Overview
Following a review of our Bitcoin mining operations in early 2019, we
consolidated our activities at a Company-owned and managed facility in
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
MGT's miners are housed in a modified shipping container on the property in
24
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
Use of estimates and assumptions and critical accounting estimates and assumptions
The preparation of the consolidated financial statements in conformity with
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 25
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
Other Revenues
We receive revenues from third parties renting capacity at our facility and from
hosting miners owned by others. The Company recognized
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.
26 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
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.
27 ? 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
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
Recent accounting pronouncements
Note 3 to our audited consolidated financial statements appearing elsewhere in this report includes Recent Accounting Pronouncements.
28 Results of operations
Years ended
Revenues
Our revenues for the year ended
We also receive revenues from third parties renting capacity at our facility and
from hosting miners owned by others. The Company recognized
Operating Expenses
Operating expenses for the year ended
The decrease in cost of revenues of
Other Income and Expense
For the year ended
For the year endedDecember 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
In
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
29
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
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
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
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
Sale of Common Stock
On
Debt FinancingDecember 2020 Note 30
On
On
The Note was to be funded in tranches, with the initial tranche of
On
The PPP Loan
On
On
Cash Flows
Operating activities
Net cash used in operating activities was
31 Investing activities
Net cash provided by investing activities was
Financing activities
During the year ended
During the year ended
Off-balance sheet arrangements
As of
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