Note
2. Going concern and management plans
The
accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates
the realization of assets and the satisfaction of liabilities in the normal course of business. As of March 31, 2017, the Company
had incurred significant operating losses since inception and continues to generate losses from operations and has an accumulated
deficit of $334,358. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The
unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and
classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue
as a going concern.
Commercial
results have been limited and the Company has not generated significant revenues. The Company’s primary source of operating
funds since inception has been debt and equity financings. 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
March 31, 2017, MGT’s cash and cash equivalents were $334. 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.
Note
3. Summary of significant accounting policies
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.
Fair
value of financial instruments
The
Company follows ASC 820–10 of the FASB Accounting Standards Codification to measure the fair value of its financial instruments
and disclosures about fair value of its financial instruments. ASC 820–10 establishes a framework for measuring fair value
in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value
measurements. To increase consistency and comparability in fair value measurements and related disclosures, ASC 820–10 establishes
a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels.
The three (3) levels of fair value hierarchy defined by ASC 820–10 are described below:
Level
1
|
|
Quoted
market prices available in active markets for identical assets or liabilities as of the reporting date.
|
|
|
|
Level
2
|
|
Pricing
inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable
as of the reporting date.
|
|
|
|
Level
3
|
|
Pricing
inputs that are generally unobservable inputs and not corroborated by market data.
|
Financial
assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or
similar techniques and at least one significant model assumption or input is unobservable.
The
fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within
more than one level described above, the categorization is based on the lowest level input that is significant to the fair value
measurement of the instrument.
The
carrying amounts of the Company’s financial assets and liabilities, such as cash, prepaid expenses and other current assets,
accounts payable and accrued expenses approximate their fair values because of the short maturity of these instruments.
The
Company’s had no Level 3 financial assets or liabilities as of March 31, 2017 and December 31, 2016.
Fair
value of financial assets and liabilities measured on a recurring basis
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.
Financial
assets and liabilities measured at fair value on a recurring basis are summarized below and disclosed on the balance sheets as
follows:
|
|
|
|
|
Fair
value measurement using
|
|
|
|
Carrying
value
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Digital
currencies
|
|
$
|
19
|
|
|
$
|
19
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
19
|
|
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
|
|
Derivative
instruments
The
Company evaluates its convertible debt, warrants or other contracts to determine if those contracts or embedded components of
those contracts qualify as derivatives to be separately accounted for in accordance with ASC 815–15. The result of this
accounting treatment is that the fair value of the embedded derivative is marked–to–market each balance sheet date
and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded
in the statements of operations as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument
is marked to fair value at the conversion date and then that fair value is reclassified to equity.
In
circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also
other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative
instruments are accounted for as a single, compound derivative instrument.
The
classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is
re–assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become
subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date.
Management
analyzed the contingent variable conversion features embedded within the convertible notes issued during the three months ended
March 31, 2017 and concluded that the contingent conversion features should be bifurcated and accounted for as a derivative liability
upon the triggering of a default event. Because all default events were cured prior to the release of the financial statements,
no derivative liability was recognized.
Beneficial
Conversion Feature of Convertible Notes Payable
The
Company accounts for convertible notes payable in accordance with the guidelines established by the Financial Accounting Standards
Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 470-20, Debt with Conversion and
Other Options, Emerging Issues Task Force (“EITF”) 98-5, Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios, and EITF 00-27, Application of Issue No 98-5 To Certain Convertible Instruments.
The Beneficial Conversion Feature (“BCF”) of a convertible note is normally characterized as the convertible portion
or feature of certain notes payable that provide a rate of conversion that is below market value or in-the-money when issued.
The Company records a BCF related to the issuance of a convertible note when issued and also records the estimated fair value
of any warrants issued with those convertible notes. Beneficial conversion features that are contingent upon the occurrence of
a future event are recorded when the contingency is resolved.
