UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10–Q
[X] |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
For
the quarterly period ended June 30, 2020
[ ] |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
For
the transition period from ______________ to
______________
Commission
file number: 001–32698
MGT CAPITAL INVESTMENTS, INC.
(Exact
name of registrant as specified in its charter)
Delaware |
|
13–4148725 |
(State
or other jurisdiction of
incorporation or organization) |
|
(I.R.S.
Employer
Identification No.) |
150 Fayetteville Street, Suite 1110
Raleigh, NC 27601
(Address
of principal executive offices)
(914) 630–7430
(Registrant’s
telephone number, including area code)
Shares
registered pursuant to section 12(b) of the Act: None.
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
[ ] No [X]
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S–T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Yes
[ ] No [X]
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non–accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b–2 of the
Exchange Act.
Large
accelerated filer [ ] |
|
Accelerated
filer [ ] |
Non–accelerated
filer [ ] |
|
Smaller
reporting company [X] |
|
|
Emerging
growth company [ ] |
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act.
[ ]
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b–2 of the Exchange Act).
Yes
[ ] No [X]
As of
January 11, 2021, there were 506,779,781 shares of the registrant’s
Common stock, $0.001 par value per share, issued and
outstanding.
MGT
CAPITAL INVESTMENTS, INC.
FORM
10-Q FOR THE QUARTER ENDED JUNE 30, 2020
TABLE
OF CONTENTS
PART I - FINANCIAL
INFORMATION
Item 1. Financial
Statements
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE
SHEETS
(Dollars
in thousands, except per-share amounts)
|
|
June 30,
2020 |
|
|
December 31,
2019 |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
58 |
|
|
$ |
216 |
|
Prepaid expenses
and other current assets |
|
|
161 |
|
|
|
125 |
|
Intangible digital
assets |
|
|
7 |
|
|
|
18 |
|
Total current
assets |
|
|
226 |
|
|
|
359 |
|
|
|
|
|
|
|
|
|
|
Non-current assets |
|
|
|
|
|
|
|
|
Property and
equipment, at cost, net |
|
|
2,868 |
|
|
|
3,536 |
|
Right of use
asset, operating lease, net of accumulated amortization |
|
|
65 |
|
|
|
78 |
|
Other assets |
|
|
123 |
|
|
|
321 |
|
Total assets |
|
$ |
3,282 |
|
|
$ |
4,294 |
|
|
|
|
|
|
|
|
|
|
Liabilities and
Stockholders’ Equity |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts
payable |
|
$ |
1,379 |
|
|
$ |
795 |
|
Accrued expenses
and other payables |
|
|
82 |
|
|
|
26 |
|
Current portion of
SBA PPP Note |
|
|
48 |
|
|
|
- |
|
Note payable, net
of discount |
|
|
154 |
|
|
|
52 |
|
Management
agreement termination liability |
|
|
10 |
|
|
|
116 |
|
Operating lease
liability |
|
|
18 |
|
|
|
19 |
|
Total current
liabilities |
|
|
1,691 |
|
|
|
1,008 |
|
|
|
|
|
|
|
|
|
|
Non-current liabilities |
|
|
|
|
|
|
|
|
SBA PPP Note, less
current portion |
|
|
60 |
|
|
|
- |
|
Operating lease
liability |
|
|
47 |
|
|
|
59 |
|
Total
liabilities |
|
|
1,798 |
|
|
|
1,067 |
|
|
|
|
|
|
|
|
|
|
Commitments and
Contingencies (Note 9) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity |
|
|
|
|
|
|
|
|
Undesignated
preferred stock, $0.001 par value, 8,489,800 shares authorized. No
shares issued and outstanding at June 30, 2020 and December 31,
2019. |
|
|
- |
|
|
|
- |
|
Series B preferred
stock, $0.001 par value, 10,000 shares authorized.No shares issued
or outstanding at June 30, 2020 and December 31, 2019. |
|
|
- |
|
|
|
- |
|
Series C
convertible preferred stock, $0.001 par value, 200 and 200 shares
authorized at June 30, 2020 and December 31, 2019, respectively.
