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The following discussion and analysis should be read in conjunction with our
consolidated financial statements and notes included in the Annual Report on
Form 10-K. In addition to historical information, the following discussion
contains forward-looking statements that are subject to risks and uncertainties.
Actual results may differ substantially from those referred to herein due to a
number of factors, including but not limited to risks described in Part I,
Item 1A. Risks Factors, and elsewhere in this Annual Report. References to
“Notes” are Notes included in our Notes to Consolidated Financial Statements.
Overview
In 2022, we commenced operations of our digital mining operation and are
dedicated to becoming a leading carbon-neutral Bitcoin mining company. We are
establishing an enterprise-scale mining operation through procurement of
next-generation mining equipment and partnering with experienced service
providers. In addition to digital mining, we deliver data management and desktop
and application virtualization solutions through hybrid cloud, cloud and on
premise implementations by its reseller network. We achieve this through a
combination of containerized applications, virtual desktops, virtual storage and
physical hyper-converged platforms. Our products allow organizations to deploy a
combination of public, private or hybrid cloud strategies while backing them up
with the latest storage solutions.
2022 and Recent Key Events
•In the first quarter of 2023, pursuant to the Modified Hertford Agreement, we
issued 5,239,000 common shares for the conversion of 5,239 Series H Preferred
Shares.
•In the first quarter of 2023, we sold 2,066 miners for cash proceeds of
$3.1 million.
•On November 29, 2022, MEOA held a special meeting of stockholders (the “MEOA
Meeting”). At the MEOA Meeting, MEOA’s stockholders approved an Extension
Amendment to MEOA’s amended and restated certificate of incorporation to extend
the date by which MEOA must consummate its initial business combination from
November 30, 2022 to May 30, 2023, or such earlier date as determined by MEOA’s
board of directors. In connection with the MEOA Meeting, the holders of MEOA’s
shares of its Class A common stock exercised their right to redeem such shares
for a pro rata portion of the funds in the trust account. After giving effect to
the redemption MEOA’s public shares, on November 30, 2022, the Company owned a
controlling
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interest of MEOA and since such time MEOA has been recorded on a consolidated
basis.
•On November 7, 2022, we entered into an agreement with Hertford Advisors Ltd.
(“Hertford”) modifying the number of outstanding Series H Preferred Shares held
by Hertford (the “Modified Hertford Agreement”). Pursuant to the Modified
Hertford Agreement, the Company cancelled 36,000 Series H Preferred Shares,
representing 37.5% of the outstanding Series H Preferred Shares, without payment
of any cash consideration. Each Series H Preferred Share is convertible into
1,000 common shares. Hertford will retain 60,000 Series H Preferred Shares,
which are non-voting and do not accrue dividends. At our Annual General Meeting
held December 20, 2022, shareholders’ approved the conversion of the remaining
60,000 Series H Preferred Shares, subject to the terms and conditions contained
in the Company’s Articles of Incorporation. The Modified Hertford Agreement also
provides for certain resale restrictions applicable to the common shares that
are issuable upon the conversion of the remaining Series H Preferred Shares
during the two-year period ending on December 31, 2024, which are different from
the restrictions contained in the Hertford Agreement.
•On October 31, 2022, we filed an arbitration request against Core Scientific,
Inc. (“Core Scientific”) regarding the digital mining hosting sub-license
agreement assigned to us on October 5, 2021. We have requested that certain
advanced deposits paid be refunded back to us as a result of the modification to
our BitFuFu machine purchase agreement. In December 2022, Core Scientific filed
for Chapter 11 bankruptcy.
•On October 19, 2022, we entered into an amendment to our BitFuFu Agreement. The
amended agreement stated no additional payments are required to be made by us,
and the purchase order was reduced from 60,000 to approximately 17,000 machines
and was completed in December 2022.
•In September 2022, Compute North filed for Chapter 11 bankruptcy. In December
2022, the Compute North MA was assigned to GC Data Center Granbury, LLC (the “GC
Data Center MA”) and has a term of five years from such assignment date. A
deposit of $0.5 million previously paid to Compute North for the last two months
of monthly service fees was remitted to GC Data Center on behalf of the Company
and is included in other assets in the consolidated balance sheets at
December 31, 2022.