The
BCF of a convertible note is measured by allocating a portion of the note’s proceeds to the warrants, if applicable, and
as a discount on the carrying amount of the convertible note equal to the intrinsic value of the conversion feature, both of which
are credited to additional paid-in-capital. The value of the proceeds received from a convertible note is then allocated between
the conversion features and warrants and the debt on an allocated fair value basis. The allocated fair value is recorded in the
financial statements as a debt discount (premium) from the face amount of the note and such discount is amortized over the expected
term of the convertible note (or to the conversion date of the note, if sooner) and is charged to interest expense.
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.
|
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, stock
warrants and stock options, are not reflected in diluted net loss per share because such shares are anti–dilutive.
The
computation of diluted loss per share for the three months ended March 31, 2017, excludes 1,500,000 unvested restricted
shares, 6,000,000 shares issuable under options and 5,375,000 shares issuable under warrants, as they are anti–dilutive
due to the Company’s net loss. The computation of diluted loss per share for the three months ended March 31, 2016, excluded
10,768 shares in connection to the Convertible Preferred stock, 96,000 unvested restricted shares and 3,820,825 shares issuable
under warrants, as they were 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 currently operate in the cybersecurity and bitcoin mining segment. During the three months ended March 31, 2017, we
operated in two operational segments, Cybersecurity, and Bitcoin Mining. Certain corporate expenses are not allocated
to segments.
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
fair value of option award is estimated on the date of grant using the Black–Scholes option valuation model. The Black–Scholes
option valuation model requires the development of assumptions that are input into the model. These assumptions are the expected
stock volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock
and the expected forfeiture rate. Expected volatility is calculated based on the historical volatility of our Common stock over
the expected option life and other appropriate factors. Risk–free interest rates are calculated based on continuously compounded
risk–free rates for the appropriate term. The dividend yield is assumed to be zero as the Company has never paid or declared
any cash dividends on our Common stock and does not intend to pay dividends on our Common stock in the foreseeable future. The
expected forfeiture rate is estimated based on historical experience.
Determining
the appropriate fair value model and calculating the fair value of equity–based payment awards requires the input of the
subjective assumptions described above. The assumptions used in calculating the fair value of equity–based payment awards
represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment.
As a result, if factors change and the Company uses different assumptions, our equity–based compensation could be materially
different in the future. In addition, the Company is required to estimate the expected forfeiture rate and recognize expense only
for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the equity–based
compensation could be significantly different from what the Company has recorded in the current period.
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.
Recent
accounting pronouncements
Management
does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material
effect on the accompanying consolidated financial statements, other than those disclosed in the Annual Report on Form 10–K.
Note
4. Prepaid expenses and other current assets
Prepaid
expenses and other current assets consisted of the following:
|
|
March
31,
2017
|
|
|
December
31,
2016
|
|
Prepaid
services
|
|
$
|
120
|
|
|
$
|
153
|
|
Deferred
offering costs (See note 8)
|
|
|
160
|
|
|
|
–
|
|
Total
prepaid expenses and other current assets
|
|
$
|
280
|
|
|
$
|
153
|
|
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 condensed consolidated balance sheets. For non–publicly traded securities, market prices are determined
through the use of pricing models that evaluate securities. For publicly traded securities, market value is based on quoted market
prices or valuation models that use observable market inputs.
Investments
available for sale
|
|
March
31,
2017
|
|
|
December
31,
2016
|
|
FNCX
Common shares
|
|
$
|
–
|
|
|
$
|
44
|
|
For
non–public, non–controlled investments in equity securities, the Company uses the cost–method of accounting.
Investments
at cost
|
|
March
31,
2017
|
|
|
December
31,
2016
|
|
DDGG
Common shares
|
|
$
|
–
|
|
|
$
|
287
|
|
During
the three months ended March 31, 2017, the Company recognized an impairment charge of $287 related to its investment in DDGG.
