PART
I
Item
1. Business
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”), MGT Interactive, LLC (“MGT Interactive”)
and 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 Durham, North Carolina.
The
Company is in the process of acquiring and developing a diverse portfolio of cybersecurity technologies. With industry pioneer
John McAfee at its helm, MGT is positioning itself to address various cyber threats through advanced protection technologies for
mobile and personal tech devices, as well as corporate networks.
Also
as part of its corporate efforts in secure technologies, MGT is growing its capacity in mining Bitcoin. Currently at 5.0 PH/s,
the Company’s facility in WA state produces about 100 Bitcoins per month, ranking it as one of the largest U.S. based Bitcoin
miners. Further, MGT is in active discussions with potential financial partners to grow Bitcoin output materially.
Lastly,
MGT stockholders have voted to change the corporate name of MGT to “John McAfee Global Technologies, Inc.” Following
a dispute over ownership and permitted usage of the name McAfee, the Company and Intel have agreed to a mediation process to avoid
unnecessary legal costs.
Cybersecurity
On
May 9, 2016, we, through our wholly owned subsidiary, MGT Cybersecurity, Inc. entered an asset purchase agreement (APA) to acquire
certain assets owned by D–Vasive, Inc., a Wyoming corporation in the business of developing and marketing certain privacy
and anti–spy applications (the “D–Vasive APA). Pursuant to the terms of the D–Vasive APA, the Company
had agreed to purchase assets 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. The proposed purchase price for D–Vasive
was $300 in cash and 23.8 million shares of MGT common stock. On October 5, 2016, the Company paid a $70 refundable advance as
part of a modification of terms. The advance will be refundable if the APA is not close within twelve months of the modification.
On
May 26, 2016, the Company entered an asset purchase agreement with Demonsaw LLC, a Delaware company, for the purchase of certain
technology and assets. Demonsaw is in the business of developing and marketing secure and anonymous information sharing applications.
Pursuant to the terms of the Demonsaw APA, we had agreed to purchase assets including the source code for the Demonsaw solution,
intellectual property, customer lists, databases, sales pipelines, proposals and project files, licenses and permits. The proposed
purchase price for Demonsaw was 20.0 million shares of MGT common stock.
On
July 7, 2016, and prior to the closing of either of the above transactions, the Company and Demonsaw terminated the Demonsaw APA.
Simultaneously, D–Vasive entered an agreement with the holders of Demonsaw outstanding membership interests, whereby D–Vasive
would purchase all such membership interests. The closing of that transaction was contingent on the closing of the transaction
contemplated under the D–Vasive APA. Accordingly, the proposed purchase price for D–Vasive (inclusive of the Demonsaw
assets) was increased to 43.8 million shares of MGT common stock (the “Amended APA”).
On
August 8, 2016, the Company filed a Definitive Proxy Statement to solicit, among other things, shareholder approval of the D–Vasive
acquisition, at the upcoming Annual Meeting of Stockholders. On September 8, 2016, shareholder approval was obtained. However,
on September 19, 2016, the New York Stock Exchange informed the Company that it would not approve the listing on the Exchange
of the 43.8 million shares required to be issue to complete the closing of the D–Vasive acquisition. Not reaching this critical
closing condition resulted in the termination of the Amended APA.
On
October 24, 2016, the Company consummated the July 2016 asset purchase agreement with Cyberdonix, Inc., an Alabama corporation
for the purchase of the “
Sentinel
” network intrusion detection device, all underlying software and firmware,
the server contract, and case and circuit board inventory by issuing 150,000 shares of MGT common stock.
On
March 3, 2017, MGT purchased 46% of the outstanding membership interests in Demonsaw LLC for 2.0 million MGT common shares.
On
April 3, 2017, the Company terminated the APA dated May 9, 2016, as amended on July 7, 2016, entered into by and among MGT, D–Vasive,
the shareholders of D–Vasive and MGT Cybersecurity. The termination of the APA was premised on Section 3.4(b) of the APA
which states that the APA may be terminated by either party thereto if the Closing contemplated thereunder did not occur on or
before a specified date and the same is not otherwise extended by the parties, in writing or otherwise. Pursuant to the APA, as
amended, MGT would have acquired certain technology and assets of D–Vasive if the Closing had occurred on the terms of the
APA, as amended.
Bitcoin
Mining
On
September 13, 2016, the Company announced launch of its 5.0 PH/s Bitcoin mining operation. Based in central Washington, the mining
facility currently produces about 100 Bitcoins per month.
Legacy
Businesses
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 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).
DraftDay
Gaming Group
Effective
September 3, 2015, the Company terminated the Asset Purchase Agreement with Random Outcome (“RO”) (“RO Agreement”)
originally entered into on June 11, 2015, as amended to date. According to its terms, the RO Agreement could be terminated by
the Company or RO if a closing had not occurred by August 31, 2015. The RO Agreement provided for the sale of the DraftDay.com
Business to RO for a purchase price of (i) cash equal to the sum of (a) $4,000 and (b) $10 per day for the period starting July
15, 2015 and ending on the closing date and (ii) a three–year warrant to purchase 500,000 shares of RO Common stock at an
exercise price of $1.00, a three–year warrant to purchase 500,000 shares of RO Common stock at an exercise price of $1.33,
and a three–year warrant to purchase 500,000 shares of RO Common stock at an exercise price of $1.66. The non–refundable
deposit of $250 was recorded as gain on termination of Asset Purchase Agreement in the Consolidated Statement of Operations under
discontinued operations for the year ended December 31, 2015.
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 (share
amounts and per share amounts are reflected post stock split): (a) 63,467 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
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 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. As of December 31, 2015, the Company booked a reserve of $300 against the Note.
The
following table summarizes fair values of the net assets assumed in consideration for the sale of the DraftDay.com Business assets:
Viggle
Common shares received at closing share price of $26.00
|
|
$
|
1,650
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|
Viggle
promissory notes
|
|
|
2,109
|
|
DDGG
Common shares received at fair market value of $400.00 per share
(1)
|
|
|
1,020
|
|
DDGG
stock purchase warrants received
(2)
|
|
|
360
|
|
Total
consideration
|
|
$
|
5,139
|
|
The
transaction resulted in a loss on the sale of $387 in the Consolidated Statement of Operations under discontinued operations during
the year ended December 31, 2015.
|
(1)
|
DDGG
Common shares were valued based on recent equity sales by DDGG to Viggle. Viggle purchased
shares of DDGG at a price of $400.00 per share.
|
|
|
|
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(2)
|
The
Company determined fair value of the warrants received utilizing a Black–Scholes
option pricing model. The Company utilized the following assumptions: fair value of Common
share of DDGG stock – $400.00 per share, exercise price of $400.00, risk free rate
of 0.65%, expected volatility of 98% which is the 3–year historical volatility
of the Company’s Common stock.
|
On
March 24, 2016, the Company entered into an Exchange Agreement (the “FNCX March 24th Agreement”) with FNCX. The purpose
of the FNCX March 24th 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 24th Agreement, the Note had an outstanding principal balance
of $1,875 and accrued interest in the amount of $51 (the “March 24th Interest”). Pursuant to the FNCX March 24th Agreement,
a portion consisting of $825 of the outstanding principal of the FNCX Note was exchanged for 137,418 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 18,332 shares of FNCX’s Common stock. Finally, FNCX agreed to make a cash payment to MGT
Sports for the total amount of March 24th 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 24th 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 14th Agreement”)
with FNCX to exchange $940 remaining outstanding principal of the FNCX Note for 132,092 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 14th Agreement. The closing of the FNCX June 14th Agreement was 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 14th
Agreement.
On
September 16, 2016, FNCX amended its Certificate of Incorporation to effect a reverse stock split of all issued and outstanding
shares of common stock at a ratio of 1 for 20 (the "Reverse Stock Split"). The effective date of the Reverse Stock Split
is September 16, 2016. The above common stock share amounts received from FNCX have been adjusted to reflect the Reverse Stock
Split.
On
October 10, 2016, the Note was satisfied through the issuance of 136,304 shares of common stock and payment of interest of $16.
These shares were sold during December 2016, and the Company recorded a loss on sale of investments of $86 and loss on conversion
of the notes receivable with shares of $196.
Other
Assets
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. As a result of the August 2015 settlement, during 2015, the Company
received a payment of $90, which was recorded as licensing revenue. In an effort to monetize its gaming patent portfolio during
the year ended December 31, 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 December 31, 2016, an impairment charge for the full value
of the patent ($659) was recorded, as the Company is in no longer engaged in this business.
On
April 21, 2015, Gioia Systems, LLC (“Gioia”) filed a complaint against the Company, the Company’s majority owned
subsidiary, MGT Interactive, LLC, Robert Ladd and Robert Traversa with the United States District Court for the Southern District
of New York. MGT Interactive, LLC was also included as a derivative plaintiff in the action. Gioia’s complaint asserts claims
for breach of contract and breach of fiduciary duty relating to the Contribution Agreement and related agreements. On July 19,
2015, the Company and the other defendants filed an answer, in which they denied the allegations, raised affirmative defenses,
and introduced several counterclaims against Gioia.
On
August 28, 2015, the Company and MGT Interactive along with Gioia entered into an Assignment and Sale Agreement (the “Agreement”).
MGT Interactive purchased the 49% membership interest that Gioia owned of MGT Interactive and sold the certain tangible and intellectual
property assets that MGT Interactive previously acquired from Gioia. Effective as of August 28, 2015, MGT Interactive irrevocably
sold all assets and Gioia accepts all assets free and clear of all liens etc. In exchange for such assets, Gioia is to transfer
the 49% membership interest to Interactive along with a cash payment of $35. As a result of the Agreement, the Company recognized
a $144 loss on sale of assets during the year ended December 31, 2015.
The
following summarizes the recognition of the Agreement:
Cash
|
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$
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35
|
|
Intangible
assets
|
|
|
(179
|
)
|
Loss
on sale
|
|
$
|
144
|
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On August 16, 2016, the
Company purchased 17.5% membership interest in Two minute Quests LLC (“2MQ”) for $115. 2MQ is introducing a game for
the iWatch and iPhone. As of December 31, 2016, the Company recorded an impairment charge for the full value of $115 of this investment.
On
May 13, 2016, the Company acquired 6% Membership Interest in The Round House LLC for cash consideration of $150. Round House LLC
is an Alabama–based technology incubator, offering co–working space, accelerator services and angel investment. As
of December 31, 2016, the Company recorded an impairment charge for the full value of $150 of this investment.
Strategy
MGT
and its subsidiaries are principally engaged in the business of acquiring, developing and monetizing assets in the online and
mobile gaming space, as well as the casino industry. The Company’s acquisition strategy is designed to obtain control of
assets with a focus on risk mitigation coupled with large potential upside. We plan to build our portfolio by seeking out large
social and real money gaming opportunities via extensive research and analysis. Next, we will attempt to secure controlling interests
for modest cash and/or stock outlays. MGT then budgets and funds operating costs to develop business operations and tries to motivate
sellers with equity upside. While the ultimate objective is to operate businesses for free cash flow, there may be opportunities
where we sell or otherwise monetize certain assets.
There
can be no assurance that any acquisitions will occur at all, or that any such acquisitions will be accretive to earnings, book
value and other financial metrics, or that any such acquisitions will generate positive returns for Company stockholders. Furthermore,
it is contemplated that any acquisitions may require the Company to raise capital; such capital may not be available on terms
acceptable to the Company, if at all.
Competition
MGT
encounters intense competition in its businesses, in most cases from larger companies with greater financial resources such cybersecurity
firms FireEye, Inc. (NASDAQ: FEYE), Palo Alto Networks, Inc. (NYSE: PANW) and Intel Corporation (NASDAQ: INTC).
Employees
Currently,
the Company and its subsidiaries have 8 full–time employees. None of our employees is represented by a union and we believe
our relationships with our employees are good.
Available
Information
MGT
maintains a website at www.mgtci.com. The Company makes available free of charge our annual report on Form 10–K, Quarterly
Reports on Form 10–Q and current reports on Form 8–K, including any amendments to the foregoing reports, as soon as
is reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission
or the SEC. These materials along with our Code of Business Conduct and Ethics are also available through our corporate website
at www.mgtci.com. A copy of this Annual Report on Form 10–K (“Annual report”) is located at the Securities and
Exchange Commission’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of
the Public Reference Room can be obtained by calling the SEC at 1–800–SEC–0330. The public may also download
these materials from the Securities and Exchange Commission’s website at http://www.sec.gov. Any amendments to, and waivers
of, our Code of Business Conduct and Ethics will be posted on our corporate website. The Company is not including the information
contained at
mgtci.com
as a part of this Annual Report.
Item
1A. Risk Factors
Discussion
of our business and operations included in this Annual Report on Form 10–K should be read together with the risk factors
set forth below. They describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties,
together with other factors described elsewhere in this report, have the potential to affect our business, financial condition,
results of operations, cash flows, strategies or prospects in a material and adverse manner. New risks may emerge at any time,
and we cannot predict those risks or estimate the extent to which they may affect our financial performance. Each of the risks
described below could adversely impact the value of our securities. These statements, like all statements in this report, speak
only as of the date of this prospectus (unless another date is indicated), and we undertake no obligation to update or revise
the statements in light of future developments.
We
cannot assure you that we will be successful in commercializing any of the technologies or products acquired and/or developed,
or if any of our technologies or products are commercialized, that they will be profitable for the Company.
The
Company generates limited revenue from operations upon which an evaluation of our prospects can be made. The Company’s prospects
must be considered keeping in mind the risks, expenses and difficulties frequently encountered in the establishment of a new business
in a constantly changing industry. There can be no assurance that the Company will be able to achieve profitable operations in
the foreseeable future, if at all.
The
Company has identified a number of specific risk areas that may affect our operations and results in the future:
Company
Specific Risks
Going
Concern Risks
The
Company’s consolidated financial statements have been prepared on a going concern basis, and do not include adjustments
that might be necessary if the Company is unable to continue as a going concern.
The
Company’s consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. As of December 31, 2016, the Company had incurred
significant operating losses since inception, and continues to generate losses from operations, and has an accumulated deficit
of $328,467. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated
financial statements incorporated in this Annual Report 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.
We
have had limited commercial results and revenues, and we may be required to curtail operations if adequate funds are not available
to us.
Our
commercial results have been limited. Historically, the Company has not generated significant revenues to fund its operations,
and the Company does not expect that revenues will be sufficient to fund operations for the foreseeable future. The Company’s
primary source of operating funds since inception has been debt and equity financings. At December 31, 2016, MGT’s cash
and cash equivalents were approximately $345. The Company intends to raise additional capital, either through debt or equity financings,
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, moreover, 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 its operations and implement a plan to extend payables or reduce
overhead until sufficient additional capital is raised to support further operations. The Company may also attempt 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. There can be no assurance that any such
plan will be successful.
Risks
Associated with Our Being a Development Stage Company
We
have recently refocused our business, so that our historical operations are not indicative of future results.
We
were originally formed as an internet and technology business, and later became involve in medical imaging technology. Most recently,
we focused our activities principally on the online and mobile gaming space and the social casino industry. In September 2015,
the Company disposed of substantially all its equity interest in DraftDay Gaming Group, Inc., its principal gaming property, and
began repositioning itself as a participant in the cybersecurity industry. Accordingly, the Company’s performance and operating
results in prior periods are unlikely to be indicative of its future operating performance.
We
are now a development stage company in the cybersecurity industry, and our business is subject to the risks and uncertainties
of development stage companies generally.