•On July 25, 2022, the Company received a letter from the Nasdaq Listing
Qualifications department of The Nasdaq Stock Market LLC notifying the Company
that it was not in compliance with the requirement of Nasdaq Marketplace Rule
5550(a)(2) for continued inclusion on the NASDAQ Capital Market as a result of
the closing bid price for the Company’s common stock being below $1.00 for 30
consecutive business days. On January 24, 2023, we received notification from
Nasdaq indicating that we will have an additional 180-day grace period, or until
July 24, 2023, to regain compliance with the Listing Rule’s $1.00 minimum bid
requirement for at least 10 consecutive business days. This notification has no
effect on the listing of the Company’s common shares at this time.
•On February 15, 2022, and subsequently on March 7, 2022, primarily as a result
of comments we received from the SEC relating to an amendment to the
registration statement on Form F-4 we filed with the SEC on January 4, 2022 in
connection with our proposed merger with Gryphon, we retained two independent
investment banks to review the terms of the proposed Gryphon merger transaction.
The nature of the review was to provide an independent analysis as to whether
the consideration to be paid by us in the proposed merger was fair to our
stockholders from a financial point of view and to assess the inputs to the
financial models that were used to test such fairness. On April 4, 2022, the
Merger Agreement was terminated. The Merger Agreement, among other matters,
provided that, upon termination of the Merger Agreement, we would forgive all
amounts outstanding under the outstanding Promissory Note and Security Agreement
as amended with Gryphon (the “Gryphon Note”), and release to Gryphon 850,000
common shares previously deposited into an escrow account for the benefit of
Gryphon. As a result of the termination of the Merger Agreement in the second
quarter of 2022, we forgave the Gryphon Note which had a balance of $13.1
million and released the 850,000 common shares held in escrow to Gryphon. We
will continue our relationship with Gryphon through the Gryphon Master Services
Agreement entered into in 2021.
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Results of Operations – Comparison of Years Ended December 31, 2022 and 2021
Revenue
We had revenue of $6.1 million during 2022 compared to $3.7 million during 2021.
The $2.4 million increase in net revenue is due to the addition of $3.4 million
in revenues from our digital mining operation, offset by a decrease of $1.0
million in service and product, primarily due to the sale of our SnapServer
product line. The majority of our revenue was derived from digital currency
mining and data management services. Income from our mining segment is a result
of bitcoin mining activities in the United States. Income from our product and
services segment is primarily generated in the United States.
For the years ended December 31, 2022 and 2021, direct cost of revenues were
$3.4 million and $1.7 million, respectively, representing an increase of $1.7
million, or 100%, primarily due to the addition of our digital mining operation.
Operating Expenses
Sales and Marketing Expense
Sales and marketing expenses were $1.0 million and $1.3 million for the years
ended December 31, 2022 and 2021, respectively. The decrease of $0.3 million was
primarily due to decreases in advertising and employee related costs associated
with a lower average headcount, and share-based compensation.
Research and Development Expense
Research and development expenses were $0.6 million and $1.0 million for the
years ended December 31, 2022 and 2021, respectively. The decrease of $0.4
million was primarily due to a decrease in employee and related expenses
associated with a lower average headcount.
General and Administrative Expense
General and administrative expenses were $24.1 million and $12.9 million for the
years ended December 31, 2022 and 2021, respectively. The increase of $11.2
million was primarily due to increases of $8.2 million in share-based
compensation primarily related to awards granted to a former executive and
certain current executives, $4.5 million primarily related to professional
services associated with our expansion into the digital mining industry, $0.9
million of additional insurance cost primarily related to our director and
officers’ insurance, $0.6 million in employee and related expenses primarily
associated with a higher average headcount and an executive bonus, $0.4 million
of costs primarily related to our transaction with Gryphon which was terminated
on April 4, 2022, and $0.3 million of costs related to audit services. These
increases were offset by decreases of $2.0 million for legal expenses primarily
related to a prior year legal settlement expense not recurring, $1.4 million for
a fair value adjustment for a Bitcoin liability subsequently forgiven, and $0.3
million for public relations.
