MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except share and per–share amounts) (unaudited)
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,100
|
|
|
$
|
359
|
|
Prepaid expenses and other current assets
|
|
|
141
|
|
|
|
61
|
|
Investments available for sale
|
|
|
495
|
|
|
|
444
|
|
Notes receivable
|
|
|
640
|
|
|
|
1,575
|
|
Total current assets
|
|
|
2,376
|
|
|
|
2,439
|
|
|
|
|
|
|
|
|
|
|
Non–current assets
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
–
|
|
|
|
39
|
|
Property and equipment, at cost, net
|
|
|
25
|
|
|
|
35
|
|
Intangible assets, net
|
|
|
–
|
|
|
|
730
|
|
Goodwill
|
|
|
–
|
|
|
|
1,496
|
|
Note receivable
|
|
|
45
|
|
|
|
–
|
|
Investments, at cost
|
|
|
1,530
|
|
|
|
1,380
|
|
Total assets
|
|
$
|
3,976
|
|
|
$
|
6,119
|
|
|
|
|
|
|
|
|
|
|
Liabilities and equity
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
111
|
|
|
$
|
63
|
|
Accrued expenses
|
|
|
16
|
|
|
|
15
|
|
Other payables
|
|
|
–
|
|
|
|
1
|
|
Total liabilities
|
|
|
127
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Redeemable Convertible Preferred stock – temporary equity
|
|
|
|
|
|
|
|
|
Preferred stock, Series A Convertible Preferred, $0.001 par value, 1,500,000
shares authorized at June 30, 2016 and December 31, 2015; No shares outstanding at June 30, 2016 and 10,608 shares outstanding
at December 31, 2015.
|
|
|
–
|
|
|
|
–
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
Undesignated Preferred stock, $0.001 par value, 8,583,840 shares authorized at June 30, 2016
and December 31, 2015. No shares issued and outstanding at June 30, 2016 and December 31, 2015
|
|
|
–
|
|
|
|
–
|
|
Common stock, $0.001 par value; 75,000,000 shares authorized; 25,847,017
and 17,928,221 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively
|
|
|
26
|
|
|
|
18
|
|
Additional paid–in capital
|
|
|
315,430
|
|
|
|
311,167
|
|
Accumulated other comprehensive income / (loss)
|
|
|
81
|
|
|
|
(1,206
|
)
|
Accumulated deficit
|
|
|
(311,374
|
)
|
|
|
(303,944
|
)
|
Total stockholders’ equity
|
|
|
4,163
|
|
|
|
6,035
|
|
Non–controlling interests
|
|
|
(314
|
)
|
|
|
5
|
|
Total equity
|
|
|
3,849
|
|
|
|
6,040
|
|
|
|
|
|
|
|
|
|
|
Total equity, liabilities, redeemable convertible preferred
stock and non–controlling interest
|
|
$
|
3,976
|
|
|
$
|
6,119
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per–share amounts,
unaudited)
|
|
Three months ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Revenues
|
|
$
|
–
|
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
3,769
|
|
|
|
586
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(3,769
|
)
|
|
|
(572
|
)
|
|
|
|
|
|
|
|
|
|
Other non–operating (expense) / income
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
11
|
|
|
|
5
|
|
Loss on sale of investments
|
|
|
(462
|
)
|
|
|
–
|
|
Impairment of goodwill
|
|
|
(1,496
|
)
|
|
|
–
|
|
Impairment of intangible assets
|
|
|
(673
|
)
|
|
|
–
|
|
|
|
|
(2,620
|
)
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations before non–controlling interest
|
|
|
(6,389
|
)
|
|
|
(567
|
)
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations – DraftDay.com
|
|
|
–
|
|
|
|
(283
|
)
|
|
|
|
|
|
|
|
|
|
Net loss before non–controlling interest
|
|
|
(6,389
|
)
|
|
|
(850
|
)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to non–controlling interest
|
|
|
296
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Common stockholders
|
|
$
|
(6,093
|
)
|
|
$
|
(828
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
Reclassification adjustment for loss included in net Loss
|
|
|
775
|
|
|
|
–
|
|
Unrealized holding gain
|
|
|
82
|
|
|
|
–
|
|
Comprehensive loss
|
|
$
|
(5,236
|
)
|
|
$
|
(828
|
)
|
|
|
|
|
|
|
|
|
|
Per–share data
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share – continuing operations
|
|
$
|
(0.29
|
)
|
|
$
|
(0.04
|
)
|
Basic and diluted loss per share – discontinued
operations
|
|
|
–
|
|
|
|
(0.02
|
)
|
Basic and diluted loss per share
|
|
$
|
(0.29
|
)
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of Common shares outstanding
|
|
|
21,228,156
|
|
|
|
13,578,181
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per–share amounts,
unaudited)
|
|
Six months ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Revenues
|
|
$
|
–
|
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
4,423
|
|
|
|
1,651
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(4,423
|
)
|
|
|
(1,637
|
)
|
|
|
|
|
|
|
|
|
|
Other non–operating (expense) / income
|
|
|
|
|
|
|
|
|
Interest and other income / (expense)
|
|
|
36
|
|
|
|
(36
|
)
|
Loss on sale of investments
|
|
|
(1,193
|
)
|
|
|
–
|
|
Impairment of goodwill
|
|
|
(1,496
|
)
|
|
|
–
|
|
Impairment of intangible assets
|
|
|
(673
|
)
|
|
|
–
|
|
|
|
|
(3,326
|
)
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations before non–controlling interest
|
|
|
(7,749
|
)
|
|
|
(1,673
|
)
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations – DraftDay.com
|
|
|
–
|
|
|
|
(558
|
)
|
|
|
|
|
|
|
|
|
|
Net loss before non–controlling interest
|
|
|
(7,749
|
)
|
|
|
(2,231
|
)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to non–controlling interest
|
|
|
319
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Common stockholders
|
|
$
|
(7,430
|
)
|
|
$
|
(2,122
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
Reclassification adjustment for loss included in net Loss
|
|
|
1,205
|
|
|
|
–
|
|
Unrealized holding loss
|
|
|
82
|
|
|
|
–
|
|
Comprehensive loss
|
|
$
|
(6,143
|
)
|
|
$
|
(2,122
|
)
|
|
|
|
|
|
|
|
|
|
Per–share data
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share – continuing operations
|
|
$
|
(0.38
|
)
|
|
$
|
(0.12
|
)
|
Basic and diluted loss per share – discontinued
operations
|
|
|
–
|
|
|
|
(0.05
|
)
|
Basic and diluted loss per share
|
|
$
|
(0.38
|
)
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of Common shares outstanding
|
|
|
19,578,022
|
|
|
|
12,373,621
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS
(In
thousands, unaudited)
|
|
Six months ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,749
|
)
|
|
$
|
(2,231
|
)
|
Net loss from discontinued operations
|
|
|
–
|
|
|
|
558
|
|
|
|
|
(7,749
|
)
|
|
|
(1,673
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
11
|
|
|
|
6
|
|
Amortization of intangible assets
|
|
|
57
|
|
|
|
114
|
|
Stock–based expense
|
|
|
1,413
|
|
|
|
179
|
|
Warrant modification expense
|
|
|
431
|
|
|
|
–
|
|
Loss on sale of investments – short term
|
|
|
1,193
|
|
|
|
–
|
|
Impairment of intangible assets
|
|
|
673
|
|
|
|
–
|
|
Impairment of goodwill
|
|
|
1,496
|
|
|
|
–
|
|
Change in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
–
|
|
|
|
(7
|
)
|
Prepaid expenses and other current assets
|
|
|
(80
|
)
|
|
|
42
|
|
