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 June 30, 2017, the Company
had incurred significant operating losses since inception and continues to generate losses from operations and as of June 30,
2017, has an accumulated deficit of $338,593. At June 30, 2017, MGT’s cash and cash equivalents were $323. 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. The Company intends to raise additional capital, through debt and equity
financings. 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.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
3. Summary of significant accounting policies
Basis
of presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions
to Form 10–Q and Rule 10 of Regulation S–X. Accordingly, they do not include all of the information and notes required
by U.S. GAAP. However, in the opinion of the management of the Company, all adjustments necessary for a fair presentation of the
financial position and operating results have been included in these statements. These unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s
Annual Report on Form 10–K for the fiscal year ended December 31, 2016, as filed with the SEC on April 20, 2017. Operating
results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for
any subsequent quarters or for the year ending December 31, 2017.
Use
of estimates and assumptions and critical accounting estimates and assumptions
The
preparation of financial statements, in conformity with U.S. 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 and debt instruments:
Management estimates the expected
term of embedded conversion features, 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 derivative
financial instruments, 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.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
3. Summary of significant accounting policies, continued
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 Financial Accounting Standards Board’s (“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 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 had no Level 3 financial assets or liabilities as of June 30, 2017 and December 31, 2016.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
3. Summary of significant accounting policies, continued
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:
The
following table provides the investments carried at fair value measured on a recurring basis as of June 30, 2017:
|
|
|
|
|
Fair
value measurement using
|
|
|
|
Carrying
value
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Digital
currencies
|
|
$
|
17
|
|
|
$
|
17
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17
|
|
The
following table provides the investments carried at fair value measured on a recurring basis as of December 31, 2016:
|
|
Carrying
Value
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Investments
– FNCX common shares
|
|
$
|
44
|
|
|
$
|
44
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
44
|
|
Digital
currencies
|
|
|
10
|
|
|
|
10
|
|
|
|
–
|
|
|
|
–
|
|
|
|
10
|
|
Beneficial
conversion feature of convertible notes payable
The
Company accounts for convertible notes payable in accordance with the guidelines established by the FASB Accounting Standards
Update (“ASU”) 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 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 beneficial conversion feature 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.
The beneficial conversion features that are contingent upon the occurrence of a future event are recorded when the contingency
is resolved.
The
beneficial conversion feature of a convertible note is measured by first allocating a portion of the note’s proceeds to
any warrants, if applicable, as a discount on the carrying amount of the convertible on a relative fair value basis. The discounted
face value is then used to measure the effective conversion price of the note. The effective conversion price and the market price
of the Company’s common stock are used to calculate the intrinsic value of the conversion feature. The intrinsic value is
recorded in the financial statements as a debt discount 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 stream is related
to the mining of digital currency. 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.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
3. Summary of significant accounting policies, continued
Loss
per share
Basic
loss per share is calculated by dividing net loss applicable to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted loss per share is calculated by dividing the net loss attributable to common shareholders
by the sum of the weighted average number of common shares outstanding plus potential dilutive common shares outstanding during
the period. Potential dilutive securities, comprised of unvested restricted shares, 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 and six months ended June 30, 2017, excludes 2,500,000 unvested restricted shares, 6,000,000
shares issuable under options and 11,716,819 shares issuable under warrants. The computation of diluted loss per share for the
three and six months ended June 30, 2016, excluded 1,000,000 unvested restricted shares and 100,000 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 segments. 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.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
3. Summary of significant accounting policies, continued
Stock–based
compensation, continued
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.
Reclassification
Certain
amounts in prior periods have been reclassified to conform to current period presentation. These reclassifications had no effect
on the previously reported net loss.
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 below and in the Annual Report on Form
10–K.
In
July 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-11, “
Earnings Per Share (Topic 260),
Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial
Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments
of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception
”. Part
I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round
features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced
on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that
issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement
of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating
Topic 480, Distinguishing
Liabilities from Equity
, because of the existence of extensive pending content in the FASB Accounting Standards Codification.
This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial
instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part
II of this update do not have an accounting effect. ASU 2017-11 is effective for fiscal years, and interim periods within those
years, beginning after December 15, 2018. The Company has adopted the ASU beginning with these condensed consolidated financial
statements. As a result, the conversion features of certain of its convertible notes payable and equity instruments that contain
“down round” provisions will not be bifurcated and will not be recorded as a derivative liability.
Note
4. Prepaid expenses and other current assets
Prepaid
expenses and other current assets consisted of the following:
|
|
June
30, 2017
|
|
|
December
31, 2016
|
|
Prepaid
services
|
|
$
|
86
|
|
|
$
|
153
|
|
Deferred
offering costs (See note 9)
|
|
|
160
|
|
|
|
–
|
|
Total
prepaid expenses and other current assets
|
|
$
|
246
|
|
|
$
|
153
|
|
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
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 publicly traded securities, market value is based on quoted market
prices or valuation models that use observable market inputs.
Investments
available for sale
|
|
|
June
30, 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
|
|
|
June
30, 2017
|
|
|
December
31, 2016
|
|
|
DDGG
common shares
|
|
|
$
|
–
|
|
|
$
|
287
|
|
During
the three and six months ended June 30, 2017, the Company recognized an impairment charge of $0 and $287, respectively, related
to its investment in DDGG.
Note
6. Intangible assets
The
Company’s intangible assets consisted of the following:
|
|
|
Intangible
assets
|
|
|
January
1, 2017
|
|
|
$
|
468
|
|
|
Impairment
|
|
|
|
–
|
|
|
Amortization
|
|
|
|
(83
|
)
|
|
June
30, 2017
|
|
|
$
|
385
|
|
For
the three months ended June 30, 2017 and 2016, the Company recorded amortization expense of $41 and $57, respectively. For the
six months ended June 30, 2017 and 2016, the Company recorded amortization expense of $83 and $57, respectively.
