UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
Commission File Number 001-32698
MGT CAPITAL INVESTMENTS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
150 Fayetteville Street, Suite 1110
Raleigh, NC
(Address of principal executive offices)
13-4148725
(I.R.S. Employer
Identification No.)
27601
(Zip Code)
(914) 630–7430
(Registrant’s telephone number, including area code)
Securities registered under section 12(b) of the Act:
Not applicable
Securities registered under section 12(g) of the Act:
common stock, par value $.001 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirement for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth
company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ☐
Non-accelerated filer ☒
Emerging growth company ☐
Accelerated filer ☐
Smaller reporting company ☒
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 30, 2021, the last day of the registrant’s most recently completed second fiscal quarter; the aggregate market value of the
registrant’s common stock held by non–affiliates of the registrant was approximately $24,015,261.
As of March 31, 2022, the registrant had outstanding 640,970,903 shares of common stock, $0.001 par value.
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
INDEX
($ in thousands, except share and per–share amounts)
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters And Issuer’s Purchases Of Equity Securities
Item 6. Reserved
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management And Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules.
Item 16. Form 10–K Summary.
SIGNATURES
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NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K and other written and oral statements made from time to time by us may contain forward-
looking statements. Forward-looking statements can be identified by the use of words such as “expects,” “plans,” “will,” “forecasts,”
“projects,” “intends,” “estimates,” and other words of similar meaning. One can identify them by the fact that they do not relate strictly
to historical or current facts. These statements are likely to address our growth strategy, financial results and product and development
programs. One must carefully consider any such statement and should understand that many factors could cause actual results to differ
from our forward-looking statements. These factors may include inaccurate assumptions and a broad variety of other risks and
uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future
results may vary materially.
These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the
risks in the section entitled “Risk Factors” and the risks set out below, any of which may cause our or our industry’s actual results,
levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements. These risks include, by way of example and not in limitation:
● The uncertainty of profitability based upon our history of losses;
● Risks related to failure to obtain adequate financing on a timely basis and on acceptable terms to continue as going concern;
and
● Other risks and uncertainties related to our business plan and business strategy.
This list is not an exhaustive list of the factors that may affect any of our forward-looking statements. These and other factors
should be considered carefully and readers should not place undue reliance on our forward-looking statements. Forward looking
statements are made based on management’s beliefs, estimates and opinions on the date the statements are made, and we undertake no
obligation to update forward-looking statements if these beliefs, estimates and opinions or other circumstances should change.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the
United States we do not intend to update any of the forward-looking statements to conform these statements to actual results.
Information regarding market and industry statistics contained in this Annual Report on Form 10-K is included based on
information available to us that we believe is accurate. It is generally based on industry and other publications that are not produced for
purposes of securities offerings or economic analysis. We have not reviewed or included data from all sources. Forecasts and other
forward-looking information obtained from these sources are subject to the same qualifications and the additional uncertainties
accompanying any estimates of future market size, revenue and market acceptance of products and services. As a result, investors
should not place undue reliance on these forward-looking statements.
As used in this annual report, the terms “we”, “us”, “our”, “MGT” and the “Company” mean MGT Capital Investments, Inc.
and its subsidiary, unless otherwise indicated.
All dollar amounts set forth in this Annual Report as of and for the year ended December 31, 2021 on this Form 10–K are in
thousands, except per–share amounts.
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Item 1. Business
PART I
The Company is a Delaware corporation incorporated in 2000. MGT was originally incorporated in Utah in 1977. MGT’s
corporate office is in Raleigh, North Carolina.
Cryptocurrency Mining Business
Industry Summary
Bitcoin is a world–recognized cryptocurrency, which can be traded and converted into major fiat currencies on cryptocurrency
exchanges. Cryptocurrencies are a medium of exchange that are transacted through and recorded on a decentralized distributed ledger
system, called the “Blockchain.” The Blockchain is built by a chronological addition of transactions, which are grouped into blocks.
Each new block requires a mathematical problem to be solved before it can be confirmed and added to the Blockchain. The processing
power used to solve these mathematical problems is measured by Hash Rate or Hashes per second (“H/s”). The complexity of these
problems, also referred to as mining difficulty, increases with the network’s growing Hash Rate.
Bitcoin mining entails solving these complex mathematical problems using custom designed and programmed application-
specific integrated circuit (“ASIC”) computers (also referred to as “miners”). Bitcoin miners perform a vital function on the Bitcoin
Blockchain network, by performing these calculations and adding transaction blocks to the Blockchain ledger. When a miner is
successful in adding a block to the Blockchain, it is rewarded with a fixed number of Bitcoin; a miner can also be compensated by
network transaction fees.
Additional information about Bitcoin, Blockchain and cryptocurrencies can be found on publicly available educational
sources such as www.Bitcoin.org.
Our Operations
Cryptocurrency mining
Following a review of our Bitcoin mining operations in early 2019, we consolidated our activities at a Company-owned and
managed facility in LaFayette, GA. Located adjacent to a utility substation, the several-acre property has access to about 20 megawatts
(MW) of low-cost electrical power, about half of which is presently utilized by the Company.
As of December 31, 2021 and March 31, 2022, the Company owned 480 and 430 Antminer S17 Pro Bitcoin miners (“S17
miners”), respectively, plus 35 Antminer S19 Pro miners as of March 31, 2022. All miners are located at our Georgia facility. As more
fully described in the following paragraph, over three-quarters of the S17 miners require various repairs to be productive. We
purchased a total of 1,506 S17 miners in the latter part of 2019 directly from Bitmaintech Pte. Ltd. (“Bitmain”), for an aggregate
purchase price of approximately $2,768, which was paid in full. From May 2020 through March 31, 2022, the Company sold a total of
923 of these miners, receiving aggregate gross proceeds of approximately $869, and has scrapped 153 miners due to burning or other
events that reduced their value to $0.
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 miners, the Company was unsuccessful in obtaining any compensation from Bitmain. The manufacturing
defects, combined with inadequate repair facilities has rendered approximately 350 of our remaining 430 miners in need of repair or
replacement. To date, in addition to a significant amount in lost revenue, we have incurred approximately $140 in costs of repairing or
replacing the defective machines. Currently, we plan to sell all our remaining inventory of S17 miners, as well as loose hash boards,
power supplies, controller boards, and other parts.
MGT’s miners are housed in a modified shipping container on the property in Georgia owned by the Company. The entire
facility, including the land and improvements, five 2500 KVA 3-phase transformers, three mining containers, and miners, are owned by
MGT. We continue to explore ways to grow and maintain our current operations including but not limited to further potential
equipment sales and raising capital to acquire the newest generation miners. The Company is also investigating other sites to develop
into Bitcoin mining facilities in addition to expansion at its current property.
Leasing Operations
In addition to its self-mining operations, the Company leases its owned space to other Bitcoin miners and also provides
hosting services for owners of mining equipment. These measures improve utilization of the electrical infrastructure and better insulate
us against the volatility of Bitcoin mining.
Bitcoin And Blockchain Overview
A Bitcoin is one type of a digital asset that is issued by, and transmitted through, an open source, math-based protocol
platform using cryptographic security (the “Bitcoin Network”). The Bitcoin Network is an online, peer-to-peer user network that hosts
the public Blockchain transaction ledger and the source code that comprises the basis for the cryptography and math-based protocols
governing the Bitcoin Network. No single entity owns or operates the Bitcoin Network, the infrastructure of which is collectively
maintained by a decentralized user base. Bitcoin can be used to pay for goods and services or can be converted to fiat currencies, such
as the US Dollar, at rates determined on Bitcoin exchanges or in individual peer to peer end-user-to-end-user transactions.
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Bitcoins are “stored” or reflected on the Blockchain in a decentralized manner on the computers of each Bitcoin Network user.
The Blockchain records the transaction history of all Bitcoin in existence and, through the transparent reporting of transactions, allows
the Bitcoin Network to verify the association of each Bitcoin with the digital wallet that owns it. The Bitcoin Network and Bitcoin
software programs can interpret the Blockchain to determine the exact Bitcoin balance, if any, of any digital wallet listed in the
Blockchain as having taken part in a transaction on the Bitcoin Network.
The Bitcoin Network, being decentralized, does not rely on either governmental authorities or financial institutions to create,
transmit or determine the value of Bitcoin. Rather, Bitcoin are created and allocated by the Bitcoin Network protocol through a
“mining” process subject to a strict, well-known issuance schedule. The value of Bitcoin is determined by the supply and demand of
Bitcoin in the Bitcoin exchange market (and in private peer to peer transactions), as well as the number of merchants that accept it. As
Bitcoin transactions can be broadcast to the Bitcoin Network by any user’s Bitcoin software and Bitcoin can be transferred without the
involvement of intermediaries or third parties, there are only minor transaction costs in direct peer-to-peer transactions on the Bitcoin
Network. Third party service providers such as Bitcoin exchanges and third-party payment processing services may charge significant
fees for processing transactions and for converting, or facilitating the conversion of, Bitcoin to or from fiat currency.
Miners dedicate substantial resources to mining. Given the increasing difficulty of the target established by the Bitcoin
Network, miners must continually invest in expensive mining hardware to achieve adequate processing power to hash at a competitive
rate.
Bitcoin is an example of a digital asset that is not a fiat currency (i.e., a currency that is backed by a central bank or a national,
supra-national or quasi-national organization) and are not backed by hard assets or other credit. As a result, the value of Bitcoin is
determined by the value that various market participants place on Bitcoin through their transactions.
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 Bitcoin halving (“Halving”) where the Bitcoin provided upon mining a block is reduced by 50%. Halvings are scheduled
to occur once every 210,000 blocks, or roughly every four years, until the maximum supply of 21 million Bitcoin is reached. The most
recent Halving occurred in May 2020, with a revised reward payout of 6.25 Bitcoin per block.
Given a stable hash rate, a Halving reduces the number of new Bitcoin being generated by the network. While the effect is to
limit the supply of new coins, it has no impact on the quantity of total Bitcoin outstanding. As a result, the price of Bitcoin could rise or
fall based on overall investor and consumer demand. Should the price of Bitcoin remain unchanged after the next Halving, the
Company’s revenue would be reduced by 50%, with a much larger negative impact to profit.
The cryptocurrency markets have grown rapidly in both popularity and market size. These markets are local, national and
international and include an ever-broadening range of products and participants. The United States Securities and Exchange
Commission (the “SEC”), and other governmental agencies around the world, are evaluating the cryptocurrency markets and are likely
to institute new rules and regulations within this market to protect investors and such regulations could result in the restriction of the
acquisition, ownership, holding, selling, use or trading of our common stock.
Strategy
MGT’s strategy is to oversee the operations in La Fayette, Georgia, which include self-mining, hosting others’ miners for a
fee, and leasing its physical space and electrical infrastructure. The Company’s immediate focus is to grow free cash flow, with a
longer-term objective to expand its mining operations.
Competition
Our industry is very new and subject to rapid change and constant innovation. We face significant competition, including from
companies that have entered this space much earlier than us and are better capitalized, with vertically integrated business models. Some
of these companies are our suppliers. We compete to attract, engage, and retain personnel, educated and skilled in the Blockchain and
cryptocurrency mining space.
We compete with vertically integrated companies such as Bitmain that engage in both the design and distribution of mining
machines, as well as cryptocurrency mining. We also compete with many other companies that are engaged in cryptocurrency mining,
some of which have better access to mining hardware, lower operating expenses and lower cost of capital than MGT. These companies
include Riot Blockchain, Inc. and Marathon Digital Holdings, Inc.
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Employees
Currently, the Company has 2 full–time employees. Neither employee is represented by a union, and we believe our
relationships with our employees are good.
Government Regulation
Government regulation of cryptocurrency is being actively considered by the United States federal government via a number
of agencies and regulatory bodies, as well as similar entities in other countries. State government regulations also may apply to our
activities and other activities in which we participate or may participate in the future. Other regulatory bodies are governmental or
semi-governmental and have shown an interest in regulating or investigating companies engaged in the cryptocurrency business.
Businesses that are engaged in the transmission and custody of Bitcoin and other digital assets, including brokers and
custodians, can be subject to U.S. Treasury Department regulations as money services businesses as well as state money transmitter
licensing requirements. Bitcoin and other digital assets are subject to anti-fraud regulations under federal and state commodity laws,
and digital asset derivative instruments are substantively regulated by the U.S. Commodity Futures Trading Commission. Certain
jurisdictions, including, among others, New York and a number of countries outside the United States, have developed regulatory
requirements specifically for digital assets and companies that transact in them.
Regulations may substantially change in the future and it is presently not possible to know how regulations will apply to our
businesses, or when they will be effective. As the regulatory and legal environment evolves, we may become subject to new laws,
further regulation by the SEC and other agencies, which may affect our mining and other activities. For instance, various bills have also
been proposed in Congress related to our business, which may be adopted and have an impact on us. For additional discussion
regarding our belief about the potential risks existing and future regulation pose to our business, see the Section entitled “Risk Factors”
herein.
In addition, since transactions in Bitcoin provide a reasonable degree of pseudo anonymity, they are susceptible to misuse for
criminal activities, such as money laundering. This misuse, or the perception of such misuse (even if untrue), could lead to greater
regulatory oversight of Bitcoin platforms, and there is the possibility that law enforcement agencies could close Bitcoin platforms or
other Bitcoin-related infrastructure with little or no notice and prevent users from accessing or retrieving Bitcoin held via such
platforms or infrastructure.
Available Information
MGT maintains a website at www.mgtci.com. The Company makes available free of charge our annual reports on Form 10–
K, quarterly reports on Form 10–Q and current reports on Form 8–K, including any amendments to the foregoing reports, as soon as is
reasonably practicable after such material is electronically filed with, or furnished to, the SEC. These materials along with our Code of
Business Conduct and Ethics are also available through our corporate website at www.mgtci.com. The public may also access, free of
charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these
reports as filed with the SEC under the Securities Exchange Act of 1934, as amended on the SEC’s website at http://www.sec.gov. Any
amendments to, and waivers of, our Code of Business Conduct and Ethics will be posted on our corporate website. The Company is not
including the information contained at mgtci.com as a part of this Annual Report.
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Item 1A. Risk Factors
Discussion of our business and operations included in this Annual Report should be read together with the risk factors set
forth below. They describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties,
together with other factors described elsewhere in this report, have the potential to affect our business, financial condition, results of
operations, cash flows, strategies, or prospects in a material and adverse manner. New risks may emerge at any time, and we cannot
predict those risks or estimate the extent to which they may affect our financial performance. Each of the risks described below could
adversely impact the value of our securities. These statements, like all statements in this report, speak only as of the date of this Annual
Report (unless another date is indicated), and we undertake no obligation to update or revise the statements in light of future
developments.
The Company generates limited revenue from operations upon which an evaluation of our prospects can be made. The
Company’s prospects must be considered keeping in mind the risks, expenses and difficulties frequently encountered in the
establishment of a new business in a constantly changing industry. There can be no assurance that the Company will be able to achieve
profitable operations in the foreseeable future, if at all.
Summary of Risk Factors
Our business and an investment in our common stock is subject to numerous risks and uncertainties, including those
highlighted in the section immediately following this summary. Some of these risks include:
● We have a history of operating losses, have been and will continue to be reliant on debt and equity financings to fund our
operations, and we may not be able to raise capital when needed or otherwise take action necessary to achieve or sustain
profitability.
● Our auditors have expressed substantial doubt about our ability to continue as a going concern.
● Our mining operating costs, including the costs to operate, maintain, repair and replace our mining equipment, have
historically outpaced our mining revenues, which has and could continue to put a strain on our business or increase our losses.
● We are reliant upon Mr. Robert B. Ladd, our Chief Executive Officer and sole executive officer, the loss of whom could
materially harm our ability to continue or grow our operations as planned or at all. For example, he is subject to a pending
SEC action which could affect his ability to serve us if he is found to be culpable.
● The cryptocurrency mining industry is highly competitive, with many of our competitors having better access to capital and
may buy mining equipment at scale. The competition has intensified as the price of Bitcoin has appreciated in recent years,
which could have a material adverse effect on our results of operations if we are unable to keep up.
● Because we have a single mining facility at one location, if we were to experience damage or loss of this facility, which may
be uninsured or underinsured, your investment in us would be at risk.
● Our operations and the results thereof are subject to risks arising from Internet disruptions or delays, cybersecurity threats,
incorrect digital recording of transactions, and other contingencies resulting from holding and transacting in digital assets.
Further, due to current lack of regulation, we may be unable to seek or obtain recourse if such contingencies were to occur.
● Our operations and ability to generate revenue depends on a steady supply of low-cost electricity, and with our current
electrical contract with the municipal government in Lafayette, Georgia expired in September 2021, our ability to continue to
receive a relatively low-cost power supply remains uncertain.
● The future development and growth of cryptocurrencies such as Bitcoin is subject to a variety of factors that are difficult to
predict and evaluate. If the market for Bitcoin does not grow as we expect, our business, operating results, and financial
condition could be adversely affected.
● Certain features of Bitcoin’s Blockchain, such as “forking” in which one type of Bitcoin could turn into many due to source
code variation, or Halving which reduces the rewards for mining efforts by 50% every 210,000 blocks that are solved, pose
the risk of adversely affecting our ability to generate revenue.
● Our operating results have and will significantly fluctuate due to the highly volatile nature of Bitcoin, and if the price of
Bitcoin declines, including potentially due to political, economic, or other forces beyond our control, it would materially
adversely affect our business. Our current miners are designed primarily to mine Bitcoin and cannot be used to mine other
cryptocurrencies, which magnifies the risk.
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● Our reliance on third party “mining pools,” which enable us to cooperate with other Bitcoin mining enterprises to receive
Bitcoin with less variance in probability of reward by sharing Bitcoin earned pro rata based on contribution to a block solved,
subjects us to risks of inaccurate sharing of rewards and the loss of other at-will participants in the pool.
● The COVID-19 pandemic has disrupted and may continue to disrupt our operations and those of our vendors, suppliers and
other third parties on which we rely, and we may not be able to obtain new miners or replacement parts for our existing miners
in a timely or cost-effective manner, which could materially and adversely affect our business and results of operations.
● We may become subject to an uncertain and rapidly evolving regulatory landscape and any adverse changes to, or our failure
to comply with, any laws and regulations, including those imposing restrictions or bans on Bitcoin mining due to concerns
about high electrical power usage, could adversely affect our business, operating results, and financial condition.
● The markets for Bitcoin and other cryptocurrencies may be under-regulated and, as a result, the market price of Bitcoin may
be subject to significant volatility or manipulation, which could decrease consumer confidence in cryptocurrencies and have a
material adverse effect on our business and results of operations.
● Banks and financial institutions may not provide banking services, or may cut off services, to businesses that engage in
cryptocurrency-related activities, which could have a material adverse effect on us.
● If a malicious actor or botnet obtains control of the Bitcoin network, such actor or botnet could manipulate the Blockchain to
adversely affect us.
● Because cryptocurrencies may be determined to be investment securities, we may inadvertently violate or become subject to
the Investment Company Act of 1940 and incur large losses as a result and potentially be required to register as an investment
company or terminate operations.
● Our stock price is subject to significant volatility due to a variety of factors, many of which are beyond our control, including
its status as a “penny stock,” the fact that it is not listed on a national securities exchange, and its potential connection to the
price of Bitcoin or other cryptocurrencies, which could adversely affect investors.
● We have not paid cash dividends to our stockholders and do not intend to do so in the foreseeable future.
● Substantial future sales of our common stock by us or our stockholders could have a depressive effect on our stock price. For
example, Company has issued warrants that allow the holders to exercise for an indeterminant, and potentially material,
number of shares of our common stock on a cashless basis.
Risks Related to Our Cryptocurrency Mining Business
We have a history of operating losses, and we may not be able to achieve or sustain profitability.
Our primary focus is on our Bitcoin mining operation located at our Lafayette, Georgia facility where as of December 31,
2021 and March 31, 2022, we operated a total of 480 and 430 S17 miners, respectively. Our current strategy will continue to expose us
to the numerous risks and volatility associated within this sector, including due to the high costs of purchasing miners and sourcing
power for them, while monitoring the price of Bitcoin, which has historically been volatile. Further, we have experienced recurring
losses and negative cash flows from operations. Our net losses for the years ended December 31, 2021 and 2020 were $1,539 and
$3,887, respectively.
To date, we have relied on debt or equity financings to fund our operations, and if the price of Bitcoin is not sufficiently high
to enable us to sell the Bitcoin we mine at prices above our cost to mine it, then we are likely to continue to be unable to fund our
operations without raising additional capital. Further, even if prices are sufficiently high for our mining activities, we are likely to need
to raise additional capital to fund the acquisition of new miners to repair or replace our existing miners and expand our number of
miners to be competitive.