The
Company has just begun its entry into the cybersecurity industry with the acquisition of its Sentinel product. We are also exploring
other acquisitions in the cybersecurity space. The products on which the Company is currently focused, and products and applications
which the Company hopes to acquire in the future, are, or are expected to be, in the early stages of development and/or commercialization,
with the anticipation that the Company will be able to build substantial value in the products over time.
As
a consequence of this strategy, the Company expects that the revenues generated by its product offering, at least initially, will
be not be sufficient to cover its administrative, research and development, marketing expenses. Therefore, as is typical with
many development stage companies, the Company will be relying for the foreseeable future on its cash on hand and its ability to
raise additional capital, rather than operating revenues, in order to fund the majority of its operating expenses.
As
a development stage company, we expect to incur operating losses for the foreseeable future, and we may not achieve or sustain
profitability
.
For
the foreseeable future, the Company is not expected to experience positive earnings. While typical of development stage companies,
the absence of earnings will make the Company more difficult to value, which may result in wide swings in its share price that
are unrelated to the fundamental operations or prospects of its businesses.
Despite
our optimism that the Company’s business strategy is sound and that we will ultimately achieve profitability, there is substantial
uncertainty regarding the course of our future operations, including expected growth through as yet unidentified acquisitions
in the cybersecurity business and as yet undetermined new product offerings. The time period that will be required for our Company
to achieve profitability and positive cash flow, or whether such profitability and cash flow will be at all achievable, is indeterminate.
The
Company could be confused with a shell company.
The
Company currently employs 2 people in management and administration at its office in Harrison, New York, 2 people in marketing
and communications who work remotely, and 4 engineering and management personnel in product development at its main facility in
Durham, North Carolina. The Company currently engages 4 engineers on a consulting basis, some of whom may be expected to become
Company employees in the future. The Company also owns bitcoin machines in a hosted environment in Cashmere, Washington. Also,
the Company has three advisory boards, a four–member Hacker Advisory Board, a two member Emerging Large Scale Technology
Board and a three member Cryptocurrency Advisory Board. At its current level of operation, the Company is not a shell company
under applicable rules and regulations of the Securities and Exchange Commission. Nevertheless, because the Company has recently
disposed of, and has ceased to conduct, its legacy online sports gaming business, and has only recently begun it activities in
the cybersecurity space, it is possible that the Company could be confused with a shell company. This erroneous perception could
have adverse consequences for the Company’s market valuation, as well as for its relationships with potential customers,
potential joint venture partners and other constituencies. The Company expects the risk of this perception to diminish as the
level of the Company’s operations increases.
Risks
Associated with Management and Other Personnel
The
Company will be relying on John McAfee, one of the pioneers of the cybersecurity industry, to provide vision and direction, but
we cannot assure you that his association with the Company will result in our commercial success, and the Company could lose the
benefit of Mr. McAfee’s services.
John
McAfee, one of the pioneers of the cybersecurity industry is currently Chief Executive Officer of the Company, as well as our
executive chairman. In addition to founding McAfee Associates, one of the leading anti–virus protections firms, Mr. McAfee
has been involved with numerous other ventures in the cybersecurity space. The Company anticipates that Mr. McAfee’s experience
and vision will be an invaluable resource to the Company as it seeks to identify, develop and commercialize additional product
offerings in the cybersecurity space. The Company also believes that Mr. McAfee’s association with the Company will provide
it with name recognition and credibility among customers, vendors, industry professionals and market participants. For this reason,
the Company is proposing to rename itself John McAfee Global Technologies.
We
cannot assure you, however, that Mr. McAfee will be able to replicate his prior successes at the Company. Also, while Mr. McAfee
occupies the position of executive chairman and CEO, he does not manage the day–to–day operations of the Company,
and Mr. McAfee may continue to have other interests that are unrelated to the Company. In addition, while Mr. McAfee has committed
himself to the Company, and has a substantial equity stake in the Company via stock options, we cannot guarantee that the Company
will continue to have the benefit of his services after his two–year employment agreement expires. Furthermore, despite
his equity interest, he could determine to disassociate himself from the Company, or Mr. McAfee could die or become disabled,
and the Company has determined that it cannot obtain key person insurance on Mr. McAfee on economically reasonable terms. Finally,
Mr. McAfee has been the subject of certain publicity with respect to his personal life, particularly with respect to the time
when he was residing in Belize, which could be viewed as adverse to the Company. Despite these risks, the Company believes that
Mr. McAfee’s association with the Company will provide substantial direct and indirect benefits to the Company and will
contribute the Company’s hoped for success in the cybersecurity space.
The
Company is continuing to assemble a management team appropriate to its cybersecurity business, but there is no assurance that
it will be successful in identifying and engaging suitable candidates.
The
Company has retained John McAfee because the Company believes he has the experience and expertise to guide the Company in development
of its cybersecurity business. The Company anticipates, however, that it will require other management personnel to complement
and assist Mr. McAfee in the operational leadership of the Company. In particular, the Company is in the process of identifying
candidates for a permanent chief financial officer and the position of chief operating officer, and the Company also expects to
pursue the engagement of other members of senior management. There is no assurance that the Company will be successful in identifying
appropriate candidates for the positions that it seeks to fill, or that any candidates identified will be prepared to be employed
by the Company on terms that are commercially reasonable. Also, because the Company is in the development stage and the precise
direction of its cybersecurity business could evolve over time, the management roles, qualifications and positions that are most
suitable to the Company’s businesses may change, which may result in the Company making changes in its management personnel
and structure. Such management changes could be costly to the Company and could result in inefficiencies and dislocations that
may adversely affect the Company’s development.
We
may fail to attract and retain other qualified personnel.
There
is intense competition from other companies, research and academic institutions, government entities and other organizations for
qualified personnel in the area of cyber technology. As a development stage company with a limited operating history, we may fail
to identify, attract, retain and motivate the kind of highly skilled personnel that we require to develop our products and grow
our business. Although we believe that the opportunity to work alongside Mr. McAfee and Mr. Andersen, who we believe are recognized
leaders in the cybersecurity industry, and what we believe are the growth prospects afforded by our industry, will allow us to
attract the qualified personnel that we require, we cannot assure you that this will be the case.
Risks
Associated with Potential Acquisitions
The
Company’s business plan contemplates additional acquisitions of cybersecurity businesses and products, but there is no assurance
that it will be successful with its acquisition program.
The
Company anticipates that a substantial portion of the future growth of its products and services will come through acquisitions.
Other than the proposed acquisition of the assets of D–Vasive and Demonsaw (see below), the Company has not identified specific
businesses that it is presently intending to acquire. There can be no assurance that the Company will be successful in identifying
suitable businesses of entities for acquisition, or that if identified, the Company will have the resources, whether cash or available
securities, to consummate the acquisition. There can also be no assurance that any future acquisitions, if consummated, will be
financial and business successes, in the near term or at all, or that the Company would have the resources to adequately develop
the business opportunities offered by the acquisitions. It is also possible that the Company would not have sufficient financial,
personnel and other resources to fully exploit the businesses existing at the time of an acquisition or the business of an acquisition,
with the result that the development of one or more of the existing businesses and acquired businesses would suffer, at least
in the short term.
You
should also be aware that, while a substantial portion of the Company’s anticipated growth is expected to result from its
acquisition activity, stockholders will generally not be asked to approve an acquisition, unless required by applicable law or
the rules and regulations of any stock exchange on which the Company’s shares may be listed at the time. Thus, it is possible
that the Company could engage in one or more acquisitions that would alter the direction of the Company’s business and operations
without stockholders having a formal say on whether to pursue such acquisition transactions.
Acquisitions
could also entail other potential risks.
Acquisition
activity typically involves other significant risks and uncertainties, including the following:
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●
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inability
to successfully integrate the acquired technology and operations into our business and maintain uniform standards, controls,
policies and procedures;
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●
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challenges
in retaining key employees, customers and other business partners of the acquired business;
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inability
to realize synergies expected to result from an acquisition;
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●
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an
impairment of acquired goodwill and other intangible assets in future periods would result in a charge to earnings in the
period in which the write–down occurs;
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●
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the
internal control environment of an acquired entity may not be consistent with our standards and may require significant time
and resources to improve; and
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potential
liability for activities of the acquired companies undertaken before the acquisition, including violations of laws, rules
and regulations, commercial disputes, tax liabilities and other known and unknown liabilities.
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Risks
Associated with the Cybersecurity Industry
There
is no assurance that we will be successful in commercializing our cybersecurity products.
Our
current and currently proposed cybersecurity products are in the initial stages of commercialization, and we expect that the same
will be the case with respect to the products of other businesses that we acquire. Because of the rapidly evolving nature of the
cybersecurity industry, and the constantly changing threats that cybersecurity products are intended to address, our products
may require continuous and effective upgrades in order to obtain effective recognition and commercial traction in the cybersecurity
marketplace. We cannot assure you that we will be successful in commercializing any of our cybersecurity products or, if they
are commercialized, that they will be profitable for the Company.
The
cybersecurity market is intensely competitive.
We
believe that the cybersecurity industry offers great opportunity because of the increasing, highly publicized cybersecurity breaches
being experienced in virtually all segments the business and government sectors. We also believe that the historical approaches
to protecting servers and personal computers are not suited to mobile devices and cloud computing, opening up a substantial array
of possibilities for capturing market share in the cybersecurity industry.
Nonetheless,
the cybersecurity market is already very competitive, and it is characterized by rapid change. We will be competing with numerous
vendors in the cybersecurity space. The overall number of our competitors providing niche cyber–attack solutions may increase.
Also, the identity and composition of competitors may change as we increase our activity in newer product categories.
Some
of these competitors may also introduce various products that compete with different products that we offer, while others are
primarily focused in a specific product area. Barriers to entry are relatively low, and new ventures to create products that do
or could compete with our products are regularly formed. In addition, some of our competitors will have substantially greater
resources, including technical, engineering and marketing resources, than we will.
We
also may face competition from customers to which we may license or supply technology and suppliers from which we may transfer
or license technology. As such, we must cooperate and at the same time compete with many companies. Any inability to effectively
manage these complicated relationships with customers, suppliers, and strategic alliance partners could have a material adverse
effect on our business, operating results, and financial condition and accordingly affect our chances of success.
The
information security market may not adopt our cybersecurity technologies and/or products.
We
seek to acquire and develop products that provide advanced protection technologies across a variety of platforms, including mobile
and personal technology devices. However, even if we are successful in acquiring or developing such technologies, if we are unable
to convince customers that our technologies and products should be an integral part of their overall approach to information security,
we will not be able to grow our business as anticipated.
Moreover,
even if there is significant demand for our technologies and products, if our competitors’ products include functionalities
that are, or are perceived to be, better than or equivalent to that offered by us, we may have difficulty increasing the market
penetration of our technologies and products. Furthermore, even if the functionality offered by other cybersecurity technologies
or products is more limited than the functionality of our own, customers may elect to accept such limited functionality, and thus
not accept or adopt the technologies and products offered by the Company.
Our
cybersecurity technologies and/or products may not perform as intended.
Even
the most advanced cybersecurity products cannot guarantee 100% security against all forms of intrusion, as evidenced by successful
cyberattacks on the computing systems of government agencies and major public corporations. We believe that, through the vision
and direction of our team of experienced cybersecurity leaders, and with the guidance of our advisory boards, we will be able
to develop cutting edge technologies and products to deal successfully with the continuously evolving threats of sophisticated
hackers. Nevertheless, it is possible that our products could fail to perform as intended, with the result that our customers
may experience cybersecurity breaches. If that were to happen, and depending on the scale of the breaches, we could suffer damage
to our reputation for technical excellence, which may affect receptivity to our products, including products that were not implicated
in a security breach.
Computer
and communications failures could lead to customer dissatisfaction.
As
a provider of cyber products, we anticipate that it will be important to maintain reliable channels of electronic communications
with our customers, for purposes of customer support, product access and diagnostics, and possibly, the secure hosting of customer
data. If we experience periodic systems interruptions and infrastructure failures, or if our systems are subject to security breaches,
this may cause customer dissatisfaction and may adversely affect the reputation for reliability of our products and services.
We expect that the demands on our technological infrastructure will grow with our customer base, and we face the risk that, without
continuing, and perhaps costly, investment, the reliability of our systems will not keep pace with the increasing demand.
Risks
Associated with Securities Litigation and Regulatory Matters
A
number of law firms have filed claims against the Company alleging violations of federal securities laws.
A
number of law firms have filed claims, or announced an intention to file, on behalf of stockholders of the Company alleging that
the company has violated the Securities Exchange Act of 1934. While the Company believes that there are no merits to claims that
the Company violated applicable securities laws, the results of any investigation, or the outcome of any claims that may brought
against us, if any, cannot be predicted with certainty. Moreover, regardless of the outcome, investigations can have an adverse
impact on us because they may entail a significant amount of costs to defend the Company against any claims, such claims may negatively
affect morale of employees and may divert the attention of management.
The
Company has received a subpoena from the Securities and Exchange Commission.
On
September 15, 2016, the Company received a subpoena from the Securities and Exchange Commission requesting certain information
from the Company. We have no indication or reason to believe that the Company is or will be the subject of any enforcement proceedings.
The Company has publicly announced its receipt of the subpoena and is fully cooperating to comply with the SEC’s request.
Nevertheless, response to the subpoena may entail legal costs and the diversion of management’s attention, and the issuance
of the subpoena may create a perception of wrongdoing that could be harmful to our business.
Risks
Associated with Our Capital Requirements
We
will need additional capital to fund our operations and to pursue acquisitions.
As
discussed above, we expect to require additional financing through debt or equity financing in order to fund the development of
our business for the foreseeable future. We may also require financing in order to fund acquisitions. We cannot be certain that
such additional debt or equity financing will be available to us on favorable terms when required, or at all, or that sales of
our assets, if any, will be sufficient to enable us to accomplish our business objectives. If we cannot raise funds in a timely
manner, or on acceptable terms, we will be unable to pursue our business plan.
Future
issuance of equity may be dilutive to our existing stockholders.
If
the D–Vasive acquisition is consummated, we anticipate that we will be issuing to D–Vasive, Inc. approximately 43,800,000
shares of our common stock. This issuance was approved by stockholders at a meeting held on September 8, 2016. On April 3, 2017,
the Company terminated the APA dated May 9, 2016, as amended on July 7, 2016, entered into by and among MGT, D–Vasive, the
shareholders of D–Vasive and MGT Cybersecurity. The termination of the APA was premised on Section 3.4(b) of the APA which
states that the APA may be terminated by either party thereto if the Closing contemplated thereunder did not occur on or before
a specified date and the same is not otherwise extended by the parties, in writing or otherwise. Pursuant to the APA, as amended,
MGT would have acquired certain technology and assets of D–Vasive if the Closing had occurred on the terms of the APA, as
amended.
We
may issue additional equity to raise cash for operations or to fund acquisitions, to provide equity based incentives to our management,
employees and consultants or as consideration in acquisition transactions. Depending on the price at which such equity is issued,
the issuances could be economically dilutive to our existing stockholders. If we issue substantial amounts of additional equity,
the voting control of our existing stockholders will be meaningfully reduced irrespective of any economic dilution. Also, the
board has the authority to issue preferred stock that may have rights, preferences or privileges senior to the rights of holders
of our common stock. The Company anticipates that the board will not approve the issuance of additional equity unless the board
determines, in the exercise of its business judgment, that the issuance is in the best interest of the Company and its stockholders.
Nevertheless, such issuances could have adverse consequences for stockholders and their interests in the Company.
Debt
that the Company raises in the future may place restrictions on the operational flexibility of the Company, and if convertible
could be dilutive.