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:
|
|
Intangible
assets
|
|
January
1, 2017
|
|
$
|
468
|
|
Impairment
|
|
|
–
|
|
Amortization
|
|
|
(42
|
)
|
March
31, 2017
|
|
$
|
426
|
|
For
the three months ended March 31, 2017 and 2016, the Company recorded amortization expense of $42 and $57, respectively.
The
following table outlines estimated future annual amortization expense for the next five years and thereafter:
Twelve–month period March 31,
|
|
|
|
2017
|
|
$
|
123
|
|
2018
|
|
|
165
|
|
2019
|
|
|
138
|
|
|
|
$
|
426
|
|
Note
6
. Property and Equipment
Property
and equipment related to continuing operations consisted of the following:
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
Computer
hardware and software
|
|
$
|
10
|
|
|
$
|
10
|
|
Bitcoin
machines
|
|
|
708
|
|
|
|
708
|
|
|
|
|
718
|
|
|
|
718
|
|
Less:
Accumulated depreciation
|
|
|
(215
|
)
|
|
|
(116
|
)
|
Property
and equipment, net
|
|
$
|
503
|
|
|
$
|
602
|
|
The
Company recorded depreciation expense of $99 and $6 for the three months ended March 31, 2017, and 2016, respectively.
Note
7
. Accrued expenses
Accrued
expenses consisted of the following:
|
|
March
31,
2017
|
|
|
December
31,
2016
|
|
Legal,
consulting, interest and others
|
|
$
|
196
|
|
|
$
|
124
|
|
Note
8
. Notes payable
August
2016 Notes
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
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 during the year ended December 31, 2016.
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 during the year ended December 31, 2016. 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.
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.
March
2017 Equity Purchase Agreement
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.
The
Company recorded the Commitment Note as a deferred offering costs as the Company is yet to receive equity proceeds from the Equity
Purchase Agreement. The Company is yet to file a registration statement on the offering. Management analyzed the contingent variable
conversion price and concluded that the contingent conversion features should be bifurcated and accounted for as a derivative
liability upon the triggering of a default event. Because all default events were cured prior to the release of the financial
statements, no derivative liability was recognized.
March
2017 Securities Purchase Agreement
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, of which first convertible note 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”).
Management
analyzed the contingent variable conversion price and concluded that the contingent conversion features should be bifurcated and
accounted for as a derivative liability upon the triggering of a default event. Because all default events were cured prior to
the release of the financial statements, no derivative liability was recognized.
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.
Under
ASC 210–20–45–1, management offset the L2 Collateralized Note by the receivable due from the investor on November
10, 2017. Currently the $500 L2 Collateralized Note is shown net of the $500 receivable from the investor.
In
connection with the issuance of the First 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 seven–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 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.
Management
recorded the warrants at relative fair value to additional paid in capital. The corresponding debt discount is being amortized
over the life of the note.
The
Company utilized the following management assumptions in valuing the derivative conversion feature during the three months ended
March 31, 2017:
Exercise
price
|
|
$
|
0.98
|
|
Risk
free interest rate
|
|
|
2.01
|
%
|
Dividend
yield
|
|
|
0
|
%
|
Expected
volatility
|
|
|
128
|
%
|
Remaining
term
|
|
|
7.0
years
|
|
During
the three months ended March 31, 2017, the Company charged to operations $27 as amortization of debt issuance cost and debt discount
on this note and warrants issued concurrent with this note.
10%
Convertible Promissory Notes
During
February and March 2017, the Company issued two $50,000, 10% convertible promissory notes. Both notes mature 1 year from the date
of issuance. Both notes are convertible at a fixed rate of $0.25. Management recorded a beneficial conversion feature on both
of the notes in aggregate of $100 and recorded to additional paid in capital. The beneficial conversion features are being accreted
to interest expense over the 1 year life of the notes.
During
the three months ended March 31, 2017, the Company charged to operations $10 as amortization of debt discount on this note.
Note
9
. Common stock issuances
Sale
of Common stock
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.