Accounts payable
|
|
|
48
|
|
|
|
78
|
|
Accrued expenses
|
|
|
1
|
|
|
|
(28
|
)
|
Other payables
|
|
|
(1
|
)
|
|
|
–
|
|
Net cash used in operating activities
|
|
|
(2,507
|
)
|
|
|
(1,289
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Release of restricted cash and security deposit
|
|
|
39
|
|
|
|
99
|
|
Purchase of investments – short term
|
|
|
(414
|
)
|
|
|
–
|
|
Purchase of investments – long term
|
|
|
(150
|
)
|
|
|
–
|
|
Purchase of note receivable – long term
|
|
|
(45
|
)
|
|
|
(250
|
)
|
Proceeds from sale of investments
|
|
|
1,391
|
|
|
|
–
|
|
Net cash provided by / (used in) investing activities
|
|
|
821
|
|
|
|
(151
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from At–The–Market sales of Common stock, net of fees
|
|
|
–
|
|
|
|
1,644
|
|
Proceeds from exercise of Common stock warrants
|
|
|
2,427
|
|
|
|
–
|
|
Net cash provided by financing activities
|
|
|
2,427
|
|
|
|
1,644
|
|
|
|
|
|
|
|
|
|
|
Cash flows from discontinued operations – DraftDay.com
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
–
|
|
|
|
(562
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
741
|
|
|
|
204
|
|
Discontinued operations
|
|
|
–
|
|
|
|
(562
|
)
|
|
|
|
741
|
|
|
|
(358
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
359
|
|
|
|
648
|
|
Discontinued operations
|
|
|
–
|
|
|
|
807
|
|
|
|
|
359
|
|
|
|
1,455
|
|
Cash and cash equivalents, end of period
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
1,100
|
|
|
|
852
|
|
Discontinued operations
|
|
|
–
|
|
|
|
245
|
|
|
|
$
|
1,100
|
|
|
$
|
1,097
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
1. Organization and basis of presentation
Organization
MGT Capital Investments,
Inc. (“MGT,” “the Company,” “we,” “us”) is a Delaware corporation, incorporated
in 2000. The Company was originally incorporated in Utah in 1977. MGT is comprised of the parent company, wholly–owned subsidiaries
MGT Cybersecurity, Inc. (“MGT Cybersecurity”), Medicsight, Inc. (“Medicsight”), MGT Sports, Inc. (“MGT
Sports”), MGT Studios, Inc. (“MGT Studios”), and majority–owned subsidiary MGT Gaming, Inc. (“MGT
Gaming”). MGT Studios also owns a controlling minority interest in the subsidiary M2P Americas, Inc. Our corporate office
is located in Harrison, New York.
Cybersecurity
MGT
and its subsidiaries are in the process of acquiring a diverse portfolio of cyber security technologies. With cyber security industry
pioneer, John McAfee, at its helm, the Company is positioned to address various cyber threats through advanced protection technologies
for mobile and personal tech devices, including tablets and smart phones. The Company is currently in the process of acquiring
D–Vasive, a provider of leading edge anti–spy software, and Demonsaw, a provider of a secure and anonymous file sharing
software platform.
On
May 9, 2016 we, through our wholly owned subsidiary, MGT Cybersecurity, Inc. entered into an Asset Purchase Agreement (the “D–Vasive
APA”) to acquire certain assets related to the D–Vasive business (as defined below). D–Vasive, Inc., a Wyoming
corporation, is in the business of developing and marketing of certain privacy and anti–spy applications (the “D–Vasive
Business”). Pursuant to the terms of the D–Vasive APA, the Company has agreed to purchase assets (“D–Vasive
Assets”) integral to the D–Vasive Business, including but not limited to applications for use on mobile devices, intellectual
property, customer lists, databases, sales pipelines, proposals and project files, licenses and permits. Among the Purchased Assets
is the D–Vasive application which is designed for protection from invasive applications that seek access to personal contacts,
cameras and other information on smart phones, tablets and other mobile devices. The Company intends to change its corporate name
to “John McAfee Global Technologies, Inc.” upon closing of the D–Vasive transaction.
On May 26, 2016, the Company
entered into an asset purchase agreement (the “Demonsaw APA”) with Demonsaw LLC, a Delaware company (“Demonsaw”)
and the shareholders of Demonsaw, for the purchase of certain technology and assets of Demonsaw. Demonsaw is in the business of
developing and marketing certain secure and anonymous information sharing applications (the “Demonsaw Business”).
Pursuant to the terms of the Demonsaw APA, the Company has agreed to purchase assets (“Demonsaw Assets”) integral
to the Demonsaw Business, including but not limited to the source code for the Demonsaw solution, intellectual property, customer
lists, databases, sales pipelines, proposals and project files, licenses and permits. Among the Demonsaw Assets is the Demonsaw
application which is designed for use in Windows and Apple operating systems. However, prior to the closing of this transaction,
the Company and Demonsaw executed an agreement to terminate the Demonsaw APA, pursuant to Section 3.4 of the Demonsaw APA. Subsequently,
D–Vasive entered into a Membership Interest Purchase Agreement (the “LLC Purchase Agreement”) with the holders
of all of Demonsaw’s outstanding membership interest, whereby D–Vasive purchased all such membership interest from
the Demonsaw members. The closing of the transaction contemplated under the LLC Purchase Agreement is contingent on, among other
things, the closing of the transaction contemplated under the D-Vasive APA.
Gaming
Prior
to second quarter ending June 30, 2016, the Company and its subsidiaries were principally engaged in the business of acquiring,
developing and monetizing assets in the online and mobile gaming space as well as the social casino industry. MGT’s portfolio
includes a social casino platform Slot Champ and minority stakes in the skill–based gaming platform MGT Play and fantasy
sports operator DraftDay Gaming Group, Inc. (“DDGG”) (see September 8, 2015 development below).
In
addition, MGT Gaming owns three patents covering certain features of casino slot machines. Two of the patents were asserted against
alleged infringers in various actions in federal court in Mississippi. In July 2014, MGT Gaming dismissed its lawsuits against
WMS Gaming Inc., and in August 2015, the Company and defendants Aruze America and Penn National Gaming agreed to settle all pending
litigation and all proceedings at the U. S. Patent and Trademark Office. The Company received a payment of $90, which was recorded
as licensing revenue. In an effort to monetize its gaming patent portfolio during the six months ended June 30, 2016, the Company
engaged Munich Innovations GmbH, the patent monetization firm that sold MGT’s medical patent portfolio to Samsung in 2013
for $1.5 million. As of June 30, 2016, an impairment charge for the full value of the patent was recorded, as the Company is in
no longer engaged in this business.