The
following table outlines estimated future annual amortization expense for the next three years:
Years
ended December 31,
|
|
|
Amount
|
|
|
2017
(six months)
|
|
|
$
|
83
|
|
|
2018
|
|
|
|
165
|
|
|
2019
|
|
|
|
137
|
|
|
|
|
|
$
|
385
|
|
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
7. Property and equipment
Property
and equipment consisted of the following:
|
|
June
30, 2017
|
|
|
December
31, 2016
|
|
Computer
hardware and software
|
|
$
|
10
|
|
|
$
|
10
|
|
Bitcoin
machines
|
|
|
1,785
|
|
|
|
708
|
|
|
|
|
1,795
|
|
|
|
718
|
|
Less:
Accumulated depreciation
|
|
|
(313
|
)
|
|
|
(116
|
)
|
Property
and equipment, net
|
|
$
|
1,482
|
|
|
$
|
602
|
|
The
Company recorded depreciation expense of $97 and $5 for the three months ended June 30, 2017, and 2016, respectively. The Company
recorded depreciation expense of $196 and $11 for the six months ended June 30, 2017, and 2016, respectively.
During
the second quarter of 2017, the Company sold bitcoin machines with a book value of $262 for gross proceeds of $310 and recorded
a gain on sale of $48.
Note
8. Accrued expenses
Accrued
expenses consisted of the following:
|
|
June
30, 2017
|
|
|
December
31, 2016
|
|
Legal,
consulting, interest and others
|
|
$
|
220
|
|
|
$
|
124
|
|
Note
9. Notes payable
As
of June 30, 2017, the Company’s notes payable consisted of the following:
|
|
Gross
|
|
|
Discount
|
|
|
Net
|
|
|
Current
|
|
|
Long
Term
|
|
Convertible
notes payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August
2016 Notes
|
|
$
|
425
|
|
|
$
|
-
|
|
|
$
|
425
|
|
|
$
|
-
|
|
|
$
|
425
|
|
10%
convertible promissory note
|
|
|
100
|
|
|
|
(95
|
)
|
|
|
5
|
|
|
|
5
|
|
|
|
-
|
|
Iliad
Note
|
|
|
1,355
|
|
|
|
(1,354
|
)
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
Total
convertible notes payable
|
|
|
1,880
|
|
|
|
(1,449
|
)
|
|
|
431
|
|
|
|
5
|
|
|
|
426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional
notes payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L2
Front End Note
|
|
|
500
|
|
|
|
(258
|
)
|
|
|
242
|
|
|
|
242
|
|
|
|
-
|
|
L2
Commitment Note
|
|
|
160
|
|
|
|
-
|
|
|
|
160
|
|
|
|
160
|
|
|
|
-
|
|
May
2017 Notes
|
|
|
330
|
|
|
|
(152
|
)
|
|
|
178
|
|
|
|
111
|
|
|
|
67
|
|
Total
conventional notes payable
|
|
|
990
|
|
|
|
(410
|
)
|
|
|
580
|
|
|
|
513
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,870
|
|
|
$
|
(1,859
|
)
|
|
$
|
1,011
|
|
|
$
|
518
|
|
|
$
|
493
|
|
As
of December 31, 2016, the Company’s notes payable consisted of the following:
|
|
|
Gross
|
|
|
Discount
|
|
|
Net
|
|
|
Current
|
|
|
Long
Term
|
|
|
August
2016 Notes
|
|
|
$
|
2,300
|
|
|
$
|
-
|
|
|
$
|
2,300
|
|
|
$
|
-
|
|
|
$
|
2,300
|
|
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
9. Notes payable
August
2016 Notes
On
August 2, 2016, the Company sold $2,300 in unsecured promissory notes in a private placement, which were subsequently exchanged
for new notes in the same principal amount (the “August 2016 Notes”). The August 2016 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, which
was to be adjusted for any future issuances of equity. During the first quarter of 2017, the conversion price of the August 2016
Notes was adjusted down to $0.75 per share.
During
February and March 2017, holders of the Company’s August 2016 Notes converted a total of $1,800 principal value into a total
of 1,900,000 shares of the Company’s common stock.
On
June 27, 2017, holders of the Company’s August 2016 Notes converted a total of $75 principal value into a total of 100,000
shares of the Company’s common stock.
10%
convertible promissory notes
During
February and March 2017, the Company issued two $50, 10% convertible promissory notes. Both notes mature one year from the
date of issuance. Both notes are convertible at a fixed rate of $0.25 per share. 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 and six months ended June 30, 2017, the Company charged to operations $3 and $4, respectively as amortization of debt
discount on this note.
Iliad
note
On
May 18, 2017, the Company sold to Iliad Research and Trading, L.P., (“Iliad”), a Utah limited partnership, a secured
convertible note (the “Iliad Note”) in the original principal amount of $1,355, with an original issuance discount
of $225 and reimbursed legal and accounting expenses of $5, and a warrant to purchase 1,231,819 shares of common stock
of the Company.
The
principal and all accrued and unpaid interest on the outstanding balance on the date that is twenty-four (24) months from the
issuance date. The Iliad Note is secured with the Company’s ownership of Mining Sub and all assets of Mining Sub. The Note
bears an interest rate of 10% per annum, provided that at any time on or after the occurrence of an Event of Default, the interest
rate shall be adjusted to 22% per annum. Subject to the terms and conditions set forth in the Iliad Note, the Company may prepay
the outstanding balance of the Iliad Note in part or in full in cash of an amount equal to 125% multiplied by the outstanding
balance of the Iliad Note.