We expect to incur additional net losses over the next several years as we seek to expand operations. The amount of future
losses and when, if ever, we will achieve profitability are uncertain. If we are unsuccessful at executing on our business plan, our
business, prospects, and results of operations may be materially adversely affected.
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Our auditors have issued a “going concern” audit opinion.
Our independent auditors have indicated in their report on our December 31, 2021 and 2020 financial statements that there is
substantial doubt about our ability to continue as a going concern. A “going concern” opinion indicates that the financial statements
incorporated in this Annual Report have been prepared assuming that we will continue as a going concern for one year from the date
the financial statements are issued and do not include any adjustments to reflect the possible future effects on the recoverability and
classification of assets, or the amounts and classification of liabilities that may result if we do not continue as a going concern.
Therefore, you should not rely on our balance sheet as an indication of the amount of proceeds that would be available to satisfy claims
of creditors, and potentially be available for distribution to shareholders, in the event of liquidation.
Our mining operating costs have historically outpaced our mining revenues, which has and could continue to put a strain on our
business or increase our losses.
Our mining operations are costly and our expenses may increase in the future. This expense increase may not be offset by a
corresponding increase in revenue. Our expenses may be greater than we anticipate, and our investments to make our business more
efficient may not succeed and may outpace monetization efforts. Increases in our costs without a corresponding increase in our revenue
would increase our losses and could seriously harm our business and financial performance.
The cost of obtaining new and replacement miners and parts has historically been and will likely continue to be highly capital
intensive which may have a material and adverse effect on our business and results of operations.
Our mining operations can only be successful and ultimately profitable if the costs, including hardware and electricity costs,
associated with mining Bitcoin are lower than the price of the Bitcoin we mine when we sell them. Our miners are subject to ordinary
wear and tear from operation and may also face more significant malfunctions caused by factors which may be beyond our control. For
example, approximately 450 of our S17 miners have experienced glitches and defects and as a result have seen either limitations on
mining capabilities or outright inability to mine, such that they had to be or will have to be replaced or repaired. The result of this
development has not only been increased costs to us, but also a reduced ability to generate revenue while these miners were not
operating, whether because they were under repair and/or failing to operate at their optimal hash rate. Circumstances such as these, or a
general need to replace outdated miners in the future, are highly cost intensive and can be a serious hindrance on our mining operations
and ability to generate revenue or obtain profitability.
Additionally, as the mining technology evolves, we may need to acquire newer models of miners to remain competitive in the
market. Over time, we may replace those miners which are no longer functional or efficient or powerful enough with new miners
purchased from third-party manufacturers, the cost of which may be higher than what we spent on prior models and/or such that we
will need to raise more capital to do so. For instance, the price of Bitcoin miners has historically been somewhat correlated to the price
of Bitcoin, which has appreciated in recent years. Depending on the price of new miners and our operational needs at the time we
decide to replace miners in the future, we may have to do so at higher costs than we could have previously, which would add to our
losses. Alternatively, even absent defects or reductions in computing power, mining machine models are upgraded frequently, and we
are and will continue to be subject to either higher competitive pressure as a result, or will be forced to expend large amounts of capital
to remain competitive and maintain optimal hash rates. For example, in 2020 Bitmain released and delivered its S19 model miners to
many of our competitors, which, aside from being more efficient because they are newer than our S17 miners, also have the advantage
of improved technology and computing power.
Many of our S17 miners need to be repaired or replaced as a product of ordinary wear and tear and depreciation, or defect
and/or competitive forces in the marketplace or other factors rendering our current miners obsolete. Any upgrading we need or choose
to undertake requires substantial capital investment, and we may face challenges in locating the requisite capital in a timely manner
and/or on terms favorable to us or not highly dilutive to our investors. If we are unable to obtain adequate numbers of new and
replacement miners in sufficient quantities or without delay, we may be unable to compete in our highly competitive and continuously
developing industry. If this happens, we may not be able to mine Bitcoin or other cryptocurrency as efficiently or in sufficient amounts
relative to our competition or at all and, as a result, our business and financial results could suffer which could, in turn, have a material
adverse effect on the trading price of our common stock.
The loss of our sole executive officer, Robert B. Ladd, could have a material adverse effect on us.
Our success is largely dependent on the continued services of Mr. Robert B. Ladd, our President, Chief Executive Officer and
acting Chief Financial Officer. The loss of the services of Mr. Ladd, including as a result of the SEC Action described in the following
risk factor, would leave us without executive leadership, which could diminish our business and growth opportunities. We will also
need to build an executive management team around Mr. Ladd, which could be a time consuming and expensive process and divert
management’s attention from other pressing matters concerning the Company’s operations or growth. The market for highly qualified
personnel in this industry is very competitive and we may be unable to attract such personnel in a timely manner, on favorable terms or
at all. If we are unable to attract such personnel, our business could be harmed. If we fail to procure the services of additional executive
management or implement and execute an effective contingency or succession plan for Mr. Ladd, the loss of Mr. Ladd would
significantly disrupt our business.
9
Other than Mr. Ladd, we have no other officers and only one other director. The loss of Mr. Ladd, would have a material
adverse effect on us. We do not have key man insurance on the life of Mr. Ladd. Mr. Ladd’s Amended and Restated Executive
Employment Agreement (the “Employment Agreement”), which was executed on April 6, 2018, and amended on November 11, 2020,
permits him to resign for good reason which includes a material breach of the agreement by the Company. In the event he terminates
his Employment Agreement for Good Reason, this would result in the Company owing him approximately $510 and would leave the
Company without an executive officer which may have a material adverse effect upon us, your investment, and hamper the ability of
the Company to continue operations.
The SEC has filed an action against the Company’s Chief Executive Officer alleging violations of federal securities laws which
could result in liabilities for the Company.
On September 7, 2018, the SEC commenced a legal action, SEC v. Barry C. Honig et al. (the “SEC Action”), in the United
States District Court for the Southern District of New York naming as defendant Mr. Robert B. Ladd, our Chief Executive Officer. An
amended complaint in the SEC Action was filed on March 8, 2019. On May 24, 2019, the SEC issued a subpoena in the SEC Action to
the Company and on October 31, 2019, the SEC issued subpoenas in the SEC Action to our Chairman and our independent director.
The SEC filed a second amended complaint in the SEC Action on March 16, 2020 asserting additional civil charges against Mr. Ladd.
The SEC Action asserts civil charges against multiple individuals and entities, including former shareholders of the Company, who are
alleged to have violated the securities laws by engaging in “pump and dump” schemes in connection with certain microcap stocks and
three entities, including the Company (the Company is not named as a defendant). To the extent the SEC Action pertains to Mr. Ladd in
his capacity as an officer of the Company, we are required to indemnify him in his defense of the SEC Action and cannot predict the
likelihood or amount of expenses this will entail. Further, the SEC Action has diverted and may continue to divert Mr. Ladd’s attention
from his management duties to the Company. If the outcome of this litigation results in the Company losing Mr. Ladd’s services, we
may be unable to find a suitable replacement in a reasonable time or without incurring significant costs or experiencing operational
disruptions. Further, we cannot predict whether the SEC Action might result in future actions, penalties or other liabilities against the
Company, and we may incur costs in responding to related requests for information and subpoenas, and if instituted, in defending
against any resulting governmental proceedings that may be instituted against the Company.
The Company’s directors and officers’ insurance policies have been exhausted and will cause the Company to increase spending on
legal expenses.
Under its certificate of incorporation and Bylaws, Mr. Ladd’s Employment Agreement, and certain indemnification
agreements, the Company has obligations to indemnify current and former directors and certain current and former employees. Based
on cumulative legal fees and settlements incurred the Company has fully exhausted its directors and officers insurance coverage.
Additional expenses currently expected to be incurred, including in connection with the SEC Action which is still ongoing, and that
may occur in the future, or liabilities that may be imposed in connection with actions against certain of the Company’s past and present
directors and officers and certain current and former employees who are entitled to indemnification will be funded by the Company
with its existing cash resources. Such expenses could have a material impact on the Company’s financial condition, results of
operations and cash flows.
There are several new and existing competitors in our industry that are purchasing mining equipment at scale, which may cause
delays or difficulty in us obtaining new miners, which could materially and adversely affect our business and results of operations.
Many of the competitors in our industry have also been purchasing mining equipment at scale, which has caused a world-wide
shortage of mining equipment and extended the corresponding delivery schedules for new miner purchases. There can be no assurances
the mining equipment manufacturers on which we rely such as Bitmain will be able to keep pace with the surge in demand for mining
equipment if and when we decide to upgrade and/or expand upon our current miners. Additionally, the supply of the materials used to
produce miners, such as the ASIC computer chips that are the primary feature in their computing power, may become subject to
shortages, which could also either increase the cost beyond what we can reasonably afford or reduce their availability without
unreasonable delay or at all. It is uncertain how manufacturers will respond to these trends and whether they can deliver on the
schedules promised to any or all of their customers in the future. In the event Bitmain or other manufacturers are not able to keep pace
with demand or avoid supply shortages, we may not be able to purchase miners from Bitmain or other manufacturers in sufficient
quantities, at reasonable prices or on the delivery schedules that meet our business needs, which could have a material adverse effect on
our business and results of operations.
10
The COVID-19 pandemic has disrupted and may continue to disrupt national and international commerce and we may not be able
to continue our operations as presently conducted, obtain new miners or replacement parts for our existing miners in a timely or
cost-effective manner, which could materially and adversely affect our business and results of operations.
The novel strain of the coronavirus (“COVID-19”) has spread as a global pandemic throughout the world and has resulted in
authorities imposing, and businesses and individuals implementing, numerous unprecedented measures to try to contain the virus.
Although the United States and countries around the world have been releasing a vaccine, there are no assurances that the vaccine will
be effective, and what impact it will have on reducing the spread or containment of COVID-19. In addition to vaccinations,
preventative efforts include travel bans and restrictions, quarantines, shelter-in-place/stay-at-home and social distancing orders, and
shutdowns. These measures may impact our mining operations, the third-party contractors on which we rely to further those operations,
and the vendors, suppliers and manufacturers with which we do business. The extent to which the COVID-19 pandemic may affect our
business, results of operations and financial condition is difficult to predict and depends on numerous evolving factors, including the
duration and scope of the pandemic and its impact on overall global economic and political uncertainty; government, social, business
and other actions that have been and will be taken in response to the pandemic; the speed and extent to which vaccines are distributed
and their efficacy at preventing the COVID-19 virus from spreading and impacting the general populace, both in the short- and long-
term, and the effect of the pandemic on short- and long-term general economic conditions and on the cryptocurrency industry in
particular.
Current and future restrictions or disruptions of transportation, such as reduced availability of air and ground transport, port
closures or congestion, and increased border controls or closures, can also impact our ability to timely mine Bitcoin in sufficient
quantities and/or sell the Bitcoin we receive at favorable prices, and could materially adversely affect us. For example, these added
challenges may increase costs or delays in the repair or replacement of certain of our miners which have demonstrated defects.
Increased transportation, electrical supply, labor or other costs which may result from the COVID-19 pandemic could have a material
adverse effect on our financial condition and results of operations, particularly if the effects of COVID-19 are prolonged.
To the extent that the profit margins of Bitcoin mining operations are not high, operators of Bitcoin mining operations or other
participants in the Bitcoin industry are more likely to immediately sell Bitcoins in the market, thereby constraining growth of the
price of Bitcoin that could adversely impact us.
Over the years, Bitcoin mining operations have shifted from individual users mining with computer processors, graphics
processing units and first-generation ASIC servers to larger enterprises with newer, more “professionalized” sources of processing
power which has been predominantly added by “professionalized” mining operations and resulting demand for more professionalized
and powerful miners having faster hash rates. These professionalized mining operations may use proprietary hardware or sophisticated
ASIC machines acquired from ASIC manufacturers. Acquiring this specialized hardware at scale requires the investment of significant
up-front capital, and mine operators incur significant expenses related to the operation of this hardware at scale, such as the leasing of
operating space, which is often done in data centers or warehousing facilities, obtaining and paying for an electricity supply to run the
miners and employing technicians to operate the mining facilities.
As a result, these professionalized mining operations are of a greater scale than prior miners and have more defined and
regular expenses and liabilities. Because these regular expenses and liabilities require professionalized mining operations to maintain
profit margins on the sale of Bitcoin, to the extent the price of Bitcoin declines and such profit margin is constrained, such miners are
incentivized to sell Bitcoin earned from mining operations more rapidly than individual miners who in past years were more likely to
hold newly mined Bitcoin for longer periods. The immediate selling of newly mined Bitcoin greatly increases the trading volume of
Bitcoin, creating downward pressure on the market price of Bitcoin rewards.
The extent to which the value of Bitcoin mined by a professionalized mining operation exceeds the allocable capital and
operating costs determines the profit margin of such an operation. A professionalized mining operation may be more likely to sell a
higher percentage of its newly mined Bitcoin rapidly if it is operating at a low profit margin and it may partially or completely cease
operations if its profit margin is negative. In a low profit margin environment, a higher percentage could be sold more rapidly, thereby
potentially depressing Bitcoin prices. Lower Bitcoin prices could result in further tightening of profit margins for professionalized
mining operations creating a network effect that may further reduce the price of Bitcoin until mining operations with higher operating
costs become unprofitable forcing them to reduce mining power or cease mining operations temporarily.
We may be unable to raise additional capital needed to grow our business.
We will likely continue to operate at a loss, at least until our business strategy is implemented, or if Bitcoin or other
cryptocurrency prices decline, and we expect to need to raise additional capital to expand our operations and pursue our growth
strategies, including potentially the acquisition of new or additional miners, and to respond to competitive pressures or unanticipated
working capital requirements. We may not be able to obtain additional debt or equity financing on favorable terms, if at all, which
could impair our growth and adversely affect our existing operations. If we raise additional equity financing, our stockholders may
experience significant dilution of their ownership interests, and the per share value of our common stock could decline. Furthermore, if
we engage in additional debt financing, the holders of such debt would have priority over the holders of common stock on order of
liquidation preference. We may be required to accept terms that restrict our ability to incur additional indebtedness or take other actions
including terms that require us to maintain specified liquidity or other ratios that could otherwise not be in the interests of our
stockholders.
11
Because our miners are designed specifically to mine Bitcoin, our future success will depend in large part upon the value of
Bitcoin, and any sustained decline in its value could adversely affect our business and results of operations.
Our operating results will depend in large part upon the value of Bitcoin because it is the primary cryptocurrency we currently
mine. Specifically, our revenues from our Bitcoin mining operations are based upon two factors: (1) the number of Bitcoin rewards we
successfully mine and (2) the value of Bitcoin. This means that our operating results will be subject to swings based upon increases or
decreases in the value of Bitcoin. Furthermore, our business strategy focuses solely on producing Bitcoin (as opposed to other
cryptocurrencies), and our current ASIC miners principally utilize the “SHA-256 algorithm,” which is designed primarily for mining
Bitcoin. We therefore, cannot use these miners to mine other cryptocurrencies, such as Ethereum, that are not mined utilizing this
algorithm. While the S17 model can mine Bitcoin Cash, we do not currently employ our miners for this purpose. If other
cryptocurrencies overtake Bitcoin in terms of acceptance, the value of Bitcoin could decline. Further, if Bitcoin were to switch its proof
of work algorithm from SHA-256 to another algorithm for which our miners would not be suited or if the value of Bitcoin were to
decline for other reasons, particularly if such decline were significant or over an extended period of time, we would likely incur very
significant costs in retooling or replacing our existing miners with miners better suited for this new protocol and our operating results
could be adversely affected. This could result in a material adverse effect on our ability to continue as a going concern or to pursue our
business strategy at all, which could have a material adverse effect on our business, prospects or operations, and thus harm investors.
Bitcoin is subject to Halving, meaning that the Bitcoin rewarded for solving a block will be reduced in the future and its value may
not commensurately adjust to compensate us for such reductions, and the overall supply of Bitcoin is finite.
Bitcoin is subject to Halving, which is the process by which the Bitcoin reward for solving a block is reduced by 50% every
210,000 blocks that are solved. This means that the amount of Bitcoin we (or any other miner) are rewarded for solving a block in the
Blockchain is permanently cut in half. For example, the latest Halving having occurred in May 2020, with a revised payout of 6.25
Bitcoin per block solved, down from the previous reward rate of 12.5 Bitcoin per block solved. There can be no assurance that the price
of Bitcoin will sufficiently increase to justify the increasingly high costs of mining for Bitcoin given the Halving feature. If a
corresponding and proportionate increase in the trading price of these cryptocurrencies does not follow these anticipated Halving
events, the revenue we earn from our mining operations would see a corresponding decrease, which would have a material adverse
effect on our business and operations. To illustrate, even if the price of Bitcoin remains at its price as of today, all other factors being
equal (including the same number of miners and a stable hash rate) our revenue would decrease substantially upon the next Halving.
Further, due to the Halving process, unless the underlying code of the Bitcoin Blockchain is altered (which may be unlikely or
difficult given its decentralized nature), the supply of Bitcoin is finite. Once 21 million Bitcoin have been generated by virtue of
solving blocks in the Blockchain, the network will stop producing more. Currently, there are approximately 19.0 million Bitcoin in
circulation representing about 90% of the total supply of Bitcoin under the current source code. For the foregoing reasons, the Halving
feature exposes us to inherent uncertainty and reliance upon the historically volatile price of Bitcoin, rendering an investment in us
particularly speculative, especially in the long-term. If the price of Bitcoin does not significantly increase in value, your investment
could become worthless.
We are subject to risks associated with our need for significant electrical power and our current Electricity Agreement.
Our Bitcoin mining operations have required significant amounts of electrical power, and, to the extent we purchase additional
miners or acquire new miners which require higher energy inputs, our electricity requirements would grow. If we are unable to
continue to obtain sufficient electrical power to operate our miners on a cost-effective basis, we may not realize the anticipated benefits
of our significant capital investments in new miners. Even at our current energy usage, there can be no guarantee that our operational
costs will not increase in the future, as our current Electricity Agreement expired on September 30, 2021. While we are engaged in
negotiations for a new contract for electricity with City of Lafayette, Georgia, a municipal corporation of the State of Georgia (“the
City”), there can be no assurance that we can reach an agreement with the City with acceptable price, volume and other terms, if at all.
Currently we are in a month-to-month agreement with the City. The City is our only supplier of electricity at our location.
Additionally, our mining operations could be materially adversely affected by prolonged power outages, and we may have to
reduce or cease our operations in the event of an extended power outage, or as a result of the unavailability or increased cost of
electrical power. If this were to occur, our business and results of operations could be materially and adversely affected, and investors
in our securities could be harmed.
12
Interruptions to internet access could disrupt our operations, which could adversely affect our business and results of operations.
Our cryptocurrency mining operations require access to high-speed internet to be successful. If we lose internet access for a
prolonged period, we may be required to reduce our operations or cease them altogether. A disruption of the Internet may affect the use
of cryptocurrencies and subsequently the value of our securities. Generally, cryptocurrencies and our business of mining
cryptocurrencies is dependent upon the Internet. A significant disruption in Internet connectivity could disrupt a currency’s network
operations until the disruption is resolved and have an adverse effect on the price of Bitcoin and our ability to mine Bitcoin. If this
occurs, our business and results of operations may suffer, and our investors may be materially and adversely effected.
Bitcoin has forked three times and additional forks may occur in the future which may affect the value of Bitcoin held or mined by
the Company.
To the extent that a significant majority of users and miners on a cryptocurrency network install software that changes the
cryptocurrency network or properties of a cryptocurrency, including the irreversibility of transactions and limitations on the mining of
new cryptocurrency, the cryptocurrency network would be subject to new protocols and software. However, if less than a significant
majority of users and miners on the cryptocurrency network consent to the proposed modification, and the modification is not
compatible with the software prior to its modification, the consequence would be what is known as a “fork” of the network, with one
prong running the pre-modified software and the other running the modified software. The effect of such a fork would be the existence
of two versions of the cryptocurrency running in parallel, yet lacking interchangeability and necessitating exchange-type transaction to
convert currencies between the two forks. Additionally, it may be unclear following a fork which fork represents the original asset and
which is the new asset. Different metrics adopted by industry participants to determine which is the original asset include: referring to
the wishes of the core developers of a cryptocurrency, Blockchains with the greatest amount of hashing power contributed by miners or
validators; or Blockchains with the longest chain. A fork in the network of a particular cryptocurrency could adversely affect an
investment in our securities or our ability to operate.