On
September 8, 2015, the Company and MGT Sports entered into an Asset Purchase Agreement with Viggle, Inc. (“Viggle”)
and Viggle’s subsidiary DDGG, pursuant to which Viggle acquired all of the assets of the DraftDay.com business (“DraftDay.com”)
from the Company and MGT Sports. In exchange for the acquisition of DraftDay.com, Viggle paid MGT Sports the following: (a) 1,269,342
shares of Viggle’s common stock, since renamed Function(x) Inc. (NASDAQ: FNCX) (“FNCX”), (b) a promissory note
in the amount of $234 paid on September 29, 2015, (c) a promissory note in the amount of $1,875 due March 8, 2016 (“FNCX
Note”, “the Note”), and (d) 2,550,000 shares of Common stock of DDGG (private entity). In addition, in exchange
for providing certain transitional services, DDGG issued to MGT Sports a warrant to purchase 1,500,000 shares of DDGG common stock.
Following consummation of the transaction, MGT Sports owns an 11% equity interest in DDGG, FNCX owns 49%, and Sportech, Inc. owns
39%. As a result of the transaction, the Company has presented DraftDay.com as a discontinued operation.
On
March 24, 2016, the Company entered into an Exchange Agreement (the “FNCX March 24
th
Agreement”) with FNCX.
The purpose of the FNCX March 24
th
Agreement was to exchange the FNCX Note for other equity and debt securities of
FNCX, after the Note went into default on March 8, 2016. On the effective date of the FNCX March 24
th
Agreement, the
Note had an outstanding principal balance of $1,875 and accrued interest in the amount of $51 (the “March 24
th
Interest”). Pursuant to the FNCX March 24
th
Agreement, a portion consisting of $825 of the outstanding principal
of the FNCX Note was exchanged for 2,748,353 shares of FNCX’s Common stock, and an additional portion of $110 of the outstanding
principal was exchanged for 110 shares (the “FNCX Preferred shares”) of a newly created class of Preferred stock,
the Series D Convertible Preferred stock. The FNCX Preferred shares were subsequently converted into 366,630 shares of FNCX’s
Common stock. Finally, FNCX agreed to make a cash payment to MGT Sports for the total amount of March 24
th
Interest.
In exchange for the forgoing, MGT Sports and the Company agreed to waive all Events of Default under the FNCX Note prior to the
effective date of the FNCX March 24
th
Agreement and to release FNCX from any rights, remedies and claims related thereto.
After giving effect to the forgoing, the remaining outstanding principal balance of the FNCX Note was $940 which continued to
accrue interest a rate of 5% per annum, and all terms of the Note remained unchanged except that the maturity date was changed
to July 31, 2016.
On
June 14, 2016, the Company and MGT Sports entered into a Securities Exchange Agreement (the “FNCX June 14
th
Agreement”)
with FNCX to exchange $940 remaining outstanding principal of the FNCX Note for 2,641,837 shares of FNCX’s Common stock
and FNCX shall make a cash payment to MGT Sports for the total amount of interest accrued until consummation of the transaction
contemplated in the FNCX June 14
th
Agreement. The closing of the FNCX June 14
th
Agreement is conditioned
on FNCX’s shareholders’ approval of the issuance of the FNCX Common shares and satisfaction of other closing conditions
set forth in the FNCX June 14
th
Agreement. As of June 30, 2016, the Note was recorded on the balance sheet at $640,
net of reserve of $300.
Basis
of presentation
The
accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form 10–Q and Rule 8–03 of Regulation S–X.
Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the
United States of America. However, in the opinion of the management of the Company, all adjustments necessary for a fair presentation
of the financial position and operating results have been included in these statements. These Condensed Consolidated Financial
Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s
Annual Report on Form 10–K for the fiscal year ended December 31, 2015, as filed with the SEC on April 14, 2016. Operating
results for the three and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for
any subsequent quarters or for the year ending December 31, 2016.
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
$
|
–
|
|
|
$
|
248
|
|
|
$
|
–
|
|
|
$
|
464
|
|
Cost of sales
|
|
|
–
|
|
|
|
(96
|
)
|
|
|
–
|
|
|
|
(186
|
)
|
Gross margin
|
|
|
–
|
|
|
|
152
|
|
|
|
–
|
|
|
|
278
|
|
Operating expenses
|
|
|
–
|
|
|
|
(435
|
)
|
|
|
–
|
|
|
|
(836
|
)
|
Net loss
|
|
$
|
–
|
|
|
$
|
(283
|
)
|
|
$
|
–
|
|
|
$
|
(558
|
)
|
Investments
Equity
security investments available for sale, at market value, reflect unrealized appreciation and depreciation, as a result of temporary
changes in market value during the period, in shareholders’ equity, net of income taxes in “accumulated other comprehensive
loss” in the condensed consolidated balance sheets. For non–publicly traded securities, market prices are determined
through the use of pricing models that evaluate securities. For publicly traded securities, market value is based on quoted market
prices or valuation models that use observable market inputs.
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 the convertible Preferred Stock, unvested restricted shares and stock
options, are not reflected in diluted net loss per share because such shares are anti–dilutive.
The
computation of diluted loss per share for the three and six months ended June 30, 2016, excludes 1,000,000 unvested restricted
shares and 100,000 warrants, as they are anti–dilutive due to the Company’s net loss. The computation of diluted loss
per share for the three and six months ended June 30, 2015, excluded 10,296 shares in connection to the Convertible Preferred
stock, 77,500 unvested restricted shares and 1,020,825 warrants, as they were anti–dilutive due to the Company’s net
loss.
Recent
accounting pronouncements
In
April 2016, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”)
No. 2016–09
,
“Compensation – Stock Compensation” (topic 718)
. The FASB issued this update to
improve the accounting for employee share–based payments and affect all organizations that issue share–based payment
awards to their employees. Several aspects of the accounting for share–based payment award transactions are simplified,
including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on
the statement of cash flows. The updated guidance is effective for annual periods beginning after December 15, 2016, including
interim periods within those fiscal years. Early adoption of the update is permitted. The Company is currently evaluating the
impact of the new standard.
In
February 2016, FASB issued
ASU No. 2016–02 “Leases” (topic 842)
, which creates new accounting and reporting
guidelines for leasing arrangements. The new guidance requires organizations that lease assets to recognize assets and liabilities
on the balance sheet related to the rights and obligations created by those leases, regardless of whether they are classified
as finance or operating leases. Consistent with current guidance, the recognition, measurement, and presentation of expenses and
cash flows arising from a lease primarily will depend on its classification as a finance or operating lease. The guidance also
requires new disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows
arising from leases. The new standard is effective for annual reporting periods beginning after December 15, 2018, including interim
periods within that reporting period, with early application permitted. The new standard is to be applied using a modified retrospective
approach. The Company is currently evaluating the impact of the new pronouncement on its financial statements.