At
any time beginning on the date that is six months from the issuance date until the outstanding balance of the Iliad Note has been
paid in full, Iliad may, at its option, convert all or any portion of the outstanding balance into shares of common stock of the
Company on a cashless basis at a price of $1.05 per share, which will be adjusted for any future issuances of equity that contain
a lower per-share exercise price. In addition, beginning three months after the issuance date, Iliad has the right to redeem a
portion of the outstanding balance of the Iliad Note in any amount that is less than $90 per calendar month. The Company has
the right to fund each redemption using cash or shares of the Company’s common stock at a price that is the lower of $1.05
per share and the price that is 65% of the Company’s market price.
Management
recorded a debt discount for (a) the relative fair value of the warrants issued and (b) the intrinsic value of the beneficial
conversion feature on the Iliad Note in the amounts of $202 and $923, respectively. The debt discounts will be accreted using
the effective interest method over the term of the Iliad Note. During the three months ended June 30, 2017 and 2016, the Company
recorded accretion of the debt discount on the Iliad Note of $1 and $0, respectively. During the six months ended June 30, 2017
and 2016 the Company recorded accretion of the debt discount on the Iliad Note of $1 and $0, respectively.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
9. Notes payable, continued
March
2017 equity purchase agreement
On
March 10, 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 may issue
and sell to L2 Capital from time to time up to $5,000 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) $1,000 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 only 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.
On
May 18, 2017, the Company amended the Equity Purchase Agreement to (a) facilitate the issuance of the Iliad Note and (b) to increase
the capacity of the Equity Purchase Agreement to $6,500.
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”), which was subsequently amended on March 15, 2017 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 the 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 only upon the triggering of a default event. A default event occurred on May 15, 2017.
However, on May 18, 2017, the Company and L2 Capital amended the note in order to waive all rights resulting from default events
under the note. Therefore, 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.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
9. Notes payable, continued
March
2017 securities purchase agreement, continued
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 using the effective interest method. During the three and six months ended June 30, 2017, the Company
charged to operations $25 and $29, respectively, as accretion of debt discount on this note and warrants issued concurrent with
this note.
May
2017 Notes
On
May 1, 2017, the Company issued notes payable to two investors in the aggregate amount of $330,000 (the “May 2017 Notes”).
The May 2017 Notes mature on October 1, 2018, with mandatory repayments beginning on October 1, 2017 in the amount of $25 and
continuing monthly thereafter. The May 2017 Notes accrue interest at a rate of 10% per annum.
The
May 2017 Notes are convertible into the Company’s common stock only after an event of default. Events of default include
failure to pay payments due under the May 2017 Notes, entrance into any bankruptcy or insolvency proceedings, failure to meet
the obligations of any other notes payable in an amount exceeding $100, the Company’s stock being suspending for trading
or delisted, losing the Company’s ability to deliver shares, or becoming more than 15 days delinquent on any filings required
with the SEC.
The
May 2017 Notes feature a “most favored nation” clause, in which, if the Company were to issue convertible notes with
more favorable terms to another investor, the holders of the May 2017 Notes can elect to replace their notes with new notes with
the same terms as the more favorable notes. As of the date of the issuance of this report, the Company has not replaced
the May 2017 Notes under this clause.
The
Company recorded an initial debt discount of $165, representing $65 related to an original issue discount and $100 representing
the relative fair value of warrants issued to the note holders. The debt discount will be amortized using the effective interest
method.
During
the three and six months ended June 30, 2017, the Company recorded amortization of debt discount of $14 and $14, respectively,
on the May 2017 Notes.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
10. Common stock issuances
Sale
of common stock
During
February and March 2017, the Company sold 1,625,000 shares of its common stock to accredited investors at a purchase price of
$0.40 per Share for aggregate proceeds received of $650. In addition, for every Share purchased, the Investors received detachable
warrants, as follows: (i) one Series A Warrant; (ii) one Series B Warrant; and (iii) one Series C Warrant.
During
May 2017, the Company sold 1,250,000 shares of its common stock at $0.40 per share for total proceeds of $500. In addition, for
every Share purchased, the Investors received detachable warrants, as follows: (i) one Series A Warrant; (ii) one Series B Warrant;
and (iii) one Series C Warrant.
Each
Series A Warrant is exercisable for one share of common stock, for a period of three years at a price of $0.50 per share. Each
Series B Warrant is exercisable for one share of common stock, for a period of three years at a price of $0.75 per share, and
each Series C Warrant is exercisable is exercisable for one share of common stock, for a period of three years at a price of $1.00
per share.
Management
evaluated the terms of the warrants and determined that each were considered “fixed for fixed” and that they were
properly classified as equity instruments.
During
the three months ended June 30, 2017, the Company issued 1,010,000 shares of its common stock to consultants in exchange for services.
The Company charged $969 to stock based compensation, which is a component of selling, general and administrative expenses in
the Company’s Statements of Operations and Comprehensive Loss.
Note
11. Stock–based compensation
Issuance
of restricted shares – directors, officers and employees
During
the six months ended June 30, 2017, the Company issued 2,150,000 shares of restricted common stock to certain employees.
The Company valued each award on its grant date and is expensing the grant date fair value over the 16-24 month vesting period.
The
Company’s activity in restricted shares was as follows for the six months ended June 30, 2017:
|
|
Number of shares
|
|
|
Weighted average
grant date fair value
|
|
Non–vested at December 31, 2016
|
|
|
1,000,000
|
|
|
$
|
2.31
|
|
Granted
|
|
|
2,150,000
|
|
|
|
0.93
|
|
Vested
|
|
|
(650,000
|
)
|
|
|
1.79
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
Non–vested at June 30, 2017
|
|
|
2,500,000
|
|
|
$
|
1.26
|
|
For
the three and six months ended June 30, 2017 the Company has recorded $666 and $1,005, 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 and comprehensive loss.
During
the three and six months ended June 30, 2017, the Company did
not allocate any stock–based compensation expense to non–controlling interest.