115 and 115 shares issued and outstanding at June 30, 2020 and
December 31, 2019, respectively |
|
|
- |
|
|
|
- |
|
Common stock,
$0.001 par value; 2,500,000,000 shares authorized; 489,615,049 and
413,701,289 shares issued and outstanding at June 30, 2020 and
December 31, 2019, respectively. |
|
|
490 |
|
|
|
414 |
|
Additional paid-in
capital |
|
|
418,236 |
|
|
|
417,315 |
|
Accumulated
deficit |
|
|
(417,242 |
) |
|
|
(414,502 |
) |
Total
stockholders’ equity |
|
|
1,484 |
|
|
|
3,227 |
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity |
|
$ |
3,282 |
|
|
$ |
4,294 |
|
The
accompanying notes are an integral part of these unaudited
condensed consolidated financial statements
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(Dollars
in thousands, except per-share amounts)
(Unaudited)
|
|
For the Three Months Ended June 30, |
|
|
For the Six
Months Ended June 30, |
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
460 |
|
|
$ |
70 |
|
|
$ |
1,137 |
|
|
$ |
98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
532 |
|
|
|
18 |
|
|
|
1,137 |
|
|
|
104 |
|
General and
administrative |
|
|
623 |
|
|
|
2,074 |
|
|
|
1,653 |
|
|
|
3,988 |
|
Total operating
expenses |
|
|
1,155 |
|
|
|
2,092 |
|
|
|
2,790 |
|
|
|
4,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(695 |
) |
|
|
(2,022 |
) |
|
|
(1,653 |
) |
|
|
(3,994 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-operating
income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income |
|
|
- |
|
|
|
3 |
|
|
|
10 |
|
|
|
- |
|
Change in fair
value of liability |
|
|
23 |
|
|
|
|
|
|
|
38 |
|
|
|
- |
|
Accretion of debt
discount |
|
|
(456 |
) |
|
|
(3,073 |
) |
|
|
(877 |
) |
|
|
(4,164 |
) |
Gain (loss) on
sale of property and equipment |
|
|
(288 |
) |
|
|
- |
|
|
|
(258 |
) |
|
|
82 |
|
Gain on
extinguishment of debt |
|
|
- |
|
|
|
1,473 |
|
|
|
- |
|
|
|
2,748 |
|
Total
non-operating expense |
|
|
(721 |
) |
|
|
(1,597 |
) |
|
|
(1,087 |
) |
|
|
(1,334 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
(1,416 |
) |
|
|
(3,619 |
) |
|
|
(2,740 |
) |
|
|
(5,328 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed
dividend |
|
|
- |
|
|
|
(959 |
) |
|
|
- |
|
|
|
(959 |
) |
Net loss
attributable to common stockholders |
|
$ |
(1,416 |
) |
|
$ |
(4,578 |
) |
|
$ |
(2,740 |
) |
|
$ |
(6,287 |
) |
Per-share data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
loss per share |
|
$ |
(0.00 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding |
|
|
460,697,195 |
|
|
|
210,625,579 |
|
|
|
442,692,337 |
|
|
|
166,758,828 |
|
The
accompanying notes are an integral part of these unaudited
condensed consolidated financial statements
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDERS’ (DEFICIT) EQUITY
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND
2019
(Dollars
in thousands, except per-share amounts)
(Unaudited)
|
|
Preferred
Stock |
|
|
Common
Stock |
|
|
Additional
Paid-In
|
|
|
Subscription |
|
|
Accumulated |
|
|
Total
Stockholders’
(Deficit) |
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Receivable |
|
|
Deficit |
|
|
Equity
|
|
Balance
at January 1, 2020 |
|
|
115 |
|
|
$ |
- |
|
|
|
413,701,289 |
|
|
$ |
414 |
|
|
$ |
417,315 |
|
|
$ |
- |
|
|
$ |
(414,502 |
) |
|
$ |
3,227 |
|
Stock
based compensation - employee restricted stock |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
220 |
|
|
|
- |
|
|
|
- |
|
|
|
220 |
|
Common
stock issued on conversion of note payable |
|
|
- |
|
|
|
- |
|
|
|
32,747,157 |
|
|
|
33 |
|
|
|
317 |
|
|
|
- |
|
|
|
- |
|
|
|
350 |
|
Net
loss |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,324 |
) |
|
|
(1,324 |
) |
Balance
at March 31, 2020 |
|
|
115 |
|
|
|
- |
|
|
|
446,448,446 |
|
|
|
447 |
|
|
|
417,852 |
|
|
|
- |
|
|
|
(415,826 |
) |
|
|
2,473 |
|
Stock
based compensation - employee restricted stock |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
Common
stock issued on conversion of notes payable |
|
|
- |
|
|
|
- |
|
|
|
43,166,603 |
|
|
|
43 |
|
|
|
382 |
|
|
|
- |
|
|
|
- |
|
|
|
425 |
|
Net
Loss |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
(1,416 |
) |
|
|
(1,416 |
) |
Balance
at June 30, 2020 |
|
|
115 |
|
|
$ |
- |
|
|
|
489,615,049 |
|
|
$ |
490 |
|
|
$ |
418,236 |
|
|
$ |
- |
|
|
$ |
(417,242 |
) |
|
$ |
1,484 |
|
|
|
Preferred
Stock |
|
|
Common
Stock |
|
|
Additional
Paid-In
|
|
|
Subscription |
|
|
Accumulated |
|
|
Total
Stockholders’
(Deficit) |
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Receivable |
|
|
Deficit |
|
|
Equity
|
|
Balance
at January 1, 2019 |
|
|
- |
|
|
$ |
- |
|
|
|
111,079,683 |
|
|
$ |
111 |
|
|
$ |
403,299 |
|
|
$ |
- |
|
|
$ |
(404,719 |
) |
|
$ |
(1,309 |
) |
Stock