Note
4. Goodwill and intangible assets
Goodwill
represents the difference between purchase cost and the fair value of net assets acquired in business acquisitions. Indefinite
lived intangible assets, representing trademarks and trade names, are not amortized unless their useful life is determined to
be finite. Long–lived intangible assets are subject to amortization using the straight–line method. Goodwill and indefinite
lived intangible assets are tested for impairment annually as of December 31, and more often if a triggering event occurs, by
comparing the fair value of each reporting unit to its carrying value. The Company concluded that a triggering event had occurred
based on the overall deterioration of the market capitalization of the Company and evaluated the goodwill for possible impairment.
After the evaluation as of June 30, 2016, management concluded that a full impairment existed based on the Company’s current
efforts to capitalize and execute its business plan relating to the asset.
The
Company’s intangible assets for continuing operations consisted of the following:
|
|
Goodwill
|
|
January 1, 2016
|
|
$
|
1,496
|
|
Impairment
|
|
|
(1,496
|
)
|
June 30, 2016
|
|
$
|
–
|
|
|
|
Intangible assets
|
|
January 1, 2016
|
|
$
|
730
|
|
Impairment
|
|
|
(673
|
)
|
Amortization
|
|
|
(57
|
)
|
June 30, 2016
|
|
$
|
–
|
|
For
the three months ended June 30, 2016 and 2015, the Company recorded amortization expense of $57 and $150, respectively. For the
six months ended June 30, 2016 and 2015, the Company recorded amortization expense of $57 and $300, respectively. During the three
months ended June 30, 2016, the Company recognized an impairment charge of $1,496 related to the goodwill and $673 related to
the intangible assets.
Note
5. Notes receivable
On
March 24, 2016, the Company entered into an Exchange Agreement (the “FNCX March 24
th
Agreement”) with FNCX.
The purpose of the FNCX March 24
th
Agreement was to exchange the FNCX Note for other equity and debt securities of
FNCX, after the Note went into default on March 8, 2016. On the effective date of the FNCX March 24
th
Agreement, the
Note had an outstanding principal balance of $1,875 and accrued interest in the amount of $51 (the “March 24
th
Interest”). Pursuant to the FNCX March 24
th
Agreement, a portion consisting of $825 of the outstanding principal
of the FNCX Note was exchanged for 2,748,353 shares of FNCX’s Common stock, and an additional portion of $110 of the outstanding
principal was exchanged for 110 shares (the “FNCX Preferred shares”) of a newly created class of Preferred stock,
the Series D Convertible Preferred stock. The FNCX Preferred shares were subsequently converted into 366,630 shares of FNCX’s
Common stock. Finally, FNCX agreed to make a cash payment to MGT Sports for the total amount of March 24
th
Interest.
In exchange for the forgoing, MGT Sports and the Company agreed to waive all Events of Default under the FNCX Note prior to the
effective date of the FNCX March 24
th
Agreement and to release FNCX from any rights, remedies and claims related thereto.
After giving effect to the forgoing, the remaining outstanding principal balance of the FNCX Note was $940 which continued to
accrue interest a rate of 5% per annum, and all terms of the Note remained unchanged except that the maturity date was changed
to July 31, 2016.
On
June 14, 2016, the Company and MGT Sports entered into a Securities Exchange Agreement (the “FNCX June 14
th
Agreement”)
with FNCX to exchange $940 remaining outstanding principal of the FNCX Note for 2,641,837 shares of FNCX’s Common stock
and FNCX shall make a cash payment to MGT Sports for the total amount of interest accrued until consummation of the transaction
contemplated in the FNCX June 14
th
Agreement.
On
June 30, 2016 and December 31, 2015, the Company carried the Note from FNCX in the net amount of $640 and $1,575, respectively.
During
the six months ended June 30, 2016, the Company purchased a 5% promissory note with a principal of $45, maturing on July 18, 2016.
Management expects to convert the note into equity of the promisor, thus the Company is carrying the note as a long–term
asset, despite the current maturity.
Note
6. Series A Convertible Preferred stock
During
the six months ended June 30, 2016 the Company converted 10,838 shares of Series A Convertible Preferred stock into 10,838 shares
of Common stock. As of June 30, 2016 there were no Series A Convertible Preferred shares outstanding.
Note
7. Stock incentive plan and stock–based compensation
Stock
incentive plan
The
Company’s board of directors established the 2012 Stock Incentive Plan (the “Plan”) on April 15, 2012, and the
Company’s shareholders ratified the Plan at the annual meeting of the Company’s stockholders on May 30, 2012. The
Company has 415,000 shares of Common Stock that are reserved to grant Options, Stock Awards and Performance Shares (collectively
the “Awards”) to “Participants” under the Plan. The Plan is administered by the board of directors or
the Compensation Committee of the board of directors, which determines the individuals to whom awards shall be granted as well
as the type, terms and conditions of each award, the option price and the duration of each award.
At
the annual meeting of the stockholders of MGT held on September 27, 2013, stockholders approved an amendment to the Plan (the
“Amended and Restated Plan”) to increase the amount of shares of Common stock that may be issued under the Amended
and Restated Plan to 1,335,000 shares from 415,000 shares, an increase of 920,000 shares and to add a reload feature.
At
the annual meeting of the stockholders of MGT held on December 31, 2015, stockholders approved an amendment to the Plan (the “Amended
and Restated Plan”) to increase the amount of shares of Common stock that may be issued under the Amended and Restated Plan
to 3,000,000 shares from 1,335,000 shares, an increase of 1,665,000 shares.
Common
Stock and options granted under the Plan vest as determined by the Company’s Compensation and Nominations Committee and
expire over varying terms, but not more than seven years from date of grant. In the case of an Incentive Stock Option that is
granted to a 10% shareholder on the date of grant, such Option shall not be exercisable after the expiration of five years from
the date of grant. No option grants were issued during the six months ended June 30, 2016, and 2015.
Issuance
of restricted shares – directors, officers and employees
|
|
Number of shares
|
|
|
Weighted average grant date
fair value
|
|
Non–vested at December 31, 2015
|
|
|
–
|
|
|
$
|
–
|
|
Granted
|
|
|
1,051,000
|
|
|
|
2.68
|
|
Vested
|
|
|
(51,000
|
)
|
|
|
2.68
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
Non–vested at June 30, 2016
|
|
|
1,000,000
|
|
|
$
|
2.68
|
|
For
the three months ended June 30, 2016 and 2015, the Company has recorded $248 and $32, respectively, in employee and director stock–based
compensation expense, which is a component of selling, general and administrative expense in the condensed consolidated statement
of operations. For the six months ended June 30, 2016 and 2015, the Company has recorded $248 and $64, respectively, in employee
and director stock–based compensation expense, which is a component of selling, general and administrative expense in the
condensed consolidated statement of operations.
In
the three and six months ended June 30, 2016 and 2015, the Company did not allocate any stock–based compensation expense
to non–controlling interest.
Unrecognized
compensation cost
As
of June 30, 2016, unrecognized compensation costs related to non–vested stock–based compensation arrangements was
$2,214 (2015: $29), and is expected to be recognized over a weighted average period of 2 years (2015: 0.52 years).
Stock–based
compensation – non–employees
For
the six months ended June 30, 2016 the Company granted and issued a total of 740,000 shares to non–employees for services
rendered. The shares were recorded at $1,165 using the closing market value on respective dates of issuance.