As
of June 30, 2017, unamortized stock-based compensation costs related to restricted share arrangements was $2,613, and will
be recognized over a weighted average period of 1.45 years.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
11. Stock–based compensation, continued
Stock
options
The
following is a summary of the Company’s stock option activity for the six months ended June 30, 2017:
|
|
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
|
Weighted
Average
Remaining
Life
|
|
|
Intrinsic
Value
|
|
Outstanding
– January 1, 2017
|
|
|
6,000,000
|
|
|
$
|
0.71
|
|
|
$
|
1.28
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
– June 30, 2017
|
|
|
6,000,000
|
|
|
$
|
0.71
|
|
|
$
|
1.28
|
|
|
|
4.42
|
|
|
$
|
3,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
– June 30, 2017
|
|
|
2,000,000
|
|
|
$
|
0.71
|
|
|
$
|
1.28
|
|
|
|
4.42
|
|
|
$
|
1,323
|
|
For
the three months ended June 30, 2017 and 2016, the Company has recorded $962 and $0, respectively, in employee and director stock–based
compensation expense, which is a component of selling, general and administrative expense in the condensed consolidated statement
of operations.
For
the six months ended June 30, 2017 and 2016, the Company has recorded $1,925 and $0, 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 June 30, 2017, unrecognized compensation costs related to non–vested stock options was $5,133 and will be recognized
over a weighted average period of 1.42 years.
Warrants
During
February and March, 2017, the Company issued warrants to purchase 4,875,000 shares of the Company’s common stock in connection
with private placements. One third of the warrants have an exercise price of $0.50 per share, one third of the warrants
have an exercise price of $0.75 per share and one third of the warrants have an exercise price of $1.00 per share. All of the
warrants expire three years from the date of issuance.
On
March 10, 2017, the Company issued a warrant to purchase 400,000 shares of the Company’s common stock to L2
Capital in connection with the March 2017 Equity Purchase Agreement. These warrants have an exercise price of $0.957 per share
and expire on March 10, 2024.
On
May 1, 2017, the Company issued warrants to purchase 360,000 shares of the Company’s common stock to the holders of the
May 2017 Notes. These warrants have an exercise price of $0.50 per share and expire on May 31, 2022.
On
May 18, 2017, the Company issued warrants to purchase 1,231,819 shares of the Company’s common stock to Iliad, in connection
with the issuance of the Iliad Note. These warrants have an exercise price of $1.05 per share and expire on May 31, 2022.
On
May 1, 2017, the Company issued warrants to purchase 3,750,000 shares of the Company’s common stock in connection with a
private placement. One third of the warrants have an exercise price of $0.05 per share, one third of the warrants have
an exercise price of $0.75 per share and one third of the warrants have an exercise price of $1.00 per share. All of the warrants
expire three years from the date of issuance.
In
June 2017, the Company issued warrants to purchase 1,000,000 shares of the Company’s common stock in connection with a private
placement. The warrants have an exercise price of $1.25 per share. All of the warrants expire three years from the date of issuance.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
11. Stock–based compensation, continued
Warrants,
continued
The
following table summarizes information about shares issuable under warrants outstanding at June 30, 2017:
|
|
Warrant
shares
outstanding
|
|
|
Weighted
average
exercise price
|
|
|
Intrinsic
Value
|
|
Outstanding
at January 1, 2017
|
|
|
100,000
|
|
|
$
|
3.75
|
|
|
|
|
|
Issued
|
|
|
11,616,819
|
|
|
|
0.83
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2017
|
|
|
11,716,819
|
|
|
$
|
0.85
|
|
|
$
|
6,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at June 30, 2017
|
|
|
11,716,819
|
|
|
$
|
0.85
|
|
|
$
|
6,331
|
|
Note
12. Non–controlling interest
At
June 30, 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
June 30, 2017
|
|
$
|
(22
|
)
|
|
$
|
(22
|
)
|
Note
13. 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 commenced
on September 1, 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 totaled $24 and $13 during the three months ended June 30, 2017 and 2016, respectively, and $60 and $23 for
the six months ended June 30, 2017 and 2016, respectively.
Total
future minimum payments required under the new operating lease are as follows.
Year
ended December 31,
|
|
|
|
|
|
2017
(six months)
|
|
|
$
|
41
|
|
|
2018
|
|
|
|
85
|
|
|
2019
|
|
|
|
85
|
|
|
2020
|
|
|
|
7
|
|
|
|
|
|
$
|
218
|
|
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
13. Operating leases, commitments and legal, continued
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 receives 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 entered into an employment agreement with John McAfee pursuant to which Mr. McAfee joined
the Company as Executive Chairman of the Board of Directors and Chief Executive Officer of the Company. Mr. McAfee has
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 was 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 is also 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 addition to operating
metrics.
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 2, 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 to “John McAfee Global Technologies, Inc.,” does not infringe
upon Intel’s trademark rights or breach any agreement between the parties. Following a series of motions and counter-motions,
both parties agreed to a court-supervised mediation process.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
13. Operating leases, commitments and legal, continued
Legal,
continued
On
June 30, 2017, the Company entered into a settlement agreement with Intel Corporation in which the Company agreed not to use “John
McAfee Global Technologies,” “John McAfee Privacy Phone,” “John McAfee” or “McAfee”
as (or as part of) a trademark, logo, trade name, business name, slogan, service mark or brand name in connection with cybersecurity
related products or services. Notwithstanding, the Company is permitted to use the name “John McAfee” in promotional
and advertising materials and on product packages, provided that the name is used in a descriptive manner and in compliance with
the specifications set forth in the Settlement Agreement. Additionally, the Company may use John McAfee’s likeness without
restrictions.