based compensation |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
894 |
|
|
|
- |
|
|
|
- |
|
|
|
894 |
|
Stock
issued for services |
|
|
- |
|
|
|
- |
|
|
|
160,500 |
|
|
|
- |
|
|
|
60 |
|
|
|
- |
|
|
|
- |
|
|
|
60 |
|
Sale
of stock under equity purchase agreement |
|
|
- |
|
|
|
- |
|
|
|
43,100,000 |
|
|
|
43 |
|
|
|
2,111 |
|
|
|
(346 |
) |
|
|
- |
|
|
|
1,808 |
|
Cumulative
effect adjustment related to ASU adoption |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3 |
|
|
|
3 |
|
Net
loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,709 |
) |
|
|
(1,709 |
) |
Balance
at March 31, 2019 |
|
|
- |
|
|
|
- |
|
|
|
154,340,183 |
|
|
|
154 |
|
|
|
406,364 |
|
|
|
(346 |
) |
|
|
(406,425 |
) |
|
|
(253 |
) |
Stock
based compensation - employee restricted stock |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
730 |
|
|
|
- |
|
|
|
- |
|
|
|
730 |
|
Sale
of stock under equity purchase agreement |
|
|
- |
|
|
|
- |
|
|
|
23,900,000 |
|
|
|
24 |
|
|
|
1,502 |
|
|
|
346 |
|
|
|
- |
|
|
|
1,872 |
|
Common
stock issued on conversion of notes payable |
|
|
- |
|
|
|
- |
|
|
|
57,224,243 |
|
|
|
57 |
|
|
|
1,640 |
|
|
|
- |
|
|
|
- |
|
|
|
1,697 |
|
Stock
sold in connection with registered direct placements |
|
|
- |
|
|
|
- |
|
|
|
17,500,000 |
|
|
|
18 |
|
|
|
507 |
|
|
|
- |
|
|
|
- |
|
|
|
525 |
|
Sale
of preferred stock |
|
|
190 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,890 |
|
|
|
- |
|
|
|
- |
|
|
|
1,890 |
|
Conversion
of preferred stock |
|
|
(50 |
) |
|
|
- |
|
|
|
14,077,092 |
|
|
|
14 |
|
|
|
(14 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Cancellation
of shares received from transfer agent |
|
|
- |
|
|
|
- |
|
|
|
(83,752 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Exercise
of warrants |
|
|
- |
|
|
|
- |
|
|
|
4,000,000 |
|
|
|
4 |
|
|
|
116 |
|
|
|
- |
|
|
|
- |
|
|
|
120 |
|
Deemed
dividend |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
959 |
|
|
|
- |
|
|
|
(959 |
) |
|
|
- |
|
Net
loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,619 |
) |
|
|
(3,619 |
) |
Balance
at June 30, 2019 |
|
|
140 |
|
|
$ |
- |
|
|
|
270,957,766 |
|
|
$ |
271 |
|
|
$ |
413,694 |
|
|
$ |
- |
|
|
$ |
(411,003 |
) |
|
$ |
2,962 |
|
The
accompanying notes are an integral part of these unaudited
condensed consolidated financial statements
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Dollars
in thousands, except per-share amounts)
(Unaudited)
|
|
For the Six Months Ended June 30, |
|
|
|
2020 |
|
|
2019 |
|
Cash Flows From
Operating Activities |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,740 |
) |
|
$ |
(5,328 |
) |
Adjustments to reconcile net loss to net cash used in operating
activities |
|
|
|
|
|
|
|
|
Depreciation |
|
|
658 |
|
|
|
- |
|
(Gain) loss on
sale of property and equipment |
|
|
288 |
|
|
|
(82 |
) |
Change in fair
value of liability |
|
|
(38 |
) |
|
|
- |
|
Stock-based
compensation expense |
|
|
222 |
|
|
|
1,679 |
|
Extinguishment of
note payable |
|
|
- |
|
|
|
(2,748 |
) |
Amortization of
note discount |
|
|
877 |
|
|
|
4,164 |
|
Change in
operating assets and liabilities |
|
|
- |
|
|
|
|
|
Prepaid expenses
and other current assets |
|
|
(36 |
) |
|
|
(220 |
) |
Intangible digital
assets |
|
|
11 |
|
|
|
(54 |
) |
Management
agreement termination liability |
|
|
(68 |
) |
|
|
- |
|
Right of use
asset |
|
|
13 |
|
|
|
36 |
|
Operating lease
liability |
|
|
(13 |
) |
|
|
(37 |
) |
Other assets |
|
|
(5 |
) |
|
|
4 |
|
Accounts
payable |
|
|
584 |
|
|
|
(108 |
) |
Accrued
expenses |
|
|
56 |
|
|
|
83 |
|
Net cash used in operating
activities |
|
|
(191 |
) |
|
|
(2,611 |
) |
|
|
|
|
|
|
|
|
|
Cash Flows From
Investing Activities |
|
|
|
|
|
|
|
|
Purchase of
property and equipment |
|
|
(370 |
) |
|
|
(72 |
) |
Deposits made on
property and equipment |
|
|
(38 |
) |
|
|
- |
|
Refund of security
deposit |
|
|
34 |
|
|
|
|
|
Proceeds from sale
of property and equipment |
|
|
299 |
|
|
|
- |
|
Net cash used in investing
activities |
|
|
(75 |
) |
|
|
(72 |
) |
|
|
|
|
|
|
|
|
|
Cash Flows From
Financing Activities |
|
|
|
|
|
|
|
|
Proceeds from sale
of common stock |
|
|
- |
|
|
|
525 |
|
Payment of
deferred offering costs |
|
|
- |
|
|
|
(8 |
) |
Proceeds from sale
of stock under equity purchase agreement, net of issuance
costs |
|
|
- |
|
|
|
3,329 |
|
Sale of preferred
stock, net of issuance costs |
|
|
- |
|
|
|
1,890 |
|
Repayment of notes
payable |
|
|
- |
|
|
|
(210 |
) |
Proceeds from exercise of
warrants |
|
|
- |
|
|
|
120 |
|
Proceeds from SBA
PPP bank loan |
|
|
108 |
|
|
|
- |
|
Net cash provided by financing
activities |
|
|
108 |
|
|
|
5,646 |
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash
equivalents |