Warrants
In May 2016, the Company
entered into Warrant Modification Agreements (the “$3 Warrant Modification Agreements”) with holders of 517,796 of
Common Stock Purchase Warrants issued in connection with the Company’s private placement offering dated May 24, 2012. The
warrants entitled its holders to purchase the Company’s Common stock at an exercise price of $3 per Company share for a
period of five years from the date of issuance (the “$3 Warrants”). Under the terms of the $3 Warrant Modification
Agreements, the exercise price of the $3 Warrants was reduced to $0.25 per share. During the three months ended June 30, 2016,
the Company issued 517,796 shares of Common stock for gross proceeds of $129 in connection with exercise of the $3 Warrants and
recorded a Warrant modification expense of $431 related to the $3 Warrant Modification Agreements.
Also in May 2016, the
Company entered into agreements with the holders of 2,800,000 Common Stock Purchase Warrants issued in connection with the Company’s
private placement offering dated October 8, 2015 (the “2015 Warrants”). Pursuant to its terms, each 2015 Warrant entitled
the holder to purchase two shares of Company’s Common stock at a price of $0.25 per share on the earlier of: (i) one year
from the date of issue, or (ii) the occurrence of certain corporate events, including a private or public financing in which the
Company receives gross proceeds of at least $7,500,000; a spinoff; one or more acquisitions or sales by the Company of certain
assets approved by the stockholders of the Company; or a merger, consolidation, recapitalization, or reorganization approved by
the stockholders of the Company (each, a “Qualifying Transaction”). In the absence of a Qualifying Transaction, the
Company allowed holders of the 2015 Warrants to accelerate exercise, if the holder agreed to pay an exercise price of greater
than $0.25 per share. All 2015 Warrants were exercised under this agreement, with the Company issuing a total of 5,600,000 shares
of Common stock for gross proceeds of $2,298, or approximately $0.41 per share. Due to the gain, no income statement impact was
recorded as a result of the above exercises. Id state are to gain - no recgintion.
During the three months
ended June 30, 2016 the Company issued a total of 6,117,796 shares of Common stock in connection with exercise of warrants, resulting
in gross proceeds of $2,427.
As of June 30, 2016 the
Company had 100,000 warrants outstanding at a weighted average exercise price of $3.75 and an intrinsic value of $7. All issued
warrants are exercisable and expire through 2018.
Note
8. Non–controlling interest
At
June 30, 2016 the Company’s non–controlling interest was as follows:
|
|
MGT Gaming
|
|
|
M2P Americas
|
|
|
Total
|
|
At January 1, 2016
|
|
$
|
28
|
|
|
$
|
(23)
|
|
|
$
|
5
|
|
Non–controlling share of net loss
|
|
|
(318
|
)
|
|
|
(1
|
)
|
|
|
(319
|
)
|
At June 30, 2016
|
|
$
|
(290
|
)
|
|
$
|
(24
|
)
|
|
$
|
(314
|
)
|
Note
9. Operating leases, commitments and security deposit
Operating
leases
In
August 2014, the Company entered into a lease modification agreement, extending its existing office lease in Harrison, NY for
a period of one year. Total rent payments over the 12–month period were $73 and the lease expired on November 30, 2015.
A refundable rental deposit of $39 was held in a restricted cash account as of December 31, 2015, which was released in January
2016.
On
October 26, 2015, the Company entered into an Office License Agreement commencing December 1, 2015. The term expires on November
30, 2016 and carries a monthly fee of $4, with one month (January) rent free. The Company paid a refundable service retainer of
$6 and a non–refundable set up fee of $1.
Total
lease rental expense for the three months ended June 30, 2016 and 2015, was $13 and $23, respectively. Total lease rental expense
for the six months ended June 30, 2016 and 2015, was $26 and $42, respectively.
Commitments
On
October 7, 2015, the Company entered into an amended and restated employment agreement with Robert Ladd, its Chief Executive Officer
and President, effective October 1, 2015. The agreement amends and restates in its entirety the employment agreement entered into
between the Company and Mr. Ladd in November 2012, as amended January 28, 2014. The term of the agreement expires on November
30, 2016, subject to automatic renewals of one year. The agreement provides for a base salary of $199 per year. Pursuant to the
agreement, the Company also granted Mr. Ladd 200,000 shares of unregistered Common stock. Mr. Ladd is eligible for bonus compensation
and equity awards as may be approved in the discretion of the Compensation Committee and the Board of Directors. Upon termination
of his employment for reasons other than death, disability, or cause or upon resignation for good reason, Mr. Ladd will be entitled
to a severance payment equal to the higher of the aggregate amount of his base salary for the then remaining term of the agreement
or twelve times the average monthly base salary paid or accrued during the three full calendar months immediately preceding such
termination. All unvested stock options shall immediately vest and the exercise period of such options shall be extended to the
later of the longest period permitted by the Company’s stock option plans or ten years following the termination date. The
agreement also contains non–compete and change of control provisions.
Note
10. Segment reporting
Operating
segments are defined as components of an enterprise about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision–making group in deciding how to allocate resources and in assessing
performance. The Company’s chief operating decision–making group is composed of the Chief Executive Officer. The Company
operates in two segments, Gaming and Intellectual Property. Certain corporate expenses are not allocated to segments.