The
Company does not currently contemplate issuing any substantial amount of debt. As the business of the Company matures, however,
the Company could turn to the debt markets to raise additional capital. If we raise additional funds through the issuance of debt,
we will be required to service that debt and are likely to become subject to restrictive covenants and other restrictions contained
in the instruments governing that debt. This may limit our operational flexibility, by constraining our ability to issue additional
debt, place liens on our assets, make distributions or engage in other capital transactions or asset sales. We may also issue
convertible debt. If we do so, we anticipate that the conversion price would be at a premium to the market price at the time of
issuance. At the time of conversion, however, the issuance of the additional equity could be dilutive to existing stockholders
based upon the then current market price.
Risks
Associated with Intellectual Property
The
protection of our intellectual property may be uncertain and we may face claims of others
.
Although
we expect to receive patents with respect to certain aspects of our technology, we generally do not expect to rely on patent protection
with respect to our products and technologies. Instead, we expect to rely primarily on a combination of trade secret and copyright
law, employee and third party non–disclosure agreements and other protective measures to protect intellectual property rights
pertaining to our products and technologies.
Such
measures may not provide meaningful protection of our acquired technologies, trade secrets, know how or other intellectual property
in the event of any unauthorized use, misappropriation or disclosure. Others may independently develop similar technologies or
duplicate our technologies. In addition, to the extent that we apply for any patents, such applications may not result in issued
patents or, if issued, such patents may not be valid or of value. Third parties could, in the future, assert infringement or misappropriation
claims against us with respect to our current or future products and technologies, or we may need to assert claims of infringement
against third parties. Royalty or licensing agreements, if required, may not be available on acceptable terms, if at all.
Moreover,
we may not be able to effectively protect our intellectual property rights in certain foreign countries where we may do business
in the future or from which competitors may operate.
While
we have, and may in the future apply for copyright and trademark protection, we may not receive the protections that we desire
or expect.
We
expect that our marks and other forms of intellectual property that identify us with our products will be an important marketing
tool and will create recognition for our brand of cybersecurity protection and related products. While we intend to make application
to register this intellectual property in appropriate cases, no assurances can be given that any of the measures we undertake
to protect and maintain these intellectual property assets and the associated goodwill. For example,
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our
applications for trademarks and copyrights may not be granted and, if granted, may be challenged or invalidated;
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issued
trademark and copyrights may not provide us with any competitive advantages versus potentially infringing parties;
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our
efforts to protect these intellectual property rights may not be effective in preventing misappropriation of our technology;
or
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our
efforts may not prevent confusion with others of products or technologies similar to or competitive with ours.
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We
face risks of claims from third parties for intellectual property infringement and we may have to defend our own intellectual
property through litigation.
Litigation
regarding intellectual property rights is common in the internet, application and software industries. Any infringement or misappropriation
claim by us or against us could place significant strain on our financial resources, divert management’s attention from
our business and harm our reputation. The costs of prosecuting or defending an intellectual property claim could be substantial
and could adversely affect our business, even if we are ultimately successful in prosecuting or defending any such claims. If
our products or technologies are found to infringe the rights of a third party, we could be required to pay significant damages
or license fees or cease production, any of which could have material adverse effect on our business. If a claim is brought against
us, or if we are unsuccessful on the claims on their merits, this could have a material adverse effect on our business, financial
condition, results of operations and future prospects.
General
Business and Economic Risks
Fluctuating
economic conditions will make it difficult to predict operating results in future periods.
Uncertainty
about future economic conditions makes it difficult to forecast operating results and to make decisions about future investments.
Future or continued economic weakness for us or our customers, failure of our customers and target markets to recover from such
weakness, customer financial difficulties, and reductions in spending on cybersecurity products could have a material adverse
effect on demand for our technologies and products and consequently on our business, financial condition and results of operations.
Our
results of operations are likely to vary significantly from period to period.
Our
results of operations may vary as a result of a number of factors, many of which are outside of our control and may be difficult
to predict, including:
changes
in the growth rate of the cybersecurity market, particularly the market for threat protection solutions like ours that target
advanced cyber–attacks;
the
timing and success of new product and service introductions by us or our competitors or any other change in the competitive landscape
in the cybersecurity market, including consolidation among our customers or competitors;
the
level of awareness of cybersecurity threats, particularly advanced cyber–attacks, and the market adoption of our technologies
and products;
deferral
of orders from customers in anticipation of new products or product enhancements announced by us or our competitors;
decisions
by large scale potential customers such us corporations and organizations to purchase cybersecurity solutions from larger, more
established security vendors or from their primary cybersecurity equipment vendors;
changes
in our pricing policies or those of our competitors;
the
cost and potential outcomes of future litigation;
general
economic conditions, both domestic and in our foreign markets;
future
accounting pronouncements or changes in our accounting policies or practices; and
the
amount and timing of operating costs and capital expenditures related to the expansion of our business,
This
variability and unpredictability could result in our failure to meet our operating plan or the expectations of investors or analysts
for any period. If we fail to meet such expectations for these or other reasons, the market price of our common stock could fall.
Other
Risks
As
we grow our business, including through contemplated acquisitions, we expect to experience significant strains on our management
and operations.
We
currently employ or have consulting arrangements with 8 personnel and occupy approximately 3,000 square feet of office space in
Harrison, New York and Durham, North Carolina. Our plan is to grow substantially in the future, both through the development of
our existing product offering and through acquisitions. To manage our growth successfully, we must continue to improve and expand
our systems and infrastructure in a timely and efficient manner. We intend to make continuing investments in our infrastructure
to support the growth of our business. We cannot assure you that we will have the financial resources to do so, or that our controls,
accounting and information systems, procedures and resources will be adequate to support a changing and growing company. If we
cannot effectively meet the challenges of our growth, we will not be able to meet our business objectives and may have difficulty
achieving profitability.
The
Company is invested in bitcoin mining, but we cannot assure you that this aspect of our business will continue to be profitable
or that we will determine to continue to maintain and invest in this business.
The
Company currently has a 5.0 PH/s fully owned bitcoin facility which is hosted in Cashmere, Washington. The facility currently
operates at a rate that is expected to generate approximately $100,000 of EBITDA each month, and the Company is in the process
of doubling capacity with the recent purchase of more machines. Further plans to substantially increase operations in 2017 are
contemplated.
Bitcoin
mining by its nature over time requires increasing processing power, which in turn requires continuing investment in computer
hardware and increasing power demands. We cannot assure you that the Company’s bitcoin mining operations will remain profitable
or say whether the Company will determine to continue to invest in these operations.
Market
And Investment Risks
General
Investment Risk
You
could lose all of your investment.
An
investment in our securities is speculative and involves a high degree of risk. Potential investors should be aware that the value
of an investment in the Company may go down as well as up. In addition, there can be no certainty that the market value of an
investment in the Company will fully reflect its underlying value. Accordingly, there is no guarantee that shares of our common
stock will appreciate in value or that the price at which stockholders have purchased their shares will be able to be maintained.
You could also lose your entire investment.
Risks
Associated with Our Stock Price
The
Company’s common stock has recently been delisted from the NYSE MKT.
The
Company was previously listed on the NYSE MKT. On October 19, 2016, the Company received notice from the New York Stock Exchange
stating that the staff of NYSE Regulation has determined to commence proceedings to delist the Company’s common stock and
that the trading of the Company’s stock on the NYSE MKT was suspended. While the Company disputes the determination of the
NYSE staff, the Company did not appeal the decision of NYSE Regulation. The Company’s stock currently trades on the OTC
Pink tier of OTC Markets LLC under the symbol “MGTI.”
The
delisting of the Company’s common stock from the NYSE MKT has had and may continue to have an adverse effect on the market
price of our common stock.
The
Company is subject to the risks relating to penny stocks.
Trading
in our common stock is also subject to the requirements of certain rules promulgated under the Securities Exchange Act of 1934.
These rules require additional disclosure by broker–dealers in connection with any trades involving a stock defined as a
“penny stock” and impose various sales practice requirements on broker–dealers who sell penny stocks to persons
other than established customers and accredited investors, generally institutions. These additional requirements may discourage
broker–dealers from effecting transactions in securities that are classified as penny stocks, which could severely limit
the market price and liquidity of such securities and the ability of purchasers to sell such securities in the secondary market.
A penny stock is defined generally as any non–exchange listed equity security that has a market price of less than $5.00
per share, subject to certain exceptions.
Our
stock price and trading volume may be volatile, which could result in losses for our stockholders.
The
equity markets may experience periods of volatility, which could result in highly variable and unpredictable pricing of equity
securities. The market price of our common stock could change in ways that may or may not be related to our business, our industry
or our operating performance and financial condition and could negatively affect our share price or result in fluctuations in
the price or trading volume of our common stock. We cannot predict the potential impact of these periods of volatility on the
price of our common stock. The Company cannot assure you that the market price of our common stock will not fluctuate or decline
significantly in the future.
If
securities or industry analysts do not publish research or reports about our business, or if they publish inaccurate or unfavorable
research reports about our business, our share price and trading volume could decline.
The
trading market for our common stock will, to some extent, depend on the research and reports that securities or industry analysts
publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us
should downgrade our shares or change their opinion of our business prospects, our share price would likely decline. If one or
more of these analysts ceases coverage of our Company or fails to regularly publish reports on us, we could lose visibility in
the financial markets, which could cause our share price and volume to decline.
Offers
or availability for sale of a substantial number of shares of our common stock, for example, in connection with the shares registered
for sale herein, may cause the price of our common stock to decline.
If
our stockholders sell substantial amounts of our common stock in the public market, including upon the expiration of any statutory
holding period under Rule 144 or registration for resale, or the conversion of preferred stock or exercise of warrants, circumstances
commonly referred to as an “overhang” could result, in anticipation of which the market price of our common stock
could fall. The existence of an overhang, whether or not sales have occurred or are occurring, could also make more difficult
our ability to raise additional financing through the sale of equity or equity–related securities in the future at a time
and price that we deem reasonable or appropriate.
Investor
relations activities, nominal “float” and supply and demand factors may affect the price of our stock.
The
Company may utilize various techniques such as non–deal road shows and investor relations campaigns in order to create investor
awareness for the Company. These campaigns may include personal, video and telephone conferences with investors and prospective
investors in which our business practices are described. The Company may provide compensation to investor relations firms and
pay for newsletters, websites, mailings and email campaigns that are produced by third–parties based upon publicly–available
information concerning the Company. The Company does not intend to review or approve the content of such analysts’ reports
or other materials based upon analysts’ own research or methods. Investor relations firms should generally disclose when
they are compensated for their efforts, but whether such disclosure is made or complete is not under our control. In addition,
investors in the Company may, from time to time, also take steps to encourage investor awareness through similar activities that
may be undertaken at their own expense. Investor awareness activities may also be suspended or discontinued, which may impact
the trading market our common stock. Any of these activities could affect our stock price in a manner that is unrelated to the
underlying value of our Company.
Other
Risks
You
may experience dilution of your ownership interests because of the future issuance of additional shares of our common or preferred
stock or other securities that are convertible into or exercisable for our common or preferred stock.
In
the future, we may issue our authorized but previously unissued equity securities, resulting in the dilution of the ownership
interests of our present stockholders. We are authorized to issue an aggregate of 75,000,000 shares of common stock and 10,000,000
shares of “blank check” preferred stock, and stockholders in the future may approve an increase in the number of authorized
shares. We may issue additional shares of our common stock or other securities that are convertible into or exercisable for our
common stock in connection with hiring or retaining employees, future acquisitions, future sales of our securities for capital
raising purposes or for other business purposes. The future issuance of any such additional shares of our common stock may create
downward pressure on the trading price of the common stock. We will need to raise additional capital in the near future to meet
our working capital needs, and we may have to issue additional shares, warrants or other convertible securities in the future
in conjunction with these capital raising efforts, possibly at a price (or exercise or conversion prices) below the price an investor
paid for stock.
The
ability of our Board of Directors to issue additional stock may prevent or make more difficult certain transactions, including
a sale or merger of the Company.
Our
board of directors is authorized to issue up to 10,000,000 shares of preferred stock with powers, rights and preferences designated
by it. See “Preferred Stock” in the section of this prospectus titled “Description of Capital Stock.”
Shares of voting or convertible preferred stock could be issued, or rights to purchase such shares could be issued, to create
voting impediments or to frustrate persons seeking to effect a takeover or otherwise gain control of the Company. The ability
of the board of directors to issue such additional shares of preferred stock, with such rights and preferences it deems advisable,
could discourage an attempt by a party to acquire control of the Company by tender offer or other means. Such issuances could
therefore deprive stockholders of benefits that could result from such an attempt, such as the realization of a premium over the
market price for their shares in a tender offer or the temporary increase in market price that such an attempt could cause. Moreover,
the issuance of such additional shares of preferred stock to persons friendly to the board of directors could make it more difficult
to remove incumbent officers and directors from office even if such removal would be favorable to stockholders generally.
We
do not anticipate paying any cash dividends on our common stock in the foreseeable future.
We
have not declared or paid cash dividends on our common stock to date. We currently intend to retain our future earnings, if any,
to fund the development and growth of our business. In addition, the terms of any existing or future debt agreements may preclude
us from paying dividends.
Item
1B. Unresolved Staff Comments
Not
applicable.
Item
2. Properties
Our
principal corporate office is located at 512 S. Magnum Street, Suite 408 Durham, NC 2770, under a sublease that expires on January
31, 2020. Monthly rent will be $6 for the first 12–month period, $7 for the second 12–month period, $7 for the third
12–month period and $7 per month for the remaining months until expiration of the lease. A security deposit of $13 was required
upon execution of the sublease. The Company believes our office is in good condition and is sufficient to conduct our operations.
Item
3. Legal Proceedings
On
September 1, 2016, the Company and John McAfee filed an action in the United States District Court for the Southern District of
New York seeking a declaration that the use of or reference to the personal name of John McAfee and/or McAfee in its business,
and specifically in the context of renaming the Company, of which McAfee is the Executive Chairman, to “John McAfee Global
Technologies, Inc.,” does not infringe upon Intel’s trademark rights or breach any agreement between the parties.
Intel has submitted an Amended Answer and Counterclaims alleging Lanham Act and federal/state trademark violations and common
law unfair competition relating to the same factual circumstances. The Company filed a Reply to Counterclaims on November 3, 2016,
and a case management plan and scheduling order was filed on October 28, 2016.
On
September 15, 2016, the Company received a subpoena from the U.S. Securities and Exchange Commission. The Company has cooperated
fully with the Commission and its Staff. The Company does not presently believe it or its officers are the focus of the Staff’s
investigation.
In
September 2016, various shareholders of the Company filed putative class action lawsuits against the Company, its president and
certain of its individual officers and directors. The cases were filed in the United States District Court for the Southern District
of New York and allege violations of federal securities laws and seek damages. On April 11, 2017 those cases were consolidated
into a single action (the “Securities Action”) and two individual shareholders were appointed lead plaintiffs by the
Court. The Company believes there is no merit to the Securities Action and intends to defend against the action vigorously.
On
January 24, 2017, the Company was served with a copy of a summons and complaint filed by plaintiff Atul Ojha in New York state
court against certain officers and directors of the Company and the Company as a nominal defendant. The lawsuit is styled as a
derivative action (the “Derivative Action”) and was originally filed on October 15, 2016. The Derivative Action substantively
alleges that the defendants, collectively or individually, inadequately managed the business and assets of the Company resulting
in the deterioration of the Company’s financial condition. The Derivative Action asserts claims including but not limited
to breach of fiduciary duties, unjust enrichment and waste of corporate assets. The Company believes there is no merit to the
Derivative Action and intends to defend against the action vigorously. On February 27, 2017, the parties to the Derivative Action
executed a stipulated stay of the proceedings pending full or partial resolution of the Securities Action.