|
|
(158 |
) |
|
|
2,963 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning
of period |
|
|
216 |
|
|
|
96 |
|
Cash and cash equivalents, end of
period |
|
$ |
58 |
|
|
$ |
3,059 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information |
|
|
|
|
|
|
|
|
Cash paid for
interest |
|
$ |
- |
|
|
$ |
3 |
|
Cash paid for
income tax |
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Non-cash investing
and financing activities |
|
|
|
|
|
|
|
|
Deemed dividend on
warrant modification and beneficial conversion feature of preferred
stock |
|
$ |
- |
|
|
$ |
959 |
|
Cumulative effect
adjustment related to ASU adoption |
|
$ |
- |
|
|
$ |
3 |
|
Conversion of
notes payable into common stock |
|
$ |
775 |
|
|
$ |
1,697 |
|
Repayment of note
payable and interest through the issuance of shares under the
equity purchase agreement |
|
$ |
- |
|
|
$ |
354 |
|
Non-cash deferred
offering costs |
|
$ |
- |
|
|
$ |
62 |
|
Conversion of
Series C convertible preferred stock into common stock |
|
$ |
- |
|
|
$ |
14 |
|
The
accompanying notes are an integral part of these unaudited
condensed consolidated financial statements
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per–share amounts)
Note
1. Organization and Basis of Presentation
Organization
MGT
Capital Investments, Inc. (“MGT” or the “Company”) was incorporated
in Delaware in 2000. MGT was originally incorporated in Utah in
1977. MGT is comprised of the parent company and its wholly owned
subsidiary MGT Sweden AB. MGT’s corporate office is in Raleigh,
North Carolina.
Cryptocurrency mining
Current
Operations
The
Company owns approximately 924 and 669 S17 Antminer Pro Bitcoin
miners at its Company-owned and managed facility located in
LaFayette, GA as of June 30, 2020 and January 11, 2021,
respectively. All miners were purchased from Bitmaintech Pte. Ltd.,
a Singapore limited company (“Bitmain”), and are collectively rated
at approximately 30 Ph/s in computing power. Bitmain has
acknowledged manufacturing defects, combined with inadequate repair
facilities, rendering approximately one half of our miners in need
of repair or replacement. The Company’s miners are housed in four
modified shipping containers including one manufactured by Bit5ive
LLC of Miami, Florida (“Pod5ive Containers”). A utility substation,
adjacent to the several acre property, has access to over 20
megawatts (MW) of low-cost power. The Company’s current electrical
load is estimated at slightly over 1.0 MW. The entire facility,
including the land, two 2500 KVA 3-phase transformers, the mining
containers, and miners, are owned by MGT. As the Company is
presently using only a portion of the built-out available
electrical load, it is exploring ways to grow and maintain its
current operations including but not limited to further equipment
sales, leasing space to other Bitcoin miners, and raising capital
to acquire newest generation miners.
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 accounting
principles generally accepted in the United States of America.
However, in the opinion of the management of the Company, all
adjustments necessary for a fair presentation of the financial
position and operating results have been included in these
statements. These 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,
2019, as filed with the SEC on March 30, 2020. Operating results
for the three and six months ended June 30, 2020 and 2019 are not
necessarily indicative of the results that may be expected for any
subsequent quarters or for the year ending December 31,
2020.
COVID-19
pandemic:
The
COVID-19 pandemic represents a fluid situation that presents a wide
range of potential impacts of varying durations for different
global geographies, including locations where we have offices,
employees, customers, vendors and other suppliers and business
partners.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES TO
THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Dollars
in thousands, except per–share amounts)
Like
most US-based businesses, the COVID-19 pandemic and efforts to
mitigate the same began to have impacts on our business in March
2020. By that time, much of our first fiscal quarter was
completed.
In
light of broader macro-economic risks and already known impacts on
certain industries, we have taken, and continue to take targeted
steps to lower our operating expenses because of the COVID-19
pandemic. We continue to monitor the impacts of COVID-19 on our
operations closely and this situation could change based on a
significant number of factors that are not entirely within our
control and are discussed in this and other sections of this
quarterly report on Form 10-Q.