The
Company evaluates performance of its operating segments based on revenue and operating loss. The following table summarizes our
segment information for the three and six months ended June 30, 2016 and 2015:
|
|
Intellectual
property
|
|
|
Gaming
- Continuing Operations
|
|
|
Unallocated
corporate/other
|
|
|
Total
|
|
|
Discountinued
Operations
|
|
Three months ended
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Cost of revenue
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Gross margin
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Operating
loss
|
|
|
–
|
|
|
|
–
|
|
|
|
(3,769
|
)
|
|
|
(3,769
|
)
|
|
|
–
|
|
Three months ended
June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
12
|
|
|
$
|
2
|
|
|
$
|
–
|
|
|
$
|
14
|
|
|
$
|
248
|
|
Cost of revenue
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(96
|
)
|
Gross margin
|
|
|
12
|
|
|
|
2
|
|
|
|
–
|
|
|
|
14
|
|
|
|
152
|
|
Operating loss
|
|
|
(35
|
)
|
|
|
(8
|
)
|
|
|
(529
|
)
|
|
|
(572
|
)
|
|
|
(283
|
)
|
Six months ended June
30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Cost of revenue
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Gross margin
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Operating loss
|
|
|
(50
|
)
|
|
|
(5
|
)
|
|
|
(4,368
|
)
|
|
|
(4,423
|
)
|
|
|
–
|
|
Six months ended June
30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
12
|
|
|
$
|
2
|
|
|
$
|
–
|
|
|
$
|
14
|
|
|
$
|
464
|
|
Cost of revenue
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(186
|
)
|
Gross margin
|
|
|
12
|
|
|
|
2
|
|
|
|
–
|
|
|
|
14
|
|
|
|
278
|
|
Operating loss
|
|
|
(227
|
)
|
|
|
(24
|
)
|
|
|
(1,386
|
)
|
|
|
(1,637
|
)
|
|
|
(558
|
)
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
1,100
|
|
|
$
|
1,100
|
|
|
$
|
–
|
|
Property and equipment
|
|
|
–
|
|
|
|
–
|
|
|
|
25
|
|
|
|
25
|
|
|
|
–
|
|
Intangible assets
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Goodwill
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Intangible assets
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Goodwill
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Disposals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Intangible assets
|
|
|
(659
|
)
|
|
|
(14
|
)
|
|
|
–
|
|
|
|
(673
|
)
|
|
|
–
|
|
Goodwill
|
|
|
–
|
|
|
|
(1,496
|
)
|
|
|
–
|
|
|
|
(1,496
|
)
|
|
|
–
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
(excludes $39 of restricted cash)
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
359
|
|
|
$
|
359
|
|
|
$
|
–
|
|
Property and equipment
|
|
|
–
|
|
|
|
–
|
|
|
|
35
|
|
|
|
35
|
|
|
|
–
|
|
Intangible assets
|
|
|
710
|
|
|
|
20
|
|
|
|
–
|
|
|
|
730
|
|
|
|
–
|
|
Goodwill
|
|
|
–
|
|
|
|
1,496
|
|
|
|
–
|
|
|
|
1,496
|
|
|
|
–
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
–
|
|
|
|
–
|
|
|
|
35
|
|
|
|
35
|
|
|
|
–
|
|
Intangible assets
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Goodwill
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Note
11. Investment and fair value
The
authoritative guidance for fair value measurements defines fair value as the exchange price that would be received for an asset
or paid to transfer a liability (an exit price) in the principal or the most advantageous market for the asset or liability in
an orderly transaction between market participants on the measurement date. Market participants are buyers and sellers in the
principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact. The guidance
describes a fair value hierarchy based on the levels of inputs, of which the first two are considered observable and the last
unobservable, that may be used to measure fair value which are the following:
|
●
|
Level
1
– Quoted prices in active markets for identical assets or liabilities
|
|
|
|
|
●
|
Level
2
– Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or corroborated by
observable market data or substantially the full term of the assets or liabilities
|
|
|
|
|
●
|
Level
3
– Unobservable inputs that are supported by little or no market activity and that are significant to the value
of the assets or liabilities
|
The
following table provides the investments carried at fair value measured on a recurring basis as of March 31, 2016:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Investments – FNCX Common shares
|
|
$
|
103
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
103
|
|
Investments – APPY Common shares
|
|
|
392
|
|
|
|
–
|
|
|
|
–
|
|
|
|
392
|
|
|
|
$
|
495
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
495
|
|
The
following table provides the investments carried at fair value measured on a recurring basis as of December 31, 2015:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Investments – FNCX Common shares
|
|
$
|
444
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
444
|
|
Note
12. Subsequent events
The
Company has evaluated events that occurred subsequent to June 30, 2016, and through the date of the Condensed Consolidated Financial
Statements.
Subsequent
to June 30, 2016, and through the date of filing the Quarterly Report on Form 10–Q, the Company granted and issued a total
of 10,000 shares to non–employees for services rendered. The shares were recorded at $35 using the closing market value
on respective dates of issuance.
On August 2, 2016 (the
“Closing Date”), the Company entered into a Securities Purchase Agreement (the “SPA”) with selected accredited
investors (each an “Investor” and collectively, the “Investors”). Pursuant to the terms of the Purchase
Agreement, the Company sold $2,050 in unsecured promissory notes (“Notes) in a private placement (the “Offering”).
The Notes mature on September 30, 2019 or such other date as set forth in the Notes. The Notes bear interest at a rate of twelve
per cent (12%) per annum, to be paid quarterly in arrears, with the first payment due on September 30, 2016 to be calculated on
a pro–rata basis. In addition, for each one thousand dollars invested by an Investor, the Investor shall receive two detachable
Warrants (“Warrant”), each of which is exercisable for one hundred (100) shares of the Company’s common stock:
Each Warrant has an initial exercise price of $3.31 per share, and is exercisable for a period of thirty–six (36) months
from the date of issuance.
Item
2. Management’s discussion and analysis of financial condition and results of operations
This
Quarterly Report on Form 10–Q contains forward–looking statements that involve risks and uncertainties, as well as
assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed
or implied by such forward–looking statements. The statements contained herein that are not purely historical are forward–looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). Forward–looking statements are often identified by the use of
words such as, but not limited to, “anticipate,” “estimates,” “should,” “expect,”
“guidance,” “project,” “intend,” “plan,” “believe” and similar expressions
or variations intended to identify forward–looking statements. These statements are based on the beliefs and assumptions
of our management based on information currently available to management. Such forward–looking statements are subject to
risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially
from future results expressed or implied by such forward–looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors”
included in our Annual Report on Form 10–K filed with the SEC on April 14, 2016, in addition to other public reports we
filed with the Securities and Exchange Commissions (“SEC”). The forward–looking statements set forth herein
speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward–looking
statements to reflect events or circumstances after the date of such statements.
Executive
summary
MGT Capital Investments,
Inc. (“MGT,” “the Company,” “we,” “us”) is a Delaware corporation, incorporated
in 2000. The Company was originally incorporated in Utah in 1977. MGT is comprised of the parent company, wholly–owned subsidiaries
MGT Cybersecurity, Inc. (“MGT Cybersecurity”), Medicsight, Inc. (“Medicsight”), MGT Sports, Inc. (“MGT
Sports”), MGT Studios, Inc. (“MGT Studios”), and majority–owned subsidiary MGT Gaming, Inc (“MGT
Gaming”). MGT Studios also owns a controlling minority interest in the subsidiary M2P Americas, Inc. Our corporate office
is located in Harrison, New York.
Cybersecurity
MGT
and its subsidiaries are in the process of acquiring a diverse portfolio of cyber security technologies. With cyber security industry
pioneer, John McAfee, at its helm, the Company is positioned to address various cyber threats through advanced protection technologies
for mobile and personal tech devices, including tablets and smart phones. The Company is currently in the process of acquiring
D–Vasive, a provider of leading edge anti–spy software, and Demonsaw, a provider of a secure and anonymous file sharing
software platform.
On
May 9, 2016 we, through our wholly owned subsidiary, MGT Cybersecurity, Inc. entered into an Asset Purchase Agreement (the “D–Vasive
APA”) to acquire certain assets related to the D–Vasive business (as defined below). D–Vasive, Inc., a Wyoming
corporation, is in the business of developing and marketing of certain privacy and anti–spy applications (the “D–Vasive
Business”). Pursuant to the terms of the D–Vasive APA, the Company has agreed to purchase assets (“D–Vasive
Assets”) integral to the D–Vasive Business, including but not limited to applications for use on mobile devices, intellectual
property, customer lists, databases, sales pipelines, proposals and project files, licenses and permits. Among the Purchased Assets
is the D–Vasive application which is designed for protection from invasive applications that seek access to personal contacts,
cameras and other information on smart phones, tablets and other mobile devices. The Company intends to change its corporate name
to “John McAfee Global Technologies, Inc.” upon closing of the D–Vasive transaction.