On
July 5, 2017, the United States District Court for the Southern District of New York (the “Court”) dismissed with
prejudice all claims and counterclaims filed in the case entitled John McAfee et al. v. Intel Corporation et al., Case No. 1:16-CV-06934
(the “Action”). The Action relates to a complaint for declaratory judgement filed by Mr. John McAfee and MGT Capital
Investments, Inc. (the “Company”) against Intel Corporation (“Intel”), seeking, among other things, a
ruling that John McAfee and the Company’s intended uses of Mr. McAfee’s name were lawful and did not infringe upon
or dilute any of Intel’s rights in the McAfee marks.
The
dismissal of the Action was based upon a stipulation of voluntary dismissal (the “Stipulation”) entered into by the
Parties pursuant to a settlement agreement (the “Settlement Agreement”) dated June 30, 2017. Under the terms of the
Settlement Agreement, the Company agreed not to use “John McAfee Global Technologies,” “John McAfee Privacy
Phone,” “John McAfee” or “McAfee” as (or as part of) a trademark, logo, trade name, business name,
slogan, service mark or brand name in connection with cybersecurity related products or services. Notwithstanding, the Company
is permitted to use the name “John McAfee” in promotional and advertising materials and on product packages, provided
that the name is used in a descriptive manner and in compliance with the specifications set forth in the Settlement Agreement.
Additionally, the Company may use John McAfee’s likeness without restrictions. The Court will retain jurisdiction over the
Parties for purposes of enforcing this Settlement Agreement.
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.
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 in a timely manner. The Company intends to fully comply with any additional requests the
Company may receive from the SEC in the future.
In
September 2016, various shareholders 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 alleged 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. On June 30, 2017, the lead plaintiffs filed an amended complaint. The Company is vigorously defending
the lawsuits and believes it has meritorious defenses against the claims alleged in the amended complaint.
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.
Note
13. Operating leases, commitments and legal, continued
Legal,
continued
On
March 3, 2017 and April 4, 2017 respectively, two additional actions were filed against the Company by its shareholder
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. On June 5, 2017, the Company filed a motion to dismiss the lawsuit, and on July 17, 2017 the plaintiff
filed on opposition brief to the motion to dismiss. The Company and its president are vigorously defending the suit and believe
they have good and meritorious defenses.
The
second action was brought by Honig and certain shareholders 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, (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 filed a motion to dismiss on June 5, 2017 and the plaintiffs filed an amended complaint on June 26, 2017. On June
30, 2017, the court granted a motion for extension of time filed by the Company and granted the Company until August 28, 2017
to file its response. The Company and its officers and directors believe that they have meritorious defense against the
claims alleged in the amended complaint.
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.
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.
Note
14. 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. 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.
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 three months ended June 30, 2017 and 2016, the Company recorded consulting fees of $73 and
$646, respectively, to FTS for such services. During the six months ended June 30, 2017 and 2016, the Company recorded consulting
fees of $135 and $646, respectively, to FTS for such services. As of June 30, 2017, the Company owed $0 to FTS, which is included
in accounts payable in the accompanying unaudited condensed consolidated balance sheet.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
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 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 as of and for the three and six months ended June 30, 2017 and 2016:
|
|
Intellectual
property
|
|
|
Gaming
|
|
|
Cybersecurity
|
|
|
Unallocated
corporate/
other
|
|
|
Bitcoin
mining
|
|
|
Total
|
|
Three
months ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
388
|
|
|
$
|
388
|
|
Cost
of revenue
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(188
|
)
|
|
|
(188
|
)
|
Gross
margin
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
200
|
|
|
|
200
|
|
Operating
(loss) income
|
|
|
–
|
|
|
|
–
|
|
|
|
(148
|
)
|
|
|
(4,172
|
)
|
|
|
200
|
|
|
|
(4,120
|
)
|
Three
months ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
–
|
|
|
$
|
–
|
|
Cost
of revenue
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Gross
margin
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Operating
loss
|
|
|
(659
|
)
|
|
|
(1,510
|
)
|
|
|
–
|
|
|
|
(3,769
|
)
|
|
|
–
|
|
|
|
(5,938
|
)
|
Six
months ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
–
|
|
|
$
|
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
700
|
|
|
$
|
700
|
|
Cost
of revenue
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(389
|
)
|
|
|
(389
|
)
|
Gross
margin
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
311
|
|
|
|
311
|
|
Operating
(loss) income
|
|
|
–
|
|
|
|
–
|
|
|
|
(369
|
)
|
|
|
(7,007
|
)
|
|
|
311
|
|
|
|
(7,065
|
)
|
Six
months ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Cost
of revenue
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Gross
margin
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Operating
loss
|
|
|
(659
|
)
|
|
|
(1,510
|
)
|
|
|
–
|
|
|
|
(4,423
|
)
|
|
|
–
|
|
|
|
(6,592
|
)
|
June
30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
323
|
|
|
|
–
|
|
|
$
|
323
|
|
Property
and equipment
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
5
|
|
|
|
1,477
|
|
|
|
1,482
|
|
Intangible
assets
|
|
|
–
|
|
|
|
–
|
|
|
|
385
|
|
|
|
-
|
|
|
|
–
|
|
|
|
385
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
345
|
|
|
|
–
|
|
|
$
|
345
|
|
Property
and equipment
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
8
|
|
|
|
594
|
|
|
|
602
|
|
Intangible
assets
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
468
|
|
|
|
–
|
|
|
|
468
|
|
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
16.
Subsequent events
The
Company has evaluated the impacts of subsequent events through August 9, 2017, and has determined that no such events occurred
that were required to be reflected in the condensed consolidated financial statements, except as described below.
Conversion
of August 2016 Notes
On
July 7, 2017, holders of the Company’s August 2016 Notes converted a total of $175 principal value into a total of 233,334
shares of the Company’s common stock.
Shares
Issued to Consultants
During
July and August 2017, the Company issued an aggregate of 715,000 shares of its common stock to consultants.