Depreciation and Amortization Expense
Depreciation and amortization expense was $28.3 million and $5.7 million for the
years ended December 31, 2022 and 2021, respectively. The increase of $22.6
million was primarily due to amortization related to our intangible asset for
costs directly related to the acquisition of digital mining machines and
depreciation of digital mining machines.
Impairment of Mining Equipment
For the year ended December 31, 2022, adverse changes in the business climate,
including the decline in the price of Bitcoin and two vendor bankruptcy filings,
indicated that an impairment triggering event occurred, and it was determined
the carrying value of mining equipment exceeded its estimated fair value. In
measuring fair value, we used a weighted probability of the income and market
approaches. We compared the indicated fair value to the carrying value of our
mining equipment assets, and as a result of the analysis, an impairment charge
of $75.9 million was recorded for the year ended December 31, 2022.
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Provision for Losses on Deposits Due to Vendor Bankruptcy Filings
For the year ended December 31, 2022, primarily as a result of two vendors
filing for Chapter 11 bankruptcy, we made provisions of $16.1 million on our
previously made deposits to the two such digital mining hosting vendors.
Impairment of Acquired Intangible Assets and Goodwill
Impairment of goodwill and acquired intangible assets were $13.2 million and
$0.8 million for the years ended December 31, 2022 and 2021, respectively. For
the year ended December 31, 2022, adverse changes in the business climate,
including the decline in the price of Bitcoin and two of our vendors, Core
Scientific and Compute North filing for bankruptcy, indicated that an impairment
triggering event occurred, and we determined the carrying value of finite-lived
intangible assets exceeded its estimated fair value. In measuring fair value, we
used a weighted income and market approach. We compared the indicated fair value
to the carrying value of its finite-lived assets, and as a result of the
analysis, an impairment charge of $13.2 million was recorded for supplier
agreements for the year ended December 31, 2022.
For the year ended December 31, 2021, primarily as a result of the disposal of
our SnapServer® product line, it was determined the carrying value of
finite-lived intangible assets exceeded its estimated fair value. In measuring
fair value, we used an excess of earnings approach. We compared the indicated
fair value to the carrying value of our finite-lived assets, and as a result of
the analysis, an impairment charge of $298,000 was recorded for developed
technology for the year ended December 31, 2021.
In October 2021, we disposed of our SnapServer® product line and removed the
related goodwill of $863,000 and is included in the net gain on sale of the
asset. For the year ended December 31, 2021, we performed qualitative impairment
evaluations on our remaining goodwill and determined that there were indications
that the goodwill was impaired and recorded an impairment charge of $522,000.
Impairment of Digital Assets
Impairment of digital assets was $1.1 million and nil for the years ended
December 31, 2022 and 2021, respectively. The increase of $1.1 million was due
to impairment losses recognized on our digital assets.
Non-Operating Expenses
Impairment of Investments
Impairment of investments was $14.5 million and nil for the years ended December
31, 2022 and 2021, respectively. The increase of $14.5 million was due to a
$12.4 million impairment loss recognized on our Filecoiner investments, and $2.1
million impairment loss recognized on our Silicon Valley Technology Partners
Preferred Shares. The fair value of the Filecoiner investments was impacted by
the decrease in the price of Filecoin since the time of the investments
resulting in an impairment.
Forgiveness of Note Receivable
Forgiveness of note receivable was $13.1 million and nil for the years ended
December 31, 2022 and 2021, respectively. The increase of $13.1 million was due
to the forgiveness of our note receivable, including accrued interest, with
Gryphon which occurred when the Merger Agreement with Gryphon was terminated by
us on April 4, 2022.
Provision for Losses on Deposit for Mining Equipment
Provision for deposit on mining equipment was $10.0 million and nil for the
years ended December 31, 2022 and 2021, respectively. The increase of $10.0
million was due to a provision made for the deposit we made to NuMiner Global,
Inc. (“NuMiner”) for the purchase of mining machines. During the second quarter
of 2022, we requested the return of the deposit when the purchase agreement was
cancelled due to NuMiner not delivering mining machines according to the
agreement terms.