Common
stock awards to employees
During
the three months ended March 31, 2017, the Company issued 550,000 shares of restricted Common stock to certain employees. The
Company valued the awards on the grant date ($338) and is expensing over the 16-18 months vesting period. During
the three months ended March 31, 2017, the Company expensed $51 of the stock based compensation.
Note
10
. Stock–based compensation
Issuance
of restricted shares – directors, officers and employees
|
|
Number
of shares
|
|
|
Weighted
average
grant date fair
value
|
|
Non–vested
at December 31, 2016
|
|
|
1,000,000
|
|
|
$
|
2.31
|
|
Granted
|
|
|
550,000
|
|
|
|
0.81
|
|
Vested
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
Non–vested
at March 31, 2017
|
|
|
1,550,000
|
|
|
$
|
1.78
|
|
For
the three months ended March 31, 2017 and 2016, the Company has recorded $338 and $nil, respectively, in employee and director
stock–based compensation expense, which is a component of selling, general and administrative expense in the condensed consolidated
statement of operations.
In
the three months ended March 31, 2017 and 2016, the Company did not allocate any stock–based compensation expense to non–controlling
interest.
Unrecognized
compensation cost
As
of March 31, 2017, unrecognized compensation costs related to non–vested stock–based compensation arrangements was
$1,728 (2016: $nil), and is expected to be recognized over a weighted average period of 1.75 years (2016: 0 years).
Stock
options
The
following is a summary of the Company’s option activity:
|
|
Options
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding
– January 1, 2017
|
|
|
6,000,000
|
|
|
$
|
0.71
|
|
Exercisable
– January 1, 2017
|
|
|
500,000
|
|
|
$
|
0.71
|
|
Granted
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Forfeited/Cancelled
|
|
|
–
|
|
|
|
–
|
|
Outstanding
– March 31, 2017
|
|
|
6,000,000
|
|
|
$
|
0.71
|
|
Exercisable
– March 31, 2017
|
|
|
1,250,000
|
|
|
$
|
0.71
|
|
Exercise
price
|
|
|
Number
outstanding
|
|
|
Weighted
average
remaining
contractual
life
(in
years)
|
|
Weighted
average
exercise price
|
|
|
Number
exercisable
|
|
|
Weighted
average
exercise price
|
|
$
|
0.71
|
|
|
|
6,000,000
|
|
|
4.64
years
|
|
$
|
0.71
|
|
|
|
1,250,000
|
|
|
$
|
0.71
|
|
For
the three months ended March 31, 2017 and 2016, the Company has recorded $962 and $nil, respectively, in employee and director
stock–based compensation expense, which is a component of selling, general and administrative expense in the condensed consolidated
statement of operations.
As
of March 31, 2017, unrecognized compensation costs related to non–vested stock–based compensation arrangements was
$6,095 (2016: $nil), and is expected to be recognized over a weighted average period of 1.6 years (2016: 0 years).
At
March 31, 2017, the total intrinsic value of options outstanding and exercisable was $1,360 and $0, respectively.
Warrants
During the three months
ended March 31, 2017 the Company issued a total of 5,275,000 stock purchase warrants in connection with the Company’s March
2017 Securities Purchase Agreement and sales of Common stock (Notes 8 and 9).
The
following table summarizes information about shares issuable under warrants outstanding at March 31, 2017:
|
|
Warrant
shares
outstanding
|
|
|
Weighted
average
exercise price
|
|
At
January 1, 2017
|
|
|
100,000
|
|
|
$
|
3.75
|
|
Issued
|
|
|
5,275,000
|
|
|
|
0.75
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Expired
|
|
|
–
|
|
|
|
–
|
|
At
March 31, 2017
|
|
|
5,375,000
|
|
|
$
|
0.82
|
|
As of March 31, 2017,
the Company had 5,375,000 shares issuable under warrants outstanding at a weighted average exercise price of $0.82 and an intrinsic
value of $797. All issued warrants are exercisable and expire through 2024.