Since August 1, 2017, Bitcoin’s Blockchain was forked three times creating Bitcoin Cash, Bitcoin Gold and Bitcoin SV. The
forks resulted in a new Blockchain being created with a shared history, and a new path forward. The value of the newly created Bitcoin
Cash, Bitcoin Gold and Bitcoin SV may or may not have value in the long run and may affect the price of Bitcoin if interest is shifted
away from Bitcoin to the newly created digital assets. The value of Bitcoin after the creation of a fork is subject to many factors
including the value of the fork product, market reaction to the creation of the fork product, and the occurrence of forks in the future. As
such, the value of Bitcoin could be materially reduced if existing and future forks have a negative effect on Bitcoin’s value.
Our reliance primarily on a single model of miner may subject our operations to increased risk of mine failure.
The performance and reliability of our miners and our technology is critical to our operations. Because we currently use
mostly S17 miners, if there continue to be issues with those machines, such as a design flaw in the ASIC chips they employ, our entire
system could be affected. We recently experienced this issue with our S17 miners, as of the 430 miners we currently own, 350 have
defects that render them either unusable or unable to operate at their maximum designed capacity. Additionally, we have sold 923 of
our S17 miners and had to scrap 153 S17 miners which lost their value. This results in both lost revenue from inhibited mining
operations and increased costs to repair and replace our mining infrastructure. Therefore, any disruption in our ability to continue
mining, even with a portion of our total miners, could result in a material reduction to Bitcoin reward yields which would harm our
business. Any weakness, flaw, or error which arises with our miners such similar to or more severe and widespread than the problems
we experienced with our S17 miners may affect all or a large portion of our miners; therefore, if a defect or other flaw exists, our entire
mine could go offline simultaneously. Any such interruption, delay or inability to continue operations could result in financial losses, a
decrease in the trading price of our common stock and reputational harm.
Our mining operations, including the miners, the container, the land and the facility as a whole in which our miners are operated,
are subject to real estate risks and potential damage and contingencies for which we are not covered by insurance.
Our current mining operations are exclusively conducted at our Lafayette, GA facility. This facility is, and any future mines
we may establish, will be subject to a variety of risks relating to housing all of our operations, which include expensive revenue
generating equipment at a single physical location. We also face risks because we own the land underlying the facility rather than rent,
and therefore face risks inherent in the ownership of real estate. While we have insurance covering general liability and property theft
and damage, we may be underinsured for some of the risks we face due to our single facility and ownership of the underlying land,
including:
● the possibility of construction or repair defects or other structural or building damage;
13
● any noncompliance with or liabilities under applicable environmental, noise, health or safety regulations or requirements or
building permit requirements;
● any damage resulting from natural disasters, such as hurricanes, earthquakes, fires, floods and windstorms;
● claims by employees and others for injuries sustained at our facility;
● theft, arson or other crimes upon our facility;
● adverse changes in national and local economic and market conditions;
● declines in the value of the real estate; and
● the potential for uninsured or underinsured property losses.
For example, our facility could be rendered inoperable, temporarily or permanently, as a result of a fire or other natural
disaster or by a terrorist or other attack on the facility. The security and other measures we take to protect against these risks may not be
sufficient. Additionally, our mine could be materially adversely affected by a power outage or loss of access to the electrical grid or
loss by the grid of cost-effective sources of electrical power generating capacity. Given our constant power requirement to operate our
miners and generate revenue, it would not be feasible to run miners on back-up power generators in the event of a power outage. We do
not carry insurance that would cover losses resulting from any of these events. In the event of an uninsured loss, including a loss in
excess of insured limits, at any of the miners in our network, such miners may not be adequately repaired in a timely manner or at all
and we may lose some or all of the future revenues which could have otherwise been derived from such miners. Additionally, to the
extent the miners, the modified containers in which they are held, or the land itself is permanently damaged, we may not be able to bear
the cost of repair or replacement. Should any of these events transpire, we may not be able to recover, could lose a material amount of
potential revenue, and our business and results of operations could be materially harmed as a result. Further, we may be unable to
replace our fire and theft insurance which exposes us to further risk of loss.
The Company’s reliance on a third-party mining pool service provider for our mining revenue payouts may have a negative impact
on the Company’s operations.
We receive Bitcoin mining rewards from our mining activity through a third-party mining pool operator. Mining pools allow
miners to combine their processing power, increasing their chances of solving a block and getting paid by the network. The rewards are
distributed by the pool operator, proportionally to our contribution to the pool’s overall mining power, used to generate each block.
Should the pool operator’s system suffer downtime due to a cyber-attack, software malfunction or other similar issues, it will
negatively impact our ability to mine and receive revenue. Furthermore, we are dependent on the accuracy of the mining pool
operator’s record keeping to accurately record the total processing power provided to the pool for a given Bitcoin mining application in
order to assess the proportion of that total processing power we provided. We would have limited means of recourse against the mining
pool operator if we determine the proportion of the reward paid out to us by the mining pool operator is incorrect, other than leaving
the pool. If we are unable to consistently obtain accurate proportionate rewards from our mining pool operators, we may experience
reduced reward for our efforts, which would have an adverse effect on our business and operations.
There is a possibility of cryptocurrency mining algorithms transitioning to proof of stake validation and other mining related risks,
which could make us less competitive and ultimately adversely affect our business and the value of our stock.
Proof of stake is an alternative method in validating cryptocurrency transactions that is less dependent on the consumption of
electricity. Should the algorithm shift from a proof of work validation method to a proof of stake method, mining would likely require
less energy, which may render any company that maintains advantages in the current climate (for example, from lower priced
electricity, processing, real estate, or hosting) less competitive. We, as a result of our efforts to optimize and improve the efficiency of
our Bitcoin mining operations, may be exposed to the risk in the future of losing the relative competitive advantage we may have over
some of our competitors as a result, and may be negatively impacted if a switch to proof of stake validation were to occur. This is
because we have invested heavily in setting up our facility based on the mining algorithms method of validation. Such events could
have a material adverse effect on our ability to continue as a going concern, which could have a material adverse effect on our business,
prospects or results of operations, the value of Bitcoin.
We may be accused of infringing intellectual property rights of third parties.
We may be subject to legal claims of alleged infringement of the intellectual property rights of third parties. Due to the open-
source and constantly evolving nature of our business, we may not always be able to determine that we are using or accessing protected
information or software. For example, there could be issued patents of which we are not aware that our activities or the equipment or
software we use may infringe. The ready availability of damages, royalties and the potential for injunctive relief has increased the
defense litigation costs of patent infringement claims, especially those asserted by third parties whose sole or primary business is to
assert such claims. Such claims, even if not meritorious, may result in significant expenditure of financial and managerial resources,
and the payment of damages or settlement amounts. Additionally, we may become subject to injunctions prohibiting us from using
software or business processes we currently use or may need to use in the future or requiring us to obtain licenses from third parties
when such licenses may not be available on financially feasible terms or terms acceptable to us or at all. In addition, we may not be
able to obtain on favorable terms, or at all, licenses or other rights with respect to intellectual property we do not own in providing
ecommerce services to other businesses and individuals under commercial agreements.
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Risks Related to Our Dependence on Bitcoin
The trading price of shares of our common stock may increase or decrease as does the trading price of Bitcoin, which subject
investors to pricing risks, including “bubble” type risks, and volatility.
Because of our dependence on Bitcoin, the trading prices of our common stock may at times be tied to the trading prices of
Bitcoin. Specifically, we may experience adverse effects on our stock price when the value of Bitcoin drops. Furthermore, if the market
for Bitcoin company stocks or the stock market in general experiences a loss of investor confidence, the trading price of our stock
could decline for reasons unrelated to our business, operating results or financial condition. The trading price of our common stock
could be subject to arbitrary pricing factors that are not necessarily associated with traditional factors that influence stock prices or the
value of non-cryptocurrency assets such as revenue, cash flows, profitability, growth prospects or business activity since the value and
price, as determined by the investing public, may be influenced by uncertain contingencies such as future anticipated adoption or
appreciation in value of cryptocurrencies or Blockchains generally, and other factors over which we have little or no influence or
control.
Bitcoin and other cryptocurrency market prices, which have historically been volatile and are impacted by a variety of factors
(including those discussed below), are determined primarily using data from various exchanges, over-the-counter markets and
derivative platforms. Furthermore, such prices may be subject to factors such as those that impact commodities, more so than business
activities, which could be subjected to additional influence from fraudulent or illegitimate actors, real or perceived scarcity, and
political, economic, regulatory or other conditions. Pricing may be the result of, and may continue to result in, speculation regarding
future appreciation in the value of cryptocurrencies, or our share price, making their market prices more volatile or creating “bubble”
type risks for the trading price of Bitcoin.
During the year ended December 31, 2021, the trading price of Bitcoin has appreciated significantly, from a low closing value
of approximately $30 per Bitcoin in January 2021, to a high closing value of approximately $68 per Bitcoin in November 2021, before
closing the year at $46. There can be no assurances that similar volatility in the trading price of Bitcoin will not occur in the future.
Accordingly, since the trading price of our securities may at times be connected to the trading price of Bitcoin, if the trading price of
Bitcoin again experiences a significant decline, we could experience a similar decline in the trading price for shares of our common
stock. If this occurs, you may not be able to sell the shares of our common stock which you purchased at or above the price you paid
for them or at all.
The markets for Bitcoin and other cryptocurrencies and the existing markets may be under regulated and, as a result, the market
price of Bitcoin may be subject to significant volatility or manipulation, which could decrease consumer confidence in
cryptocurrencies and have a materially adverse effect on our business and results of operations.
Cryptocurrencies that are represented and trade on a ledger-based platform and those who hold them may not enjoy the same
benefits as traditional securities available on trading markets and their investors. Stock exchanges have listing requirements and vet
issuers, requiring them to be subjected to rigorous listing standards and rules, and monitor investors transacting on such platforms for
fraud and other improprieties. These conditions may not necessarily be replicated on a distributed ledger platform, depending on the
platform’s controls and other policies. The more lax a distributed ledger platform is about vetting issuers of cryptocurrency assets or
users that transact on the platform, the higher the potential risk for fraud or the manipulation of the ledger due to a control event.
Bitcoin and other cryptocurrency market prices have historically been volatile, are impacted by a variety of factors, and are
determined primarily using data from various exchanges, over-the-counter markets and derivative platforms. Furthermore, such prices
may be subject to factors such as those that impact commodities, more so than business activities, which could be subjected to
additional influence from fraudulent or illegitimate actors, real or perceived scarcity, and political, economic, regulatory or other
conditions. Pricing may be the result of, and may continue to result in, speculation regarding future appreciation in the value of
cryptocurrencies, or our share price, making their market prices more volatile or creating “bubble” type risks for both Bitcoin and
shares of our common stock.
These factors may inhibit consumer trust in and market acceptance of cryptocurrencies as a means of exchange which could
have a material adverse effect on our business, prospects, or operations and potentially the value of any Bitcoin or other
cryptocurrencies we mine or otherwise acquire.
15
The development and acceptance of cryptographic and algorithmic protocols governing the issuance of and transactions in
cryptocurrencies is subject to a variety of factors that are difficult to evaluate.
The use of cryptocurrencies, including Bitcoin, to, among other things, buy and sell goods and services and complete
transactions, is part of a new and rapidly evolving industry that employs cryptocurrency assets based upon a computer-generated
mathematical and/or cryptographic protocol. Large-scale acceptance of cryptocurrencies as a means of payment has not, and may
never, occur. The growth of this industry in general, and the use of Bitcoin in particular, is subject to a high degree of uncertainty, and
the slowing or stopping of the development or acceptance of developing protocols may occur unpredictably. The factors include, but
are not limited to:
● the progress of worldwide growth in the adoption and use of Bitcoin and other cryptocurrencies as a medium of exchange;
● governmental and organizational regulation of Bitcoin and other cryptocurrencies and their use, or restrictions on or regulation
of access to and operation of the network or similar cryptocurrency systems;
● changes in consumer demographics and public tastes and preferences, including as may result from coverage of Bitcoin or
other cryptocurrencies by journalists and other sources of information and media;
● the maintenance and development of the open-source software protocol of the network;
● the increased consolidation of contributors to the Bitcoin Blockchain through mining pools and scaling of mining equipment
by well-capitalized market participants;
● the availability and popularity of other forms or methods of buying and selling goods and services, including new means of
using fiat currencies;
● the use of the networks supporting Bitcoin or other cryptocurrencies for developing smart contracts and distributed
applications;
● general economic conditions and the regulatory environment relating to Bitcoin and other cryptocurrencies; and
● the impact of regulators focusing on cryptocurrencies and the costs associated with such regulatory oversight.
A decline in the popularity or acceptance of the Bitcoin network could adversely affect an investment in us.
The outcome of these factors could have negative effects on our ability to continue as a going concern or to pursue our
business strategy at all, which could have a material adverse effect on our business, prospects or operations as well as potentially
negative effects on the value of any Bitcoin or other cryptocurrencies we mine or otherwise acquire, which would harm investors in our
securities.
Currently, there is relatively small use of Bitcoins in the retail and commercial marketplace in comparison to relatively large use by
speculators, thus contributing to price volatility that could adversely affect an investment in us.
As relatively new products and technologies, Bitcoins and the Bitcoin network have only recently become widely accepted as
a means of payment for goods and services by many major retail and commercial outlets, and use of Bitcoins by consumers to pay such
retail and commercial outlets remains limited. Conversely, a significant portion of Bitcoin demand is generated by speculators and
investors seeking to profit from the short- or long-term holding of Bitcoins. A lack of expansion by Bitcoins into retail and commercial
markets, or a contraction of such use, may result in increased volatility or a reduction in the price of Bitcoin, either of which could
adversely impact an investment in us.
Banks and financial institutions may not provide banking services, or may cut off services, to businesses that engage in
cryptocurrency-related activities.
A number of companies that engage in Bitcoin and/or other cryptocurrency-related activities have been unable to find banks
or financial institutions that are willing to provide them with bank accounts and other services. Similarly, a number of companies and
individuals or businesses associated with cryptocurrencies may have had and may continue to have their existing bank accounts closed
or services discontinued with financial institutions in response to government action, particularly in China, where regulatory response
to cryptocurrencies has been to exclude their use for ordinary consumer transactions within China. Specifically, in May 2021 the
Chinese government banned financial institutions and payment companies from providing services related to cryptocurrency
transactions. We also may be unable to obtain or maintain these services for our business. The price of Bitcoin has declined
dramatically beginning in May 2021 in response to this trend. The difficulty that many businesses that provide Bitcoin and/or
derivatives on other cryptocurrency-related activities have and may continue to have in finding banks and financial institutions willing
to provide them services may be decreasing the usefulness of cryptocurrencies as a payment system and harming public perception of
cryptocurrencies, and could decrease their usefulness and harm their public perception in the future.
The usefulness of cryptocurrencies as a payment system and the public perception of cryptocurrencies could be damaged if
banks or financial institutions were to close the accounts of businesses engaging in Bitcoin and/or other cryptocurrency-related
activities. This could occur as a result of compliance risk, cost, government regulation or public pressure. The risk applies to securities
firms, clearance and settlement firms, national stock and derivatives on commodities exchanges, the over-the-counter market, and the
Depository Trust Company, which, if any of such entities adopts or implements similar policies, rules or regulations, could negatively
affect our relationships with financial institutions and impede our ability to convert cryptocurrencies to fiat currencies. Such factors
could have a material adverse effect on our ability to continue as a going concern or to monetize our mining efforts, which could have a
material adverse effect on our business, prospects or operations and harm investors.
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Political or economic crises may motivate large-scale sales of cryptocurrencies, which could result in a reduction in values of
cryptocurrencies such as Bitcoin and adversely affect an investment in us.
Geopolitical crises may motivate large-scale sales of cryptocurrencies, which could rapidly decrease the price of
cryptocurrencies such as Bitcoin. Alternatively, as an emerging asset class with limited acceptance as a payment system or commodity,
global crises and general economic downturn may discourage investment in cryptocurrencies as investors focus their investment on
less volatile asset classes as a means of hedging their investment risk.
As an alternative to fiat currencies that are backed by central governments, cryptocurrencies such as Bitcoin, which are
relatively new, are subject to supply and demand forces based upon the desirability of an alternative, decentralized means of buying
and selling goods and services, and it is unclear how such supply and demand will be impacted by geopolitical events. Nevertheless,
political or economic crises may motivate large-scale acquisitions or sales of cryptocurrencies either globally or locally. Large-scale
sales of cryptocurrencies would result in a reduction in digital asset values and could adversely affect an investment in us.
The decentralized nature of cryptocurrency systems may lead to slow or inadequate responses to crises, which may negatively affect
our business.
The decentralized nature of the governance of cryptocurrency systems may lead to ineffective decision making that slows
development or prevents a network from overcoming emergent obstacles. Governance of many cryptocurrency systems is by voluntary
consensus and open competition with no clear leadership structure or authority. To the extent lack of clarity in corporate governance of
cryptocurrency systems leads to ineffective decision making that slows development and growth of such cryptocurrencies, the value of
our common stock may be adversely affected.
It may be illegal now, or in the future, to acquire, own, hold, sell or use digital assets in one or more countries, and ownership of,
holding or trading in our securities may also be considered illegal and subject to sanction.
As digital assets have grown in both popularity and market size, governments around the world have reacted differently to
digital assets; certain governments have deemed them illegal, and others have allowed their use and trade without restriction, while in
some jurisdictions, such as in the U.S., subject to extensive, and in some cases overlapping, unclear and evolving regulatory
requirements. Ongoing and future regulatory actions may impact our ability to continue to operate, and such actions could affect our
ability to continue as a going concern or to pursue our new strategy at all, which could have a material adverse effect on our business,
prospects or operations.
The emergence of competing Blockchain platforms or technologies may harm our business as presently conducted.
If Blockchain platforms or technologies which compete with Bitcoin and its Blockchain, including competing
cryptocurrencies which our miners may not be able to mine, such as cryptocurrencies being developed or may be developed by popular
social media platforms, online retailers, or government sponsored cryptocurrencies, consumers may use such alternative platforms or
technologies. If that were to occur, we would face difficulty adapting to emergent such digital ledgers, Blockchains, or alternative
platforms or digital assets. This may adversely affect us by preventing us from realizing the anticipated profits from our investments
and forcing us to expend additional capital in an effort to adapt. Further, to the extent we cannot adapt, be it due to our specialized
miners or otherwise, we could be forced to cease operations. Such circumstances would have a material adverse effect on our business,
and in turn investors’ investments in our securities.
Cryptocurrencies face significant scaling obstacles that can lead to high fees or slow transaction settlement times.
Cryptocurrencies face significant scaling obstacles that can lead to high fees or slow transaction settlement times, and attempts
to increase the volume of transactions may not be effective. Therefore, scaling cryptocurrencies will be essential to the widespread
acceptance of cryptocurrencies as a means of payment, which widespread acceptance is necessary to the continued growth and
development of our business. Many cryptocurrency networks face significant scaling challenges, such as limitations on how many
transactions can occur per second. There can be no guarantee that any of the systems in place or being considered to increasing the
scale of settlement of cryptocurrency transactions will be effective, or how long they will take to become effective, which could
adversely affect an investment in our securities.
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The price of cryptocurrencies may be affected by the sale of such cryptocurrencies by other vehicles investing in cryptocurrencies or
tracking cryptocurrency markets.
The global market for cryptocurrency is characterized by supply constraints that differ from those present in the markets for
commodities or other assets such as gold and silver. The mathematical protocols under which certain cryptocurrencies are mined permit
the creation of a limited, predetermined amount of digital currency, while others have no limit established on total supply. Increased
numbers of miners and deployed mining power globally will likely continue to increase the available supply of Bitcoin and other
cryptocurrencies, which may depress their market price. Further, large “block sales” involving significant numbers of Bitcoin following
appreciation in the market price of Bitcoin may also increase the supply of Bitcoin available on the market, which, without a
corresponding increase in demand, may cause its price to fall. Additionally, to the extent that other vehicles investing in
cryptocurrencies or tracking cryptocurrency markets form and come to represent a significant proportion of the demand for
cryptocurrencies, large redemptions of the securities of those vehicles and the subsequent sale of cryptocurrencies by such vehicles
could negatively affect cryptocurrency prices and therefore affect the value of the cryptocurrency inventory we hold. Such events could
have a material adverse effect on our business, prospects or operations and potentially the value of any Bitcoin or other
cryptocurrencies we mine.