To
date, travel restrictions and border closures have not materially
impacted our ability to operate. However, if such restrictions
become more severe, they could negatively impact those activities
in a way that would harm our business over the long term. Travel
restrictions impacting people can restrain our ability to operate,
but at present we do not expect these restrictions on personal
travel to be material to our business operations or financial
results.
Like
most companies, we have taken a range of actions with respect to
how we operate to assure we comply with government restrictions and
guidelines as well as best practices to protect the health and
well-being of our employees. We have also undertaken measures to
reduce our administrative and advisory costs required as a publicly
reporting company. Actions taken to date include salary reductions
for senior management and termination of certain consulting
agreements. However, the impacts of COVID-19 and efforts to
mitigate the same have remained unpredictable and it remains
possible that challenges may arise in the future.
The
actions we have taken so far during the COVID-19 pandemic include,
but are not limited to:
|
● |
requiring
all employees who can work from home to work from home; |
|
|
|
|
● |
increasing
our IT networking capability to best assure employees can work
effectively outside the office; and |
|
|
|
|
● |
for
employees who must perform essential functions in one of our
offices;
|
|
|
|
|
● |
Having
employees maintain a distance of at least six feet from other
employees whenever possible; |
|
|
|
|
● |
Having
employees work in dedicated shifts to lower the risk all employees
who perform similar tasks might become infected by
COVID-19; |
|
|
|
|
● |
Having
employees stay segregated from other employees in the office with
whom they require no interaction; and |
|
|
|
|
● |
Requiring
employees to wear masks while they are in the office whenever
possible. |
Note
2. Going Concern and Management’s 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, 2020, the Company had
incurred significant operating losses since inception and continues
to generate losses from operations. As of June 30, 2020, the
Company had an accumulated deficit of $417,242. As of June 30, 2020
MGT’s cash and cash equivalents were $58.
The
Company will require additional funding to grow its operations.
Further, depending upon operational profitability, the Company may
also need to raise additional funding for ongoing working capital
purposes. There can be no assurance however that the Company will
be able to raise additional capital when needed, or at terms deemed
acceptable, if at all. The Company’s ability to raise additional
capital is impacted by the volatility of Bitcoin mining economics
and the SEC’s ongoing enforcement action against our Chief
Executive Officer, both of which are highly uncertain, cannot be
predicted, and could have an adverse effect on the Company’s
business and financial condition.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Dollars
in thousands, except per–share amounts)
Since
January 2020, the Company has secured working capital from a PPP
loan, the issuance of a convertible note, and the sale of
assets.
Such
factors raise substantial doubt about the Company’s ability to
sustain operations for at least one year from the issuance of these
unaudited condensed consolidated financial statements. The
accompanying unaudited condensed consolidated financial statements
do not include any adjustments related 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.
Note
3. Summary of Significant Accounting Policies
Principles of consolidation
The
unaudited condensed consolidated financial statements include the
accounts of MGT and MGT Sweden AB. All intercompany transactions
and balances have been eliminated.
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.
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 the disclosure
of contingent assets and liabilities as of the date of the
financial statements, and also affect the amounts of revenues and
expenses reported for each period. Actual results could differ from
those which result from using such estimates. Management utilizes
various other estimates, including but not limited to determining
the estimated lives of long-lived assets, stock compensation,
determining the potential impairment of long-lived assets, the fair
value of warrants issued, the fair value of conversion features,
the recognition of revenue, the valuation allowance for deferred
tax assets and other legal claims and contingencies. The results of
any changes in accounting estimates are reflected in the financial
statements in the period in which the changes become evident.
Estimates and assumptions are reviewed periodically, and the
effects of revisions are reflected in the period that they are
determined to be necessary.
Revenue recognition
The
Company’s primary revenue stream is related to the mining of
digital currencies. The Company derives its revenue by solving
“blocks” to be added to the blockchain and providing transaction
verification services within the digital currency network of
Bitcoin, commonly termed “cryptocurrency mining.” In consideration
for these services, the Company receives digital currency
(“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 as an intangible digital asset valued
at the lower of cost or net realizable value. Net realizable value
adjustments, to adjust the value of Coins to market value, are
included in cost of revenue on the Company’s consolidated statement
of operations. Further, any gain or loss on the sale of Coins would
be recorded to costs of revenue. Costs of revenue include
electricity costs, equipment and infrastructure depreciation, and
net realizable value adjustments. During 2019, costs of revenues
also included hosting fees based on third-party hosting agreements,
all of which were terminated as of December 31, 2019.
The
Company also recognizes a royalty participation upon the sale of
Pod5ive Containers under the terms of a five-year collaboration
agreement entered in August 2018.