Note
11
. Non–controlling interest
At
March 31, 2017, the Company’s non–controlling interest was as follows:
|
|
M2P
Americas
|
|
|
Total
|
|
At
January 1, 2017
|
|
$
|
(22
|
)
|
|
$
|
(22
|
)
|
Non–controlling
share of net loss
|
|
|
(–
|
)
|
|
|
(–
|
)
|
At
March 31, 2017
|
|
$
|
(22
|
)
|
|
$
|
(22
|
)
|
Note
12
. Operating leases, commitments and legal
Operating
leases
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 three months ended March 31, 2017 and 2016, was $36 and $13, respectively.
Total
future minimum payments required under the new operating lease are as follows.
Twelve month period March
31,
|
|
|
|
2018
|
|
$
|
78
|
|
2019
|
|
|
74
|
|
2020
|
|
|
69
|
|
|
|
$
|
221
|
|
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 parties met for a court supervised settlement conference
on April 21, 2017. A second court supervised settlement conference has been scheduled for June 29, 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
13
. Segment reporting
Operating
segments are defined as components of an enterprise about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision–making group in deciding how to allocate resources and in assessing
performance. The Company’s chief operating decision–making group is composed of the Chief Executive Officer. The Company
operates in two segments, Cybersecurity 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 three months ended March 31, 2017 and 2016:
|
|
Intellectual
property
|
|
|
Cybersecurity
|
|
|
Unallocated
corporate/other
|
|
|
Bitcoin
mining
|
|
|
Total
|
|
Three
months ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
312
|
|
|
$
|
312
|
|
Cost of revenue
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(201
|
)
|
|
|
(201
|
)
|
Gross
margin
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
111
|
|
|
|
111
|
|
Operating
loss
|
|
|
–
|
|
|
|
(221
|
)
|
|
|
(2,835
|
)
|
|
|
111
|
|
|
|
(2,945
|
)
|
Three
months ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
–
|
|
|
$
|
–
|
|
Cost of revenue
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Gross
margin
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Operating
loss
|
|
|
(50
|
)
|
|
|
–
|
|
|
|
(604
|
)
|
|
|
–
|
|
|
|
(654
|
)
|
March
31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
334
|
|
|
|
–
|
|
|
$
|
334
|
|
Property
and equipment
|
|
|
–
|
|
|
|
–
|
|
|
|
6
|
|
|
|
497
|
|
|
|
503
|
|
Intangible
assets
|
|
|
–
|
|
|
|
–
|
|
|
|
426
|
|
|
|
–
|
|
|
|
426
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
345
|
|
|
|
–
|
|
|
$
|
345
|
|
Property
and equipment
|
|
|
–
|
|
|
|
–
|
|
|
|
8
|
|
|
|
594
|
|
|
|
602
|
|
Intangible
assets
|
|
|
–
|
|
|
|
–
|
|
|
|
468
|
|
|
|
–
|
|
|
|
468
|
|
Note
14
. Subsequent events
The
Company has evaluated events that occurred subsequent to March 31, 2017, and through the date of the Consolidated Financial
Statements.
In
April 2017, the Company entered into Securities Purchase Agreements (the “Purchase Agreements”) with accredited investors
(the “Investors”) relating to the issuance and sale of 1,250,000 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 and net proceeds from the Purchase Agreements were $500.
In
May 2017, the Company entered into Securities Purchase Agreements (the “Purchase Agreements”) with accredited investors
(the “Investors”) relating to the issuance and sale of $330 principal value in 10% Amortizing Notes, due October 1,
2018. Beginning on October 1, 2017 the Company is required to make monthly payments of interest and principal to pay off the Note
on maturity. Under certain circumstances, including default, the Investors have the right to convert the Note into common shares
of the Company at a 35% discount to the then current market price. In addition, Investors received 360,000 detachable warrants
exercisable for a period of five (5) years at a price of $0.50 per Share.