The Bitcoin we mine may be subject to loss, damage, theft or restriction on access.
There is a risk that some or all of the Bitcoin we mine could be lost or stolen. In general, cryptocurrencies are stored in
cryptocurrency sites commonly referred to as “wallets” by holders of cryptocurrencies which may be accessed to exchange a holder’s
cryptocurrency assets. Access to our Bitcoin could also be restricted by cybercrime (such as a denial of service attack). While we take
steps to attempt to secure the Bitcoin we hold, there can be no assurance our efforts to protect our digital assets will be successful.
Hackers or malicious actors may launch attacks to steal, compromise or secure cryptocurrencies, such as by attacking the
cryptocurrency network source code, exchange miners, third-party platforms, cold and hot storage locations or software, or by other
means. Any of these events may adversely affect our operations and, consequently, our ability to generate revenue and become
profitable. The loss or destruction of a private key required to access our digital wallets may be irreversible and we may be denied
access for all time to our Bitcoin holdings. Our loss of access to our private keys or our experience of a data loss relating to our digital
wallets could adversely affect our business.
Cryptocurrencies are controllable only by the possessor of both the unique public and private keys relating to the local or
online digital wallet in which they are held, which wallet’s public key or address is reflected in the network’s public Blockchain. We
are required to publish the public key relating to digital wallets in use when we verify the receipt of transfers and disseminate such
information into the network, but we will need to safeguard the private keys relating to such digital wallets. To the extent such private
keys are lost, destroyed or otherwise compromised, we will be unable to access our Bitcoin rewards and such private keys may not be
capable of being restored by any network. Any loss of private keys relating to digital wallets used to store our mined Bitcoin could
have a material adverse effect on our results of operations and ability to continue as a going concern, which could have a material
adverse effect on our business, prospects or operations and potentially the value of any Bitcoin we mine.
Incorrect or fraudulent cryptocurrency transactions may be irreversible.
Cryptocurrency transactions are irrevocable and stolen or incorrectly transferred cryptocurrencies may be irretrievable. As a
result, any incorrectly executed or fraudulent cryptocurrency transactions, such as a result of a cybersecurity breach against our Bitcoin
holdings, could adversely affect our investments and assets. This is because cryptocurrency transactions are not, from an administrative
perspective, reversible without the consent and active participation of the recipient of the cryptocurrencies from the transaction. Once a
transaction has been verified and recorded in a block that is added to a Blockchain, an incorrect transfer of a cryptocurrency or a theft
thereof generally will not be reversible and we may not have sufficient recourse to recover our losses from any such transfer or theft.
Further, it is possible that, through computer or human error, or through theft or criminal action, our cryptocurrency rewards could be
transferred in incorrect amounts or to unauthorized third parties, or to uncontrolled accounts. If an errant or fraudulent transaction in
our Bitcoin were to occur, we would have very limited means of seeking to reverse the transaction or seek recourse. To the extent that
we are unable to recover our losses from such action, error or theft, such events could have a material adverse effect on our business.
Security threats to us could result in a loss of Company’s Bitcoin holdings.
Security breaches, computer malware and computer hacking attacks have been a prevalent concern in the Bitcoin exchange
market since the launch of the Bitcoin network. Any security breach caused by hacking, which involves efforts to gain unauthorized
access to information or systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other
computer equipment, and the inadvertent transmission of computer viruses, could harm our business operations or result in loss of our
Bitcoin and lost revenue. Furthermore we believe that to the extent we hold greater amounts of Bitcoin, we may become a more
appealing target for security threats such as hackers and malware.
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The security system and operational infrastructure may be breached due to the actions of outside parties, error or malfeasance
of an employee of ours, or otherwise, and, as a result, an unauthorized party may obtain access to our, private keys, data or Bitcoins.
Additionally, outside parties may attempt to fraudulently induce employees of ours to disclose sensitive information in order to gain
access to our infrastructure. As the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems
change frequently, or may be designed to remain dormant until a predetermined event and often are not recognized until launched
against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. If an actual or
perceived breach of our security system occurs, the market perception of the effectiveness of our security system could be harmed,
which could adversely affect an investment in us. In the event of a security breach, we may be forced to cease operations, or suffer a
reduction in our digital assets, the occurrence of each of which could adversely affect an investment in us.
If a malicious actor or botnet obtains control of more than 50% of the processing power on a cryptocurrency network, such actor or
botnet could manipulate Blockchains to adversely affect us, which would adversely affect an investment in us or our ability to
operate.
If a malicious actor or botnet (a volunteer or hacked collection of computers controlled by networked software coordinating
the actions of the computers) obtains a majority of the processing power dedicated to mining a cryptocurrency, it may be able to alter
Blockchains on which transactions of cryptocurrency reside and rely by constructing fraudulent blocks or preventing certain
transactions from completing in a timely manner, or at all. The malicious actor or botnet could control, exclude or modify the ordering
of transactions, though it could not generate new units or transactions using such control. The malicious actor could “double-spend” its
own cryptocurrency (i.e., spend the same Bitcoin in more than one transaction) and prevent the confirmation of other users’
transactions for as long as it maintained control. To the extent that such malicious actor or botnet does not yield its control of the
processing power on the network or the cryptocurrency community does not reject the fraudulent blocks as malicious, reversing any
changes made to Blockchains may not be possible. The foregoing description is not the only means by which the entirety of
Blockchains or cryptocurrencies may be compromised but is only an example.
Although there are no known reports of malicious activity or control of Blockchains achieved through controlling over 50% of
the processing power on the network, it is believed that certain mining pools may have exceeded the 50% threshold in Bitcoin. The
possible crossing of the 50% threshold indicates a greater risk that a single mining pool could exert authority over the validation of
Bitcoin transactions. To the extent that the Bitcoin community, and the administrators of mining pools, do not act to ensure greater
decentralization of Bitcoin mining processing power, the feasibility of a botnet or malicious actor obtaining control of the Blockchain’s
processing power will increase, because such botnet or malicious actor could more readily infiltrate and seize control over the
Blockchain by compromising a single mining pool, if the mining pool compromises more than 50% of the mining power on the
Blockchain, than it could if the mining pool had a smaller share of the Blockchain’s total hashing power. Conversely, if the Blockchain
remains decentralized it is inherently more difficult for the botnet or malicious actor to aggregate enough processing power to gain
control of the Blockchain. If this were to occur, the public may lose confidence in the Bitcoin Blockchain, and Blockchain technology
more generally. This would likely have a material and adverse effect on the price of Bitcoin, which could have a material adverse effect
on our business, financial results and operations, and harm investors.
If the Bitcoin rewards for solving blocks are not sufficiently high, miners may not have adequate incentive to continue mining and
may cease mining operations, which may make the Blockchains they support with their mining activity less stable.
As the number of cryptocurrency rewards awarded for solving a block in a Blockchain decreases, the relative cost of
producing a single cryptocurrency will also increase, unless there is a corresponding increase in demand for that cryptocurrency. Even
relatively stable demand may not be sufficient to support the costs of mining, because as new miners begin working to solve blocks, the
relative amount of energy expended to obtain a cryptocurrency award will tend to increase. This increased energy directly relates to an
increased cost of mining, which means an increased cost of obtaining a cryptocurrency award. This increased cost, if not met with a
corresponding increase in the market price for the cryptocurrency resulting from increased scarcity and demand, may lead miners, such
as us, to conclude they do not have an adequate incentive to continue mining and, therefore, may cease their mining operations. This
could in turn reduce the sustainability of the Bitcoin Blockchain, which is dependent upon continued mining to solve the block’s
algorithms and process transactions in Bitcoin. If this were to occur, this could have a material adverse effect on our business, financial
results and operations.
Cryptocurrencies, including those maintained by or for us, may be exposed to cybersecurity threats and hacks.
As with any computer code generally, flaws in cryptocurrency codes may be exposed by malicious actors. Several errors and
defects have been found previously, including those that disabled some functionality for users and exposed users’ information.
Exploitations of flaws in the source code that allow malicious actors to take or create money have previously occurred. Despite our
efforts and processes to prevent breaches, our devices, as well as our miners, computer systems and those of third parties that we use in
our operations, are vulnerable to cyber security risks, including cyber-attacks such as viruses and worms, phishing attacks, denial-of-
service attacks, physical or electronic break-ins, employee theft or misuse, and similar disruptions from unauthorized tampering with
our miners and computer systems or those of third parties that we use in our operations. Such events could have a material adverse
effect on our business, prospects or operations and potentially the value of any Bitcoin or other cryptocurrencies we mine.
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We have an evolving business model which is subject to various uncertainties.
As cryptocurrency assets and Blockchain technologies become more widely available, we expect the services and products
associated with them to evolve. In order to stay current with the industry, our business model may need to evolve as well. From time to
time, we may modify aspects of our business model relating to our strategy. We cannot offer any assurance that these or any other
modifications will be successful or will not result in harm to our business. We may not be able to manage growth effectively, which
could damage our reputation, limit our growth and negatively affect our operating results. Further, we cannot provide any assurance
that we will successfully identify all emerging trends and growth opportunities in this business sector and we may lose out on those
opportunities. Such circumstances could have a material adverse effect on our business, prospects or operations.
Since there has been limited precedence set for financial accounting of digital assets, it is unclear how we will be required to
account for Bitcoin transactions in the future.
Since there has been limited precedence set for the financial accounting of digital assets such as Bitcoin, it is unclear how we
will be required to account for Bitcoin transactions or holdings. Furthermore, a change in regulatory or financial accounting standards
could result in the necessity to restate our financial statements. Such a restatement could negatively impact our business, prospects,
financial condition and results of operation.
Risks Related to Governmental Regulation and Enforcement
Regulatory changes or actions may alter the nature of an investment in us or restrict the use of cryptocurrencies in a manner that
adversely affects our business, prospects or operations.
As cryptocurrencies have grown in both popularity and market size, governments around the world have reacted differently to
cryptocurrencies; certain governments have deemed them illegal, and others have allowed their use and trade with no or minimal
restriction, while in some jurisdictions, such as in the U.S., cryptocurrencies are subject to extensive, and in some cases overlapping,
unclear and evolving regulatory requirements. Ongoing and future regulatory actions could have a material adverse effect on our
business, prospects or operations.
Because cryptocurrencies may be determined to be investment securities, we may become subject to the Investment Company Act of
1940 and be subject to comprehensive regulatory requirements that we would likely be unable to afford.
While we do not believe that we are primarily engaged in the business of investing, reinvesting, or trading in securities, nor do
we hold ourselves out as being engaged in those activities, we may become subject to the Investment Company Act of 1940 (the “1940
Act”) based on our Bitcoin holdings. Under the 1940 Act, an entity may be deemed to be an investment company if the value of its
investment securities is more than 40% of its total assets (exclusive of government securities and cash items) on an unconsolidated
basis.
As a result of our Bitcoin holdings resulting from our mining activities, to the extent Bitcoin or another cryptocurrency we
may hold is determined by the SEC or a state legislator to be a security, our holdings could exceed 40% of our total assets such that we
may trigger the threshold described above and become an inadvertent investment company unless we can rely an applicable exemption.
Classification as an investment company under the 1940 Act requires registration with the SEC. Such registration is time
consuming, expensive and restrictive and would require a substantial and onerous restructuring of our operations, and we would be
very constrained in the kind of business we could do as a registered investment company. Further, we would become subject to
substantial regulation concerning management, operations, transactions with affiliated persons and portfolio composition, and would
need to file reports under the 1940 Act regime. The cost of such compliance would result in the Company incurring substantial
additional expenses, and such costs or the failure to register if required would have a materially adverse impact on our operations.
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Current interpretations require the regulation of Bitcoin under the CEA by the CFTC, and we may be required to register and
comply with such regulations. Any disruption of our operations in response to the changed regulatory circumstances may be at a
time that is disadvantageous to investors.
Current and future legislation, the Commodity Futures Trading Commission (the “CFTC”) and other regulatory developments,
including interpretations released by a regulatory authority, may impact the manner in which Bitcoin and other cryptocurrencies are
treated for classification and clearing purposes. In particular, derivatives on these assets are not excluded from the definition of
“commodity future” by the CFTC. We cannot be certain as to how future regulatory developments will impact the treatment of Bitcoin
and other cryptocurrencies under the law.
Bitcoins have been deemed to fall within the definition of a commodity and, we may be required to register and comply with
additional regulation under the Commodity Exchange Act (“CEA”), including additional periodic report and disclosure standards and
requirements. Moreover, we may be required to register as a commodity pool operator and to register us as a commodity pool with the
CFTC through the National Futures Association. Such additional registrations may result in extraordinary, non-recurring expenses,
thereby materially and adversely impacting an investment in us. If we determine not to comply with such additional regulatory and
registration requirements, we may seek to cease certain of our operations. Any such action may adversely affect an investment in us.
Our interactions with a Blockchain may expose us to SDN or blocked persons or cause us to violate provisions of law that did not
contemplate distributed ledger technology.
The Office of Financial Assets Control (“OFAC”) of the U.S. Department of Treasury requires us to comply with its sanction
program and not conduct business with persons named on its specially designated nationals (“SDN”) list. However, because of the
pseudonymous nature of Blockchain transactions we may inadvertently and without our knowledge engage in transactions with persons
named on OFAC’s SDN list. Our Company’s policy prohibits any transactions with such SDN individuals, but we may not be
adequately capable of determining the ultimate identity of the individual with whom we transact with respect to selling cryptocurrency
assets. Moreover, federal law prohibits any U.S. person from knowingly or unknowingly possessing any visual depiction commonly
known as child pornography. Recent media reports have suggested that persons have imbedded such depictions on one or more
Blockchains. Because our business requires us to download and retain one or more Blockchains to effectuate our ongoing business, it is
possible that such digital ledgers contain prohibited depictions without our knowledge or consent. To the extent government
enforcement authorities literally enforce these and other laws and regulations that are impacted by decentralized distributed ledger
technology, we may be subject to investigation, administrative or court proceedings, and civil or criminal monetary fines and penalties,
all of which could harm our reputation and affect the value of our common stock.
Governmental action against the Blockchain and Bitcoin mining may have a materially adverse effect on the industry, and could
affect us if widely adopted.
We could become subject to regulations aimed at preventing what are perceived as some of the negative attributes of Bitcoin
and Bitcoin mining. For example, China has already made transacting in cryptocurrencies illegal for Chinese citizens in mainland
China, and additional restrictions may follow. Further, on March 2, 2021, governmental authorities of the Chinese province of Inner
Mongolia, began to take action to impose an outright ban on Bitcoin mining in the province due to the industry’s high electrical
consumption demands and negative environmental impacts. This could demonstrate the beginning of a regulatory trend in response to
concerns of overconsumption as it relates to environmental impact and energy conservation, and similar action in a jurisdiction in
which we operate could have devastating effects to our operations. If further regulation follows, it is possible that our industry may not
be able to adjust to a sudden and dramatic overhaul to our ability to deploy energy towards the operation of mining equipment.
Because we are unable to influence or predict future regulatory actions taken by governments, we may face difficulty
monitoring and responding to rapid regulatory developments affecting Bitcoin mining, which may have a materially adverse effect on
our industry and, therefore, our business and results of operations. If further regulatory action is taken by governments in the United
States or elsewhere, our business may be materially harmed.
We are subject to the information and reporting requirements of the Securities Exchange Act of 1934, and other federal securities
laws, including compliance with the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”).
The costs of preparing and filing annual and quarterly reports and other information with the SEC and furnishing audited
reports to shareholders will cause our expenses to be higher than they would have been if we were privately held. It may be time
consuming, difficult and costly for us to develop, implement and maintain the internal controls and reporting procedures required by
the Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal controls and other finance personnel in order to
develop and implement appropriate internal controls and reporting procedures.
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Public company compliance may make it more difficult to attract and retain officers and directors.
The Sarbanes-Oxley Act and rules implemented by the SEC have required changes in corporate governance practices of
public companies. As a public company, we expect these rules and regulations to increase our compliance costs and make certain
activities more time consuming and costly. The impact of the SEC’s July 25, 2017 report on Digital Securities (the “DAO Report”) as
well as enforcement actions will increase our compliance and legal costs. As a public company, we also expect that these rules and
regulations will make it more difficult and expensive for us to obtain director and officer liability insurance in the future and we may be
required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a
result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers,
and to maintain insurance at reasonable rates, or at all.
Risks Related to Ownership of Our Common Stock
Our stock price may be volatile.
The market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response to various
factors, many of which are beyond our control, including the following:
● changes in our industry including changes which adversely affect Bitcoin;
● the continued volatility of the price of Bitcoin;
● our ability to obtain working capital financing;
● progress and publications of the commercial acceptance of Bitcoin and other cryptocurrencies;
● additions or departures of key personnel including our executive officers;
● sales of our common stock;
● any public announcement of entering into new agreements and terms thereof, including with respect to the purchase of miners
and contracts for the supply of electricity to our facility;
● conversion of our convertible notes and the subsequent sale of the underlying common stock;
● business disruptions caused by earthquakes, tornadoes or other natural disasters;
● our ability to execute our business plan;
● operating results that fall below expectations;
● loss of any strategic relationship;
● adverse regulatory developments; and
● economic and other external factors.
In addition, the securities markets have from time-to-time experienced significant price and volume fluctuations that are
unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the
market price of our common stock. As a result, you may be unable to resell your shares at a desired price.
We have not paid cash dividends in the past and do not expect to pay dividends in the future. Any return on investment may be
limited to the value of our common stock.
We have never paid cash dividends on our common stock and do not anticipate doing so in the foreseeable future. The
payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors
affecting us at such time as our board of directors may consider relevant. If we do not pay dividends, our common stock may be less
valuable because a return on your investment will only occur if our stock price appreciates.
Because our common stock does not trade on a national securities exchange, the prices of our common stock may be more volatile
and lower than if we were listed.
Our common stock trades on the OTCQB operated by OTC Markets Group Inc. This market is not a national securities
exchange. While our common stock trading has been relatively active, generally the OTCQB does not have the same level of activity
as a national securities exchange like Nasdaq. Most institutions will not purchase a security unless it is on a national securities
exchange. In addition, they do not purchase stocks that trade below $5.00 per share. We may, in the future, take certain steps, including
utilizing investor awareness campaigns, press releases, road shows and conferences to increase awareness of our business and any steps
that we might take to bring us to the awareness of investors may require we compensate consultants with cash and/or stock. There can
be no assurance that there will be any awareness generated or the results of any efforts will result in any impact on our trading volume.
Consequently, investors may not be able to liquidate their investment or liquidate it at a price that reflects the value of the business and
trading may be at an inflated price relative to the performance of our company due to, among other things, availability of sellers of our
shares.
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Our common stock is deemed a “penny stock,” which makes it more difficult for our investors to sell their shares.
Our common stock is subject to the “penny stock” rules adopted under Section 15(g) of the Securities Exchange Act of 1934
(the “Exchange Act”). The penny stock rules generally apply to companies whose common stock trades at less than $5.00 per share,
subject to specific exceptions. Such exceptions include among others any equity security listed on a national securities exchange and
any equity security issued by an issuer that has (i) net tangible assets of at least $2,000, if such issuer has been in continuous operation
for three years, (ii) net tangible assets of at least $5,000, if such issuer has been in continuous operation for less than three years, or (iii)
average annual revenue of at least $6,000 for the last three years. The “penny stock” designation requires any broker-dealer selling
these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine
that the purchaser is reasonably suitable to purchase the securities. These rules limit the ability of broker-dealers to solicit purchases of
our common stock and therefore reduce its liquidity.
Moreover, as a result of apparent regulatory pressure from the SEC and the Financial Industry Regulatory Authority, a
growing number of broker-dealers decline to permit investors, or otherwise make it difficult, to purchase and sell “penny stocks.” The
“penny stock” designation may have a depressive effect upon our common stock price. If we remain subject to the penny stock rules
for any significant period, it could have an adverse effect on the market, if any, for our securities. Because our common stock is subject
to the penny stock rules, investors will find it more difficult to dispose of our securities.
Our amended and restated certificate of incorporation allows for our board to create new series of preferred stock without further
approval by our shareholders, which could adversely affect the rights of the holders of our common stock.
Our board of directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our board
of directors also has the authority to issue preferred stock without further shareholder approval. As a result, our board of directors could
authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation,
provide holders of the preferred anti-dilution protection, the right to receive dividend payments before dividends are distributed to the
holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our
common stock. In addition, our board of directors could authorize the issuance of a series of preferred stock that has greater voting
power than our common stock or that is convertible into our common stock, which could decrease the relative voting power of our
common stock or result in dilution to our existing shareholders.