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, its 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”),
MGT Gaming, Inc. (“MGT Gaming”) and MGT Mining One, Inc. (“Mining Sub”). MGT Studios also owns a controlling
minority interest in 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 cryptocurrency
technologies, MGT is growing its capacity in mining Bitcoin.
On September 8, 2016,
MGT stockholders voted to change the corporate name of MGT to “John McAfee Global Technologies, Inc.” On September
2, 2016, the Company and John McAfee (“Plaintiffs”) commenced an action in the United States District Court for the
Southern District of New York (the “Court”) seeking a declaratory judgment that the Company’s proposed name
change to “John McAfee Global Technologies, Inc.” does not infringe on Intel Corporation’s (“Intel”)
trademarks and does not breach any agreement between John McAfee and Intel’s subsidiaries and/or predecessors. Following
the judicial procedures, on June 30, 2017 the Company and Intel entered into a settlement agreement (the “Settlement Agreement”)
based on which and a stipulation of voluntary dismissal, on July 5, 2017 the Court dismissed with prejudice all claims and counterclaims
filed in this case. Item 1, Part II of this Quarterly Report on Form 10-Q shall have more details relating to this action.
All figures set forth
in this Quarterly Report as of and for the three and six months ended June 30, 2017 on this Form 10-Q are in thousands, except
share and per-share amounts.
Cybersecurity
On May 9, 2016, we, through
our wholly owned subsidiary, MGT Cybersecurity, Inc., entered into an asset purchase agreement (the “D-Vasive
APA”) to acquire certain assets owned by D–Vasive, Inc., a Wyoming corporation in the business of developing and
marketing certain privacy and anti–spy applications. 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 into an asset purchase agreement with Demonsaw LLC, a Delaware company, for the purchase of certain technology
and assets (the “Demonsaw APA”). 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 issued 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 in exchange for 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 3.2(a)(ii) of the
APA that required as a condition of Closing, that Buyer and Sellers obtain from each Governmental Authority, including NYSE MKT,
all approvals, waivers, and consents necessary to the consummation of, or in connection with, the transactions contemplated by
the APA. On September 19, 2016, NYSE MKT denied the issuance of shares required to close the transaction. In addition, the termination
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 facility
is currently being expanded with the addition of 13 PH/s in computing power.
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.
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 (“U.S.
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.
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 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
beneficial conversion feature 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
beneficial conversion feature of a convertible note is measured by first allocating a portion of the note’s proceeds to
any warrants, if applicable, as a discount on the carrying amount of the convertible on a relative fair value basis. The discounted
face value is then used to measure the effective conversion price of the note. The effective conversion price and the market price
of the Company’s common stock are used to calculate the intrinsic value of the conversion feature. The intrinsic value is
recorded in the financial statements as a debt discount 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 stream is related
to the mining of digital currency. 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.
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 common 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 June 30, 2017 and 2016
The
Company achieved the following results for the three months ended June 30, 2017 and 2016, respectively:
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●
|
Revenues
totaled $388 for the three months ended June 30, 2017 (2016: $0);
|
|
|
|
|
●
|
Costs
of revenues were $188 for the three months ended June 30, 2017 (2016: $0);
|
|
|
|
|
●
|
Operating
expenses were $4,320 for the three months ended June 30, 2017 (2016: $5,938);
|
|
|
|
|
●
|
Net
loss attributable to common shareholders was $4,235 for the three months ended June 30, 2017 (2016: $6,093)
and resulted in a basic and diluted loss per share of $0.12 for the three months ended June 30, 2017 (2016: $0.29).
|
Our
operating expenses decreased approximately 27% during the three months ended June 30, 2017 compared to the comparable three
months ended June 30, 2016. The decrease is primarily attributed to the impairment of goodwill and intangible assets that was
recorded in the three months ended June 30, 2016.
Intellectual
property
During
the three months ended June 30, 2017 and 2016, the Company recognized no revenues in either period.
Operating
expenses for the three months ended June 30, 2017 was $0 (2016: $659). During the three months ended June 30, 2016, the
Company recognized an impairment charge of $659 related to a gaming patent. Such decreases were incurred because the Company
ceased operations in the Intellectual Property segment.
Gaming
During the three months
ended June 30, 2017, the Company recognized operating expenses of $0 (2016:$1,510). During the three months ended June
30, 2016, the Company recognized an impairment charge of $1,496 related to goodwill and $14 related to intangible assets. The
Company did not recognize any operating expenses because it ceased operations in the gaming segment.
Cybersecurity
During
the three months ended June 30, 2017, the Company recognized operating expenses of $148 (2016: $0).
Bitcoin
mining
During
the three months ended June 30, 2017, the Company recognized $388 in revenues for this segment as compared to no revenue for the
same period last year. The Company’s Bitcoin mining operation commenced in September 2016.
There
was $188 cost of revenue for the three months ended June 30, 2017 (2016: $0). The increase in 2017 is attributed to the
start of the Bitcoin mining operation in September 2016.
Unallocated
Corporate / Other
Operating
expenses during the three months ended June, 2017 were $4,172 (2016: $3,769). 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 June 30, 2017, non–operating expenses mainly consisted of, interest and other expenses of $152, accretion
of debt discount of $11 and gain on sale of property and equipment of $48. During the comparable period ended June 30,
2016, non–operating expenses mainly consisted of a loss on sale of investments of $462. This was offset by interest
income of $11.