Property and Equipment
Property
and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated using the straight–line method on the
various asset classes over their estimated useful lives, which
range from one to ten years when placed in service. The cost of
repairs and maintenance is expensed as incurred; major replacements
and improvements are capitalized. When assets are retired or
disposed of, the cost and accumulated depreciation are removed from
the accounts, and any resulting gains or losses are included in
income in the year of disposition. Deposits on property and
equipment are initially classified as Other Assets and upon
delivery, installation and full payment, the assets are classified
as property and equipment on the consolidated balance
sheet.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Dollars
in thousands, except per–share amounts)
Income taxes
The
Company accounts for income taxes in accordance with ASC 740,
“Income Taxes”. ASC 740 requires an asset and liability approach
for financial accounting and reporting for income taxes and
established for all the entities a minimum threshold for financial
statement recognition of the benefit of tax positions and requires
certain expanded disclosures. The provision for income taxes is
based upon income or loss after adjustment for those permanent
items that are not considered in the determination of taxable
income. Deferred income taxes represent the tax effects of
differences between the financial reporting and tax basis of the
Company’s assets and liabilities at the enacted tax rates in effect
for the years in which the differences are expected to reverse. The
Company evaluates the recoverability of deferred tax assets and
establishes a valuation allowance when it is more likely than not
that some portion or all the deferred tax assets will not be
realized. Management makes judgments as to the interpretation of
the tax laws that might be challenged upon an audit and cause
changes to previous estimates of tax liability. In management’s
opinion, adequate provisions for income taxes have been made. If
actual taxable income by tax jurisdiction varies from estimates,
additional allowances or reversals of reserves may be
necessary.
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, convertible debt, convertible preferred stock,
stock warrants and stock options, are not reflected in diluted net
loss per share because such potential shares are anti–dilutive due
to the Company’s net loss.
Accordingly,
the computation of diluted loss per share for the three and six
months ended June 30, 2020 excludes 66,667 unvested restricted
shares, 14,174,747 shares issuable upon the conversion of
convertible debt, and 105,990,783 shares issuable under convertible
preferred stock. The computation of diluted loss per share for the
three and six months ended June 30, 2019 excludes 1,100,001
unvested restricted shares, 6,000,000 shares issuable under stock
options, 74,776,203 shares issuable upon conversion of convertible
debt, 1,450,000 shares issuable under warrants, and 48,780,488
shares issuable under preferred stock.
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 compensation
committee of the board of directors of the Company (the “Board of
Directors”). These awards are restricted as to the transfer of
ownership and generally vest over the requisite service periods,
typically over a 12 to 24-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 the Company’s common stock on the grant
date.
The
fair value of an 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 inputs 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 the Company’s common stock over the
expected term of the option. Risk–free interest rates are
calculated based on continuously compounded risk–free rates for the
appropriate term.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Dollars
in thousands, except per–share amounts)
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. The Company is
required to estimate the expected forfeiture rate and recognize
expense only for those shares expected to vest.
The
Company accounts for share–based payments granted to non–employees
in accordance with ASC 505–50, “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 readily determinable. 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.
Fair Value Measure and Disclosures
ASC
820 “Fair Value Measurements and Disclosures” provides the
framework for measuring fair value. That framework provides a fair
value hierarchy that prioritizes the inputs to valuation techniques
used to measure fair value. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for
identical assets or liabilities (Level 1 measurements) and the
lowest priority to unobservable inputs (Level 3
measurements).
Fair
value is defined as an exit price, representing the amount that
would be received upon the sale of an asset or payment to transfer
a liability in an orderly transaction between market participants.
Fair value is a market-based measurement that is determined based
on assumptions that market participants would use in pricing an
asset or liability. A three-tier fair value hierarchy is used to
prioritize the inputs in measuring fair value as
follows:
|
● |
Level
1 Quoted prices in active markets for identical assets or
liabilities. |
|
● |
Level
2 Quoted prices for similar assets or liabilities in active
markets, quoted prices for identical or similar assets or
liabilities in markets that are not active, or other inputs that
are observable, either directly or indirectly. |
|
● |
Level
3 Significant unobservable inputs that cannot be corroborated by
market data. |
As of
June 30, 2020, the Company had a Level 3 financial instrument
related to the management agreement termination liability.
Observable transactions are not available to aid in determining the
fair value of the management agreement termination liability.
Therefore, the fair value was determined based on the remaining
payments which include two components that are based on market
conditions, Bitcoin price and Difficulty Rate, thus requiring the
liability to be adjusted to fair value on a periodic basis. The
fair value of Bitcoin price and Difficulty Rate are obtained on
quoted prices in active markets.
Gain (Loss) on Modification/Extinguishment of
Debt
In
accordance with ASC 470, a modification or an exchange of debt
instruments that adds or eliminates a conversion option that was
substantive at the date of the modification or exchange is
considered a substantive change and is measured and accounted for
as extinguishment of the original instrument along with the
recognition of a gain/loss. Additionally, under ASC 470, a
substantive modification of a debt instrument is deemed to have
been accomplished with debt instruments that are substantially
different if the present value of the cash flows under the terms of
the new debt instrument is at least 10 percent different from the
present value of the remaining cash flows under the terms of the
original instrument. A substantive modification is accounted for as
an extinguishment of the original instrument along with the
recognition of a gain/loss.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Dollars
in thousands, except per–share amounts)
Cash and cash equivalents
The
Company considers all highly liquid instruments with an original
maturity of three months or less when acquired to be cash
equivalents. The Company’s combined accounts were $58 and $216 as
of June 30, 2020 and December 31, 2019, respectively. Since the
FDIC’s insurance coverage is for combined account balances that do
not exceed $250, there is no concentration of credit
risks.