Substantial future sales of our common stock by us or by our existing shareholders could cause our stock price to fall.
Additional equity financings or other share issuances by us, including shares issued in connection with strategic alliances and
corporate partnering transactions, and shares issued on the conversion of outstanding notes, could adversely affect the market price of
our common stock. Sales by existing shareholders of a large number of shares of our common stock in the public market or the
perception that additional sales could occur could cause the market price of our common stock to drop.
For these reasons and others, an investment in our securities is risky and you should invest only if you can withstand a
total loss of, and wide fluctuations in, the value of your investment.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Our principal corporate office is located at 150 Fayetteville Street, Suite 1110 Raleigh, NC 27601, occupied under a lease that
expires January 2023. Monthly rent is $3 until expiration of the lease. A security deposit of $3 was required upon execution of the
lease. We believe our office is in good condition and is sufficient to conduct our operations.
We have constructed our own Bitcoin mining facility on 6 acres in LaFayette, GA which we acquired in May 2019. We
believe our mining facility is in good condition and is sufficient to conduct our operations. In 2021, we entered into a lease for a
contiguous area of land near our LaFayette, GA property, for $3 per year for five years.
Item 3. Legal Proceedings
As more fully described in Item 1A Risk Factors, in September 2018, the SEC filed an action against the Company’s Chief
Executive Officer alleging violations of federal securities laws which could result in liabilities for the Company.
Item 4. Mine Safety Disclosures
None.
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Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer’s Purchases of Equity Securities
PART II
Market Information
Our common stock is traded on the OTC QB tier of OTC Markets LLC under the symbol “MGTI.”
Holders
On March 30, 2022, the Company’s common stock closed on the OTC QB tier of OTC Markets LLC at $0.03 per share and
there were 363 stockholders of record.
Dividends
The Company has never declared or paid cash dividends on its common stock and has no intention to do so in the foreseeable
future.
Unregistered sales of equity securities
During the year ended December 31, 2021, 14,270,833 warrants were exercised on a cashless basis for the issuance of
23,500,000 shares of common stock.
Repurchases of Equity Securities
None.
Item 6. Reserved
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Following a review of our Bitcoin mining operations in early 2019, we consolidated our activities at a Company-owned and
managed facility in LaFayette, GA. Located adjacent to a utility substation, the several-acre property has access to about 20 megawatts
(MW) of low-cost electrical power, about half of which is presently utilized by the Company.
As of December 31, 2021 and March 31, 2022, the Company owned 480 and 430Antminer S17 miners, respectively, plus 35
Antminer S19 Pro miners as of March 31, 2022. All miners are located at our Georgia facility. As more fully described in the following
paragraph, over three-quarters of the S17 miners require various repairs to be productive. We purchased a total of 1,506 S17 miners in
the latter part of 2019 directly from Bitmain, for an aggregate purchase price of approximately $2,768, which was paid in full. From
May 2020 through March 31, 2022, the Company sold a total of 923 of these miners, receiving aggregate gross proceeds of
approximately $869, and has scrapped 153 S17 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 miners, the Company was unsuccessful in obtaining any compensation from Bitmain. The manufacturing
defects, combined with inadequate repair facilities has rendered approximately 350 of our remaining 430 miners in need of repair or
replacement. To date, in addition to a significant amount in lost revenue, we have incurred approximately $140 in costs of repairing or
replacing the defective machines. Currently, we plan to sell with all our remaining inventory of S17 miners, as well as loose hash
boards, power supplies, controller boards, and other parts.
MGT’s miners are housed in a modified shipping container on the property in Georgia owned by the Company. The entire
facility, including the land and improvements, five 2500 KVA 3-phase transformers, three mining containers, and miners, are owned by
MGT. We continue to explore ways to grow and maintain our current operations including but not limited to further potential
equipment sales and raising capital to acquire the newest generation miners. The Company is also investigating other sites to develop
into Bitcoin mining facilities in addition to expansion at its current property.
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In addition to its self-mining operations, the Company leases its owned space to other Bitcoin miners and also provides hosting
services for owners of mining equipment. These measures improve utilization of the electrical infrastructure and better insulate us
against the volatility of Bitcoin mining.
Critical accounting policies and estimates
Principles of consolidation
The consolidated financial statements include the accounts of MGT and MGT Sweden AB. MGT Sweden AB was dissolved
effective on October 1, 2021. All intercompany transactions and balances have been eliminated.
Use of estimates and assumptions and critical accounting estimates and assumptions
The preparation of the consolidated 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 warrants issued, 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
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Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the
amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is
subsequently resolved. The transaction price is allocated to each performance obligation on a relative standalone selling price basis.
The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in
time or over time as appropriate.
The Company has entered into digital asset mining pools by agreeing to terms and conditions, as amended from time to time,
with the mining pool operators to provide computing power to the mining pool. The contracts are terminable at any time by either party
and the Company’s enforceable right to compensation only begins when the Company provides computing power to the mining pool
operator. In exchange for providing computing power, the Company is entitled to a fractional share of the fixed cryptocurrency award
the mining pool operator receives (less digital asset transaction fees to the mining pool operator which are recorded as a component of
cost of revenues), for successfully adding a block to the Blockchain. The terms of the agreement provide that neither party can dispute
settlement terms after thirty-five days following settlement. The Company’s fractional share is based on the proportion of computing
power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in
solving the current algorithm.
Providing computing power to solve complex cryptographic algorithms in support of the Bitcoin Blockchain (in a process
known as “solving a block”) is an output of the Company’s ordinary activities. The provision of providing such computing power is the
only performance obligation in the Company’s agreements with mining pool operators. The transaction consideration the Company
receives, if any, is noncash consideration, which the Company measures at fair value on the date received, which is not materially
different than the fair value at contract inception or the time the Company has earned the award from the pools. The consideration is all
variable. Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration is constrained
until the mining pool operator successfully places a block (by being the first to solve an algorithm) and the Company receives
confirmation of the consideration it will receive, at which time revenue is recognized. There is no significant financing component in
these transactions.
Fair value of the cryptocurrency award received is determined using the quoted price of the related cryptocurrency at the time
of receipt. There is currently no specific definitive guidance under GAAP or alternative accounting framework for the accounting for
cryptocurrencies recognized as revenue or held, and management has exercised significant judgment in determining the appropriate
accounting treatment. In the event authoritative guidance is enacted by the Financial Accounting Standards Board (“FASB”), the
Company may be required to change its policies, which could have an effect on the Company’s consolidated financial position and
results from operations.
Other Revenues
We receive revenues from third parties renting capacity at our facility and from hosting miners owned by others. The
Company recognized $197 and $0 from these sources during the years ended December 31, 2021 and 2020, respectively.
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.
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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 year ended December 31, 2021 excludes 74,614,871 shares
issuable upon the exercise of outstanding warrants. The computation of diluted loss per share for the year ended December 31, 2020
excludes 33,333 unvested restricted shares, 9,173,651 shares issuable upon the conversion of convertible debt, and 45,634,921 shares
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”). 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.
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● 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 December 31, 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 $1,230 and $236 as of December 31, 2021 and December 31, 2020,
respectively. Accounts are insured by the FDIC up to $250 per financial institution. The Company has not experienced any losses in
such accounts with these financial institutions. As of December 31, 2021, and December 31, 2020, the Company had $980 and $0,
respectively, in excess over the FDIC insurance limit.
Recent accounting pronouncements
Note 3 to our audited consolidated financial statements appearing elsewhere in this report includes Recent Accounting
Pronouncements.
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Results of operations
Years ended December 31, 2021 and 2020
Revenues
Our revenues for the year ended December 31, 2021 decreased by $551, or 38%, to $883 as compared to $1,434 for the year
ended December 31, 2020. Our revenue is primarily derived from cryptocurrency mining which totaled $686 during 2021. The
decrease in revenues is a result of less Bitcoins mined due to fewer miners in operation and higher difficulty rate, offset by increased
Bitcoin prices.
We also receive revenues from third parties renting capacity at our facility and from hosting miners owned by others. The
Company recognized $197 and $0 from these sources during the years ended December 31, 2021 and 2020, respectively.
Operating Expenses
Operating expenses for the year ended December 31, 2021 decreased by $1,641, or 38%, to $2,670 as compared to $4,311 for
the year ended December 31, 2020. The decrease in operating expenses was comprised of a decrease in cost of revenues of $822 and
general and administrative expenses of $819.
The decrease in cost of revenues of $822 or 48% to $906 as compared to $1,728 for the year ended December 31, 2020, was
primarily due to decreases in electricity costs of $405, decreases in depreciation of $427, offset by increases in mark to market
revaluation of $10. The decrease in general and administrative expenses of $819 or 32% to $1,764 as compared to $2,583 for the year
ended December 31, 2020, was primarily due to decreases in payroll and related expenses of $193, stock-based compensation of $223,
legal and audit fees of $203, and insurance of $121.
Other Income and Expense
For the year ended December 31, 2021, non–operating expense consisted of accretion of debt discount of $526, loss on
settlement of debt of $541, loss on settlement of derivative of $228, interest expense of $340, loss on change in fair value of derivative
liability of $79, offset by non-operating income of a gain on sale of property and equipment of $246, the change in fair value of
derivative liabilities of $955, gain on settlement of payables of $675 and other non-operating income of $392, and non-operating
expense of $306.
For the year ended December 31, 2020, non–operating expense consisted of accretion of debt discount of $882, a loss on sale
of property and equipment of $352, interest expense of $347, offset by non-operating income of a gain on change in fair value of the
liability associated with the termination of management agreements of $26, forgiveness of debt of $111, the change in fair value of
liability and derivative liability of $309, and net other income of $125.
.
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 December 31, 2021 have an accumulated
deficit of $419,928. At December 31, 2021, our cash and cash equivalents were $1,230, and we had a working capital deficit of $191.
As of December 31, 2021, we had no outstanding debt.
In January 2020, management consolidated its activities in a Company-owned and managed facility, having terminated all
third-party management agreements and hosting arrangements in 2019. The Company will likely need to raise additional funding to
maintain 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. Such factors raise substantial doubt about the Company’s ability to sustain operations
for at least one year from the issuance of these consolidated financial statements. The accompanying 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 in
our operating results and liquidity and could harm the price of our common stock. Movements may be influenced by various factors,
including, but not limited to, government regulation, security breaches experienced by service providers, as well as political and
economic uncertainties around the world. Since we record revenues partly based on the price of earned Bitcoin and we may retain such
Bitcoin as an asset or as payment for future expenses, the relative value of such revenues may fluctuate, as will the value of any Bitcoin
we retain. The high and low exchange rate per Bitcoin for the year ending December 31, 2021, as reported by Blockchain.info, were
approximately $68 and $30 respectively.
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The supply of Bitcoin is finite. Once 21 million Bitcoin are generated, the network will stop producing more. Currently, there
are approximately 19 million Bitcoin in circulation, or 90% of the total supply of Bitcoin. Within the Bitcoin protocol is an event
referred to as Halving where the Bitcoin reward provided upon mining a block is reduced by 50%. Halvings are scheduled to occur
once every 210,000 blocks, or roughly every four years, until the maximum supply of 21 million Bitcoin is reached. The most recent
Halving occurred in May 2020, with a revised reward payout of 6.25 Bitcoin per block.
Given a stable hash rate, a Halving reduces the number of new Bitcoin being generated by the network. While the effect is to
limit the supply of new coins, it has no impact on the quantity of total Bitcoin outstanding. As a result, the price of Bitcoin could rise or
fall based on overall investor and consumer demand. Should the price of Bitcoin remain unchanged after the next Halving, the
Company’s revenue would be reduced by 50%, with a much larger negative impact to profit.
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 annual report on Form 10-K. 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. We have also undertaken measures to reduce our administrative and
advisory costs required as a publicly reporting company. Actions taken to date include salary reductions for senior management and
termination of certain consulting agreements. 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.
Our primary source of operating funds has been through debt and equity financing.
Sale of Preferred Stock
In April and July of 2019, we sold 200 shares of Series C Convertible Preferred Stock with a par value of $0.001 and a stated
value of $10,000 per share (“Preferred Shares”) for $1,990.
The Preferred Shares did not have voting rights or pay a dividend, and were redeemable by the Company for cash. Further,
each Preferred Share was convertible into shares of our 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 our common
stock, defined as the lowest trading price of our common stock during the ten-day period preceding the conversion date. The common
shares issued upon conversion were registered under a Form S-3 registration statement.
All Preferred Shares were converted into common stock during the period from issuance through February 2021.
Sale of Common Stock
On July 21, 2021, as part of a corporate fundraising of $990, net of issuance costs, the Company issued 35,385,703 shares of
common stock and 35,385,703 warrants to purchase common stock.
Debt Financing
December 2020 Note
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On December 8, 2020, we entered into a securities purchase agreement pursuant to which we issued a convertible promissory
note in the principal amount of $230 which was 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. This entirety of the principal amount of
this note was converted into 11,435,289 shares of common stock during 2021, and this note was extinguished as of December 31, 2021.
March 2021 Note
On March 5, 2021, we entered into a securities purchase agreement (the “Securities Purchase Agreement”) with Bucktown
Capital, LLC (the “Investor”), pursuant to which the Company issued a convertible promissory note in the original principal amount of
$13,210 (the “March 2021 Note”). The March 2021 Note was convertible, at the option of the Investor, into shares of common stock of
the Company at a conversion price equal to 70% of the lowest price for a share of common stock during the ten trading days
immediately preceding the applicable conversion (the “Conversion Price”); provided, however, in no event would the Conversion Price
be less than $0.04 per share. The March 2021 Note bore interest at a rate of 8% per annum and was to mature in twelve months.
The Note was to be funded in tranches, with the initial tranche of $1,210 funded by the Investor on March 5, 2021 for
consideration of $1,000.
On September 30, 2021, the March 2021 Note was extinguished by exchanging the March 2021 Note for a warrant to
purchase 53,500,000 shares of common stock (the “2021 Warrant”). Subject to the terms and adjustments in the 2021 Warrant, the
2021 Warrant is exercisable at an initial price of $0.05 per share, for five years from March 5, 2021. The Investor has the option to
exercise all or any part of the 2021 Warrant on a cashless or cash basis. Following this exchange, the outstanding balance on the March
2021 Note is $0.
The PPP Loan
On April 16, 2020, we entered into a promissory note with Aquesta Bank for $111 in connection with the Paycheck Protection
Program offered by the U.S. Small Business Administration (the “PPP Loan”). The PPP Loan bears interest at 1% per annum, with
monthly installments of $6 commencing on November 1, 2021 for 18 months through its maturity on April 1, 2023. The principal
amount of the PPP Loan will be forgiven if the loan proceeds are used to pay for payroll costs, rent and utilities costs over the 24-week
period after the PPP Loan is made. Not more than 40% of the forgiven amount may be used for non-payroll costs. The amount of the
PPP Loan forgiveness may be reduced if the Company reduces its full-time head count.
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
Operating activities
Net cash used in operating activities was $1,160 for the year ended December 31, 2021 as compared to $650 for the year
ended December 31, 2020. The amount in 2021 primarily consisted of a net loss of $1,539 offset by non-cash charges of $749
(including: depreciation expense of $675, change in fair value of derivative liability $79, loss on settlement of derivative of $228, loss
on settlement of payables of $541, amortization of note discount $526, non-cash interest expense of $270, and non-operating expense
of $306, partially offset by gain on disposal of assets of $246, gain on settlement of payables of $675 and the change in fair value of
warrant liability of ($955), and reduced by a change in working capital excluding cash of $370. The amount in 2020 primarily
consisted of a net loss of $3,887 offset by non-cash charges of $2,516 (including: stock-based compensation of $222, an impairment
charge to the Company’s intangible cryptocurrency mining assets of $49, depreciation expense of $1,102, amortization of debt discount
of $882, non-cash interest expense of $355 and loss on sale of property and equipment of $352), and reduced by other non-cash items,
including funding from the PPP Loan recognized as income in the amount of $111, the change in the fair value of the liability
associated with the termination of the management agreements of $26, the change in the fair value of the derivative liability of $309,
and a change in working capital excluding cash of $721.
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Investing activities
Net cash provided by investing activities was $164 for the year ended December 31, 2021 as compared to net cash provided
by investing activities of $359 for the year ended December 31, 2020. The amount in 2021 consisted of proceeds from the sale of
property and equipment of $426 offset by purchases of property and equipment of $212 and an investment of $50 in the form of a
convertible promissory note.
Financing activities
During the year ended December 31, 2021, cash provided by financing activities totaled $1,990 which includes $1,000 in net
proceeds from the issuance of convertible notes payable and $990 from the sale of common stock.
During the year ended December 31, 2020, cash provided by financing activities totaled $311 which includes $200 in net
proceeds from the issuance of notes payable and $111 of proceeds from PPP Loan.
Off–balance sheet arrangements
As of December 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.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Company is not exposed to market risk related to interest rates on foreign currencies. Inflation has not materially affected
us during the past fiscal year; however, we do believe that inflation may significantly impact our business in 2022. We do not believe
that our business is seasonal in nature.
Item 8. Financial Statements and Supplementary Data
See Financial Statements and Schedules attached hereto.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that the information we are required to disclose in reports
that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified under
the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to
ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and our
acting Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. As required by paragraph (b) of
Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer (our principal executive) and acting Chief Financial
Officer (our principal financial officer and principal accounting officer) carried out an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures as of December 31, 2021. Based on this evaluation, our Chief Executive Officer
and acting Chief Financial Officer concluded that our disclosure controls and procedures (as defined in paragraph (e) of Rules 13a-15
and 15d-15 under the Exchange Act) were not effective as December 31, 2021.
Limitations on Internal Control over Financial Reporting
An internal control system over financial reporting has inherent limitations and may not prevent or detect misstatements.
Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design
into the process safeguards to reduce, though not eliminate, this risk.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined
in Exchange Act Rule 13a-15(f) and 15d-15(f). Internal control over financial reporting is a process used to provide reasonable
assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in
accordance with generally accepted accounting principles in the United States. Internal control over financial reporting includes
policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions
and dispositions of our assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of our
financial statements in accordance with generally accepted accounting principles in the United States, and that our receipts and
expenditures are being made only in accordance with the authorization of our board of directors and management; and provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could
have a material effect on our financial statements.
Under the supervision and with the participation of our management, including our Chief Executive Officer (our principal
executive) and acting Chief Financial Officer (our principal financial officer and principal accounting officer), we performed a
complete documentation of the Company’s significant processes and key controls, and conducted an evaluation of the effectiveness of
our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on this evaluation, management concluded that
our internal control over financial reporting was not effective as of December 31, 2021.
This Annual Report on Form 10-K does not include an attestation report of the Company’s independent registered public
accounting firm regarding internal control over financial reporting since the Company is a smaller reporting company under the rules
of the SEC.
Changes in Internal Control over Financial Reporting
During the year ended December 31, 2021, there were no changes in internal control over financial reporting.
Item 9B. Other Information. None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. Not applicable.
33
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Name
Robert B. Ladd
Age
63
Position
President, Chief Executive Officer, acting Chief Financial Officer and Director
Michael Onghai
51
Chairman of the Audit Committee, Compensation Committee and Nominating/Corporate
Governance Committee Member, Independent Director
Directors are elected based on experience, qualifications and in accordance with the Company’s by–laws to serve until the
next annual stockholders meeting and until their successors are elected in their stead. Officers are appointed by the Board and hold
office until their successors are chosen and qualified, until their death or until they resign or have been removed from office. All
corporate officers serve at the discretion of the Board. There are no family relationships between any director or executive officer and
any other director or executive officer of the Company.
Robert B. Ladd joined the Company in December 2010 as a Director. He was named Interim President and CEO in February
2011, and appointed President and CEO in January 2012, positions held continuously with the exception of November 2016 through
August 2017, a period during which Mr. Ladd was President. He also served as our Interim CFO from November 2015 through
February 2018 and acting Chief Financial Officer since July 1, 2020. On September 10, 2018, Mr. Ladd took a leave of absence from
his positions as President and Chief Executive Office and was reappointed as President and Chief Executive Officer on May 1, 2019.
Mr. Ladd was the Managing Member of Laddcap Value Advisors, LLC, which served as the investment manager for various private
partnerships, including Laddcap Value Partners LP. Prior to forming his investment partnership in 2003, Mr. Ladd was a Managing
Director at Neuberger Berman Group. Mr. Ladd is a former Director of InFocus Systems, Inc. (NASDAQ – INFS, 2007 to 2009), and
served on the boards of Delcath Systems, Inc. (NASDAQ – DCTH, 2006–2012) and Pyxis Tankers (NASDAQ – PXS, 2016 – 2017).