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Interest Expense
Interest expense was nil and $0.5 million for the years ended December 31, 2022
and 2021, respectively. The decrease of $0.5 million was related to the
settlement of all outstanding debt in 2021, primarily our Oasis debt and related
interest expense and debt costs. We have no outstanding debt at December 31,
2022.
Interest Income and Other, Net
Interest income and other, net, was $2.6 million and $2.9 million for the years
ended December 31, 2022 and 2021, respectively. In 2022, we recognized a gain on
forgiveness of liabilities of $2.1 million and interest income of $0.6 million
from our notes receivable. In 2021, we sold our SnapServer® product line and
recorded a gain on the sale of the assets of $5.0 million, in addition, we
recognized a gain on the forgiveness of PPP Funds of $1.1 million, including
accrued interest, $0.6 million in interest income from notes receivable, and
$0.2 million gain on forgiveness of liabilities for settlement of legal fees;
offset by warrants issued with a fair value of $2.8 million in consideration for
Westworld waiving its rights to consent to any and all past, present and future
additional financings by us, $0.7 million penalty fee related to the Series E
Preferred for the failure to file a timely registration statement required under
the securities purchase agreement and $0.6 million of fees paid to Maxim for
penalties related to our fund raises in July and August of 2021.
Liquidity and Capital Resources
We have recurring losses from operations. Our primary source of cash flow is
generated from digital mining revenue and service revenue. We have financed our
operations through proceeds from the issuance of public and private equity
securities. At December 31, 2022, we had cash and cash equivalents from
continuing operations of $1.3 million compared to $54.4 million at December 31,
2021. The decrease in cash and cash equivalents is related primarily to payments
for mining equipment and prepayments for power and hosting for our digital
mining operation. As of December 31, 2022, we had working capital of $4.1
million, reflecting a decrease in current assets of $68.1 million and an
increase in current liabilities of $1.0 million compared to December 31, 2021.
The decrease in current assets was primarily related to cash outflows for
operations, mining equipment and hosting services, as well a $16.1 million
provision on two vendor deposits for prepaid hosting services as a result of two
vendors filing for Chapter 11 bankruptcy in 2022. The increase in current
liabilities was primarily related to an increase in accrued payroll and employee
compensation and liabilities and an advance of funds from our SPAC’s identified
target for its business combination. Cash management continues to be a top
priority. We may incur negative operating cash flows as we work to maintain and
increase our digital mining revenue, product sales volume, and maintain
operational efficiencies.
Management has projected that cash on hand may not be sufficient to allow us to
continue operations beyond the next 12 months based on our hashing rate at
December 31, 2022, if we are unable to raise additional funding for operations.
We expect our working capital needs to increase in the future as we continue to
expand and enhance our operations. Our ability to raise additional funds for
working capital through equity or debt financings or other sources may depend on
the financial success of our then current business and successful implementation
of our key strategic initiatives, financial, economic and market conditions and
other factors, some of which are beyond our control. No assurance can be given
that we will be successful in raising the required capital at a reasonable cost
and at the required times, or at all. Further equity financings may have a
dilutive effect on shareholders and any debt financing, if available, may
require restrictions to be placed on our future financing and operating
activities. If we require additional capital and are unsuccessful in raising
that capital, we may not be able to continue our business operations in the
cryptocurrency mining industry or we may be unable to advance our growth
initiatives, either of which could adversely impact our business, financial
condition and results of operations.
Significant changes from our current forecasts, including but not limited to:
(i) shortfalls from projected sales levels; (ii) fluctuations in the value of
cryptocurrency; (iii) unexpected increases in product costs; (iv) increases in
operating costs; and (v) inability to maintain compliance with the requirements
of the NASDAQ Capital Market and/or inability to maintain listing with the
NASDAQ Capital Market could have a material adverse impact on our ability to
access the level of funding necessary to continue our operations at current
levels. If any of these events occurs or we are
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unable to generate sufficient cash from operations or financing sources, we may
be forced to liquidate assets where possible and/or curtail, suspend or cease
planned programs or operations generally or seek bankruptcy protection or be
subject to an involuntary bankruptcy petition, any of, which would have a
material adverse effect on our business, results of operations, financial
position and liquidity.