On
March 3, 2017 and April 4, 2017 respectively, two additional actions were filed against the Company by shareholder Barry Honig
(“Honig”). The first action was filed in federal court in North Carolina (the “Defamation Action”) against
the Company and its president and alleges claims for libel, slander, conspiracy, interference with prospective economic advantage,
and unfair trade practices. The North Carolina Action substantively alleges that the defendants defamed Honig by causing or allowing
certain statements to be published about Honig in news blogs and articles authored by a journalist, who is also a defendant in
the case. The second action was brought by Honig and others in the United States District Court for the Southern District of New
York (the “Breach of Contract Action”) against the Company and certain of its officers and directors. The Breach of
Contract Action alleges claims for tortious interference with contractual relations, breach of contract, and unjust enrichment
related to the Company’s unsuccessful attempt to acquire D-Vasive and Demonsaw in 2016 and the alleged resulting harm to
certain D-Vasive and Demonsaw noteholders. The Company believes that there is no merit to either the Defamation Action or the
Breach of Contract Action and intends to defend against the actions vigorously.
The
Company cannot presently rule out that adverse developments in one or more of the Securities Action, Derivative Action, Defamation
Action or Breach of Contract Action actions could have a materially adverse effect on the Company, and has notified its Director’s
and Officer’s Liability Insurance carrier.
Item
4. Mine Safety Disclosures
None.
The accompanying
notes are an integral part of these consolidated financial statements
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
1. 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”), MGT Interactive, LLC (“MGT Interactive”)
and 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 Durham, North Carolina.
The
Company is in the process of acquiring and developing a diverse portfolio of cybersecurity technologies.
Also
as part of its corporate efforts in secure technologies, MGT is growing its capacity in mining Bitcoin.
On
September 8, 2016,
MGT stockholders have voted to change the
corporate name of MGT to “John McAfee Global Technologies, Inc.” Following a dispute over ownership and permitted
usage of the name McAfee, The Company and Intel have agreed to a mediation process to avoid unnecessary legal costs.
Cybersecurity
On
May 9, 2016, the Company, through its wholly owned subsidiary, MGT Cybersecurity, Inc. entered an asset purchase
agreement (APA) to acquire certain assets owned by D–Vasive, Inc., a Wyoming corporation in the business of developing and
marketing certain privacy and anti–spy applications (the “D–Vasive APA). Pursuant to the terms of the D–Vasive
APA, the Company had agreed to purchase assets 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. The proposed purchase
price for D–Vasive was $300 in cash and 23.8 million shares of MGT common stock. On October 5, 2016, the Company paid a
$70 refundable advance as part of a modification of terms. The advance will be refundable if the APA is not close within twelve
months of the modification.
On
May 26, 2016, the Company entered an asset purchase agreement with Demonsaw LLC, a Delaware company, for the purchase of certain
technology and assets. Demonsaw is in the business of developing and marketing secure and anonymous information sharing applications.
Pursuant to the terms of the Demonsaw APA, we had agreed to purchase assets including the source code for the Demonsaw solution,
intellectual property, customer lists, databases, sales pipelines, proposals and project files, licenses and permits. The proposed
purchase price for Demonsaw was 20.0 million shares of MGT common stock.
On
July 7, 2016, and prior to the closing of either of the above transactions, the Company and Demonsaw terminated the Demonsaw APA.
Simultaneously, D–Vasive entered an agreement with the holders of Demonsaw outstanding membership interests, whereby D–Vasive
would purchase all such membership interests. The closing of that transaction was contingent on the closing of the transaction
contemplated under the D–Vasive APA. Accordingly, the proposed purchase price for D–Vasive (inclusive of the Demonsaw
assets) was increased to 43.8 million shares of MGT common stock (the “Amended APA”).
On
August 8, 2016, the Company filed a Definitive Proxy Statement to solicit, among other things, shareholder approval of the D–Vasive
acquisition, at the upcoming Annual Meeting of Stockholders. On September 8, 2016, shareholder approval was obtained. However,
on September 19, 2016, the New York Stock Exchange informed the Company that it would not approve the listing on the Exchange
of the 43.8 million shares required to be issue to complete the closing of the D–Vasive acquisition. Not reaching this critical
closing condition resulted in the termination of the Amended APA.
On
October 24, 2016, the Company consummated the July 2016 asset purchase agreement with Cyberdonix, Inc., an Alabama corporation
for the purchase of the “
Sentinel
” network intrusion detection device, all underlying software and firmware,
the server contract, and case and circuit board inventory by issuing 150,000 shares of MGT common stock.
On
March 3, 2017, MGT purchased 46% of the outstanding membership interests in Demonsaw LLC for 2.0 million MGT common shares.
On
April 3, 2017, the Company terminated the APA dated May 9, 2016, as amended on July 7, 2016, entered into by and among MGT, D–Vasive,
the shareholders of D–Vasive and MGT Cybersecurity. The termination of the APA was premised on Section 3.4(b) of the APA
which states that the APA may be terminated by either party thereto if the Closing contemplated thereunder did not occur on or
before a specified date and the same is not otherwise extended by the parties, in writing or otherwise. Pursuant to the APA, as
amended, MGT would have acquired certain technology and assets of D–Vasive if the Closing had occurred on the terms of the
APA, as amended.
Bitcoin
Mining
On
September 13, 2016, the Company announced launch of its 5.0 PH/s Bitcoin mining operation, based in central Washington.
Legacy
Businesses
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 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).
DraftDay
Gaming Group
Effective
September 3, 2015, the Company terminated the Asset Purchase Agreement with Random Outcome (“RO”) (“RO Agreement”)
originally entered into on June 11, 2015, as amended to date. According to its terms, the RO Agreement could be terminated by
the Company or RO if a closing had not occurred by August 31, 2015. The RO Agreement provided for the sale of the DraftDay.com
Business to RO for a purchase price of (i) cash equal to the sum of (a) $4,000 and (b) $10 per day for the period starting July
15, 2015 and ending on the closing date and (ii) a three–year warrant to purchase 500,000 shares of RO Common stock at an
exercise price of $1.00, a three–year warrant to purchase 500,000 shares of RO Common stock at an exercise price of $1.33,
and a three–year warrant to purchase 500,000 shares of RO Common stock at an exercise price of $1.66. The non–refundable
deposit of $250 was recorded as gain on termination of Asset Purchase Agreement in the Consolidated Statement of Operations under
discontinued operations for the year ended December 31, 2015.
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 (share
amounts and per share amounts are reflected post stock split): (a) 63,467 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
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 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. As of December 31, 2015, the Company booked a reserve of $300 against the Note.
The
following table summarizes fair values of the net assets assumed in consideration for the sale of the DraftDay.com Business assets:
Viggle
Common shares received at closing share price of $26.00
|
|
$
|
1,650
|
|
Viggle
promissory notes
|
|
|
2,109
|
|
DDGG
Common shares received at fair market value of $400.00 per share
(1)
|
|
|
1,020
|
|
DDGG
stock purchase warrants received
(2)
|
|
|
360
|
|
Total
consideration
|
|
$
|
5,139
|
|
The
transaction resulted in a loss on the sale of $387 in the Consolidated Statement of Operations under discontinued operations during
the year ended December 31, 2015.
|
(1)
|
DDGG Common shares
were valued based on recent equity sales by DDGG to Viggle. Viggle purchased shares of DDGG at a price of $400.00 per share.
|
|
|
|
|
(2)
|
The Company determined
fair value of the warrants received utilizing a Black–Scholes option pricing model. The Company utilized the following
assumptions: fair value of Common share of DDGG stock – $400.00 per share, exercise price of $400.00, risk free rate
of 0.65%, expected volatility of 98% which is the 3–year historical volatility of the Company’s Common stock.
|
On
March 24, 2016, the Company entered into an Exchange Agreement (the “FNCX March 24th Agreement”) with FNCX. The purpose
of the FNCX March 24th 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 24th Agreement, the Note had an outstanding principal balance
of $1,875 and accrued interest in the amount of $51 (the “March 24th Interest”). Pursuant to the FNCX March 24th Agreement,
a portion consisting of $825 of the outstanding principal of the FNCX Note was exchanged for 137,418 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 18,332 shares of FNCX’s Common stock. Finally, FNCX agreed to make a cash payment to MGT
Sports for the total amount of March 24th 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 24th 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 14th Agreement”)
with FNCX to exchange $940 remaining outstanding principal of the FNCX Note for 132,092 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 14th Agreement. The closing of the FNCX June 14th Agreement was 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 14th
Agreement.
On
September 16, 2016, FNCX amended its Certificate of Incorporation to effect a reverse stock split of all issued and outstanding
shares of common stock at a ratio of 1 for 20 (the "Reverse Stock Split"). The effective date of the Reverse Stock Split
is September 16, 2016. The above common stock share amounts received from FNCX have been adjusted to reflect the Reverse Stock
Split.
On
October 10, 2016, the Note was satisfied through the issuance of 136,304 shares of common stock and payment of interest of $16.
These shares were sold during December 2016, and the Company recorded a loss on sale of investments of $86 and loss on conversion
of the Note of $196.
Other
Assets
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. As a result, during 2015, the Company received a payment of $90,
which was recorded as licensing revenue. In an effort to monetize its gaming patent portfolio during the year ended December 31,
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 December 31, 2016, an impairment charge of ($659) for the full value of the patent
was recorded, as the Company is in no longer engaged in this business.
On
April 21, 2015, Gioia Systems, LLC (“Gioia”) filed a complaint against the Company, the Company’s majority owned
subsidiary, MGT Interactive, LLC, Robert Ladd and Robert Traversa with the United States District Court for the Southern District
of New York. MGT Interactive, LLC was also included as a derivative plaintiff in the action. Gioia’s complaint asserts claims
for breach of contract and breach of fiduciary duty relating to the Contribution Agreement and related agreements. On July 19,
2015, the Company and the other defendants filed an answer, in which they denied the allegations, raised affirmative defenses,
and introduced several counterclaims against Gioia.
On
August 28, 2015, the Company and MGT Interactive along with Gioia entered into an Assignment and Sale Agreement (the “Agreement”).
MGT Interactive purchased the 49% membership interest that Gioia owned of MGT Interactive and sold the certain tangible and intellectual
property assets that MGT Interactive previously acquired from Gioia. Effective as of August 28, 2015, MGT Interactive irrevocably
sold all assets and Gioia accepts all assets free and clear of all liens etc. In exchange for such assets, Gioia is to transfer
the 49% membership interest to Interactive along with a cash payment of $35. As a result of the Agreement, the Company recognized
a $144 loss on sale of assets during the year ended December 31, 2015.
The
following summarizes the recognition of the Agreement:
Cash
|
|
$
|
35
|
|
Intangible
assets
|
|
|
(179
|
)
|
Loss
on Sale
|
|
$
|
144
|
|
On
August 16, 2016, the Company purchased 17.5% membership interest in Two minute Quests LLC (“2MQ”) for $115. 2MQ is
introducing a game for the iWatch and iPhone. As of December 31, 2016, the Company recorded an impairment charge for the full
value of $115 of this investment.
On
May 13, 2016, the Company acquired 6% Membership Interest in The Round House LLC for cash consideration of $150. Round House LLC
is an Alabama–based technology incubator, offering co–working space, accelerator services and angel investment. As
of December 31, 2016, the Company recorded an impairment charge for the full value of $150 of this investment.
Note
2. Going Concern and Management Plans
The
accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. As of December 31, 2016, the Company had incurred
significant operating losses since inception and continues to generate losses from operations and has an accumulated deficit of
$328,467. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The 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. On October 19, 2016, the Company received a letter from the New York
Stock Exchange (“NYSE” or the “Exchange”) stating that the staff of NYSE Regulation has determined to
commence proceedings to delist the Company’s common stock (the “Action”). The delisting could have an adverse
effect on the Company’s ability to secure operating funds from 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
December 31, 2016, MGT’s cash and cash equivalents were $345. The Company intends to raise additional capital, either through
debt or equity financings or through the continued sale of the Company’s assets or equity securities 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.
In
February and March 2017, the Company entered into Securities Purchase Agreements (the “Purchase Agreements”) with
accredited investors (the “Investors”) relating to the issuance and sale of 1,625,000 shares of the Company’s
common stock, par value $0.001 per share (the “Shares”) at a purchase price of $0.40 per Share. In addition, for every
Share purchased, the Investors shall receive detachable warrants, as follows (i) one Series A Warrant; (ii) one Series B Warrant;
and (iii) one Series C Warrant (collectively the “Warrants”).
Each
Series A Warrant is exercisable for one (1) Share, for a period of three (3) years at a price of $0.50 per Share. Each Series
B Warrant is exercisable for one (1) Share, for a period of three (3) years at a price of $0.75 per Share, and each Series C Warrant
is exercisable is exercisable for one (1) Share, for a period of three (3) years at a price of $1.00 per Share.
The
gross proceeds from the Purchase Agreements were $650.
In
February and March 2017, holders of the Company’s 8% Convertible Notes converted a total of $1,800 principal value into
a total of 1,900,000 shares of the Company’s common stock.
On
March 14, 2017, the Company and L2 Capital, LLC (“L2 Capital”), a Kansas limited liability company, entered into an
equity purchase agreement (the “Equity Purchase Agreement”), pursuant to which the Company shall issue and sell to
L2 Capital from time to time up to $5 million of the Company’s common stock that will be registered with the Securities
and Exchange Commission (the “SEC”) under a registration statement on a form S–1. Pursuant to the Equity Purchase
Agreement, the Company may require L2 Capital to purchase shares of Common Stock in a minimum amount of $25 and maximum of the
lesser of (a) $1 million or (b) 150% of the Average Daily Trading Value, upon the Company’s delivery of a Put Notice to
L2 Capital. L2 Capital shall purchase such number of shares of Common Stock at a per share price that equals to the lowest closing
bid price of the Common Stock during the Pricing Period multiplied by 90%. Before the expiration of the term of the Equity Purchase
Agreement, the said Agreement shall terminate, subject to certain exceptions set forth therein, at any time by a written notice
from the Company to L2 Capital.
In
connection with the Equity Purchase Agreement, the Company has issued to L2 Capital an 8% convertible promissory note (the “Commitment
Note”) in the principal amount of $160 in consideration of L2 Capital’s contractual commitment to the Equity Purchase
Agreement. The Commitment Note matures six months after the Issue Date. All or part of the Commitment Note is convertible into
the Common Stock of the Company upon the occurrence of any of the Events of Default at a Variable Conversion Price that equals
to 75% of the lowest Trading Price for the Common Stock during a thirty–day Trading Day period immediately prior to the
Conversion Date.
In
addition, on March 10, 2017, the Company and L2 Capital entered into a securities purchase agreement (the “Securities Purchase
Agreement”), pursuant to which the Company issued two 10% convertible notes (the “Convertible Notes”) in an
aggregate principal amount of $1 million with a 20% original issue discount, which was funded on March 14, 2017. The Company received
gross proceeds of $393 (which represents the deduction of the 20% original discount and $7 for L2 Capital’s legal fees)
in exchange for issuance of the first Convertible Note (the “First Note”) in the Principal Amount of $500. The First
Note matures six months from the Issue Date and the accrued and unpaid interest at a rate of 10% per annum is due on such date.
At any time on or after the occurrence of an Event of Default, the Holder of the First Note shall have the right to convert all
or part of the unpaid and outstanding Principal Amount and the accrued and unpaid interest to shares of Common Stock at a Conversion
Price that equals 65% multiplied by the lowest Trading Price for the Common Stock during a thirty–day Trading Day period
immediately prior to the Conversion Date (the “Market Price”).