Mr. Ladd has earned his designation as a Chartered Financial Analyst (1986). Based on Mr. Ladd’s familiarity with the Company in
serving as our Chief Executive Officer since 2011 and his overall background and experience as an executive in the financial industry,
the Nominating and Corporate Governance Committee of the Board concluded that Mr. Ladd has the requisite experience,
qualifications, attributes and skill necessary to serve as a member of the Board.
Michael Onghai was appointed a director in May 2012. Mr. Onghai has been the CEO of LookSmart (OTC: LKST), since
February 2013. He has been the founder and Chairman of AppAddictive, an advertising and social commerce platform since July 2011.
Mr. Onghai is the President of Snowy August Management LLC, a special situations fund concentrating on the Asian market, spin–offs
and event–driven situations. Mr. Onghai is the founder of Stock Sheet, Inc., and Daily Stocks, Inc. – the web’s early providers of
financial information and search engine related content for financial information. Mr. Onghai has founded several other internet
technology companies for the last two decades. Mr. Onghai is an advisor to several internet incubators and is a panelist who advises
FundersClub on which companies to accept for its pioneering venture capital platform. Mr. Onghai has earned his designation as a
Chartered Financial Analyst (2006) and holds a B.S. in Electrical Engineering and Computer Science from the University of California,
Los Angeles and graduated from the Executive Management Certificate Program in Value Investing (The Heilbrunn Center for Graham
& Dodd Investing) Graduate School of Business at Columbia Business School. The Board believes that Mr. Onghai has the experience,
qualifications, attributes and skills necessary to serve as a director and chairman of the Audit Committee because of his years of
business experience and financial expertise.
Family Relationships
There are no family relationships among any of the Company’s directors and executive officers.
34
Board Role in Risk Oversight
The Board’s primary function is one of oversight. The Board as a whole works with the Company’s management team to
promote and cultivate a corporate environment that incorporates enterprise-wide risk management into strategy and operations.
Management periodically reports to the Board about the identification, assessment and management of critical risks and management’s
risk mitigation strategies. Each committee of the Board is responsible for the evaluation of elements of risk management based on the
committee’s expertise and applicable regulatory requirements. In evaluating risk, the Board and its committees consider whether the
Company’s programs adequately identify material risks in a timely manner and implement appropriately responsive risk management
strategies throughout the organization. The audit committee focuses on assessing and mitigating financial risk, including risk related to
internal controls, and receives at least quarterly reports from management on identified risk areas. In setting compensation, the
compensation committee strives to create incentives that encourage behavior consistent with the Company’s business strategy, without
encouraging undue risk-taking. The nominating committee considers areas of potential risk within corporate governance and
compliance, such as management succession. Each of the committees reports regularly to the Board as a whole as to their findings with
respect to the risks they are charged with assessing.
Code of Business Conduct and Ethics
On July 11, 2018, the Board revised the Code of Business Conduct and Ethics which applies to all directors and employees
including the Company’s principal executive officer, principal financial officer and principal accounting officer or persons performing
similar functions. Prior to July 11, 2018, the Company’s employees and directors were subject to the previous Code of Ethics adopted
by the Board on June 25, 2012.
Copies of the Code of Business Conduct and Ethics can be obtained, without charge by writing to the Corporate Secretary at
MGT Capital Investments, Inc., 150 Fayetteville Street, Suite 1110, Raleigh, NC 27601, or through our corporate website at
mgtci.com.
Audit Committee and Audit Committee Financial Expert
On November 25, 2004, the Board established an Audit Committee to carry out its audit functions. At December 31, 2021, the
membership of the Audit Committee was Michael Onghai.
The Board has determined that Michael Onghai, an independent director, is the Audit Committee financial expert, as defined
in Regulation S–K promulgated under the Exchange Act, serving on its Audit Committee.
Item 11. Executive Compensation
Summary Compensation Table
The following table summarizes Fiscal Years 2021 and 2020 compensation for services in all capacities of the Company’s named
executive officers:
Name
Principal Position
Year
Salary
Bonus
Stock
awards
All other
compensation
Total
compensation
President, Chief
Executive Officer and
Acting Chief Financial
Officer(
Robert B.
Ladd
2021 $
2020 $
240 $
282 $
- $
- $
- $
- $
- $
- $
240
282
35
Employment Agreements
Robert B. Ladd
On April 1, 2018, the Company entered into an Amended and Restated Executive Employment Agreement (the “Employment
Agreement”) with Mr. Ladd, which was executed on April 6, 2018. The Employment Agreement provides that Mr. Ladd has been
reappointed as President and Chief Executive Officer of the Company for an initial term of two years. Mr. Ladd is entitled to receive an
annualized base salary of $360 and is also eligible for a cash and/or equity bonus as the Compensation Committee may determine,
from time to time, based on meeting performance objectives and bonus criteria to be mutually identified by Mr. Ladd and the
Compensation Committee. In connection with the execution of the Employment Agreement, the Company issued to Mr. Ladd 600,000
shares of the Company’s restricted common stock, pursuant to the Company’s 2016 Stock Option Plan, vesting over a two-year period.
On September 10, 2018 through May 1, 2019, Mr. Ladd took a leave of absence as an executive and officer of the Company in order to
focus on allegations levied against him in an SEC complaint filed on September 7, 2018.
On November 11, 2020, the Company and Mr. Ladd agreed to amend the Employment Agreement, by resetting its effective
date to November 1, 2020, and reducing the annualized base salary to $240.
As part of Company-wide cost of living wage adjustments, Mr. Ladd’s annualized base salary was increased to $255 in
February 2022.
Outstanding Equity Awards at December 31, 2021
Outstanding Stock Awards at Fiscal Year-End for 2021
None
Director Compensation
The following table sets forth the compensation of persons who served as a member of our Board of Directors during all or
part of 2021, other than Robert B. Ladd, who is not compensated separately for Board service.
Name
Fees Earned
Or
Paid in Cash
Stock
Awards
All Other
Compensation
Total
Michael Onghai
$
31 $
- $
– $
31
Directors are reimbursed for their out–of–pocket expenses incurred in connection with the performance of Board duties.
Independent Director Compensation
In February 2022, the Company changed its cash compensation policy for independent directors. Each independent director
will receive annual compensation of $32, up from $30 previously.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Security Ownership of Certain Beneficial Owners
The following table sets forth certain information regarding beneficial ownership and voting power of the common stock as of
March 31, 2022, of:
● each person serving as a director, a nominee for director, or executive officer of the Company;
● all executive officers and directors of the Company as a group; and
● all persons who, to our knowledge, beneficially own more than five percent of the common stock.
“Beneficial ownership” here means direct or indirect voting or investment power over outstanding stock and stock which a
person has the right to acquire now or within 60 days after March 31, 2022. See the accompanying footnotes to the tables below for
more detailed explanations of the holdings. Except as noted, to our knowledge, the persons named in the tables beneficially own and
have sole voting and investment power over all shares listed.
36
Percentage beneficially owned is based upon 640,970,903 shares of common stock issued and outstanding as of March 31,
2022.
Name and Address of Beneficial Owner (1)
Current Directors and Officers:
Robert B. Ladd
Michael Onghai
All directors and executive officers (2 persons)
5% Owners
Streeterville Capital LLC
303 E Wacker Drive, Suite 1040
Chicago, IL 60601
Amount and Nature
of
Beneficial
Ownership
[Percentage of
Beneficial
Ownership]
1,773,334
586,000
2,359,334
0.28%
0.09%
0.37%
64,032,993,(2)
9.99%
(1) Unless otherwise noted, the addresses for the above persons are in care of the Company at 105 Fayetteville Street, Suite
1110, Raleigh, NC 27601.
(2) Streeterville Capital LLC, Bucktown Capital LLC and affiliated entities, all controlled by John M. Fife, own a total of
63,416,941 warrants exercisable into an indeterminate number of shares of common stock on a cashless basis, subject to a
blocker that prevents the holder from owning in excess of 9.99% of the Company’s shares outstanding.
Securities Authorized for Issuance Under Equity Compensation Plans
The table below provides information on our equity compensation plans as of December 31, 2021:
Number of
securities to be
issued upon
exercise of
outstanding options,
warrants and rights
(a)
Weighted–average
exercise price of
outstanding
options, warrants
and rights
(b)
-
–
-
0 $
–
0 $
Number of
securities remaining
available for future
issuance under
equity
compensation plans
(excluding
securities reflected
in column (a))
(c)
5,102,586
–
5,102,586
Plan category
Equity compensation plans approved by security holders (1)
Equity compensation plans not approved by security holders
Total
(1) On September 8, 2016, the Company’s stockholders approved the MGT Capital Investments, Inc. 2016 Equity Incentive
Plan. The Company received approval to issue up to a maximum of 18,000,000 shares of common stock, including
6,000,000 options. As of December 31, 2021, the Company has issued 6,000,000 options and 6,897,414 shares under this
plan. All options expired on January 31, 2020.
Item 13. Certain Relationships and Related Transactions and Director Independence
None.
37
Director Independence
Michael Onghai is considered independent under Section 803A of NYSE MKT rules.
Item 14. Principal Accountant Fees and Services
Effective January 5, 2017, RBSM LLP became our current independent auditor. The following is a summary of the fees billed
by our independent auditors for professional services rendered for the fiscal years ended December 31, 2021 and 2020.
Audit fees
Tax fees
Audit-related fees
Other fees
Year Ended December 31,
2021
2020
160 $
10
–
–
170 $
264
–
-
-
264
$
$
Audit fees consist of fees billed for services rendered for the audit of our financial statements and review of our financial
statements included in our quarterly reports on Form 10–Q.
Tax fees consist of fees billed for professional services related to the preparation of our U.S. federal and state income tax
returns and tax advice.
Audit–related fees consists of fees reasonably related to the performance of the audit or review of the Company’s financial
statements that are not reported as “Audit Fees.”
All other fees consist of fees for other miscellaneous items, including fees related to registrations statements.
All services provided by the Company’s independent auditor were approved by the Company’s audit committee.
Pre–Approval Policy of Services Performed by Independent Registered Public Accounting Firm
The Audit Committee’s policy is to pre–approve all audit and non–audit related services, tax services and other services. Pre–
approval is generally provided for up to one year, and any pre–approval is detailed as to the particular service or category of services
and is generally subject to a specific budget. The Audit Committee has delegated the pre–approval authority to its chairperson when
expedition of services is necessary. The independent registered public accounting firm and management are required to periodically
report to the full Audit Committee regarding the extent of services provided by the independent registered public accounting firm in
accordance with this pre–approval and the fees for the services performed to date.
38
Item 15. Exhibits and Financial Statement Schedules.
Financial Statements
PART IV
The consolidated financial statements of the Company for the fiscal years covered by this Annual Report are located on pages F-1 to F-
21 of this Annual Report.
Exhibit No.
Description
3.1
3.2
4.1
4.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
Restated Certificate of Incorporation of MGT Capital Investments, Inc., as amended (incorporated by reference to
Exhibit 3.1 to the Annual Report on Form 10-K filed with the SEC on April 16, 2019).
Amended and Restated Bylaws of MGT Capital Investments, Inc. (incorporated by reference to Exhibit 3.1 to the
Current Report on Form 8-K filed with the SEC on January 30, 2014).
Certificate of Designation of 12% Series B Preferred Stock of MGT Capital Investments, Inc., filed with the Delaware
Secretary of State on January 11, 2019 (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K
filed with the SEC on January 14, 2019).
Description of MGT Capital Investment, Inc.’s Securities (incorporated by reference to Exhibit 4.3 to the Annual Report
on Form 10-K filed with the SEC on March 30, 2020).
MGT Capital Investments, Inc. 2016 Equity Incentive Plan (incorporated by reference to Annex B to the Definitive
Proxy Statement on Schedule 14A filed with the SEC on August 15, 2016).
Employment Agreement, by and between MGT Capital Investments, Inc. and Robert Ladd, dated as of April 1, 2018
(incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on April 12, 2018).
Amendment to Employment Agreement, dated November 11, 2020, by and between MGT Capital Investments, Inc. and
Robert Ladd (incorporated by reference to Exhibit 10.5 to the Annual Report on Form 10-K filed with the SEC on April
15, 2021).
Securities Purchase Agreement dated July 21, 2021, by and between MGT Capital Investments, Inc. and Streeterville
Capital, LLC (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on July
27, 2021).
Form of Warrant, issued by MGT Capital Investments, Inc. to Streeterville Capital LLC (incorporated by reference to
Exhibit 10.2 to the Current Report on Form 8-K filed with the SEC on July 27, 2021).
Exchange Agreement dated September 30, 2021, by and between MGT Capital Investments, Inc. and Bucktown
Capital, LLC (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on
October 4, 2021).
Form of Warrant, issued by MGT Capital Investments, Inc. to Bucktown Capital LLC (incorporated by reference to
Exhibit 10.2 to the Current Report on Form 8-K filed with the SEC on October 4, 2021).
23.1
Consent of independent registered public accountant.*
31
32
Certification pursuant to Section 302 of the Sarbanes–Oxley Act of 2002 of Principal Executive Officer and Principal
Accounting Officer*
Certification pursuant to Section 906 of the Sarbanes–Oxley Act of 2002 of Principal Executive Officer and Principal
Financial Officer*
101.INS
XBRL Instance Document*
101.SCH
XBRL Taxonomy Extension Schema*
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB
XBRL Taxonomy Extension Labels Linkbase Document*
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document*
104
*
Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101).
Filed herewith.
Item 16. Form 10–K Summary.
Not applicable.
39
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
March 31, 2022
MGT CAPITAL INVESTMENTS, INC
By: /s/ Robert B. Ladd
Robert B. Ladd
President (Principal Executive Officer)
Pursuant to the requirements of the Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature
Title
/s/ Robert B. Ladd
Robert B. Ladd
/s/ Michael Onghai
Michael Onghai
Date
March 31, 2022
President, Chief Executive Officer, Acting Chief Financial Officer
and Director
(Principal Executive Officer, Principal Financial Officer and
Principal Accounting Officer)
Director
March 31, 2022
40
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
MGT Capital Investments, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of MGT Capital Investments, Inc. and its subsidiary (the Company) as
of December 31, 2021 and 2020, the related consolidated statements of operations, stockholders’ equity and cash flows for each of the
years in the two year period ended December 31, 2021, and the related notes (collectively referred to as the financial statements). In
our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31,
2021 and 2020, and the results of its operations and its cash flows for each of the years in the two year period ended December 31,
2021, in conformity with accounting principles generally accepted in the United States of America.
The Company’s Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed
in Note 2 to the financial statements, the Company has suffered recurring losses from operations and will require additional capital to
continue as a going concern. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s
plans regarding these matters are also described in Note 2. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result
from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part
of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such
opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were
communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to
the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical
audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the
critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they
relate.
Revenue from mining of digital currencies – Refer to Note 3 of the consolidated financial statements
Critical Audit Matter Description
As disclosed in Note 3 of the financial statement, the Company recognizes revenue in accordance with ASC 606, Revenue from
Contracts with Customers. The Company provides computing power in crypto asset transaction verification services to the blockchain
network. The transaction consideration received by the Company, if any, is a non-cash consideration, which the Company measures at
fair value on the date received. During the year ended December 31, 2021, the Company recognized net cryptocurrency mining
revenue of approximately $686,000.
We identified the recognition of revenue for cryptocurrency mining as a critical audit matter due to the complexities involved in
auditing completeness and occurrence of the revenue recognized by the Company particularly in light of material weakness identified
in the design and effectiveness of certain internal controls over the IT environment for certain financially relevant systems. Currently,
no authoritative guidance exists for the accounting for and disclosure of cryptocurrency mining revenue recognized in accordance with
GAAP. The Company’s management has exercised significant judgment in their determination of how existing GAAP should be
applied to the accounting for and disclosure of cryptocurrency mining revenue recognized.
How the Critical Audit Matter Was Addressed in the Audit
The primary procedures we performed to address this critical audit matter included the following:
● Performed a site visitation of the bitcoin mining facility where the Company’s mining hardware is located, which included
an observation of the physical and environmental controls and mining equipment inventory observation procedures;
● Evaluated management’s rationale for the application of ASC 606 to account for its cryptocurrency awards earned, which
included evaluating the provisions of the contract between the Company and the Pool;
● Evaluated management’s disclosures of its cryptocurrency activity in the financial statement footnotes;
● Evaluated and tested management’s rationale and supporting documentation associated with the valuation of cryptocurrency
awards earned;
● Examined and performed procedures on SOC Report and Bridge Letter for any deficiencies.
● Use of IT Specialist to assess the nature of the client’s systems and IT General Controls environment.
● Independently confirmedcertain financial and performance data directly with the blockchain network; and
● Examined supporting sale and cash receipt evidence for cryptocurrency sales, including management’s processes for
calculating any gains on sales of cryptocurrencies mined by the Company.
/s/ RBSM LLP
We have served as the Company’s auditor since 2017.
PCAOB 587
Las Vegas, NV
March 31, 2022
41
Item 1. Financial Statements
PART I – FINANCIAL INFORMATION
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per-share amounts)
December 31,
2021
2020
$
$
$
Assets
Current assets
Cash and cash equivalents
Accounts receivable, net
Prepaid expenses and other current assets
Intangible digital assets
Total current assets
Non-current assets
Property and equipment, at cost, net
Right of use asset, operating lease, net of accumulated amortization
Investment - Available for sale
Other assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable
Accrued expenses and other payables
Security deposit
Convertible note payable, net of debt discount
Operating lease liability
Warrant derivative liability
Derivative liability
Total current liabilities
Non-current liabilities
Operating lease liability long-term
Total liabilities
Commitments and Contingencies (Note 11)
Stockholders’ Equity
Undesignated preferred stock, $0.001 par value, 8,489,800 shares authorized.
No shares issued and outstanding at December 31, 2021 and December 31,
2020.
Series B preferred stock, $0.001 par value, 10,000 shares authorized. No
shares issued or outstanding at December 31, 2021 and December 31, 2020.
Series C convertible preferred stock, $0.001 par value, 200 share authorized. 0
and 115 shares issued and outstanding at December 31, 2021 and December
31, 2020, respectively
Common stock, $0.001 par value; 2,500,000,000 shares authorized;
606,970,903 and 506,779,781 shares issued and outstanding at December 31,
2021 and December 31, 2020, respectively.