On November 30, 2022, after giving effect to the redemption of certain public
redeemable shares of MEOA, our subsidiary owns a controlling interest of MEOA
and it has been consolidated. The following table shows a summary of our cash
flows (used in) provided by operating activities, investing activities and
financing activities, including MEOA beginning November 30, 2022 (in thousands):
Year Ended December 31,
2022 2021
Net cash used in operating activities $ (30,771) $ (28,518)
Net cash used in investing activities $ (22,041) $ (122,693)
Net cash provided by financing activities $ - $ 205,105
Net cash used in operating activities. The use of cash during 2022 was primarily
a result of our net loss of $192.9 million, offset by $180.1 million in non-cash
items, which primarily included impairments on mining equipment and intangibles,
a provision for losses on deposits made due to vendor bankruptcy filings,
forgiveness of a note receivable, impairment of investments, provision for
losses on deposit for mining equipment, amortization of intangible assets,
depreciation, share-based compensation expense, gain of forgiveness of
liabilities, change in fair value of crypto asset payable, change in fair value
of warrant liabilities, and impairment of digital assets. During the year ended
December 31, 2022, we paid $16.5 million for prepayments for our digital asset
hosting agreements.
Net cash used in investing activities. During 2022, we paid $17.6 million
towards digital asset mining machines and shipping costs, we entered into
promissory notes receivable with Gryphon and MEOA for $2.5 million and $1.8
million, respectively, and we purchased $0.3 million of carbon credits for
future use. The Gryphon note receivable was forgiven on April 4, 2022 upon
termination of the Merger Agreement with Gryphon. During 2021, we paid a
$92.0 million down payment to BitFuFu for a deposit towards cryptocurrency
machines for which delivery began in January 2022, paid a $10.0 million
refundable deposit to NuMiner with the intent to enter into an agreement with
NuMiner to purchase 60,000 units of new NM440 Machines for the purpose of
cryptocurrency mining, purchased 1,500,000 shares of common stock of Filecoiner,
Inc., a private company, of $6.0 million, and paid $5.4 million for the purchase
of private placement warrants of the SPAC we are sponsoring.
Net cash provided by financing activities. During 2021, we received $196.6
million from the issuance of common shares and exercise of warrants, $9.6
million from the issuance of preferred shares, and $0.3 million from the
exercise of stock options; offset by $1.1 million of payments for notes payable
and $0.2 million of payments for preferred share dividends.
Off-Balance Sheet Information
During the ordinary course of business, we may provide standby letters of credit
to third parties as required for certain transactions initiated by us. We have
one standby letter of credit to be used for the bond necessary for us to receive
mining machines. As of December 31, 2022, there was restricted cash of
$0.2 million pledged as collateral for the standby letter of credit.
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Critical Accounting Estimates
The discussion and analysis of our financial position and results of operations
are based on our consolidated financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles, or U.S. GAAP. The
preparation of our consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosure of contingent assets and
liabilities. We review our estimates on an ongoing basis. We base our estimates
on historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities. Actual
results may differ from these estimates under different assumptions or
conditions. We believe the most significant accounting estimates inherent in the
preparation of our consolidated financial statements include estimates
associated with the impairment analysis of long-lived assets. Our significant
accounting policies are outlined in Note 2 to the Consolidated Financial
Statements included in this Annual Report on Form 10-K.
Long-lived Assets
We estimate the fair value of long-lived assets that have finite useful lives
whenever an event or change in circumstances indicates that the carrying value
of the asset may not be recoverable. We test for potential impairment of other
intangible assets that have indefinite useful lives annually or whenever
indicators of impairment arise. Significant estimates and assumptions used in
estimating the fair value of the long-lived assets. A change in any of the
estimates and assumptions used may result an impairment charge in our
consolidated statement of operations.
Recent Accounting Pronouncements
Refer to Note 2, Significant Accounting Policies, of our consolidated financial
statements for a discussion of recent accounting pronouncements and their
effect, if any, on us.
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