On
the date stated immediately above, the Company received a L2 Capital Back End Note (“L2 Collateralized Note”) secured
with the First Note for its issuance of the Second Note to L2 Capital. In accordance with the Second Note, the Company shall pay
to the order of L2 Capital a Principal Amount of $500 and the accrued and unpaid interest at a rate of 10% per annum on the Maturity
Date, which is eight months from the Issue Date. At any time on or after the occurrence of an Event of Default, the Holder of
the Second Note shall have the right to convert all or part of the unpaid and outstanding Principal Amount and the accrued and
unpaid interest into shares of Common Stock at a Conversion Price that equals to 65% multiplied by the Market Price. Pursuant
to the L2 Collateralized Note, L2 Capital promises to pay the Company the Principal Amount of $500 (consisting $393 in cash, legal
fees of $7 and an original issuance discount of $100) no later than November 10, 2017.
In
connection with the issuance of the First Note and the Second Note, the Company also issued to L2 Capital Warrants to purchase
up to 400,000 shares of Common Stock (the “Warrant Shares”) pursuant to the common stock purchase warrant (the “Common
Stock Purchase Warrant”) executed by the Company. The Warrant shall be exercisable at a price of 110% multiplied by the
closing bid price of the Common Stock on the Issuance Date (the “Exercise Price”), subject to adjustments and exercisable
from the Issue Date until the five-year anniversary. At the time that the Second Note is funded by the Holder thereof in cash,
then on such funding date, the Warrant Shares shall immediately and automatically be increased by the quotient (the “Second
Warrant Shares”) of $375,000.00 divided by the lesser of (i) the Exercise Price and (ii) 110% multiplied by the closing
bid price of the Common Stock on the funding date of the Second Note. With respect to the Second Warrant Shares, the Exercise
Price hereunder shall be redefined to equal the lesser of (i) the Exercise Price and (ii) 110% multiplied by the closing bid price
of the Common Stock on the funding date of the Second Note. L2 Capital may exercise the Warrant cashless unless the underlying
shares of Common Stock have been registered with the SEC prior to the exercise.
Note
3. Summary of Significant Accounting Policies
Basis
of Presentation
The
Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America (“US GAAP”) and the rules and regulations of the SEC.
All
amounts referred to in the notes to the consolidated financial statements are in United States Dollars ($) unless stated otherwise.
Use
of Estimates and Assumptions and Critical Accounting Estimates and Assumptions
The
preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date(s) of the financial
statements and the reported amounts of revenues and expenses during the reporting period(s).
Critical
accounting estimates are estimates for which (a) the nature of the estimate is material due to the levels of subjectivity and
judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact
of the estimate on financial condition or operating performance is material. The Company’s critical accounting estimates
and assumptions affecting the financial statements were:
(1)
Fair
value of long–lived assets:
Fair value is generally determined using the asset’s expected future discounted cash
flows or market value, if readily determinable. If long–lived assets are determined to be recoverable, but the newly determined
remaining estimated useful lives are shorter than originally estimated, the net book values of the long–lived assets are
depreciated over the newly determined remaining estimated useful lives. The Company considers the following to be some examples
of important indicators that may trigger an impairment review: (i) significant under–performance or losses of assets relative
to expected historical or projected future operating results; (ii) significant changes in the manner or use of assets or in the
Company’s overall strategy with respect to the manner or use of the acquired assets or changes in the Company’s overall
business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a significant
decline in the Company’s stock price for a sustained period of time; and (vi) regulatory changes. The Company evaluates
acquired assets for potential impairment indicators at least annually and more frequently upon the occurrence of such events.
(2)
Valuation
allowance for deferred tax assets:
Management assumes that the realization of the Company’s net deferred tax assets
resulting from its net operating loss (“NOL”) carry–forwards for Federal income tax purposes that may be offset
against future taxable income was not considered more likely than not and accordingly, the potential tax benefits of the net loss
carry–forwards are offset by a full valuation allowance. Management made this assumption based on (a) the Company has incurred
recurring losses, (b) general economic conditions, and (c) its ability to raise additional funds to support its daily operations
by way of a public or private offering, among other factors.
(3)
Estimates
and assumptions used in valuation of equity instruments:
Management estimates expected term of share options and similar instruments,
expected volatility of the Company’s Common shares and the method used to estimate it, expected annual rate of quarterly
dividends, and risk free rate(s) to value share options and similar instruments.
These
significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached
to these estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.
Management
bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the
financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources.
Management
regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes
in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those
estimates are adjusted accordingly. Actual results could differ from those estimates.
Principles
of Consolidation
All
intercompany transactions and balances have been eliminated. Non–controlling interest represents the minority equity investment
in MGT subsidiaries, plus the minority investors’ share of the net operating results and other components of equity relating
to the non–controlling interest.
Business
Combinations
As
specified in
ASC 805 “Business Combinations”
the Company adheres to the following guidelines: (i) record purchase
consideration issued to sellers in a business combination at fair value on the date control is obtained, (ii) determine the fair
value of any non–controlling interest, and (iii) allocate the purchase consideration to all tangible and intangible assets
acquired and liabilities assumed based on their acquisition date fair values. The Company commences reporting the results from
operations on a consolidated basis effective upon the date of acquisition.
Cash,
Cash Equivalents and Restricted Cash
The
Company considers investments with original maturities of three months or less to be cash equivalents. Restricted cash primarily
represents cash not available for immediate and general use by the Company.
The
Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial
institution. The balance at times may exceed federally insured limits. As of December 31, 2016 and 2015 the Company had no cash
equivalents. The Company maintains its cash and cash equivalents in banks insured by the Federal Deposit Insurance Corporation
(FDIC) in accounts that at times may be in excess of the federally insured limit of $250 per bank. At December 31, 2016 and 2015,
the uninsured balances amounted to $0 and $96, respectively.
As of December 31,
2015, restricted cash was $39, which supported a letter of credit, in lieu of a rental deposit, for our Harrison, NY office lease.
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
income (loss)” in the 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.
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 two to five years. 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.
Intangible
Assets
Intangible
assets consist of patents, trademarks, domain names, software and customer lists. Estimates of future cash flows and timing of
events for evaluating long–lived assets for impairment are based upon management’s judgment. If any of our intangible
or long–lived assets are considered to be impaired, the amount of impairment to be recognized is the excess of the carrying
amount of the assets over its fair value. Applicable long–lived assets are amortized or depreciated over the shorter of
their estimated useful lives, the estimated period that the assets will generate revenue, or the statutory or contractual term
in the case of patents. Estimates of useful lives and periods of expected revenue generation are reviewed periodically for appropriateness
and are based upon management’s judgment.
Goodwill
Goodwill
represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. The Company is
required to perform impairment reviews at each of its reporting units annually and more frequently in certain circumstances. The
Company performs the annual assessment on December 31.
In
accordance with
ASC 350–20 “Goodwill”
, the Company is able to make a qualitative assessment of whether
it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two–step
goodwill impairment test. If the Company concludes that it is more likely than not that the fair value of a reporting unit is
not less than its carrying amount it is not required to perform the two–step impairment test for that reporting unit. As
of December 31, 2016, the Company impaired 100% of its Goodwill.
Fair
Value of Financial Instruments
The
carrying amounts of cash and cash equivalents, accounts payable, accrued expenses, and convertible notes payable approximate fair
value due to the short–term nature of these instruments.
The
Company measures the fair value of financial assets and liabilities based on the guidance of
ASC 820
,
“Fair Value
Measurements and Disclosures,”
which defines fair value, establishes a framework for measuring fair value, and expands
disclosures about fair value measurements.
ASC
820
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 most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date.
ASC 820
also establishes a fair value hierarchy, which requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Fair
value measurements are categorized using a valuation hierarchy for disclosure of the inputs used to measure fair value, which
prioritize the inputs into three broad levels:
Level
1
– Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active
markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing
information on an ongoing basis.
Level
2
– Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or
indirectly observable as of the reported date, and include those financial instruments that are valued using models or other valuation
methodologies.
Level
3
– Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs
may be used with internally developed methodologies that result in management’s best estimate of fair value.
Related
Parties
The
Company follows subtopic
850–10
of the
FASB Accounting Standards Codification
for the identification of related
parties and disclosure of related party transactions.
Pursuant
to Section
850–10–20 FASB Accounting Standards
, the related parties include (a) affiliates of the Company (“Affiliate”
means, with respect to any specified Person, any other Person that, directly or indirectly through one or more intermediaries,
controls, is controlled by or is under common control with such Person, as such terms are used in and construed under Rule 405
under the Securities Act); (b) entities for which investments in their equity securities would be required, absent the election
of the fair value option under the
Fair Value Option Subsection of Section 825–10–15 FASB Accounting Standards
,
to be accounted for by the equity method by the investing entity; (c) trusts for the benefit of employees, such as pension and
profit–sharing trusts that are managed by or under the trusteeship of management; (d) principal owners of the Company and
members of their immediate families; (e) management of the Company and members of their immediate families; (f) other parties
with which the Company may deal if one party controls or can significantly influence the management or operating policies of the
other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and
(g) other parties that can significantly influence the management or operating policies of the transacting parties or that have
an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more
of the transacting parties might be prevented from fully pursuing its own separate interests.
Pursuant
to
ASC Paragraphs 850–10–50–1
and
50–5
financial statements shall include disclosures of
material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the
ordinary course of business. The disclosures shall include: (a) the nature of the relationship(s) involved; (b) a description
of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for
which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions
on the financial statements; (c) the dollar amounts of transactions for each of the periods for which income statements are presented
and the effects of any change in the method of establishing the terms from that used in the preceding period; and (d) amounts
due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner
of settlement. Transactions involving related parties cannot be presumed to be carried out on an arm's–length basis, as
the requisite conditions of competitive, free–market dealings may not exist. Representations about transactions with related
parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail
in arm's–length transactions unless such representations can be substantiated.
Reclassification
of discontinued operations
In
accordance with
ASC 205–20
regarding the presentation of discontinued operations the assets, liabilities and activity
of the DraftDay.com business have been reclassified as a discontinued operation for all periods presented.
DraftDay.com’s
loss for the year ended December 31, 2015 is included in “Loss from discontinued operations” in the Company’s
Consolidated Statements of Operations and Comprehensive Loss.
Summarized
financial information for DraftDay.com’s operations for the years ended December 31, 2016, and 2015 are presented below:
|
|
Year
ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
$
|
–
|
|
|
$
|
640
|
|
Cost of sales
|
|
|
–
|
|
|
|
(225
|
)
|
Gross
margin
|
|
|
–
|
|
|
|
415
|
|
Operating
expenses
|
|
|
–
|
|
|
|
(1,483
|
)
|
Net
loss
|
|
$
|
–
|
|
|
$
|
(1,068
|
)
|
Revenue
Recognition
The
Company recognizes revenue when it is realized or realizable and earned. We consider revenue realized or realizable and earned
when there is persuasive evidence of an arrangement and that the product has been shipped or the services have been provided to
the customer, the sales price is fixed or determinable and collectability is probable. Our material revenue streams are related
to the delivery of intellectual property license fees and gaming fees:
|
●
|
Digital currencies
operating revenues
– The Company derives its revenue by providing transaction verification services within the digital
currency network of Bitcoin, commonly termed “Bitcoin mining.” In consideration for these services the Company
receives digital currency, Bitcoins (“BTC,” “coins”). The coins are recorded as revenue, using the
average spot price of Bitcoin on the date of receipt. The coins are recorded on the balance sheet at their fair value and
re–measured at each reporting date. Revaluation gains or losses, as well gains or losses on sale of BTC are recorded
in the statement of operations. Expenses associated with running the Bitcoin mining business, such as equipment deprecation,
rent and electricity cost are recorded as cost of revenues.
|
|
|
|
|
●
|
Licensing
–
License fee revenue is derived from the licensing of intellectual property. Revenue from license fees is recognized when notification
of shipment to the end user has occurred, there are no significant Company obligations with regard to implementation and the
Company’s services are not considered essential to the functionality of other elements of the arrangement.
|
|
|
|
|
●
|
Gaming
–
Gaming revenue is derived from entry fees charged in contests minus prizes paid out in contests.
|
Research
and Development
Research
and development expenses are charged to operations as incurred. During the years ended December 31, 2016 and 2015, respectively,
the Company expensed $297 and $nil in research and development costs related to continuing operations.
Advertising
and marketing costs
The
Company expenses advertising and marketing costs as incurred. During the years ended December 31, 2016 and 2015, respectively,
the Company expensed $198 and $nil in advertising costs related to continuing operations.
Stock–Based
Compensation
The
Company recognizes compensation expense for all equity–based payments in accordance with
ASC 718 “Compensation
– Stock Compensation”.
Under fair value recognition provisions, the Company recognizes equity–based compensation
net of an estimated forfeiture rate and recognizes compensation cost only for those shares expected to vest over the requisite
service period of the award.
Restricted
stock awards are granted at the discretion of the Company. These awards are restricted as to the transfer of ownership and generally
vest over the requisite service periods, typically over an eighteen–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 Company stock on the grant date.
The
Company accounts for share–based payments granted to non–employees in accordance with
ASC 505–40, “Equity
Based Payments to Non–Employees”
. The Company determines the fair value of the stock–based payment as either
the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.
If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions
as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments
is reached, or (2) the date at which the counterparty’s performance is complete. The fair value of the equity instruments
is re–measured each reporting period over the requisite service period.
Income
Taxes
The
Company applies the elements of
ASC 740–10 “Income Taxes — Overall”
regarding accounting for uncertainty
in income taxes. This clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires
the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained
by the taxing authority. As of December 31, 2016, the Company did not have any unrecognized tax benefits. The Company does not
expect that the amount of unrecognized tax benefits will significantly increase or decrease within the next twelve months. The
Company’s policy is to recognize interest and penalties related to tax matters in the income tax provision in the Consolidated
Statements of Operations. There was no interest and penalties for the years ended December 31, 2016 and 2015. Tax years beginning
in 2012 are generally subject to examination by taxing authorities, although net operating losses from all years are subject to
examinations and adjustments for at least three years following the year in which the attributes are used.
Deferred
taxes are computed based on the tax liability or benefit in future years of the reversal of temporary differences in the recognition
of income or deduction of expenses between financial and tax reporting purposes. The net difference, if any, between the provision
for taxes and taxes currently payable is reflected in the balance sheet as deferred taxes. Deferred tax assets and/or liabilities,
if any, are classified as current and non–current based on the classification of the related asset or liability for financial
reporting purposes, or based on the expected reversal date for deferred taxes that are not related to an asset or liability. Valuation
allowances are recorded to reduce deferred tax assets to that amount which is more likely than not to be realized.
Our
effective tax rate for years 2016 and 2015, were 0% and 0%, respectively. The difference in the Company’s effective tax
rate from the Federal statutory rate is primarily due to a 100% valuation allowance provided for all deferred tax assets.
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 year ended December 31, 2016, excludes 1,000,000 unvested restricted shares, 6,000,000
shares issuable under options and 100,000 shares issuable under warrants, as they are anti–dilutive due to the Company’s
net loss. For the year ended December 31, 2015, the computation excludes 10,608 shares in connection to the Convertible Preferred
stock, 3,820,825 warrants, as they are anti–dilutive due to the Company’s net loss.
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. Our chief operating decision–making group is composed of the chief executive officer and chief financial officer.
We operate in three operational segments, Gaming, Intellectual Property and Bitcoin Mining. Certain corporate expenses are not
allocated to segments.
Software
Developed for Internal Use and For Sale
The
Company follows
ASC 350–40 “Intangibles–Internal Use Software”
on accounting for the costs of computer
software developed or obtained for internal use. Costs incurred during the preliminary stage are expensed as incurred by the Company.