The
Note carried an original issue discount of $30 and expense reimbursement of $35, providing net proceeds to the Company of
$265.
Item
2. Management’s discussion and analysis of financial condition and results of operations
This
Quarterly Report on Form 10–Q contains forward–looking statements that involve risks and uncertainties, as well as
assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed
or implied by such forward–looking statements. The statements contained herein that are not purely historical are forward–looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). Forward–looking statements are often identified by the use of
words such as, but not limited to, “anticipate,” “estimates,” “should,” “expect,”
“guidance,” “project,” “intend,” “plan,” “believe” and similar expressions
or variations intended to identify forward–looking statements. These statements are based on the beliefs and assumptions
of our management based on information currently available to management. Such forward–looking statements are subject to
risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially
from future results expressed or implied by such forward–looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors”
included in our Annual Report on Form 10–K filed with the SEC on April 20, 2017, in addition to other public reports
we filed with the Securities and Exchange Commissions (“SEC”). The forward–looking statements set forth herein
speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward–looking
statements to reflect events or circumstances after the date of such statements.
Executive
summary
MGT
Capital Investments, Inc. (“MGT,” “the Company,” “we,” “us”) is a Delaware corporation,
incorporated in 2000. The Company was originally incorporated in Utah in 1977. MGT is comprised of the parent company, wholly–owned
subsidiaries MGT Cybersecurity, Inc. (“MGT Cybersecurity”), Medicsight, Inc. (“Medicsight”), MGT Sports,
Inc. (“MGT Sports”), MGT Studios, Inc. (“MGT Studios”), 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 closed 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 from Future Tense Secure Systems, Inc. (“Future Tense”) 46% of the outstanding membership
interests in Demonsaw, LLC for 2.0 million unregistered MGT Common shares, which were issued to Future Tense on the same date.
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.
Draft
Day Gaming Group
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
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.
Critical
accounting policies and estimates
Our
discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
The notes to the consolidated financial statements contained in this Quarterly Report describe our significant accounting
policies used in the preparation of the consolidated financial statements. The preparation of these financial statements requires
us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates. We continually evaluate our critical accounting policies and estimates.
We
believe the critical accounting policies listed below reflect significant judgments, estimates and assumptions used in the preparation
of our consolidated financial statements.
Derivative
instruments
The
Company evaluates its convertible debt, warrants or other contracts to determine if those contracts or embedded components of
those contracts qualify as derivatives to be separately accounted for in accordance with ASC 815–15. The result of this
accounting treatment is that the fair value of the embedded derivative is marked–to–market each balance sheet date
and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded
in the statements of operations as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument
is marked to fair value at the conversion date and then that fair value is reclassified to equity.
In
circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also
other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative
instruments are accounted for as a single, compound derivative instrument.
The
classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is
re–assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become
subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date.
Management
analyzed the contingent variable conversion features embedded within the convertible notes issued during the three months ended
March 31, 2017 and concluded that the contingent conversion features should be bifurcated and accounted for as a derivative liability
upon the triggering of a default event. Because all default events were cured prior to the release of the financial statements,
no derivative liability was recognized.
Beneficial
Conversion Feature of Convertible Notes Payable
The
Company accounts for convertible notes payable in accordance with the guidelines established by the Financial Accounting Standards
Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 470-20, Debt with Conversion and
Other Options, Emerging Issues Task Force (“EITF”) 98-5, Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios, and EITF 00-27, Application of Issue No 98-5 To Certain Convertible Instruments.
The Beneficial Conversion Feature (“BCF”) of a convertible note is normally characterized as the convertible portion
or feature of certain notes payable that provide a rate of conversion that is below market value or in-the-money when issued.
The Company records a BCF related to the issuance of a convertible note when issued and also records the estimated fair value
of any warrants issued with those convertible notes. Beneficial conversion features that are contingent upon the occurrence of
a future event are recorded when the contingency is resolved.