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
1,230 $
180
125
-
1,535
1,229
55
50
3
2,872 $
211 $
105
245
-
35
1,130
-
1,726
17
1,743
-
-
-
607
420,450
(419,928)
1,129
Total Liabilities and Stockholders’ Equity
$
2,872 $
The accompanying notes are an integral part of these consolidated financial statements
F-1
236
-
10
4
250
1,872
56
-
123
2,301
1,261
242
-
5
23
-
246
1,777
33
1,810
-
-
-
507
418,373
(418,389)
491
2,301
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per-share amounts)
For the Year Ended December 31,
2020
2021
Revenue
Bitcoin mining
Hosting services
Total revenue
Operating expenses
Cost of revenue
General and administrative
Total operating expenses
Operating loss
Other non-operating income (expense)
Interest expense
Funding from SBA PPP loan
Change in fair value of liability
Change in fair value of warrant derivative liability
Change in fair value of derivative liability
Loss on settlement of derivative
Accretion of debt discount
Gain (loss) on sale of property and equipment
Other income
Other expense
Gain on settlement of payables
Loss on settlement of debt
Total non-operating expense
Net loss
Per-share data
Basic and diluted loss per share
$
686 $
197
883
906
1,764
2,670
(1,787)
(340)
-
-
955
(79)
(228)
(526)
246
392
(306)
675
(541)
248
$
$
(1,539) $
(0.00) $
1,434
1,434
1,728
2,583
4,311
(2,877)
(347)
111
26
-
309
-
(882)
(352)
125
-
-
-
(1,010)
(3,887)
(0.01)
Weighted average number of common shares outstanding
558,522,919
473,752,463
The accompanying notes are an integral part of these consolidated financial statements
F-2
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
(Dollars in thousands, except per-share amounts)
Balance at December 31, 2019
Stock based compensation -
employee restricted stock
Common stock issued on
conversion of notes payable
Net loss
Balance at December 31, 2020
Common stock issued on
conversion of Preferred C shares
Beneficial conversion feature
Common stock issued on
conversion of notes payable
Issuance of common stock and
warrants for cash, net of issuance
costs and warrant derivative
liability
Cashless exercise of warrants
and extinguishment of related
warrant derivative liability
Net loss
Balance at December 31, 2021
Preferred Stock
Shares Amount
115 $
Common Stock
Paid-In Accumulated
Additional
Total
Stockholder’
Shares
- 413,701,289 $
Amount Capital
414 $
417,315 $
Deficit
Equity
(414,502) $
3,227
-
-
-
-
222
-
222
-
-
115
- 93,078,492
-
-
- 506,779,781
93
-
507
836
-
418,373
-
(3,887)
(418,389)
(115)
- 29,870,130
30
(30)
1,000
-
- 11,435,288
11
506
-
-
-
-
- 35,385,704
35
(10)
-
- $
23,500,000
-
-
- 606,970,903 $
24
-
607 $
611
-
420,450 $
(1,539)
(419,928) $
929
(3,887)
491
-
1,000
517
25
635
(1,539)
1,129
The accompanying notes are an integral part of these consolidated financial statements
F-3
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per-share amounts)
Cash Flows From Operating Activities
Net loss
Adjustments to reconcile net loss to net cash used in operating activities
For the Year Ended December 31,
2020
2021
$
(1,539) $
(3,887)
Depreciation
(Gain) loss on sale of property and equipment
Impairment of property and equipment
Change in fair value of liability
Change in fair value of warrants
Change in fair value of derivative liability
(Gain) loss on settlement of derivative
Stock-based compensation expense
Funding from SBA PPP loan recognized as income
Gain on settlement of payables
Loss on settlement of debt
Amortization of note discount
Non-cash interest expense
Non-operating expense
Change in operating assets and liabilities
Accounts receivable
Prepaid expenses and other current assets
Intangible digital assets
Management agreement termination liability
Operating lease liability
Other assets
Security deposit
Accounts payable
Accrued expenses
Net cash used in operating activities
Cash Flows From Investing Activities
Purchase of property and equipment
Proceeds from sale of property and equipment
Purchase of investment
Proceeds from sale of Bitcoin received for sale of equipment
Deposits made on property and equipment
Refund of security deposit
Net cash provided by (used in) investing activities
Cash Flows From Financing Activities
Proceeds from SBA PPP loan
Proceeds from the issuance of notes payable, net of original issue discount
Proceeds from sale of stock under equity purchase agreement, net of issuance
costs
Net cash provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental disclosure of cash flow information
Cash paid for interest
Cash paid for income tax
Non-cash investing and financing activities
Conversion of notes payable into common stock
Beneficial conversion feature
Exchange of notes payable to warrants
Conversion of Series C convertible preferred stock into common stock
Cashless exercise of warrants and extinguishment of related warrant derivative
liability
Debt discount on associated with convertible note
Reclassification of deposit to property plant and equipment
$
$
$
$
$
$
$
$
$
$
675
(246)
-
-
(955)
79
228
-
-
(675)
541
526
270
306
(180)
(115)
4
-
(3)
120
245
(375)
(66)
(1,160)
(212)
426
(50)
-
-
-
164
-
1,000
990
1,990
994
236
1,230 $
- $
- $
230 $
1,000 $
1,210 $
30 $
635 $
- $
- $
The accompanying notes are an integral part of these consolidated financial statements
F-4
1,102
352
49
(26)
-
(309)
-
222
(111)
-
-
882
355
-
-
115
14
(90)
-
-
-
466
216
(650)
(376)
686
-
53
(38)
34
359
111
200
-
311
20
216
236
-
-
929
-
-
-
-
230
202
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per–share amounts)
Note 1. Organization and Basis of Presentation
Organization
The Company is a Delaware corporation incorporated in 2000. MGT was originally incorporated in Utah in 1977. MGT is
comprised of the parent company and formerly its wholly owned subsidiary MGT Sweden AB. MGT Sweden AB was dissolved
effective October 1, 2021. MGT’s corporate office is in Raleigh, North Carolina.
Current Operations
Cryptocurrency mining
Following a review of our Bitcoin mining operations in early 2019, we consolidated our activities at a Company-owned and
managed facility in LaFayette, GA. Located adjacent to a utility substation, the several-acre property has access to about 20 megawatts
(MW) of low-cost electrical power, about half of which is presently utilized by the Company.
As of December 31, 2021 and March 31, 2022, the Company owned 480 and 430 Antminer S17 Pro Bitcoin miners (“S17
miners”), respectively, plus 35 Antminer S19 Pro miners as of March 31, 2022. All miners are located at our Georgia facility. As more
fully described in the following paragraph, over three-quarters of the S17 miners require various repairs to be productive. We
purchased a total of 1,506 S17 miners in the latter part of 2019 directly from Bitmaintech Pte. Ltd. (“Bitmain”), for an aggregate
purchase price of approximately $2,768, which was paid in full. From May 2020 through March 31, 2022, the Company sold a total of
923 of these miners, receiving aggregate gross proceeds of approximately $869, and has scrapped 153 S17 miners due to burning or
other events that reduced their value $0.
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 miners, the Company was unsuccessful in obtaining any compensation from Bitmain. The manufacturing
defects, combined with inadequate repair facilities has rendered approximately 350 of our remaining 430 S17 miners in need of repair
or replacement. To date, in addition to a significant amount in lost revenue, we have incurred approximately $140 in costs of repairing
or replacing the defective machines. Currently, we plan to sell all our remaining inventory of S17 miners, as well as loose hash boards,
power supplies, controller boards, and other parts.
MGT’s miners are housed in a modified shipping container on the property in Georgia owned by the Company. The entire
facility, including the land and improvements, five 2500 KVA 3-phase transformers, three mining containers, and miners, are owned by
MGT. We continue to explore ways to grow and maintain our current operations including but not limited to further potential
equipment sales and raising capital to acquire the newest generation miners. The Company is also investigating other sites to develop
into Bitcoin mining facilities in addition to expansion at its current property.
Leasing Operations
In addition to its self-mining operations, the Company leases its owned space to other Bitcoin miners and also provides
hosting services for owners of mining equipment. These measures improve utilization of the electrical infrastructure and better insulate
us against the volatility of Bitcoin mining.
Basis of presentation
The accompanying consolidated financial statements for the years ended December 31, 2021 and 2020 have been prepared in
accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and applicable rules and
regulations of the United States Securities and Exchange Commission (“SEC”).
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.
F-5
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per–share amounts)
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. Given the daily evolution of the COVID-19
outbreak and the global responses to curb its spread, we are not able to estimate the effects of the COVID-19 outbreak on our results of
operations, financial condition, or liquidity for the year ended December 31, 2021.
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 annual report on Form 10-K.
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. We have also undertaken
measures to reduce our administrative and advisory costs required as a publicly reporting company. Actions taken to date include salary
reductions for senior management and termination of certain consulting agreements. 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.
Note 2. Going Concern and Management’s Plans
The accompanying 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 December 31, 2021, the Company had
incurred significant operating losses since inception and continues to generate losses from operations. As of December 31, 2021, the
Company had an accumulated deficit of $419,928. As of December 31, 2021 MGT’s cash and cash equivalents were $1,230.
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 from the sale of common stock and warrants, 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 consolidated financial statements. The accompanying 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 consolidated financial statements include the accounts of MGT and MGT Sweden AB. All intercompany transactions and
balances have been eliminated.
F-6
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per–share amounts)
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 warrants issued, 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.
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 $1,230 and $236 as of December 31, 2021 and 2020, respectively. Accounts
are insured by the FDIC up to $250 per financial institution. The Company has not experienced any losses in such accounts with these
financial institutions. As of December 31, 2021 and 2020, the Company had $980 and $0, respectively, in excess over the FDIC
insurance limit.
Accounts Receivable
Accounts receivable are generally unsecured. The Company establishes an allowance for doubtful accounts receivable based
on the age of outstanding invoices and management’s evaluation of collectability. Accounts are written off after all reasonable
collection efforts have been exhausted and management concludes that likelihood of collection is remote. Any future recoveries are
applied against the allowance for doubtful accounts. As of December 31, 2021 and December 31, 2020, we did not believe we needed
to reserve for any doubtful accounts, respectively.
Cryptocurrencies
Cryptocurrencies, (including bitcoin and bitcoin cash) are included in current assets in the accompanying 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 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.
F-7
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per–share amounts)
The following table presents the activities of digital currencies for the years ended December 31, 2021 and 2020:
Digital currencies at January 1, 2020
Additions of digital currencies from mining
Additions of digital currencies from the sale of property and equipment
Payment of digital currencies to management partners
Realized gain on sale of digital currencies
Net realizable value adjustment
Sale of digital currencies
Digital currencies at December 31, 2020
Additions of digital currencies from mining
Realized gain on sale of digital currencies
Sale of digital currencies
Digital currencies at December 31, 2021
$
$
18
1,434
53
(90)
29
(2)
(1,438)
4
686
1
(691)
-
Investment – Available for sale
Available-for-sale securities are carried at fair value. Unrealized gains and losses are included in accumulated other
comprehensive income within the equity section of the balance sheet. Realized gains and losses, if any, are calculated on the specific
identification method and are included in other income in the consolidated statements of operations.
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.
Segment Reporting
Operating segments are defined as components of an enterprise about which separate financial information is available that is
evaluated regularly as the company reviews financial information. The Company currently operates in the Digital Currency Blockchain
segment with our mining facility located in the United States. The Company also provides hosting services which are also located in
the United States. The Company has employees only in the United States and views its operations as one operating segment as
management reviews financial information on a consolidated basis in making decisions regarding resource allocations and assessing
performance.
Leases
The Company accounts for its leases under ASC 842, Leases. Under this guidance, arrangements meeting the definition of a lease are
classified as operating or financing leases and are recorded on the consolidated balance sheet as both a right of use asset and lease
liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s
incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right of use asset is
amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right of use asset result in
straight-line rent expense over the lease term. Variable lease expenses, if any, are recorded when incurred.
Derivative Instruments
Derivative financial instruments are recorded in the accompanying 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.
Revenue recognition
Cryptocurrency mining
F-8
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per–share amounts)
The Company recognizes revenue under Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with
Customers, (“ASC 606”). The core principle of the revenue standard is that a company should recognize revenue to depict the transfer
of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in
exchange for those goods or services. The following five steps are applied to achieve that core principle:
● Step 1: Identify the contract with the customer
● Step 2: Identify the performance obligations in the contract
● Step 3: Determine the transaction price
● Step 4: Allocate the transaction price to the performance obligations in the contract
● Step 5: Recognize revenue when the Company satisfies a performance obligation
In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or
services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s
definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met: The customer can
benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the
good or service is capable of being distinct), and the entity’s promise to transfer the good or service to the customer is separately
identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the
contract).
If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of
goods or services is identified that is distinct.
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring
promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts,
variable amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following:
● Variable consideration
● Constraining estimates of variable consideration
● The existence of a significant financing component in the contract
● Noncash consideration
● Consideration payable to a customer
Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the
amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is
subsequently resolved. The transaction price is allocated to each performance obligation on a relative standalone selling price basis.
The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in
time or over time as appropriate.
The Company has entered into digital asset mining pools by agreeing to terms and conditions, as amended from time to time,
with the mining pool operators to provide computing power to the mining pool. The agreements 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.
F-9
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per–share amounts)
Fair value of the cryptocurrency award received is determined using the quoted price of the related cryptocurrency at the time
of receipt. There is currently no specific definitive guidance under GAAP or alternative accounting framework for the accounting for
cryptocurrencies recognized as revenue or held, and management has exercised significant judgment in determining the appropriate
accounting treatment. In the event authoritative guidance is enacted by the Financial Accounting Standards Board (“FASB”), the
Company may be required to change its policies, which could have an effect on the Company’s consolidated financial position and
results from operations.
Other Revenues
We receive revenues from third parties renting capacity at our facility and from hosting miners owned by others. The
Company recognized $197 and $0 from these sources during the years ended December 31, 2021 and 2020, respectively.
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”). 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.
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 or 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 or loss.
F-10
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per–share amounts)
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.
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 stock warrants,
stock options, convertible debt and convertible preferred stock 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 year ended December 31, 2021 excludes 74,614,871 shares
issuable upon the exercise of outstanding warrants. The computation of diluted loss per share for the year ended December 31, 2020
excludes 33,333 unvested restricted shares, 9,173,651 shares issuable upon the conversion of convertible debt, and 45,634,921 shares
under convertible preferred stock.
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 December 31, 2021, the Company had a Level 3 financial instrument related to the warrant derivative liability. As of
December 31, 2020, the Company had a Level 3 financial instrument related to the derivative liability.
F-11
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and 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 14 – Subsequent Events, the Company did not identify any recognized or
non-recognized subsequent events that would have required adjustment or disclosure in the consolidated financial statements.
Reclassification
Certain prior years balances have been reclassified to conform to current year presentation. These reclassifications had no
effect on the reported results of operations.
Recent accounting pronouncements
Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will
have a material effect on the accompanying 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.
Note 4. Accounts receivable
Accounts receivable balance of $180 as of December 31, 2021 consisted primarily of receivables in respect of leases for
hosting and rental income. There was no balance of accounts receivable at December 31, 2020.
Note 5. Property and Equipment and Other Assets
Property and equipment consisted of the following:
Land
Computer hardware and software
Bitcoin mining machines
Infrastructure
Containers
Leasehold improvements
Property and equipment, gross
Less: Accumulated depreciation
Property and equipment, net
As of
December 31, 2021 December 31, 2020
57
55 $
$
10
10
1,206
910
905
1,117
550
403
4
4
2,732
2,499
(860)
(1,270)
1,872
1,229 $
$
The Company recorded depreciation expense of $675 and $1,102 for the years ended December 31, 2021 and 2020,
respectively. For the year ended December 31, 2021 a gain on sale of property and equipment of $246 was recorded as other non-
operating income related to the sale and disposition of S17 miners. For the year ended December 31, 2020 a loss on sale of property
and equipment of $352 was recorded as other non-operating expense related to the sale and disposition of S17 miners. For the year
ended December 31, 2020 an impairment of mining assets of $49 was recorded as general and administrative expense related to the
disposal of S17 miners.
Other assets consisted of the following:
Security deposits
Other Assets
As of
December 31, 2021 December 31, 2020
123
123
3
3 $
$
F-12
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per–share amounts)
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. During 2021, the $120 in security deposits related to its electrical contract was used to offset outstanding invoices.
Note 6. Investment – Available for sale
In December 2021, the Company invested $50 in the form of a convertible promissory note. The note bears annual interest of
8% and matures on December 31, 2024. The note contains certain anti-dilution features with an as-converted ownership of 5%. As the
investment was made close to year end, the Company determined that the book value represented the fair value and no adjustment was
necessary.
Note 7. 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 several times bringing the total
outstanding principal balance to $929 as of December 31, 2019.
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 December 31, 2020,
the fair value of the derivative liability was $246 and for the year ended December 31, 2020 the Company recorded a gain of
$309 from the change in fair value of derivative liability as non-operating income in the consolidated statements of operations.
The Company valued the derivative liability using the Black-Scholes option pricing model using the following assumptions as of
December 8, 2020 and December 31, 2020, respectively: 1) stock prices of $0.027 and $0.04, 2) conversion prices of $0.009 and
$0.025, 3) remaining lives of 1 year and 0.94 years, 4) dividend yields of 0%, 5) risk free rates of 0.10%, and 6) volatility of
158.55% and 167.36%.
On June 15, 2021, the holder converted $120 of principal into 4,761,905 shares of common stock valued at $238. As a result
of the conversion, $172 of derivative liability and $86 unamortized debt discount was settled and $32 was recorded as loss on
settlement of debt. The derivative value was calculated using a share fair value of $0.0252, a discount rate of 0.05% and volatility of
238.79%.
On July 27, 2021, the holder converted the remaining $110 of principal and $11 of accrued interest into 6,673,384 shares of
common stock valued at $280. As a result of this conversion, $153 of derivative liability and $66 unamortized debt discount was settled
and $72 was recorded as loss on settlement of debt. The derivative value was calculated using a share fair value of $0.0182, a discount
rate of 0.05% and volatility of 127.04%. As of December 31, 2021, this note had no outstanding balance.
F-13
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per–share amounts)
March 2021 Note
On March 5, 2021, the Company entered into a securities purchase agreement with Bucktown Capital, LLC (the “Investor”),
pursuant to which the Company issued a convertible promissory note in the original principal amount of $13,210 (the “March 2021
Note”). The March 2021 Note was convertible, at the option of the Investor, into shares of common stock of the Company at a
conversion price equal to 70% of the lowest price for a share of common stock during the ten trading days immediately preceding the
applicable conversion (the “Conversion Price”); provided, however, in no event was the Conversion Price to be less than $0.04 per
share. The March 2021 Note bore interest at a rate of 8% per annum and will mature in twelve months.
The March 2021 Note was to be funded in tranches, with the initial tranche of $1,210 funded on March 5, 2021 for
consideration of $1,000. Six subsequent tranches (five tranches, each for $1,200 and one tranche for $6,000) were to be funded upon
the notice of effectiveness of a Registration Statement on Form S-1 covering the common stock issuable in connection with the March
2021 Note. Further, the final tranche required the mutual agreement of the Company and Investor. Until such time as Investor funded
the subsequent tranches, the Company would hold a series of Investor Notes that offset any unfunded portion of the March 2021 Note.
The Company determined that the embedded conversion feature of the convertible promissory note meets the definition of a
beneficial conversion feature. The Company measured the beneficial conversion feature’s intrinsic value on March 5, 2021 and
determined that the beneficial conversion feature was valued at $1,000 which was recorded as a debt discount, and together with the
original issue discount of $210, in the aggregate of $1,210, is being amortized over the life of the loan.
As a result of the Company failing to meet certain registration requirements under the March 2021 Note, the outstanding
balance of the March 2021 Note was automatically increased by 5% on each of July 5, 2021 and August 5, 2021, September 5, 2021
and as part of the exchange agreement an additional 5% on September 30, 2021, prior to the exchange. An additional $270 was
recorded as outstanding principal, bringing the outstanding balance prior to the exchange to $1,481.
On September 30, 2021, the Company entered into an exchange agreement with the March 2021 Note holder under which the
outstanding principal balance of $1,481 and $60 of accrued interest were exchanged for 53,500,000 warrants to purchase common
stock (See Note 7), which were treated as a warrant derivative liability. Upon the exchange, the Company settled $1,481 of outstanding
principal, $60 of accrued interest, $758 of debt discount, recorded a warrant liability in the amount of $1,221 resulting in a loss on
settlement of debt of $438. The derivative was calculated using a share fair value of $0.025 per share, a discount rate of 0.98%,
remaining lives of 4.43 years and volatility of 176.1%. As of December 31, 2021, this note had no outstanding balance.
During the years ended December 31, 2021 and 2020, the Company recorded accretion of debt discount of $526 and $882,
respectively.
Derivative Liabilities
The Company’s activity in its derivative liabilities was as follows for the year ended December 31, 2021:
Balance of derivative liability at January 1, 2020
Transfer in due to issuance of convertible notes with embedded conversion provisions
Change in fair value of derivative liability
Balance of derivative liability at December 31, 2020
Transfer in due to issuance of warrants with embedded conversion features
Transfer out upon conversion of convertible notes and warrants with embedded
conversion provisions
Change in fair value of warrant liability
Change in fair value of derivative liability
Balance of derivative liabilities at December 31, 2021
$
$
-
555
(309)
246
2,492
(732)
(955)
79
1,130
On July 21, 2021, as part of a corporate fundraising, the Company issued 35,385,703 shares of common stock and 35,385,703
warrants to purchase common stock. As a result of this issuance, the Company recognized a derivative liability in the amount of
$1,271. The derivative was calculated using the fair value per share of $0.038, volatility factor of 176.1%, remaining lives of 5 year
and discount rate of 0.74%.
As of December 31, 2021, the fair value of the warrant derivative liability was $1,130 and for the year ended December
31, 2021 the Company recorded a gain of $955 from the change in fair value of derivative warrant liability as non-operating
income in the consolidated statements of operations. The Company valued the warrant derivative liability using the Black-
Scholes option pricing model using the following assumptions as of December 31, 2021: 1) stock prices of $0.017, 2) exercise
prices of $0.05, 3) remaining lives of 4.2 – 4.6 years, 4) dividend yields of 0%, 5) risk free rates of 1.26%, and 6) volatility of
175.5%.