Certain qualifying costs incurred during the application development stage are capitalized as software by the Company. The Company
begins capitalization when the preliminary project stage is complete and it is probable that the project will be completed and
the software will be used to perform the function intended.
The
Company incurs costs in connection with the development of software products that are intended for sale. Costs incurred prior
to technological feasibility being established for the product are expensed as incurred. Technological feasibility is established
upon completion of a detail program design or, in its absence, completion of a working model. Thereafter, all software production
costs are capitalized and subsequently reported at the lower of unamortized cost or net realizable value. Capitalized costs are
amortized based on current and future revenue for each product with an annual minimum equal to the straight–line amortization
over the remaining estimated economic life of the product. Amortization commences when the product is available for general release
to customers.
The
Company concluded that capitalizing such expenditures after completion of a working model was inappropriate because the Company
did not incur any material software production costs and therefore expenses were all research and development costs. Our research
and development costs are comprised of staff, consultancy and other costs expensed on our products.
Comprehensive
Loss
Comprehensive
loss consists of two components, net loss and other comprehensive loss. Other comprehensive loss refers to revenue, expenses,
gains and losses that are recorded as an element of stockholder’s equity but are excluded from net loss. The Company’s
other comprehensive loss is comprised of reclassification adjustments for losses included in net income and unrealized holding
losses on available for sale securities.
Virtual
Currency Accrual
Users
of the Company’s website maintain virtual currency balances which are accumulated as users participate in the Company’s
online games. The amounts may become payable in cash by the Company once the user’s virtual currency balance exceeds a certain
minimum threshold; a virtual currency balance of $0.01 or $0.02 based upon initial date of enrollment on the site. User accounts
expire after six months of inactivity. The Company records an accrual for potential virtual currency payouts at the end of each
reporting period based on historical payout experience and current virtual currency balances.
Recent
accounting pronouncements
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.
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
April 2016, the FASB issued 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 adoption of ASU 2016–09 is not
expected to have a material impact on our consolidated financial position, results of operations or cash flows.
In
April 2016, the FASB issued ASU No. 2016–10, “Revenue from Contracts with Customers: Identifying Performance Obligations
and Licensing” (topic 606). In March 2016, the FASB issued ASU No. 2016–08, “Revenue from Contracts with Customers:
Principal versus Agent Considerations (Reporting Revenue Gross verses Net)” (topic 606). These amendments provide additional
clarification and implementation guidance on the previously issued ASU 2014–09, “Revenue from Contracts with Customers”.
The amendments in ASU 2016–10 provide clarifying guidance on materiality of performance obligations; evaluating distinct
performance obligations; treatment of shipping and handling costs; and determining whether an entity’s promise to grant
a license provides a customer with either a right to use an entity’s intellectual property or a right to access an entity’s
intellectual property. The amendments in ASU 2016–08 clarify how an entity should identify the specified good or service
for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. The
adoption of ASU 2016–10 and ASU 2016–08 is to coincide with an entity’s adoption of ASU 2014–09, which
we intend to adopt for interim and annual reporting periods beginning after December 15, 2017. The adoption of ASU 2016–10
is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
In
August 2016, the FASB issued ASU No. 2016–15, “Statement of Cash Flows – Classification of Certain Cash Receipts
and Cash Payments.” ASU No. 2016–15 addresses specific cash flow classification issues where there is currently diversity
in practice including debt prepayment and proceeds from the settlement of insurance claims. ASU 2016–15 is effective for
annual periods beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact
of the new standard on its consolidated financial statements.
In
November 2016, the FASB issued ASU No. 2016–18 “Statement of Cash Flows (Topic 230), Restricted Cash” which
provides guidance on the presentation of restricted cash and restricted cash equivalents in the statements of cash flows. The
new guidance requires restricted cash and restricted cash equivalents to be included within the cash and cash equivalents balances
when reconciling the beginning–of–period and end–of–period amounts shown on the statements of cash flows.
The ASU is effective for reporting periods beginning after December 15, 2017 with early adoption permitted. The Company is currently
evaluating the impact of the new standard on its consolidated financial statements.
In
January 2017, the FASB issued ASU No. 2017–04 “Intangibles—Goodwill and Other (Topic 350), Simplifying the Test
for Goodwill Impairment” which eliminated Step 2 from the goodwill impairment test. In computing the implied fair value
of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its
assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining
the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this ASU
an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with
its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting
unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting
unit. Additionally, an entity should consider income tax effects from any tax–deductible goodwill on the carrying amount
of the reporting unit when measuring the goodwill impairment loss, if applicable. The ASU also eliminated the requirements for
any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative
test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units.
An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount
of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative
impairment test is necessary. The ASU is effective for reporting periods beginning after December 15, 2019 with early adoption
permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently
evaluating the impact of the new standard on its consolidated financial statements.
There
were no other new accounting pronouncements that were issued or became effective since the issuance of our 2016 Annual Report
on Form 10–K that had, or are expected to have, a material impact on our consolidated financial position, results of operations
or cash flows.
Note
4. Prepaid Expenses and Other Current Assets
Prepaid
expenses and other current assets consisted of the following:
|
|
December
31, 2016
|
|
|
December 31,
2015
|
|
Prepaid
services
|
|
$
|
153
|
|
|
$
|
–
|
|
Insurance
|
|
|
–
|
|
|
|
3
|
|
Other
|
|
|
–
|
|
|
|
58
|
|
Total
prepaid expenses and other current assets
|
|
$
|
153
|
|
|
$
|
61
|
|
Note
5. 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 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.
Investments
Available for Sale
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
FNCX
Common shares
|
|
$
|
44
|
|
|
$
|
444
|
|
During the years ended
December 31, 2016 and 2015, the Company recorded losses on sale of investments of $1,169 and $0, respectively. The Company
records unrealized gains and losses to accumulated other comprehensive income (loss) and upon realization, records the gain or
losses through the statement of operations.
For
non–public, non–controlled investments in equity securities, the Company uses the cost–method of accounting.
Investments
at Cost
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
DDGG
Common shares
|
|
$
|
287
|
|
|
$
|
1,020
|
|
DDGG stock purchase
warrants received
|
|
|
–
|
|
|
|
360
|
|
Total
|
|
$
|
287
|
|
|
$
|
1,380
|
|
During
the year ended December 31, 2016, the Company recognized an impairment charge of $1,093 related to its investment in DDGG.
On August 16, 2016, the
Company purchased 17.5% membership interest in Two minute Quests LLC (“2MQ”) for $115. 2MQ is introducing a game for
the iWatch and iPhone. As of December 31, 2016, the Company recorded an impairment charge for the full value of $115 of this investment.
On
May 13, 2016, the Company acquired 6% Membership Interest in The Round House LLC for cash consideration of $150. Round House LLC
is an Alabama–based technology incubator, offering co–working space, accelerator services and angel investment. As
of December 31, 2016, the Company recorded an impairment charge for the full value of $150 of this investment.
Note
6. 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 December 31, 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, 2015
|
|
$
|
1,496
|
|
Additions (disposals)
|
|
|
–
|
|
December 31, 2015
|
|
|
1,496
|
|
Impairment
|
|
|
(1,496
|
)
|
December 31, 2016
|
|
$
|
–
|
|
|
|
Intangible
Assets
|
|
January
1, 2015
|
|
$
|
1,608
|
|
Disposals
|
|
|
(179
|
)
|
Impairment
|
|
|
(472
|
)
|
Amortization
|
|
|
(227
|
)
|
|
|
|
730
|
|
Additions
|
|
|
495
|
|
Impairment
|
|
|
(673
|
)
|
Amortization
|
|
|
(84
|
)
|
December
31, 2016
|
|
$
|
468
|
|
During
the year ended December 31, 2016, the Company issued 150,000 shares of its common stock valued at $495 for the acquisition of
intangible assets.
For
the years ended December 31, 2016 and 2015, the Company recorded amortization expense of $84 and $227, respectively. During the
year ended December 31, 2016, the Company recognized an impairment charge of $1,496 related to the goodwill and $673 related to
the intangible assets.
The
following table outlines estimated future annual amortization expense for the next five years and thereafter:
For
the year ending December 31,
|
|
|
|
|
2017
|
|
$
|
165
|
|
|
2018
|
|
|
165
|
|
|
2019
|
|
|
138
|
|
|
|
|
$
|
468
|
|
Note
7. Notes Receivable
Total
outstanding balance of notes receivable was the following:
|
|
As
of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Notes
receivable
|
|
$
|
–
|
|
|
$
|
1,575
|
|
FNCX
Note
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) 63,467
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 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 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. As of December 31, 2015,
the Company had booked a reserve of $300 against the Note.
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 137,418 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 18,332 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 14th Agreement”)
with FNCX to exchange $940 remaining outstanding principal of the FNCX Note for 132,097 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 14th Agreement, which was estimated to be completed by December 31, 2016. On October 10, 2016, the Note was satisfied
through the issuance of 136,304 shares of common stock and payment of interest of $16. These shares were sold during December
2016 with the company incurring a loss on sale of investments of $86. The Company also recorded a loss of $196 on conversion of
the Note with shares on December 1, 2016.
Other
Notes
On
February 26, 2015, the Company signed a letter of intent with Tera Group, Inc., owner of TeraExchange, LLC, a Swap Execution Facility
regulated by the U.S. Commodity Futures Trading Commission, to negotiate a merger agreement. Since the merger agreement was not
executed by the execution date, the merger was aborted. Simultaneous with the letter of intent, on February 26, 2015, the Company
purchased a promissory note in the principal amount of $250 bearing interest at the rate of 5% per annum from the aggregate unpaid
principal balance and all accrued and unpaid interest are due and payable upon demand at any time after August 15, 2015. As of
December 31, 2015, the Company has fully reserved against the collectability of this note and the corresponding accrued interest.
During 2016, the Company received payment on the Note of $267 and recorded the receipt in other income.
During
the year ended December 31, 2016, the Company purchased a 5% promissory note with a principal of $45, maturing on July 18, 2016.
As of December 31, 2016, the Company has fully reserved against the collectability of this note and the corresponding accrued
interest.
Note
8. Property and Equipment
Property
and equipment related to continuing operations consisted of the following:
|
|
As
of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Computer
hardware and software
|
|
$
|
10
|
|
|
$
|
38
|
|
Bitcoin
machines
|
|
|
708
|
|
|
|
–
|
|
|
|
|
718
|
|
|
|
38
|
|
Less:
Accumulated depreciation
|
|
|
(116
|
)
|
|
|
(3
|
)
|
Property
and equipment, net
|
|
$
|
602
|
|
|
$
|
35
|
|
The
Company recorded depreciation expense of $126 and $14 for the years ended December 31, 2016, and 2015, respectively.
Note
9. Accrued Expenses
Accrued
expenses consisted of the following:
|
|
As
of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Independent director fees
|
|
$
|
–
|
|
|
$
|
15
|
|
Legal, consulting and other
|
|
|
124
|
|
|
|
–
|
|
|
|
$
|
124
|
|
|
$
|
15
|
|
Note
8. Notes Payable
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 $2,300 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 exercise price of $3.31 per share, and is exercisable for a period of thirty–six
(36) months from the date of issuance.
The
Company estimated the relative fair value of these warrants on the date of grant, using the Black–Scholes option–pricing
model with the following weighted–average assumptions:
Expected
option life (year)
|
|
|
3.00
|
|
Expected
volatility
|
|
|
131.75
|
%
|
Risk–free
interest rate
|
|
|
0.85
|
%
|
Dividend
yield
|
|
|
0.00
|
%
|
The
relative fair value of these warrants granted, estimated on the date of grant, was $761, which was recorded as a discount to the
notes payable. The Company amortizes the discount over the term of the notes.
On
October 28, 2016 and on November 4, 2016, the Company entered into a Note Exchange Agreement (“Note Exchange Agreement”)
and a Warrant Exchange Agreement (the “Warrant Exchange Agreement”) with all the holders (“Holders”) of
the 12% unsecured promissory notes (the “Notes”) previously issued by the Company pursuant to the above Securities
Purchase Agreement dated August 2, 2016 (the “Purchase Agreement”). Pursuant to the Note Exchange Agreement, the Company
and the Holders agreed to exchange the Notes, including accrued but unpaid interest thereon, for an 8% Senior Unsecured Promissory
Notes in the aggregate principal amount of $2,300 (the “New Notes”). The New Notes are convertible, at the option
of the holder thereof, into shares of the Company’s common stock at a conversion price of $1.00 per share, subject to adjustments
as set forth in the New Note.
In
addition, and pursuant to the Exchange Agreement, the Company and the Holders also agreed to a cashless exercise of warrants to
purchase 460,000 shares of Company common stock. The value of the shares issued for warrants of $600 was recorded as a loss on
extinguishment of debt in the Consolidated Statement of Operations.
The
Company analyzed the modification and concluded that extinguishment accounting was to be applied. Unamortized discount on warrants
of $711 was reversed and recorded as a loss on extinguishment of debt. The Company calculated beneficial conversion feature on
the conversion option added in the new modified note payable of $702 and recorded it as a loss on extinguishment of debt for the
year ended December 31, 2016.
During
the year ended December 31, 2016, the Company charged to operations amortization of debt discount of $41.
Note
9. Series A Convertible Preferred stock
During
the year ended December 31, 2016 the Company converted 10,838 shares of Series A Convertible Preferred stock into 10,838 shares
of Common stock. For the year ended December 31, 2016 and 2015, respectively, the Company issued 230 and 615 of dividend shares
to the preferred stock holders. As of December 31, 2016 and 2015 there were 0 and 10,608 Series A Convertible Preferred shares
outstanding.
Note
10. Sale of Common stock
On
December 30, 2013, and as amended on March 27, 2014, the Company entered into an At–The–Market Offering Agreement
(the “ATM Agreement”) with Ascendiant Capital Markets, LLC (the “Manager”). Pursuant to the ATM Agreement,
the Company may offer and sell shares of its Common Stock (the “Shares”) having an aggregate offering price of up
to $8.5 million from time to time through the Manager. The Company can use the net proceeds from any sales of Shares in the offering
for working capital, capital expenditures, and general business purposes. For the year ended December 31, 2015, the Company sold
approximately 3,155,000 Shares under the ATM Agreement for gross proceeds of approximately $1,695 before related expenses. The
ATM Agreement expired by its terms in August 2015.
On
October 8, 2015, the Company entered into separate subscription agreements (the “Subscription Agreement”) with accredited
investors (the “Investors”) relating to the issuance and sale of $700 of units (the “Units”) at a purchase
price of $0.25 per Unit, with each Unit consisting of one share (the “Shares”) of the Company’s common stock,
par value $0.001 per share (the “Common Stock”) and a three year warrant (the “Warrants”) to purchase
two shares of Common Stock at an initial exercise price of $0.25 per share (such sale and issuance, the “Private Placement”).
The
Warrants are exercisable at a price of $0.25 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, subject to approval of the lead investor, in which the Company receives
gross proceeds of at least $7,500; 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”). The Warrants may be exercised by means of a “cashless exercise”
following the four–month anniversary of the date of issue, provided that the Company has consummated a Qualifying Transaction
and there is no effective registration statement registering the resale of the shares of Common Stock underlying the Warrants
(the “Warrant Shares”). The Company is prohibited from effecting an exercise of any Warrant to the extent that, as
a result of any such exercise, the holder would beneficially own more than 4.99% of the number of shares of Common Stock outstanding
immediately after giving effect to the issuance of shares of Common Stock upon exercise of such Warrant, which beneficial ownership
limitation may be increased by the holder up to, but not exceeding, 9.99%. The Warrants are also subject to certain adjustments
upon certain actions by the Company as outlined in the Warrants. Prior to receipt of shareholder approval, the warrants, when
aggregated with the shares of common stock issued in the offering, shall not be exercisable into more than 19.99% of the number
of shares of Common Stock outstanding as of the closing date.