The
BCF of a convertible note is measured by allocating a portion of the note’s proceeds to the warrants, if applicable, and
as a discount on the carrying amount of the convertible note equal to the intrinsic value of the conversion feature, both of which
are credited to additional paid-in-capital. The value of the proceeds received from a convertible note is then allocated between
the conversion features and warrants and the debt on an allocated fair value basis. The allocated fair value is recorded in the
financial statements as a debt discount (premium) from the face amount of the note and such discount is amortized over the expected
term of the convertible note (or to the conversion date of the note, if sooner) and is charged to interest expense.
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:
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●
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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.
|
|
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●
|
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.
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|
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●
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Gaming
– Gaming revenue is derived from entry fees charged in contests minus prizes paid out in contests.
|
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
fair value of option award is estimated on the date of grant using the Black–Scholes option valuation model. The Black–Scholes
option valuation model requires the development of assumptions that are input into the model. These assumptions are the expected
stock volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock
and the expected forfeiture rate. Expected volatility is calculated based on the historical volatility of our Common stock over
the expected option life and other appropriate factors. Risk–free interest rates are calculated based on continuously compounded
risk–free rates for the appropriate term. The dividend yield is assumed to be zero as the Company has never paid or declared
any cash dividends on our Common stock and does not intend to pay dividends on our Common stock in the foreseeable future. The
expected forfeiture rate is estimated based on historical experience.
Determining
the appropriate fair value model and calculating the fair value of equity–based payment awards requires the input of the
subjective assumptions described above. The assumptions used in calculating the fair value of equity–based payment awards
represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment.
As a result, if factors change and the Company uses different assumptions, our equity–based compensation could be materially
different in the future. In addition, the Company is required to estimate the expected forfeiture rate and recognize expense only
for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the equity–based
compensation could be significantly different from what the Company has recorded in the current period.
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.
Results
of operations
The
Company currently has two operational segments, Cybersecurity and Bitcoin Mining. Intellectual property and Gaming are no longer
considered business segments. Certain corporate expenses are not allocated to a particular segment.
Three
Months ended March 31, 2017 and 2016
The
Company achieved the following results for the three months ended March 31, 2017 and 2016, respectively:
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●
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Revenues
totaled $312 (2016: $0);
|
|
|
|
|
●
|
Costs
of revenues were $201 (2016: $0);
|
|
|
|
|
●
|
Operating
expenses were $3,056 (2016: $654);
|
|
|
|
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●
|
Net
loss attributable to Common shareholders was $5,891 (2016: $1,337) and resulted in a basic and diluted loss per share of $0.20
(2016: $0.07).
|
Our
operating expenses increased approximately 367% during the three months ended March 31, 2017 compared to the comparable three
months ended March 31, 2016. The increase is primarily attributed to increases in headcount, professional fees, corporate governance
and stock–based compensation expense.
Intellectual
property
During
the three months ended March 31, 2017 and 2016, the Company recognized no revenues in either period.
Selling,
general and administrative expenses for the three months ended March 31, 2017 and 2016 were $0 (2016: $50), consisting of legal
and consulting costs and the amortization of intellectual property assets.
Cybersecurity
During
the three months ended March 31, 2017 and 2016, the Company recognized operating expenses of $221 (2016:
$0).
Bitcoin
mining
During
the three months ended March 31, 2017, the Company recognized $312 in revenues for this segment as compared to no revenue for
the same period last year. Bitcoin mining operation commenced in September 2016.
There
was $201 cost of revenue for the three months ended March 31, 2017 and 2016 (2016: $0). The increase in 2017 is attributed
to the start of the Bitcoin mining operation in September 2016.
Unallocated
Corporate / Other
Selling,
general and administrative expenses during the three months ended March 31, 2017 and 2016 were $2,835 (2015: $604). The increase
was primarily due to increased stock–based compensation expense, driven by higher stock price and increased professional
fees, such as legal and investor relations fees.