Fluctuations in the Company’s stock price are a primary driver for the changes in the derivative valuations during each
reporting period. As the stock price increases for each of the related derivative instruments, the value to the holder of the instrument
generally increases, therefore increasing the liability on the Company’s balance sheet. Additionally, stock price volatility is one of the
significant unobservable inputs used in the fair value measurement of each of the Company’s derivative instruments. The simulated fair
value of these liabilities is sensitive to changes in the Company’s expected volatility. Increases in expected volatility would generally
result in higher fair value measurement. A 10% change in pricing inputs and changes in volatilities and correlation factors would not
result in a material change in our Level 3 fair value.
December 31, 2021
Liabilities
Warrant derivative liability
Liabilities
Derivative liability
Level 1
Level 2
Level 3
Fair Value
$
- $
- $
1,130 $
1,130
Level 1
Level 2
Level 3
Fair Value
December 31, 2020
$
- $
- $
246 $
246
F-14
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per–share amounts)
The PPP Loan
On April 16, 2020, the Company entered into a promissory note with Aquesta Bank for $111 in connection with the Paycheck
Protection Program offered by the U.S. Small Business Administration (the “PPP Loan”). The PPP Loan bears interest at 1% per
annum, with monthly installments of $6 commencing on November 1, 2021 for 18 months through its maturity on April 1, 2023. The
principal amount of the PPP Loan will be forgiven if the PPP Loan proceeds are used to pay for payroll costs, rent and utilities costs
over the 24-week period after the PPP Loan is made. Not more than 40% of the forgiven amount may be used for non-payroll costs.
The amount of the PPP Loan forgiveness may be reduced if the Company reduces its full-time head count. On April 1, 2021, the
Company received notice of forgiveness in the amount of $108 in relation to the PPP Loan. The Company used all proceeds from the
PPP Loan to maintain payroll and other allowable expenses. As a result, management believes that the Company has met the PPP
eligibility criteria for forgiveness for the remaining payable of $3 to the SBA and has concluded that the PPP Loan represents, in
substance, a government grant that is expected to be 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 loan 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.
Note 8. Leases
In December 2019, the Company entered a new office lease in connection with the relocation of its executive office to
Raleigh, North Carolina. The Company accounted for its new office lease as an operating lease under the guidance of Topic 842. Rent
expense under the new lease is $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. At lease inception,
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 $34 as of December 31, 2021.
On November 1, 2021, the Company entered into a lease agreement to lease a contiguous portion of land to its existing
property, as a planting area for trees intended to mitigate noise from the Company’s cryptocurrency mining operations. The agreement
calls for yearly installments of $3 for the first five years, with an option to extend this lease for another five-year period at a rate not to
exceed 105% of the current lease payment. On each anniversary date, the Company will pay $3 in advance, with payment for the first
year paid upon execution of the lease. The Company used an incremental borrowing rate of 8.0% based on the interest rate of
incorporated in the most recent promissory note. At lease inception, the Company recorded a Right of Use Asset of $22 and a
corresponding Lease Liability of $22. The Right to Use Asset is accounted for as an operating lease and has a balance, net of
amortization, of $21 as of December 31, 2021.
Total future minimum payments required under the lease agreements are as follows:
2022
2023
2024
2025
2026
Thereafter
Total undiscounted minimum future lease payments
Less Imputed interest
Present value of operating lease liabilities
Disclosed as:
Current portion
Non-current portion
$
$
$
$
Amount
42
3
3
3
3
12
66
(14)
52
35
17
The Company recorded rent expense of $37 and $36 for the years ended December 31, 2020 and 2019, respectively.
F-15
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per–share amounts)
At December 31, 2021, the weighted average interest rate for the operating lease was 21.88%. At December 31, 2021, the
weighted average remaining lease term for the operating lease was 4.2 years. The Company’s lease agreement does not contain any
material residual value guarantees or material restrictive covenants.
Note 9. Common Stock, Preferred Stock and Warrants
Common stock
Common Stock Issuances
In connection with the conversion of 115 shares of Series C Preferred Stock during the year ended December 31, 2021 (see
Preferred Stock below) the Company issued 29,870,130 shares of common stock.
During the year ended December 31, 2021, in connection with the conversions of $120 and $110, with accrued interest, of the
December 2020 convertible note payable (see Note 7), the Company issued 4,761,905 and 6,673,384 shares of common stock,
respectively.
On July 21, 2021, as part of a corporate fundraising of $990, net of issuance costs, the Company issued 35,385,703 shares of
common stock and 35,385,703 warrants to purchase common stock (see below).
During the year ended December 31, 2021, 14,270,833 warrants with an embedded conversion feature were exercised on a
cashless basis for the issuance of 23,500,000 shares of common stock (see below).
Preferred Stock
In January 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, 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.
In April 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.
The common shares issued upon conversion of the Series C Preferred Shares were registered under the Company’s then-
effective registration statement on Form S-3. In April and July 2019, the Company sold 200 Series C Preferred Shares for $1,990, net
of issuance costs. 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. The remaining 115 shares of Series C Preferred Stock were
converted into 29,870,130 shares of common stock during the year ended December 31, 2021.
F-16
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per–share amounts)
Warrants
On July 21, 2021, as part of a corporate fundraising, the Company issued 35,385,703 shares of common stock and 35,385,703
warrants to purchase common stock for net cash proceeds of $990 (see above). The warrants were valued at $1,271 which resulted in
the recording of a warrant derivative liability in that amount. Non-operating expense of $306 was recorded in respect of the value
warrant derivative liability of $1,271 in excess of the value of common shares issued of $990.
On September 30, 2021, the Company exchanged the outstanding principal of $1,481 and accrued interest of $60 of the March
2021 Note for 53,500,000 warrants to purchase common stock (see Note 7).
During the year ended December 31, 2021, 14,270,833 warrants were exercised on a cashless basis for the issuance of
23,500,000 shares of common stock. Upon cashless exercise, the Company calculated the fair value of derivative liability on warrants
of $406, compared it to the fair value of 23,500,000 shares of $635 and recorded a loss on extinguishment of $228. The Company
valued the warrant derivative liability using the Black-Scholes option pricing model using the following assumptions on the date
of each exercise: 1) stock prices of $0.017 - $0.043, 2) exercise prices of $0.05, 3) remaining lives of 4.2 – 4.3 years, 4) dividend
yields of 0%, 5) risk free rates of 1.19% - 1.33%, and 6) volatility of 175.7% - 177.2%.
The following table summarizes information about shares issuable under warrants outstanding during the year ended
December 31, 2021:
Warrant
shares
Weighted
average
Weighted
average
Outstanding at January 1, 2021
Issued
Exercised
Expired or cancelled
Outstanding and exercisable at December 31, 2021
$
88,885,704
(14,270,833)
-
74,614,871 $
0.05
0.05
0.05
outstanding
exercise price
remaining life
-
5.0
-
-
4.47 $
Intrinsic
value
-
-
-
-
-
Note 10. 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 years ended December 31, 2021 and 2020:
Non-vested at January 1, 2020
Granted
Vested
Non–vested at December 31, 2020
Vested
Non–vested at December 31, 2021
650,000 $
- $
(616,667) $
33,333 $
(33,333) $
- $
1.24
-
1.48
0.04
0.04
-
For the years ended December 31, 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 December 31, 2020, unamortized stock-based compensation costs related to restricted share arrangements was under $1.
There were no unamortized stock-based compensation costs related to restricted share arrangements as of December 31, 2021.
Stock options
As of December 31, 2019, the Company had 6,000,000 outstanding stock options with a weighted average exercise price of
$0.71 and a weighted average grant date fair value of $1.29. All the stock options were fully vested and there were no unrecognized
costs. Under the terms of the stock option agreement, all options expired on January 31, 2020. As of December 31, 2021, there are no
outstanding or exercisable stock options.
F-17
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per–share amounts)
Note 11. Commitments and Contingencies
Bitcoin Production Equipment and Operations
In August 2018, the Company entered a collaborative venture with Bit5ive, LLC to develop a fully contained crypto currency
mining pod (the “POD5 Agreement”) for a term of five years. 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 providing capital as well as engineering and design expertise. During the years ended December 31, 2021 and
2020, the Company recognized non-operating income of $328 and $4 under this agreement, respectively.
Electricity Contract
In June 2019, the Company entered into a 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 of December 31, 2020. During 2021, the
security deposit was applied to pay outstanding invoices, leaving a zero balance on December 31, 2021.
The electricity agreement expired on September 30, 2021, the Company and City are currently operating on a month-to-month
basis.
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. During the year ended December 31, 2020, the Company recognized a gain on the change in
the fair value of $26 based on the change of Bitcoin price and Difficulty Rate, and along with the Settlement Distributions valued at
$90, the liability was reduced to $0 as of December 31, 2020.
Legal
The Company has resolved all shareholder legal actions formerly pending in state and federal courts.
On January 24, 2017, the Company was served with a summons and complaint filed by plaintiff shareholder Atul Ojha in New
York state court against certain officers and directors of the Company and naming the Company as a nominal defendant. The lawsuit is
styled as a derivative action (the “Ojha Derivative Action”) and was originally filed (but not served on any defendant) on October 15,
2016. The Ojha Derivative Action substantively alleges that the defendants, collectively or individually, inadequately managed the
business and assets of the Company resulting in the deterioration of the Company’s financial condition. The Ojha Derivative Action
asserts claims including, but not limited to, breach of fiduciary duties, unjust enrichment and waste of corporate assets.
On December 12, 2018, a shareholder derivative action was filed by shareholder Bob Thomas against certain current and
former directors, officers and shareholders of the Company, and naming the Company as a nominal defendant, in New York state court,
alleging breach of fiduciary duties, unjust enrichment, abuse of control, gross mismanagement, and waste and seeking declaratory
relief and damages (the “Thomas Derivative Action”). The underlying allegations in the Thomas Derivative Action largely repeat the
allegations of wrongdoing in the 2018 Securities Class Actions (as defined below).
F-18
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per–share amounts)
On April 23, 2020, the Company entered into a stipulation of settlement (the “Stipulation”) in connection with the Ojha
Derivative Action and the Thomas Derivative Action (together, the “State Derivative Actions”). The consideration for the settlement of
the Derivative Actions is as follows: (i) adoption by the Company of certain corporate governance reforms, the terms of which are fully
set forth in Exhibits A and B to the Stipulation; (ii) Robert B. Ladd, H. Robert Holmes, Michael Onghai, and Nolan Bushnell shall
collectively pay or cause to be paid $75 to the Company; and (iii) Barry C. Honig, John Stetson, Michael Brauser, John O’Rourke III,
and Mark Groussman shall collectively pay or cause to be paid $150 to the Company. Further, the Company shall, subject to court
approval, pay a fee and expense award to plaintiffs’ counsel in the Derivative Actions of $150 and service awards to each of the two
plaintiffs in the Derivative Actions of $1.5 each, to be paid from the fee and expense award. On April 24, 2020, the New York state
court entered an order preliminarily approving the Stipulation and the settlement contemplated therein and providing for the notice of
the settlement to be made to current MGT Stockholders. The Preliminary Approval Order further provided for a Court hearing on the
settlement on June 26, 2020. On May 4, 2020, pursuant to the Preliminary Approval Order, MGT provided notice of the settlement on
its website, by press release and by filing a Form 8-K with the Securities and Exchange Commission.
Final approval of the settlement of the State Derivative Actions was granted on July 2, 2020.
On August 28, 2019, a shareholder derivative action was filed by shareholder Tyler Tomczak against the certain directors,
officers and shareholders of the Company, and naming the Company as a nominal defendant, in the United States District Court for the
Southern District of New York, alleging breach of fiduciary duties, waste and unjust enrichment and seeking declaratory relief and
damages (the “Tomczak Derivative Action”). The underlying allegations in the Tomczak Derivative Action largely repeat the
allegations of wrongdoing in the 2018 Securities Class Actions.
On September 11, 2019, a shareholder derivative action was filed by shareholder Arthur Aviles against certain directors,
officers and shareholders of the Company, and naming the Company as a nominal defendant, in the United States District Court for the
District of Delaware, alleging breach of fiduciary duties, waste and unjust enrichment and seeking declaratory relief and damages (the
“Aviles Derivative Action”). The underlying allegations in the Aviles Derivative Action largely repeat the allegations of wrongdoing in
the 2018 Securities Class Actions.
On May 7, 2020, the Company entered into a stipulation of settlement (the “Federal Stipulation”) in connection with the
Tomczak Derivative Action and the Aviles Derivative Action (together, the “Federal Derivative Actions”). The consideration for the
settlement of the Federal Derivative Actions is as follows: (i) adoption by the Company of a certain corporate governance reform, the
terms of which are fully set forth in Exhibit A to the Federal Stipulation; and (ii) Robert B. Ladd, H. Robert Holmes, and Michael
Onghai shall collectively pay or cause to be paid $65 to the Company. Further, the Company shall, subject to court approval, pay a fee
and expense award to plaintiffs’ counsel in the Federal Derivative Actions of $30 and incentive awards to each of the two plaintiffs in
the Federal Derivative Actions of $0.4 each. The parties to the Federal Stipulation presently intend to file the Federal Stipulation with
the appropriate federal court after final approval of the settlement of the two state Derivative Actions referred to above.
Final approval of the settlement of the Federal Derivative Actions was granted on August 5, 2020. For the year ended
December 31, 2020, the Company recorded $119 as other income in relation to the settlement of the Federal Derivative Actions.
In October 2019, the Company and its then officers and directors received subpoenas from the SEC requesting information,
including but not limited to, with respect to risk factors contained in certain of the Company’s filings with the SEC. On October 21,
2020, the SEC notified the Company this investigation concluded, and it does not intend to recommend an enforcement action by the
Commission against MGT in this matter. This notice was sent pursuant to guidelines set out in Securities Acts Release 5310, which
states in part that the notice “must in no way be construed as indicating that the party has been exonerated or that no action may
ultimately result from the Staff’s investigation.”
In November 2018, the Company’s board received a shareholder demand letter dated November 6, 2018, from shareholders
Nicholas Fulton and Kelsey Thacker (the “Fulton Demand”). The Fulton Demand referenced the SEC Action, and the allegations
therein, and demanded that the board take action to investigate, address and remedy the allegations raised in the SEC Action. Shortly
after the New York state court entered the order preliminarily approving the stipulation of settlement in connection with the Ojha
Derivative Action and the Thomas Derivative Action, counsel for the Company informed counsel for shareholders Nicholas Fulton and
Kelsey Thacker of that stipulation of settlement and of counsel for the Company’s view that the releases in the settlement covered the
matters raised in the Fulton Demand.
F-19
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per–share amounts)
Settlement of Class Action
In September 2018 and October 2018, various shareholders of the Company filed putative class action lawsuits against the
Company, its Chief Executive Officer and certain of its individual officers and shareholders, alleging violations of federal securities
laws and seeking damages (the “2018 Securities Class Actions”). The 2018 Securities Class Action followed and referenced the
allegations made against the Company’s Chief Executive Officer and others in the SEC Action. The first putative class action lawsuit
was filed on September 28, 2018, in the United States District Court for the District of New Jersey, and alleges that the named
defendants engaged in a pump-and-dump scheme to artificially inflate the price of the Company’s stock and that, as a result,
defendants’ statements about the Company’s business and prospects were materially false and misleading and/or lacked a reasonable
basis at relevant times. The second putative class action was filed on October 9, 2018, in the United States District Court for the
Southern District of New York and makes similar allegations.
On May 28, 2019, the parties to the 2018 Securities Class Actions entered into a binding settlement term sheet, and on
September 24, 2019, the parties entered into a stipulation of settlement. On August 7, 2019, the lead plaintiff in the first class action
filed a notice and order of voluntary dismissal with prejudice, and on October 11, 2019, the lead plaintiff in the second class action
filed in the federal court in New York an unopposed motion for preliminary approval of the proposed class action settlement. On
December 17, 2019, the court issued an order granting preliminary approval of the settlement.
Final approval of the settlement of the 2018 Securities Class Actions was granted on May 27, 2020. The plaintiff shareholder
class received $750 in cash settlement, inclusive of attorney fees. This amount was paid by the Company’s insurance carrier.
Note 12. Income Taxes
Significant components of deferred tax assets were as follows:
U.S. federal tax loss carry–forward
U.S. State tax loss carry–forward
Equity based compensation
Fixed assets, intangible assets and goodwill
Accruals
Long-term investments
Total deferred tax assets
Less: valuation allowance
Net deferred tax asset
As of December 31,
2021
2020
17,749 $
298
8,289
6
9
(6)
26,344
(26,344)
— $
17,426
183
7,704
49
-
(6)
25,357
(25,357)
—
$
$
As of December 31, 2021, the Company had the following tax attributes:
U.S. federal net operating loss carry–forwards
U.S. State net operating loss carry–forwards - Georgia
U.S. State net operating loss carry–forwards – North Carolina
$
Amount
84,519
3,061
8,031
Begins to
expire
Fiscal 2023
unlimited
Fiscal 2031
The reconciliation of income tax expense computed at the U.S. federal statutory rate to the income tax provision for the years ended
December 31, 2021 and 2020 is as follows:
Expected Federal Tax
State income taxes (net of federal benefit)
Permanent adjustments
True up of prior year deferred tax assets
Change in state tax rate
Other
Change in valuation allowance
Effective tax rate
F-20
As of December 31,
2021
2020
-21.0%
-1.7%
-2.0%
4.7%
-48.3%
0.0%
64.32%
0.0%
-21.0%
-0.9%
4.8%
-38.5%
0.0%
0.1%
55.5%
0.0%
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per–share amounts)
As it is not more likely than not that the resulting deferred tax benefits will be realized, a full valuation allowance has been
recognized for such deferred tax assets. For the year ended December 31, 2021, the valuation allowance increased by $987,449.
Federal and state laws impose substantial restrictions on the utilization of tax attributes in the event of an “ownership change,” as
defined in Section 382 of the Internal Revenue Code. As of December 31, 2021, the Company performed a high-level review of its
changes in ownership and determined that a change of control event likely occurred under Section 382 of the Internal Revenue Code
and the Company’s net operating loss carryforwards are likely to be limited.
The Company has adopted the provisions of ASC 740-10-25, which provides recognition criteria and a related measurement
model for uncertain tax positions taken or expected to be taken in income tax returns. ASC 740-10-25 requires that a position taken or
expected to be taken in a tax return be recognized in the financial statements when it is more likely than not that the position would be
sustained upon examination by tax authorities.
Tax positions that meet the more likely than not threshold are then measured using a probability weighted approach
recognizing the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement. The Company
had no tax positions relating to open income tax returns that were considered to be uncertain.
The Company files income tax returns in the U.S. federal jurisdiction, North Carolina and Georgia jurisdictions. With few
exceptions, the Company is no longer subject to U.S. federal, state and local, or non–U.S. income tax examinations by tax authorities
for years before 2015.
Note 13. 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 years ended December 31, 2021 and 2020, the
Company made contributions to the 401(k) Plan of $10 and $11, respectively.
Note 14. Subsequent Events
From January 1, 2022 through March 31, 2022, a total of 11,197,930 warrants were exercised for the issuance of 34,000,000
shares of common stock.
F-21
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
The Board of Directors
MGT Capital Investments, Inc.
We consent to the incorporation by reference in the Registration Statement on Form S-8 (File No. 333-217663) of MGT Capital
Investments, Inc., of our report dated March 31, 2022, relating to the consolidated financial statements of MGT Capital Investments,
Inc., as of December 31, 2021 and 2020, and for each of the two years in the period ended December 31, 2021, appearing in the Annual
Report on Form 10-K of MGT Capital Investments, Inc. for the year ended December 31, 2021. Our report on the consolidated
financial statements includes an explanatory paragraph expressing substantial doubt regarding MGT Capital Investments, Inc.’s ability
to continue as a going concern.
/s/ RBSM LLP
Las Vegas, NV
March 31, 2022
Exhibit 31
CERTIFICATION PURSUANT TO SARBANES–OXLEY ACT OF 2002
I, Robert B. Ladd, certify that:
1. I have reviewed this annual report on Form 10–K of MGT Capital Investments, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e)
and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the
audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
March 31, 2022
By: /s/ Robert B. Ladd
Robert B. Ladd
President, Chief Executive Officer and Acting Chief Financial
Officer
(Principal Executive Officer, Principal Financial Officer and
Principal Accounting Officer)
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES–OXLEY ACT OF 2002
Exhibit 32
In connection with the Annual Report of MGT Capital Investments, Inc. (the “Company”) on Form 10-K for the year ended December
31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacities
and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
March 31, 2022
By: /s/ Robert B. Ladd
Robert B. Ladd
President, Chief Executive Officer and Acting Chief Financial
Officer (Principal Executive Officer, Principal Financial
Officer and Principal Accounting Officer)