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.
Equity-linked instruments
The
Company accounts for equity-linked instruments with certain
anti-dilution provisions in accordance with ASC 815 and ASC 260.
Under this guidance, the Company excludes instruments with certain
down round features when determining whether a financial instrument
(or embedded conversion feature) is considered indexed to the
Company’s own stock. As a result, financial instruments (or
embedded conversion features) with down round features are not
required to be classified as derivative liabilities. The Company
recognizes the value of a down round feature only when it is
triggered and the exercise or conversion price has been adjusted
downward. For equity-classified freestanding financial instruments,
such as warrants, the Company treats the value of the effect of the
down round, when triggered, as a deemed dividend and a reduction of
income available to common stockholders in computing basic earnings
per share. For convertible instruments with embedded conversion
features containing down round provisions, the Company recognizes
the value of the down round as a beneficial conversion discount to
be amortized to earnings.
Impairment of long-lived assets
Long-lived
assets are reviewed for impairment whenever facts or circumstances
either internally or externally may suggest that the carrying value
of an asset may not be recoverable, Should there be an indication
of impairment, we test for recoverability by comparing the
estimated undiscounted future cash flows expected to result from
the use of the asset to the carrying amount of the asset or asset
group. Any excess of the carrying value of the asset or asset group
over its estimated fair value is recognized as an impairment
loss.
Management’s evaluation of subsequent events
The
Company evaluates events that have occurred after the balance sheet
date but before the financial statements are issued. Based upon the
review, other than what is described in Note 11 – Subsequent
Events, the Company did not identify any recognized or
non-recognized subsequent events that would have required
adjustment or disclosure in the unaudited condensed consolidated
financial statements.
Digital Currencies
Digital
currencies are included in current assets in the condensed
consolidated balance sheets. Digital currencies are recorded at the
lower of cost or net realizable value.
Net
realizable value adjustments, to adjust the value of Coins to
market value, are included in cost of revenue on the Company’s
consolidated statement of operations. Further, any gain or loss on
the sale of Coins would be recorded to costs of revenue. Costs of
revenue include hosting fees, equipment and infrastructure
depreciation, net realizable value adjustments, and electricity
costs.
Halving
– The Bitcoin blockchain and the cryptocurrency reward for solving
a block is subject to periodic incremental halving. Halving is a
process designed to control the overall supply and reduce the risk
of inflation in cryptocurrencies using a Proof-of-Work consensus
algorithm. At a predetermined block, the mining reward is cut in
half, hence the term “Halving.” A Halving for bitcoin occurred on
May 12, 2020. Many factors influence the price of Bitcoin and
potential increases or decreases in prices in advance of or
following a future halving is unknown.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Dollars
in thousands, except per–share amounts)
The
following table presents the activities of the digital currencies
for the six months ended June 30, 2020:
Digital currencies at
December 31, 2019 |
|
$ |
18 |
|
Additions of digital currencies from
mining |
|
|
1,133 |
|
Payment of digital currencies to
management partners |
|
|
(68 |
) |
Realized gain on sale of digital
currencies |
|
|
12 |
|
Sale of digital currencies |
|
|
(1,085 |
) |
Digital currencies at June 30,
2020 |
|
$ |
7 |
|
Note
4. Property, Plant, and Equipment and Other Assets
Property
and equipment consisted of the following:
|
|
As of |
|
|
|
June 30,
2020 |
|
|
December 31,
2019 |
|
Land |
|
$ |
57 |
|
|
$ |
57 |
|
Computer hardware and software |
|
|
10 |
|
|
|
10 |
|
Bitcoin mining machines |
|
|
1,542 |
|
|
|
2,313 |
|
Infrastructure |
|
|
1,027 |
|
|
|
771 |
|
Containers |
|
|
782 |
|
|
|
467 |
|
Leasehold improvements |
|
|
4 |
|
|
|
- |
|
Property and
equipment, gross |
|
|
3,422 |
|
|
|
3,618 |
|
Less: Accumulated depreciation |
|
|
(554 |
) |
|
|
(82 |
) |
Property and
equipment, net |
|
$ |
2,868 |
|
|
$ |
3,536 |
|
The
Company recorded depreciation expense of $658 and $316 for the
three and six months ended June 30, 2020, respectively. No
depreciation was recorded during the three and six months ended
June 30, 2019 as the Company fully impaired all its property and
equipment as of December 31, 2018. For the three and six months
ended June 30, 2020, a loss on sale of property and equipment of
$288 and $258, respectively, was recorded as other non-operating
expense related to the sale and disposition of Antminer Pro Bitcoin
miners.