For
the three months ended March 31, 2017, non–operating expenses mainly consisted of impairment of equity method investment
– related party of $2,500, impairment of long term investments of $287, a loss on sale of investments of $84,
interest and other expenses of $38 and accretion of debt discount of $37. During the comparable period ended March 31, 2016, non–operating
expenses mainly consisted of a loss of $731 on sale of investments offset by interest income of $25.
Liquidity
and Capital Resources
|
|
As
of March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Working capital summary
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
334
|
|
|
$
|
189
|
|
Other current assets
|
|
|
280
|
|
|
|
3
|
|
Investments –
current
|
|
|
–
|
|
|
|
880
|
|
Digital currencies
|
|
|
19
|
|
|
|
–
|
|
Notes receivable
|
|
|
–
|
|
|
|
640
|
|
Current
liabilities
|
|
|
(942
|
)
|
|
|
(171
|
)
|
Working
capital (deficit) surplus
|
|
$
|
(309
|
)
|
|
$
|
1,541
|
|
|
|
Three
Months ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cash (used in) /
provided by
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
(1,180
|
)
|
|
$
|
(376
|
)
|
Investing activities
|
|
|
26
|
|
|
|
206
|
|
Financing
activities
|
|
|
1,143
|
|
|
|
–
|
|
Net
decrease in cash and cash equivalents
|
|
$
|
(11
|
)
|
|
$
|
(170
|
)
|
On
March 31, 2017, MGT’s cash and cash equivalents were $334. The Company continues to exercise discipline with respect to
current expense levels, as revenues remain limited. Our cash and cash equivalents decreased during the three months ended March
31, 2017, primarily due to $1,180 used in operating activities, mostly offset by funds provided by the sale of convertible
notes yielding a net increase in cash provided by financing activities of $1,143.
Operating
activities
Our
net cash used in operating activities differs from the net loss predominantly because of various non–cash adjustments such
as depreciation, amortization and impairment of intangibles, stock–based compensation, loss on sale of investments,
impairment of investments, accretion of debt discount, and the movement in working capital.
Investing
activities
During
the three months ended March 31, 2017, the Company received $26 from investing activities as compared to $206 from the corresponding
prior period. The proceeds were a result of the sale of investments.
Financing
activities
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. A form of the Equity Purchase Agreement is attached herein as
Exhibit 10.1
.
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. A form of the Commitment Note is attached herein as
Exhibit 10.2.
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, of which first convertible note 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”).
A form of the Securities Purchase Agreement is attached herein as
Exhibit 10.3
and a form of the Convertible Note is
attached herein as
Exhibit 10.4
.
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, 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 seven–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. A form of the Common Stock Purchase Warrant
is attached herein as
Exhibit 10.5
.
Risks
and uncertainties related to our future capital requirements
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 March 31, 2017, the Company had incurred
significant operating losses since inception and continues to generate losses from operations and has an accumulated deficit of
$334,465. 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 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
March 31, 2017, MGT’s cash, cash equivalents and restricted cash were $334. The Company intends to raise additional capital,
either through debt or equity financings or through the continued sale of the Company’s assets in order to achieve its business
plan objectives. Management believes that it can be successful in obtaining additional capital; however, no assurance can be provided
that the Company will be able to do so. There is no assurance that any funds raised will be sufficient to enable the Company to
attain profitable operations or continue as a going concern. To the extent that the Company is unsuccessful, the Company may need
to curtail or cease its operations and implement a plan to extend payables or reduce overhead until sufficient additional capital
is raised to support further operations. There can be no assurance that such a plan will be successful.
Off–balance
sheet arrangements
We
have no obligations, assets or liabilities which would be considered off–balance sheet arrangements. We do not participate
in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable
interest entities, which would have been established for the purpose of facilitating off–balance sheet arrangements.
Inflation
The
effect of inflation on the Company’s operating results was not significant.