On
December 22, 2015, the Company sold $172 of common stock at a price of $0.25 per share in a Registered Direct offering.
On
July 7, 2016, the Company entered into an employment agreement with Robert B. Ladd, to act as its President and Chief Operating
Officer. The terms of his agreement were reviewed and approved by the Company’s Nominations and Compensation Committee.
Under the terms of the agreement, Mr. Ladd will, serve as President and Chief Operating Officer and for services rendered; Mr.
Ladd shall receive a salary of $240 per year and is eligible for a cash and/or equity bonus as determined by the Nomination and
Compensation Committee. Further, Mr. Ladd is entitled to receive up to 2,000,000 shares of the Company’s common stock, 1/3
of which shall vest within 12 months from the execution of the agreement, another 1/3 within 18 months, and the remaining 1/3
within 24 months from the execution of the agreement. Lastly, the agreement also provides for certain rights granted to Mr. Ladd
in the event of his death, permanent incapacity, voluntary termination or discharge for cause. The Company charged to operations
stock based compensation of $8,740 as the fair value of 2,000,000 shares issued to Mr. Ladd during the year ended December 31,
2016.
Note
11. 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 number 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 number 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.
The
Company’s board of directors established the 2016 Equity Incentive Plan (the “Plan”) on August 15, 2016, and
the Company’s shareholders ratified the Plan at the annual meeting of the Company’s stockholders on September 8, 2016.
No grants have been made to date under the 2016 Plan but the Company received stockholder approval to issue 6,000,000 options.
The 2,000,000 shares of restricted stock that were approved under the Plan were deemed vested to an officer of the Company on
the date of his employment agreement, July 7, 2016. The stock was valued at its fair market value of $4.37 per share or an aggregate
value of $8,740. These shares were issued on November 11, 2016. The maximum number of shares of common stock that may be issued
under the 2016 Plan shall initially be 18,000,000.
The
purpose of the Plan is to provide an incentive to attract and retain directors, officers, consultants, advisors and employees
whose services are considered valuable, to encourage a sense of proprietorship and to stimulate an active interest of such persons
into the Company’s development and financial success.
The
2016 Plan is administered by the Company’s Nomination and Compensation Committee, consisting of at least two directors who
qualify as “independent directors” under the rules of the NASDAQ Stock Market, “non–employee directors”
under Rule 16b–3 of the Securities Exchange Act of 1934, as amended, and as “outside directors” under Section
162(m) of the Code.
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.
Issuance
of Restricted Shares – Directors, Officers and Employees
A
summary of the Company’s employee’s restricted stock as of December 31, 2016, is presented below:
|
|
Number
of Shares
|
|
|
Weighted
Average
Grant Date Fair Value
|
|
Non–vested
at January 1, 2015
|
|
|
110,000
|
|
|
$
|
1.42
|
|
Granted
|
|
|
255,000
|
|
|
|
0.31
|
|
Vested
|
|
|
(309,500
|
)
|
|
|
0.53
|
|
Forfeited
|
|
|
(55,500
|
)
|
|
|
1.28
|
|
Non–vested at
December 31, 2015
|
|
|
–
|
|
|
|
–
|
|
Granted
|
|
|
3,051,000
|
|
|
|
3.67
|
|
Vested
|
|
|
(2,051,000
|
)
|
|
|
4.33
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
Non–vested
at December 31, 2016
|
|
|
1,000,000
|
|
|
$
|
2.31
|
|
For
the years ended December 31, 2016 and 2015, the Company has recorded $9,566 and $130, respectively, in employee and director stock–based
compensation expense, which is a component of selling, general and administrative expense in the consolidated statement of operations.
In
the years ended December 31 and 2016, 2015, the Company did not allocate any stock–based compensation expense to non–controlling
interest.
Unrecognized
Compensation Cost
As
of December 31, 2016, unrecognized compensation costs related to non–vested stock–based compensation arrangements
were $1,623 (2015: $0), and is expected to be recognized over a weighted average period of 2 years (2015: 0 years).
Stock–Based
Compensation –Employees – Non–Restricted
For
the year ended December 31, 2016, the Company granted and issued a total of 100,000 shares to employees at termination. The shares
were recorded at $116 using the closing market value on respective dates of issuance.
Stock–Based
Compensation – Non–Employees
For
the year ended December 31, 2016, the Company granted and issued a total of 825,000 shares to non–employees for services
rendered. The shares were recorded at $1,106 using the closing market value on respective dates of issuance.
For
the year ended December 31, 2015, the Company granted and issued a total of 366,624 shares to non–employees for services
rendered. The shares were recorded at $161 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; 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.
In
August 2016, the Company entered into agreements with the holders of 460,000 Common Stock Purchase Warrants issued in connection
with the Company’s Securities Purchase Agreement offering dated August 2, 2016. Pursuant to its terms, each holder received
two detachable Warrants (“Warrant”), for each one thousand dollars invested, each of which is exercisable for one
hundred (100) shares of the Company’s common stock: Each Warrant has an exercise price of $3.31 per share, and is exercisable
for a period of thirty–six (36) months from the date of issuance. All issued warrants are exercisable and expire through
2018. The Company issued 460,000 shares in exchange of warrants valued at $600, 400 which was recognized as a loss on extinguishment
of debt.
During
the year ended December 31, 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.
During
June 2016, the Company issued 80,000 shares of common stock valued at $232 included in general and administrative expenses in
the Statements of Operations, in exchange for 403,029 warrants.
The
following table summarizes information about shares issuable under warrants outstanding at December 31, 2016:
|
|
Warrant
Shares
Outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
At
January 1, 2015
|
|
|
1,020,825
|
|
|
$
|
3.47
|
|
Issued
|
|
|
5,600,000
|
|
|
|
0.25
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Expired
|
|
|
–
|
|
|
|
–
|
|
At
December 31, 2015
|
|
|
6,620,825
|
|
|
|
1.11
|
|
Issued
|
|
|
460,000
|
|
|
|
3.31
|
|
Exercised
|
|
|
(6,980,825
|
)
|
|
|
(0.87
|
)
|
Expired
|
|
|
–
|
|
|
|
–
|
|
At
December 31, 2016
|
|
|
100,000
|
|
|
$
|
3.75
|
|
As
of December 31, 2016, the Company had 100,000 shares issuable under warrants outstanding at a weighted average exercise price
of $3.75 and an intrinsic value of $0.
On
September 29, 2016, the Company agreed to rescind that certain Subscription Agreement dated September 1, 2016 (the “Agreement”)
with an investor (“Investor”) pursuant to which, the Investor agreed to purchase in a private placement, subject to
certain conditions, an aggregate of four hundred fifty thousand (450,000) restricted shares of the Company’s common stock,
par value $0.001 (“Shares”) at a purchase price of three dollars ($3.00) per Share, for aggregate proceeds of one
million three hundred fifty thousand dollars ($1,350).
Also
on September 29, 2016, the Company agreed to cancel and rescind that certain Note and Warrant Exchange Agreement dated September
1, 2016 (the “Exchange Agreement”) entered into with a holder (“Holder”) of certain 12% unsecured promissory
notes in the amount of one million six hundred fifty thousand dollars ($1,650), including accrued interest (the “Notes”)
previously issued by the Company, whereby the Holder agreed to exchange certain Notes and warrants received with the Notes for
an aggregate of eight hundred fifty thousand (850,000) restricted shares of the Company’s common stock.
On
October 28, 2016 and on November 11, 2016, the Company entered into a Note Exchange Agreement (“Note Exchange Agreement”)
and a Warrant Exchange Agreement (the “Warrant Exchange Agreement”) with all the holders (“Holders”) of
the 12% unsecured promissory notes (the “Notes”) previously issued by the Company pursuant to the above Securities
Purchase Agreement dated August 2, 2016 (the “Purchase Agreement”). Pursuant to the Note Exchange Agreement, the Company
and the Holders agreed to exchange the Notes, including accrued but unpaid interest thereon, for an 8% Senior Unsecured Promissory
Notes in the aggregate principal amount of $2,300 (the “New Notes”). The New Notes are convertible, at the option
of the holder thereof, into shares of the Company’s common stock at a conversion price of $1.00 per share, subject to adjustments
as set forth in the New Note.
Pursuant
to the Exchange Agreement, the Company and the Holders also agreed to a cashless exercise of warrants to purchase 460,000 shares
of Company common stock. The value of the shares issued for warrants of $600 was also recorded as a loss on extinguishment of
debt in the Consolidated Statement of Operations.
Stock
Options
The
following is a summary of the Company’s option activity:
|
|
Options
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding – December 31, 2015
|
|
|
–
|
|
|
$
|
–
|
|
Exercisable – December 31, 2015
|
|
|
–
|
|
|
$
|
–
|
|
Granted
|
|
|
6,000,000
|
|
|
|
0.71
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Forfeited/Cancelled
|
|
|
–
|
|
|
|
–
|
|
Outstanding – December 31, 2016
|
|
|
6,000,000
|
|
|
$
|
0.71
|
|
Exercisable – December 31, 2016
|
|
|
500,000
|
|
|
$
|
0.71
|
|
|
|
|
Options
Outstanding
|
|
|
|
|
Options
Exercisable
|
|
|
|
Exercise
Price
|
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life
(in
years)
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
$
|
0.25 –
1.00
|
|
|
6,000,000
|
|
4.88 years
|
|
$
|
0.71
|
|
|
500,000
|
|
$
|
0.71
|
|
At
December 31, 2016, the total intrinsic value of options outstanding and exercisable was $940 and $0, respectively.
Note
12. Non–Controlling Interest
At
December 31, 2016, the Company’s non–controlling interest was as follows:
|
|
MGT
Gaming
|
|
|
|
MGT
Interactive
|
|
|
M2P
Americas
|
|
|
Total
|
|
Non–controlling
interest at January 1, 2015
|
|
$
|
370
|
|
|
|
$
|
92
|
|
|
$
|
(20
|
)
|
|
$
|
442
|
|
Non–controlling
share of losses
|
|
|
(342
|
)
|
|
|
|
4
|
|
|
|
(3
|
)
|
|
|
(341
|
)
|
Transfers
from non–controlling interest
|
|
|
–
|
|
|
|
|
(96
|
)
|
|
|
–
|
|
|
|
(96
|
)
|
Non–controlling
interest at December 31, 2015
|
|
|
28
|
|
|
|
|
–
|
|
|
|
(23
|
)
|
|
|
5
|
|
Non–controlling
share of net loss
|
|
|
(319
|
)
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(319
|
)
|
Buy
back
|
|
|
291
|
|
|
|
|
–
|
|
|
|
1
|
|
|
|
292
|
|
Non–controlling
interest at December 31, 2016
|
|
$
|
–
|
|
|
|
$
|
–
|
|
|
$
|
(22
|
)
|
|
$
|
(22
|
)
|
On
December 29, 2016, the Company entered into Stock Purchase Agreement with J&S Gaming Inc. and purchased 450 shares representing
45% of the ownership interest in MGT Gaming Inc. for $2.
Note
13. 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 expired on November
30, 2016 and carried 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.
On
August 9, 2016, the Company entered into a Sublease Agreement for an office lease in Durham, North Carolina. The lease commences
thirty days after landlord consent (August 22, 2016) and expires on January 31, 2020. Monthly rent will be $6 for the first 12–month
period, $7 for the second 12–month period, $7 for the third 12–month period and $7 per month for the remaining months
until expiration of the lease. A security deposit of $13 was required upon execution of the sublease.
Total
lease rental expense for the year ended December 31, 2016 and 2015, was $81 and $77, respectively.
Total
future minimum payments required under the new operating lease are as follows.
Year
Ending December 31,
|
|
|
|
|
2017
|
|
$
|
77
|
|
2018
|
|
|
80
|
|
2019
|
|
|
83
|
|
2020
|
|
|
7
|
|
|
|
$
|
247
|
|
Commitments
On
July 7, 2016, the Company entered into an employment agreement with Robert B. Ladd, to act as its President and Chief Operating
Officer. The terms of his agreement were reviewed and approved by the Company’s Nominations and Compensation Committee.
Under the terms of the agreement, Mr. Ladd will, serve as President and Chief Operating Officer and for services rendered; Mr.
Ladd shall receive a salary of $240 per year and is eligible for a cash and/or equity bonus as determined by the Nomination and
Compensation Committee. Further, Mr. Ladd received 2,000,000 shares of the Company’s common stock, 1/3 of which shall vest
within 12 months from the execution of the agreement, another 1/3 within 18 months, and the remaining 1/3 within 24 months from
the execution of the agreement. Lastly, the agreement also provides for certain rights granted to Mr. Ladd in the event of his
death, permanent incapacity, voluntary termination or discharge for cause.
On
November 18, 2016, the Company agreed to enter into an employment agreement with John McAfee pursuant to which Mr. McAfee will
join the Company as Executive Chairman of the Board of Directors and Chief Executive Officer of the Company at the closing of
the transaction contemplated in the D–Vasive APA. It is currently contemplated that Mr. McAfee will have a base annual salary
of $1.00 per day; payable at such times as the Company customarily pays is other senior level employees. In addition, Mr. McAfee
will be granted Executive options (the “Options”) to purchase an aggregate of six million (6,000,000) shares of the
Company’s common stock (the “Option Shares”), which shall be exercisable for a period of five (5) years as follows:
|
●
|
options to purchase
1,000,000 shares of the Company’s Common Stock at a per–share price of the lower of $0.25 or the closing price
of the Company’s Common Stock as quoted on the OTC Pink as of the date of the execution of his Employment Agreement
on November 18, 2016;
|
|
|
|
|
●
|
options to purchase
2,000,000 shares of the Company’s Common Stock at a purchase price of $0.50 per share; and
|
|
|
|
|
●
|
options to purchase
3,000,000 shares of the Company’s Common Stock at a purchase price of $1.00 per share.
|
Mr.
McAfee will also be eligible to earn a cash and/or equity bonus as the Compensation Committee may determine, from time to time,
based on meeting performance objectives and bonus criteria to be mutually identified by Mr. McAfee and the Nomination and Compensation
Committee. Such objectives and criteria may be based on a favorable sale or merger of the Company, in additional to operating
metrics.
The
appointment of Mr. McAfee is pursuant to the terms of the Employment Agreement, dated May 9, 2016, as approved by stockholders
on September 8, 2016.
During
the year ended December 31, 2016, the Company purchased 400 bitcoin mining machines from Bitmain Technologies Limited for $630
and power supplies from Hash The Planet (“HTP”) for $53. The Company also entered a 12–month agreement with
HTP to host, power, connect, monitor and service the machines for $136. The hosting data center in located in Cashmere, WA. MGT
launched its bitcoin mining operations and earned its first BTC on September 3, 2016.
Legal
On September 1, 2016,
the Company and John McAfee filed an action in the United States District Court for the Southern District of New York seeking
a declaration that the use of or reference to the personal name of John McAfee and/or McAfee in its business, and specifically
in the context of renaming the Company, of which McAfee is the Executive Chairman, to “John McAfee Global Technologies,
Inc.,” does not infringe upon Intel’s trademark rights or breach any agreement between the parties. Intel has submitted
an Amended Answer and Counterclaims alleging Lanham Act and federal/state trademark violations and common law unfair competition
relating to the same factual circumstances. The Company filed a Reply to Counterclaims on November 3, 2016, and a case management
plan and scheduling order was filed on October 28, 2016. The Plaintiffs vigorously dispute these allegations and on or about January
3, 2017, Plaintiffs filed a Motion to Dismiss Defendants' Counterclaims on the grounds that they fail as a matter of law. The
Motion is still pending before the Court. The case is in discovery and the Parties have agreed to conduct a settlement conference
before a U.S. Magistrate Judge on April 21, 2017.