Six
months ended June 30, 2017 and 2016
The
Company achieved the following results for the six months ended June 30, 2017 and 2016, respectively:
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●
|
Revenues
totaled $700 for the six months ended June 30, 2017 (2016: $0);
|
|
|
|
|
●
|
Costs
of revenues were $389 for the six months ended June 30, 2017 (2016: $0);
|
|
|
|
|
●
|
Operating
expenses were $7,376 for the six months ended June 30, 2017 (2016: $6,592);
|
|
|
|
|
●
|
Net
loss attributable to Common shareholders was $10,126 for the six months ended June 30, 2017 (2016: $7,430) and resulted
in a basic and diluted loss per share of $0.31 for the six months ended June 30, 2017 (2016: $0.38).
|
The
Company’s revenue and cost of revenue increased by $700 and $389, respectively, during the six months ended June 30, 2017
as compared to the six months ended June 30, 2016. This was due to the commencement of the Company’s Bitcoin mining operation.
Our
operating expenses increased approximately 12% during the six months ended June 30, 2017 compared to the comparable six months
ended June 30, 2016. The increase is primarily attributed to increases in headcount, professional fees, corporate governance and
stock–based compensation expense.
Intellectual
property
During
the six months ended June 30, 2017 and 2016, the Company recognized no revenues in either period due to the discontinuation
of such business segment.
Operating
expenses for the six months ended June 30, 2017 was $0 (2016: $659), consisting of impairment of a gaming patent.
Gaming
During
the six months ended June 30, 2017, the Company recognized operating expenses of $0 (2016: $1,510). During the six
months ended June 30, 2016 the Company recognized an impairment charge of $1,496 related to goodwill and $14 related to intangible
assets.
Cybersecurity
During
the six months ended June 30, 2017, the Company recognized operating expenses of $369 (2016: $0).
Bitcoin
mining
During
the six months ended June 30, 2017, the Company recognized $700 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 $389 cost of revenue for the six months ended June 30, 2017 (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 six months ended June, 2017 was $7,007 (2016: $4,423). 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 six months ended June 30, 2017, non–operating expenses mainly consisted of impairment of long term investment of $287,
impairment of equity method investments, related party of $2,500, interest and other expenses of $190, loss on sale of investments
of $84, gain on sale of property and equipment of $48 and accretion of debt discount of $48. During the comparable period
ended June 30, 2016, non–operating expenses mainly consisted of a loss on sale of investments of $1,193. This was offset
by interest income of $36.
Liquidity
and capital resources
|
|
As
of
|
|
|
|
June
30, 2017
|
|
|
December
31, 2016
|
|
Working
capital summary
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
323
|
|
|
$
|
345
|
|
Other
current assets
|
|
|
246
|
|
|
|
153
|
|
Investments
– current
|
|
|
–
|
|
|
|
44
|
|
Digital
currencies
|
|
|
17
|
|
|
|
10
|
|
Current
liabilities
|
|
|
(1,459
|
)
|
|
|
(191
|
)
|
Working
capital (deficit) surplus
|
|
$
|
(873
|
)
|
|
$
|
361
|
|
|
|
Six
months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cash
(used in) / provided by
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
(2,152
|
)
|
|
$
|
(2,507
|
)
|
Investing
activities
|
|
|
(1,003
|
)
|
|
|
821
|
|
Financing
activities
|
|
|
3,133
|
|
|
|
2,427
|
|
Net
(decrease)/ increase in cash and cash equivalents
|
|
$
|
(22
|
)
|
|
$
|
741
|
|
On
June 30, 2017, MGT’s cash and cash equivalents were $323. The Company continues to exercise discipline with respect to current
expense levels, as revenues remain limited. Our cash and cash equivalents decreased during the six months ended June 30, 2017,
primarily due to $2,152 used in operating activities, $1,003 used in investing activities offset by funds provided by the
sale of convertible notes and shares yielding a net increase in cash provided by financing activities of $3,133.
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 six months ended June 30, 2017, the Company used $1,003 in investing activities as compared to receiving $821 from
investing activities in the corresponding prior period. The proceeds were a result of the sale of investments.
Financing
activities
Conversion
of Notes
During
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.
During June 2017, holders
of the Company’s 8% Convertible Notes converted a total of $75 principal value into a total of 100,000 shares of the Company’s
Common Stock.
March
2017 Equity Purchase Agreement
On
March 10, 2017, the Company and L2 Capital, LLC (“L2 Capital”), a Kansas limited liability company, entered
into an equity purchase agreement (the “Equity Purchase Agreement”), which was subsequently amended on May 18,
2017, pursuant to which the Company may issue and sell to L2 Capital from time to time up to $6,500 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”), which was subsequently amended on March 15, 2017, 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”).
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 Common Stock Purchase 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.
On
May 18, 2017, the Company and L2 Capital entered into an amendment to the Equity Purchase Agreement and Registration Rights Agreement
(the “Amended Equity Purchase Agreement”) and an amendment to the Convertible Promissory Note (the “Amended
Convertible Promissory Note”), to facilitate the transactions of the Company and Iliad as descried below. Pursuant to the
Amended Equity Purchase Agreement, L2 Capital and the Company agreed to increase the amount of common stock issuable to L2 Capital
from $5,000 to $6,500. In accordance with the Amendment to the Convertible Promissory Note, L2 Capital agreed to waive all its
rights under the Convertible Promissory Note issued to it on March 10, 2017 with respect to certain events of default that would
or could have been triggered by the Company by entering into the Iliad financing. In consideration of such waiver, the Company
issued 200,000 shares of the Company’s common stock to L2 Capital.
On
May 18, 2017, the Company together with MGT Mining One, Inc. (“Mining One”), a wholly-owned subsidiary of the Company,
and Iliad Research and Trading, L.P., (“Iliad”), a Utah limited partnership, entered into a securities purchase agreement
(the “Securities Purchase Agreement”), pursuant to which the Company issued and sold to Iliad a secured convertible
note (the “Note”) in the original principal amount (the “Original Principal Amount”) of $1,355, with an
original issuance discount (the “OID”) of $225 and legal and accounting expenses of $5,000, and a warrant (the “Warrant”)
to purchase shares of common stock of the Company. In accordance with the Securities Purchase Agreement, Iliad shall fund the
Company and Mining One (together the “Borrowers”) the purchase price (the “Purchase Price”) in an amount
of $1,125, which equals to the result of deducting the OID and legal and accounting expenses from the Original Principal Amount.