On May 26, 2016, the Company
entered into an asset purchase agreement (the “Demonsaw APA”) with Demonsaw LLC, a Delaware company (“Demonsaw”)
and the shareholders of Demonsaw, for the purchase of certain technology and assets of Demonsaw. Demonsaw is in the business of
developing and marketing certain secure and anonymous information sharing applications (the “Demonsaw Business”).
Pursuant to the terms of the Demonsaw APA, the Company has agreed to purchase assets (“Demonsaw Assets”) integral
to the Demonsaw Business, including but not limited to the source code for the Demonsaw solution, intellectual property, customer
lists, databases, sales pipelines, proposals and project files, licenses and permits. Among the Demonsaw Assets is the Demonsaw
application which is designed for use in Windows and Apple operating systems. However, prior to the closing of this transaction,
the Company and Demonsaw executed an agreement to terminate the Demonsaw APA, pursuant to Section 3.4 of the Demonsaw APA. Subsequently,
D–Vasive entered into a Membership Interest Purchase Agreement (the “LLC Purchase Agreement”) with the holders
of all of Demonsaw’s outstanding membership interest, whereby D–Vasive purchased all such membership interest from
the Demonsaw members. The closing of the transaction contemplated under the LLC Purchase Agreement is contingent on, among other
things, the closing of the transaction contemplated under the APA.
Gaming
Prior
to second quarter ending June 30, 2016, the Company and its subsidiaries were principally engaged in the business of acquiring,
developing and monetizing assets in the online and mobile gaming space as well as the social casino industry. MGT’s portfolio
includes a social casino platform Slot Champ and minority stakes in the skill–based gaming platform MGT Play and fantasy
sports operator DraftDay Gaming Group, Inc. (“DDGG”) (see September 8, 2015 development below).
In
addition, MGT Gaming owns three patents covering certain features of casino slot machines. Two of the patents were asserted against
alleged infringers in various actions in federal court in Mississippi. In July 2014, MGT Gaming dismissed its lawsuits against
WMS Gaming Inc., and in August 2015, the Company and defendants Aruze America and Penn National Gaming agreed to settle all pending
litigation and all proceedings at the U. S. Patent and Trademark Office. The Company received a payment of $90, which was recorded
as licensing revenue. In an effort to monetize its gaming patent portfolio during the six months ended June 30, 2016, the Company
engaged Munich Innovations GmbH, the patent monetization firm that sold MGT’s medical patent portfolio to Samsung in 2013
for $1.5 million. As of June 30, 2016, an impairment charge for the full value of the patent was recorded, as the Company is in
no longer engaged in this business.
On
September 8, 2015, the Company and MGT Sports entered into an Asset Purchase Agreement with Viggle, Inc. (“Viggle”)
and Viggle’s subsidiary DDGG, pursuant to which Viggle acquired all of the assets of the DraftDay.com business (“DraftDay.com”)
from the Company and MGT Sports. In exchange for the acquisition of DraftDay.com, Viggle paid MGT Sports the following: (a) 1,269,342
shares of Viggle’s common stock, since renamed Function(x) Inc. (NASDAQ: FNCX) (“FNCX”), (b) a promissory note
in the amount of $234 paid on September 29, 2015, (c) a promissory note in the amount of $1,875 due March 8, 2016 (“FNCX
Note”, “the Note”), and (d) 2,550,000 shares of Common stock of DDGG (private entity). In addition, in exchange
for providing certain transitional services, DDGG issued to MGT Sports a warrant to purchase 1,500,000 shares of DDGG common stock.
Following consummation of the transaction, MGT Sports owns an 11% equity interest in DDGG, FNCX owns 49%, and Sportech, Inc. owns
39%. As a result of the transaction, the Company has presented DraftDay.com as a discontinued operation.
On
March 24, 2016, the Company entered into an Exchange Agreement (the “FNCX March 24
th
Agreement”) with FNCX.
The purpose of the FNCX March 24
th
Agreement was to exchange the FNCX Note for other equity and debt securities of
FNCX, after the Note went into default on March 8, 2016. On the effective date of the FNCX March 24
th
Agreement, the
Note had an outstanding principal balance of $1,875 and accrued interest in the amount of $51 (the “March 24
th
Interest”). Pursuant to the FNCX March 24
th
Agreement, a portion consisting of $825 of the outstanding principal
of the FNCX Note was exchanged for 2,748,353 shares of FNCX’s Common stock, and an additional portion of $110 of the outstanding
principal was exchanged for 110 shares (the “FNCX Preferred shares”) of a newly created class of Preferred stock,
the Series D Convertible Preferred stock. The FNCX Preferred shares were subsequently converted into 366,630 shares of FNCX’s
Common stock. Finally, FNCX agreed to make a cash payment to MGT Sports for the total amount of March 24
th
Interest.
In exchange for the forgoing, MGT Sports and the Company agreed to waive all Events of Default under the FNCX Note prior to the
effective date of the FNCX March 24
th
Agreement and to release FNCX from any rights, remedies and claims related thereto.
After giving effect to the forgoing, the remaining outstanding principal balance of the FNCX Note was $940 which continued to
accrue interest a rate of 5% per annum, and all terms of the Note remained unchanged except that the maturity date was changed
to July 31, 2016.
On
June 14, 2016, the Company and MGT Sports entered into a Securities Exchange Agreement (the “FNCX June 14
th
Agreement”)
with FNCX to exchange $940 remaining outstanding principal of the FNCX Note for 2,641,837 shares of FNCX’s Common stock
and FNCX shall make a cash payment to MGT Sports for the total amount of interest accrued until consummation of the transaction
contemplated in the FNCX June 14
th
Agreement. The closing of the FNCX June 14
th
Agreement is conditioned
on FNCX’s shareholders’ approval of the issuance of the FNCX Common shares and satisfaction of other closing conditions
set forth in the FNCX June 14
th
Agreement. As of June 30, 2016, the Note was recorded on the balance sheet at $640,
net of reserve of $300.
Critical
accounting policies and estimates
The
Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America (GAAP). Certain accounting policies have a significant impact on amounts reported in the financial statements.
A summary of those significant accounting policies can be found in Note 3 to the Company’s financial statements contained
in the 2015 Annual Report on Form 10–K and Part I, Note 3 contained in this Quarterly Report on Form 10–Q.
Results
of operations
The
Company currently has two operational segments, Gaming and Intellectual Property.
Three
months ended June 30, 2016 and 2015
The
Company achieved the following results for the three months ended June 30, 2016, and 2015:
|
●
|
Operating expenses were $3,769
(2015: $586);
|
|
|
|
|
●
|
Losses
of $nil from discontinued operations (2015: $283);
|
|
|
|
|
●
|
Net loss attributable to Common
shareholders was $6,093 (2015: $828) and resulted in a basic and diluted loss per share
of $0.29 (2015: $0.06). Net loss from continuing operations before non–controlling
interest was $6,389 (2015: $567).
|
The
increase in our operating expenses during the quarter ended June 30, 2016 was primarily due to increased stock–based compensation
expense, driven by higher stock price and increased professional fees, such as legal and investor relations fees.
Intellectual
property
Selling,
general and administrative expenses for three months ended June 30, 2016 were $nil (2015: $47). During the second quarter of 2016,
the Company recognized an impairment charge of $659 related to the gaming patent.