A
number of law firms have issued press releases announcing that they are investigating claims on behalf of shareholders of the
Company regarding potential violations of the Exchange Act.
In
September 2016, various investors in the Company filed putative class action lawsuits against the Company, its president and certain
of its individual officers and directors. The cases were filed in the United States District Court for the Southern District of
New York and allege violations of federal securities laws and seek damages. On April 11, 2017 those cases were consolidated into
a single action (the “Securities Action”).
On
January 24, 2017, the Company was served with a copy of a summons and complaint filed by plaintiff Atul Ojha in New York state
court against certain officers and directors of the Company and the Company as a nominal defendant. The lawsuit is styled as a
derivative action (the “Derivative Action”) and was originally filed on October 15, 2016. The Derivative Action substantively
alleges that the defendants, collectively or individually, inadequately managed the business and assets of the Company resulting
in the deterioration of the Company’s financial condition. The Derivative Action asserts claims including but not limited
to breach of fiduciary duties, unjust enrichment and waste of corporate assets. On February 27, 2017, the parties to the Derivative
Action executed a stipulated stay of proceedings pending full or partial resolution of the Securities Action. Thereafter, the
Company plans to address the Derivative Action.
On
March 3, 2017 and April 4, 2017 respectively, two additional actions were filed against the Company by investor Barry Honig (“Honig”).
The first action was filed in federal court in North Carolina (the “North Carolina Action”) against the Company and
its president and alleges claims for libel, slander, conspiracy, interference with prospective economic advantage, and unfair
trade practices. The North Carolina Action substantively alleges that the defendants defamed Honig by causing or allowing certain
statements to be published about Honig in news blogs and articles authored by a journalist, who is also a defendant in the case.
The second action
was brought by Honig and certain investors in the United States District Court for the Southern District of New York (the “Breach
of Contract Action”) against the Company and certain of its officers and directors. The Breach of Contract Action alleges
claims for tortious interference with contractual relations, breach of contract, and unjust enrichment related to the Company’s
unsuccessful attempt to acquire D–Vasive and Demonsaw in 2016 and the alleged resulting harm to certain D–Vasive and
Demonsaw noteholders. The damages claimed include (a) an amount of $46,750,000, (b) together with interest, costs and reasonable
attorneys’ fees as provided by law and relevant agreements, and (c) any further or different relief as this Court deems
lawful and proper under the circumstances.
The
Company believes that there is little merit to each of the above actions and has no indication or reason to believe that it is
or will be liable for any alleged wrongdoing. The Company is consulting with its counsel to determine the appropriate legal strategy
but intends to defend against the actions vigorously. The Company cannot presently rule out that adverse developments in one or
more of the above actions could have a materially adverse effect on the Company, and has notified its Director’s and Officer’s
Liability Insurance carrier.
Note
14. Income Taxes
Significant
components of deferred tax assets were as follows as of December 31:
|
|
2016
|
|
|
2015
|
|
U.S. federal tax loss carry–forward
|
|
$
|
14,632
|
|
|
$
|
14,229
|
|
U.S. State tax loss carry–forward
|
|
|
1,505
|
|
|
|
1,137
|
|
U.S. federal capital loss carry–forward
|
|
|
188
|
|
|
|
188
|
|
Equity based compensation
|
|
|
3,965
|
|
|
|
—
|
|
Fixed assets, intangible assets and goodwill
|
|
|
821
|
|
|
|
—
|
|
Long-term investments
|
|
|
462
|
|
|
|
—
|
|
Total deferred tax assets
|
|
|
21,573
|
|
|
|
15,554
|
|
Less: valuation allowance
|
|
|
(21,573
|
)
|
|
|
(15,554
|
)
|
Net deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
As
of December 31, 2016, the Company had the following tax attributes:
|
|
Amount
|
|
|
Begins to
expire
|
U.S. federal net operating loss carry–forwards
|
|
$
|
43,588
|
|
|
Fiscal 2023
|
U.S. State net operating loss carry–forwards
|
|
|
27,468
|
|
|
Fiscal 2031
|
U.S. federal capital loss carry–forwards
|
|
|
553
|
|
|
Fiscal 2015
|
As
it is not more likely than not that the resulting deferred tax benefits will be realized, a full valuation allowance has been
recognized for such deferred tax assets. For the year ended December 31, 2016, the valuation allowance increased by $6,019 Federal
and state laws impose substantial restrictions on the utilization of tax attributes in the event of an “ownership change,”
as defined in Section 382 of the Internal Revenue Code. Currently, the Company does not expect the utilization of tax attributes
in the near term to be materially affected as no significant limitations are expected to be placed on these tax attributes as
a result of previous ownership changes. If an ownership change is deemed to have occurred as a result of equity ownership changes
or offerings, potential near term utilization of these assets could be reduced.
The
provision for/ (benefit from) income tax differs from the amount computed by applying the statutory federal income tax rate to
income before the provision for/(benefit from) income taxes. The sources and tax effects of the differences are as follows for
the years ended December 31:
|
|
2016
|
|
|
2015
|
|
Expected Federal Tax
|
|
|
(34.00
|
)%
|
|
|
(34.00
|
)%
|
State Tax (Net of Federal Benefit)
|
|
|
(5.48
|
)
|
|
|
(5.48
|
)
|
Other permanent differences
|
|
|
0.05
|
|
|
|
—
|
|
Loss on extinguishment
|
|
|
2,76
|
|
|
|
—
|
|
Warrant modification
|
|
|
0.59
|
|
|
|
—
|
|
Loss on conversion of note receivable
|
|
|
0.27
|
|
|
|
—
|
|
Change in valuation allowance
|
|
|
35.82
|
|
|
|
39.48
|
|
Effective rate of income tax
|
|
|
0
|
%
|
|
|
0
|
%
|
The
Company files income tax returns in the U.S. federal jurisdiction, New York State and New Jersey jurisdictions. With few exceptions,
the Company is no longer subject to U.S. federal, state and local, or non–U.S. income tax examinations by tax authorities
for years before 2012.
Note
15. 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 three segments, Gaming, Intellectual Property and Bitcoin Mining. 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 year ended December 31, 2016 and 2015:
|
|
Intellectual
property
|
|
|
Gaming
–
Continuing
Operations
|
|
|
Unallocated
corporate/other
|
|
|
Bitcoin
mining
|
|
|
Total
|
|
|
Discontinued
Operations
|
|
Year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
313
|
|
|
$
|
313
|
|
|
$
|
–
|
|
Cost of revenue
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(209
|
)
|
|
|
(209
|
)
|
|
|
–
|
|
Gross margin
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
104
|
|
|
|
104
|
|
|
|
–
|
|
Operating income (loss)
|
|
|
(709
|
)
|
|
|
(1,536
|
)
|
|
|
(18,095
|
)
|
|
|
104
|
|
|
|
(20,236
|
)
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
102
|
|
|
$
|
2
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
104
|
|
|
$
|
640
|
|
Cost of revenue
|
|
|
(5
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(5
|
)
|
|
|
(225
|
)
|
Gross margin
|
|
|
97
|
|
|
|
2
|
|
|
|
–
|
|
|
|
–
|
|
|
|
99
|
|
|
|
415
|
|
Operating loss
|
|
|
(740
|
)
|
|
|
(32
|
)
|
|
|
(2,422
|
)
|
|
|
–
|
|
|
|
(3,194
|
)
|
|
|
(1,068
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
345
|
|
|
|
$–
|
|
|
$
|
345
|
|
|
$
|
–
|
|
Property and equipment
|
|
|
–
|
|
|
|
–
|
|
|
|
8
|
|
|
|
594
|
|
|
|
602
|
|
|
|
–
|
|
Intangible assets
|
|
|
–
|
|
|
|
–
|
|
|
|
468
|
|
|
|
–
|
|
|
|
468
|
|
|
|
–
|
|
Goodwill
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
695
|
|
|
|
695
|
|
|
|
–
|
|
Intangible assets
|
|
|
–
|
|
|
|
–
|
|
|
|
495
|
|
|
|
–
|
|
|
|
495
|
|
|
|
–
|
|
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
|
|
|
|
–
|
|
Note
16. Investments 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 December 31, 2016:
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Investments
– FNCX Common shares
|
|
$
|
44
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
44
|
|
Digital
Currencies
|
|
$
|
10
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
10
|
|
The
Company uses Level 1 of the fair value hierarchy to measure the fair value of digital currencies and revalues its digital currencies
at every reporting period and recognizes gains or losses in the consolidated statements of operations that are attributable to
the change in the fair value of the digital currency.
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
17. Related Party Transactions
Janice
Dyson, wife of John McAfee, the Company’s Executive Chairman of the Board of Directors and Chief Executive Officer’s,
is the sole director of Future Tense Secure Systems, Inc. (“FTS”) and owns 33% of the currently outstanding shares
of common stock of such company. As of December 31, 2016, FTS owned 46% of the membership interest in Demonsaw, LLC.
On
May 9, 2016, the Company entered a consulting agreement with FTS, pursuant to which FTS would provide advice, consultation, information
and services to the Company including assistance with executive management, business and product development and potential acquisitions
or related transactions. During the year ended December 31, 2016, the Company recorded consulting fees of $902 to FTS for such
services, of which $882 has been paid as of December 31, 2016 and remaining $20 is included in Accounts Payable in the consolidated
balance sheet.
On
March 3, 2017, the Company and FTS entered into the Demonsaw LLC Membership Interest Purchase Agreement (the “Purchase Agreement”).
Pursuant to the Purchase Agreement, Future Tense sold its 46% membership interest in Demonsaw, LLC, a Delaware limited liability
company for 2,000,000 unregistered shares of MGT’s common stock.
Note
18. Subsequent Events
The
Company has evaluated events that occurred subsequent to December 31, 2016, and through the date of the Consolidated Financial
Statements.
In
February and March 2017, the Company entered into Securities Purchase Agreements (the “Purchase Agreements”)
with accredited investors (the “Investors”) relating to the issuance and sale of 1,625,000 shares of the Company’s
common stock, par value $0.001 per share (the “Shares”) at a purchase price of $0.40 per Share. In addition, for every
Share purchased, the Investors shall receive detachable warrants, as follows (i) one Series A Warrant; (ii) one Series B Warrant;
and (iii) one Series C Warrant (collectively the “Warrants”).
Each
Series A Warrant is exercisable for one (1) Share, for a period of three (3) years at a price of $0.50 per Share. Each Series
B Warrant is exercisable for one (1) Share, for a period of three (3) years at a price of $0.75 per Share, and each Series C Warrant
is exercisable is exercisable for one (1) Share, for a period of three (3) years at a price of $1.00 per Share.
The
gross proceeds from the Purchase Agreements were $650.
In
February and March 2017, holders of the Company’s 8% Convertible Notes converted a total of $1,800 principal value into
a total of 1,900,000 shares of the Company’s common stock.
On
March 14, 2017, the Company and L2 Capital, LLC (“L2 Capital”), a Kansas limited liability company, entered into an
equity purchase agreement (the “Equity Purchase Agreement”), pursuant to which the Company shall issue and sell to
L2 Capital from time to time up to $5 million of the Company’s common stock that will be registered with the Securities
and Exchange Commission (the “SEC”) under a registration statement on a form S–1. Pursuant to the Equity Purchase
Agreement, the Company may require L2 Capital to purchase shares of Common Stock in a minimum amount of $25 and maximum of the
lesser of (a) $1 million or (b) 150% of the Average Daily Trading Value, upon the Company’s delivery of a Put Notice to
L2 Capital. L2 Capital shall purchase such number of shares of Common Stock at a per share price that equals to the lowest closing
bid price of the Common Stock during the Pricing Period multiplied by 90%. Before the expiration of the term of the Equity Purchase
Agreement, the said Agreement shall terminate, subject to certain exceptions set forth therein, at any time by a written notice
from the Company to L2 Capital.
In
connection with the Equity Purchase Agreement, the Company has issued to L2 Capital an 8% convertible promissory note (the “Commitment
Note”) in the principal amount of $160 in consideration of L2 Capital’s contractual commitment to the Equity Purchase
Agreement. The Commitment Note matures six months after the Issue Date. All or part of the Commitment Note is convertible into
the Common Stock of the Company upon the occurrence of any of the Events of Default at a Variable Conversion Price that equals
to 75% of the lowest Trading Price for the Common Stock during a thirty–day Trading Day period immediately prior to the
Conversion Date.
In
addition, on March 10, 2017, the Company and L2 Capital entered into a securities purchase agreement (the “Securities Purchase
Agreement”), pursuant to which the Company issued two 10% convertible notes (the “Convertible Notes”) in an
aggregate principal amount of $1 million with a 20% original issue discount, which was funded on March 14, 2017. The Company received
gross proceeds of $393 (which represents the deduction of the 20% original discount and $7 for L2 Capital’s legal fees)
in exchange for issuance of the first Convertible Note (the “First Note”) in the Principal Amount of $500. The First
Note matures six months from the Issue Date and the accrued and unpaid interest at a rate of 10% per annum is due on such date.
At any time on or after the occurrence of an Event of Default, the Holder of the First Note shall have the right to convert all
or part of the unpaid and outstanding Principal Amount and the accrued and unpaid interest to shares of Common Stock at a Conversion
Price that equals 65% multiplied by the lowest Trading Price for the Common Stock during a thirty–day Trading Day period
immediately prior to the Conversion Date (the “Market Price”).
On
the date stated immediately above, the Company received a L2 Capital Back End Note (“L2 Collateralized Note”) secured
with the First Note for its issuance of the Second Note to L2 Capital. In accordance with the Second Note, the Company shall pay
to the order of L2 Capital a Principal Amount of $500 and the accrued and unpaid interest at a rate of 10% per annum on the Maturity
Date, which is eight months from the Issue Date. At any time on or after the occurrence of an Event of Default, the Holder of
the Second Note shall have the right to convert all or part of the unpaid and outstanding Principal Amount and the accrued and
unpaid interest into shares of Common Stock at a Conversion Price that equals to 65% multiplied by the Market Price. Pursuant
to the L2 Collateralized Note, L2 Capital promises to pay the Company the Principal Amount of $500 (consisting $393 in cash, legal
fees of $7 and an original issuance discount of $100) no later than November 10, 2017.
In
connection with the issuance of the First Note and the Second Note, the Company also issued to L2 Capital Warrants to purchase
up to 400,000 shares of Common Stock (the “Warrant Shares”) pursuant to the common stock purchase warrant (the “Common
Stock Purchase Warrant”) executed by the Company. The Warrant shall be exercisable at a price of 110% multiplied by the
closing bid price of the Common Stock on the Issuance Date (the “Exercise Price”), subject to adjustments and exercisable
from the Issue Date until the five-year anniversary. At the time that the Second Note is funded by the Holder thereof in cash,
then on such funding date, the Warrant Shares shall immediately and automatically be increased by the quotient (the “Second
Warrant Shares”) of $375,000.00 divided by the lesser of (i) the Exercise Price and (ii) 110% multiplied by the closing
bid price of the Common Stock on the funding date of the Second Note. With respect to the Second Warrant Shares, the Exercise
Price hereunder shall be redefined to equal the lesser of (i) the Exercise Price and (ii) 110% multiplied by the closing bid price
of the Common Stock on the funding date of the Second Note. L2 Capital may exercise the Warrant cashless unless the underlying
shares of Common Stock have been registered with the SEC prior to the exercise.
Subsequent
to December 31, 2016, the Company issued 550,000 shares of restricted Common stock to certain employees.