On
May 18, 2017, in connection with the Securities Purchase Agreement, the Company executed the secured convertible promissory note
(the “Secured Convertible Promissory Note” or the “Note”), promising to pay Iliad the Original Principal
Amount and all amounts of accrued and unpaid interest on the outstanding balance on the date that is twenty-four (24) months from
when Iliad transfers the funds in the amount of $1,125 to the Borrowers (the “Purchase Price Date”). The Note is secured
with all assets of the Mining One, currently owned and later acquired, and the Company’s three thousand (3,000) shares of
common stock of the Mining One. The Note bears an interest rate of ten per cent (10%) per annum. Subject to the terms and conditions
set forth in the Note, the Borrowers may prepay the outstanding balance of the Note in part or in full in cash of an amount equal
to 125% multiplied by the outstanding balance of the Note. At any time beginning on the date that is six (6) months from the Purchase
Price Date until the outstanding balance of the Note has been paid in full, Iliad may, at its option, convert all or any portion
of the outstanding balance into shares of common stock of the Company on a cashless basis at a price of $1.05 per share (the “Lender
Conversion Price”), as adjusted from time to time depending on circumstances as defined in the Secured Convertible Promissory
Note. In addition, beginning three (3) months after the Purchase Price Date, Iliad has the right to redeem a portion of the outstanding
balance of the Note in any amount that is less than $90 per month, in cash or, in the Event of Default by converting such Redemption
Amount, in full or in part, into shares of the Company’s common stock at a per share price that is the lower of the Lender
Conversion Price and the price that is sixty-five percent (65%) of Market Price.
In
connection with the issuance of the Note, the Company also issued to Iliad a Warrant to purchase up to 1,231,819 shares of Common
Stock of the Company (the “Warrant Shares”) in accordance with the terms of the warrant to purchase shares of common
stock (the “Warrant to Purchase Common Stock” or the “Warrant”). The Warrant shall be exercisable at a
cash price of $1.05 per share (the “Exercise Price”) for a term of five years.
Iliad
note
On
May 18, 2017, the Company sold to Iliad Research and Trading, L.P., (“Iliad”), a Utah limited partnership, a secured
convertible note (the “Iliad Note”) in the original principal amount of $1,355,000, with an original issuance discount
of $225,000 and reimbursed legal and accounting expenses of $5,000, and a warrant to purchase 1,231,819 shares of common stock
of the Company.
The
principal and all accrued and unpaid interest on the outstanding balance on the date that is twenty-four (24) months from the
issuance date. The Iliad Note is secured with the Company’s ownership of and all assets of Mining Sub. The Note bears an
interest rate of 10% per annum, provided that at any time on or after the occurrence of an Event of Default, the interest rate
shall be adjusted to 22% per annum. Subject to the terms and conditions set forth in the Iliad Note, the Company may prepay the
outstanding balance of the Iliad Note in part or in full in cash of an amount equal to 125% multiplied by the outstanding balance
of the Iliad Note.
At
any time beginning on the date that is six months from the issuance date until the outstanding balance of the Iliad Note has been
paid in full, Iliad may, at its option, convert all or any portion of the outstanding balance into shares of common stock of the
Company on a cashless basis at a price of $1.05 per share, which will be adjusted for any future issuances of equity that contain
a lower per-share exercise price. In addition, beginning three months after the issuance date, Iliad has the right to redeem a
portion of the outstanding balance of the Iliad Note in any amount that is less than $90,000 per calendar month. The Company has
the right to fund each redemption using cash or shares of the Company’s common stock at a price that is the lower of $1.05
per share and the price that is 65% of the Company’s market price.
May
2017 note
s
On
May 1, 2017, the Company issued notes payable to two investors in the aggregate amount of $330,000 (the “May 2017 Notes”).
The May 2017 Notes mature on October 1, 2018, with mandatory repayments beginning on October 1, 2017 in the amount of $25 and
continuing monthly thereafter. The May 2017 Notes accrue interest at a rate of 10% per annum.
The
May 2017 Notes are convertible into the Company’s common stock only after an event of default. Events of default include
failure to pay payments due under the May 2017 Notes, entrance into any bankruptcy or insolvency proceedings, failure to meet
the obligations of any other notes payable in an amount exceeding $100, the Company’s stock being suspending for trading
or delisted, losing the Company’s ability to deliver shares, or becoming more than 15 days delinquent on any filings required
with the SEC.
The
May 2017 Notes feature a “most favored nation” clause, in which, if the Company were to issue convertible notes with
more favorable terms to another investor, the holders of the May 2017 Notes can elect to replace their notes with new notes with
the same terms as the more favorable notes. As of August 7, 2017, the Company has not replaced the May 2017 Notes under this clause.
Sales
of stock
During
February and March 2017, the Company sold 1,625,000 shares of its common stock to investors at a purchase price of $0.40 per Share
for aggregate gross proceeds of $650. 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.
During
May 2017, the Company sold 1,250,000 shares of its common stock at $0.40 per share for total proceeds of $500. In addition, for
every Share purchased, the Investors received detachable warrants, as follows: (i) one Series A Warrant; (ii) one Series B Warrant;
and (iii) one Series C Warrant.
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.
Risks
and uncertainties related to our future capital requirements
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 June 30, 2017, the Company
had incurred significant operating losses since inception and continues to generate losses from operations and has an accumulated
deficit of $338,593. 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 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.
As
of
June 30, 2017, MGT’s cash, cash equivalents and restricted
cash were $323. 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.