Gaming
– continuing operations
During
three months ended June 30, 2016, the Company did not incur any operating costs related to this segment (2015: $10). During the
second quarter of 2016, the Company recognized an impairment charge of $1,496 related to the goodwill and $14 related to the intangible
assets.
Gaming
– discontinued operations (DraftDay.com)
During
the three months ended June 30, 2016, the Company did not recognize any revenues or expenses for this segment. During the three
months ended June 30, 2015, the Company recognized $248 in revenues, $96 in cost of revenue and $435 in selling, general and administrative
expenses, consisting of marketing expenses, employee compensation, information technology and office related expenses.
Unallocated
corporate / other
Selling, general and administrative
expenses during the three months ended June 30, 2016 were $3,769 (2015: $529). The increase was primarily due to increased stock–based
compensation expense, driven by higher stock price and increased professional fees, such as legal and investor relations fees.
The
Company recorded $11 in interest income, (2015: $5), the income was related to interest earned on note receivable from Function
(X) Inc. (“FNCX”).
Six
months ended June 30, 2016 and 2015
The
Company achieved the following results for the six months ended June 30, 2016, and 2015:
|
●
|
Operating expenses were $4,423
(2015: $1,651);
|
|
|
|
|
●
|
Losses
of $nil from discontinued operations (2015: $558);
|
|
|
|
|
●
|
Net loss attributable to Common
shareholders was $7,430 (2015: $2,122) and resulted in a basic and diluted loss per share
of $0.38 (2015: $0.17). Net loss from continuing operations before non–controlling
interest was $7,749 (2015: $1,673).
|
The
increase in our operating expenses during the six months ended June 30, 2016 was primarily due to increased stock–based
compensation expense during the second quarter of 2016, driven by higher stock price and increased professional fees, such as
legal and investor relations fees.
Intellectual
property
Selling,
general and administrative expenses for the six months ended June 30, 2016 were $50 (2015: $239) consisting of amortization. During
the second quarter of 2016, the Company recognized an impairment charge of $659 related to the gaming patent.
Gaming
– continuing operations
Selling,
general and administrative expenses for the six months ended June 30, 2016 were $5 (2015: $26). During the second quarter of 2016,
the Company recognized an impairment charge of $1,496 related to the goodwill and $14 related to the intangible assets.
Gaming
– discontinued operations (DraftDay.com)
During
the six months ended June 30, 2016, the Company did not recognize any revenues or expenses for this segment. During the six months
ended June 30, 2015, the Company recognized $464 in revenues, $186 in cost of revenue and $836 in selling, general and administrative
expenses, consisting of marketing expenses, employee compensation, information technology and office related expenses.
Unallocated
corporate / other
Selling, general and administrative
expenses during the six months ended June 30, 2016 were $4,368 (2015: $1,386). The increase was primarily due to increased stock–based
compensation expense during the second quarter of 2016, driven by higher stock price and increased professional fees, such as
legal and investor relations fees.
The
Company recorded $36 in interest income, (2015: expense of $36), the income was related to interest earned on note receivable
from Function (X) Inc. (“FNCX”).
Liquidity
and capital resources
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
Working capital summary
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (excluding $39 of restricted cash as
of December 31, 2015)
|
|
$
|
1,100
|
|
|
$
|
359
|
|
Other current assets
|
|
|
141
|
|
|
|
61
|
|
Investments available for sale
|
|
|
495
|
|
|
|
444
|
|
Notes receivable
|
|
|
640
|
|
|
|
1,575
|
|
Current assets – Discontinued operations
|
|
|
–
|
|
|
|
–
|
|
Current liabilities
|
|
|
(127
|
)
|
|
|
(79
|
)
|
Current liabilities – Discontinued operations
|
|
|
–
|
|
|
|
–
|
|
Working capital surplus
|
|
$
|
2,249
|
|
|
$
|
2,360
|
|
|
|
Six months ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Cash (used in) / provided by
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(2,507
|
)
|
|
$
|
(1,289
|
)
|
Investing activities
|
|
|
821
|
|
|
|
(151
|
)
|
Financing activities
|
|
|
2,427
|
|
|
|
1,644
|
|
Discontinued operations
|
|
|
–
|
|
|
|
(562
|
)
|
Effects of exchange rates on cash and cash equivalents
|
|
|
–
|
|
|
|
–
|
|
Net change in cash and cash equivalents
|
|
$
|
741
|
|
|
$
|
(358
|
)
|
On
June 30, 2016, MGT’s cash and cash equivalents were $1,100. The Company continues to exercise discipline with respect to
current expense levels. Our cash and cash equivalents have decreased during the six months ended June 30, 2016, primarily due
to $2,507 used in operating activities, offset by $821 and $2,427 provided by investing activities and financing activities, respectively.
Operating
activities
Our
net cash used in operating activities differs from the net loss predominantly because of various non–cash adjustments such
as depreciation, amortization of intangibles, stock–based compensation, warrants modification expense, loss on sale of investments
and movement in working capital.
Investing
activities
During
the six months ended June 30, 2016 the Company generated $1,391 in gross proceeds from sales of FNCX Common stock on the open
market.
During
the six months ended June 30, 2016, the Company purchased a 5% promissory note with a principal of $45, maturing on July 18, 2016.
On
May 13, 2016 the Company acquired 6% Membership Interest in The Round House LLC (“Round House”) for cash consideration
of $150. Round House is an Alabama–based technology incubator, offering co–working space, accelerator services and
angel investment.
On
May 18, 2016 the Company acquired 112,000 Common shares of Venaxis, Inc. (“APPY”) in the open market at a cost of
$414.
Financing
activities
During
the three months ended June 30, 2016 the Company issued 6,117,296 shares of Common stock in connection with exercise of warrants,
resulting in gross proceeds of $2,427.
Risks
and uncertainties related to our future capital requirements
The accompanying condensed
consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. As of June 30, 2016, the Company had incurred significant operating
losses since inception and continues to generate losses from operations and has an accumulated deficit of $311,374. These matters
raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial
statements do not include any adjustments relating 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.
Commercial
results have been limited and the Company has not generated significant revenues. The Company’s primary source of operating
funds since inception has been debt and equity financings. The Company cannot assure its stockholders that the Company’s
revenues will be sufficient to fund its operations. If adequate funds are not available, the Company may be required to curtail
its operations significantly or to obtain funds through entering into arrangements with collaborative partners or others that
may require the Company to relinquish rights to certain of our technologies or products that the Company would not otherwise relinquish.
At
June 30, 2016, MGT’s cash and cash equivalents were $1,100. The Company intends to raise additional capital, either through
debt or equity financings or through the continued sale of the Company’s assets in order to achieve its business plan objectives.
Management believes that it can be successful in obtaining additional capital; however, no assurance can be provided that the
Company will be able to do so. There is no assurance that any funds raised will be sufficient to enable the Company to attain
profitable operations or continue as a going concern. To the extent that the Company is unsuccessful, the Company may need to
curtail or cease its operations and implement a plan to extend payables or reduce overhead until sufficient additional capital
is raised to support further operations. There can be no assurance that such a plan will be successful.
Off–balance
sheet arrangements
We
have 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.