Other
Assets consisted of the following:
|
|
As of |
|
|
|
June 30,
2020 |
|
|
December 31,
2019 |
|
Deposits on
containers |
|
$ |
- |
|
|
$ |
203 |
|
Security deposits |
|
|
123 |
|
|
|
118 |
|
Other Assets |
|
$ |
123 |
|
|
$ |
321 |
|
During
September 2019, the Company entered into an agreement to purchase
two containers to house the Bitcoin mining machines and paid a
deposit of $203. Full payment on these containers was made upon
delivery and installation in January 2020, at which time the cost
of containers was reclassified to property and equipment and
depreciated over the estimated useful life of 5 years using the
straight-line method. The Company has paid $120 in security
deposits related to its electrical contract, see Note 9, and $3
related to its office lease in Raleigh, NC.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Dollars
in thousands, except per–share amounts)
Note
5. Notes Payable
May
2018 Notes
On
May 23, 2018, the Company entered into a securities purchase
agreement with two accredited investors, pursuant to which the
Company issued $840 in unsecured promissory notes for aggregate
consideration of $700 (the “May 2018 Notes”), with an initial
maturity date of March 23, 2019. On January 7, 2019, and again on
March 28, 2019 the Company entered amendments to one of the May
2018 Notes, whereby the parties agreed to extend the maturity date
of the note to July 15, 2019, agreed to forego certain monthly
installments, and agreed prospective installments were to be paid
in cash unless the Company elected to make payments in shares of
the Company’s common stock, at a price equal to the lowest VWAP of
the Company’s common stock during the preceding twenty trading days
multiplied by 70%, or any lower price made available to any other
holder of the Company’s securities. In consideration of these
amendments, the Company incurred extension fees of $121. Because
these amendments were considered substantive changes, the Company
accounted for the modifications as extinguishments of debt and
recorded a gain of $0 and $320 during the three and six months
ended June 30, 2019, respectively.
On
April 9, 2019, the Company entered an amendment to one of its May
2018 Notes, whereby the parties agreed to extend the maturity date
of the note to August 15, 2019, agreed to forego certain monthly
installments, and provided a substantial conversion feature
allowing the lender, in its sole discretion, the right to convert
prospective installments into shares of the Company’s common stock,
at a price equal to the lowest intra-day price of the Company’s
common stock during the preceding twenty trading days multiplied by
70%, or any lower price made available to any other holder of the
Company’s securities. In consideration of this amendment, the
Company incurred an extension fee of $50. Because this amendment
was considered a substantive change, the Company accounted for this
modification as an extinguishment of debt and recorded a gain of
$127 during the three months ended June 30, 2019.
On
May 10, 2019, the original holders of the Company’s May 2018 Notes
assigned and sold all notes to Oasis Capital, LLC (“Oasis
Capital”). On the same date, the Company and Oasis Capital executed
a letter agreement to amend the terms to allow Oasis Capital to
convert the total outstanding principal amount of $421 into shares
of the Company’s common stock, at a price equal to the lowest
trading price of the Company’s common stock during the preceding
twenty trading days multiplied by 70%, or any lower price made
available to any other holder of the Company’s securities. On May
15, 2019, Oasis executed a full conversion of the May 2018 Notes
and was issued 10,568,087 shares of the Company’s common
stock.
June
2018 Note
On
June 1, 2018, the Company entered into a note purchase agreement
with an accredited investor, pursuant to which the Company issued
an unsecured promissory note in the amount of $3,600 (the “June
2018 Note”) for consideration of $3,000. The outstanding balance
was to be made in nine equal monthly installments beginning August
1, 2018, with an initial maturity date of April 1, 2019, with no
prepayment penalty. Upon an event of default, the outstanding
balance of the promissory note would immediately increase by 120%
and become immediately due and payable. Prior to 2019, this note
was amended twice.
On
January 28, 2019, the Company entered a third amendment, whereby
the parties agreed to extend the maturity date to October 1, 2019
and to forego certain monthly installments. The parties also agreed
the Company would pay all installments in cash unless both the
Company and the lender agreed to make payments in shares of the
Company’s common stock, at a price equal the lowest intra-day trade
price of the Company’s common stock during the preceding twenty
trading days multiplied by 70%. In consideration of this amendment,
the Company incurred an extension fee of $527. The Company
accounted for this amendment as an extinguishment of debt and
recorded a gain of $0 and $991 during the three and six months
ended June 30, 2019, respectively.
On
May 10, 2019, the Company entered a fourth amendment, allowing the
lender to convert the total outstanding principal amount of $3,159
into shares of the Company’s common stock, at a price equal the
lowest intra-day trade price of the Company’s common stock during
the preceding twenty trading days multiplied by 70%, or any lower
price made available to any other holder of the Company’s
securities. This amendment also eliminated the Company’s mandatory
monthly amortization payments and extended the maturity to December
15, 2019. After such date, and within 10 business days, any
outstanding balance shall be satisfied, at the Company’s election,
either with cash, common stock conversion, or any combination
thereof. The Company accounted for this amendment as an
extinguishment of debt and recorded a gain of $1,310 during the
three months ended June 30, 2019.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Dollars
in thousands, except per–share amounts)
On
December 31, 2019, the Company entered a fifth amendment extending
the maturity date to June 30, 2020 and deleting in its entirety,
the requirement to settle the outstanding balance with cash, common
stock conversion or any combination thereof, no later than December
15, 2019. An extension fee of $84 was added to the outstanding
balance bringing the total outstanding principal balance to $929 as
of December 31, 2019. The Company accounted for this amendment as
an extinguishment of debt and recorded a gain of $792. In
connection with recording the new debt, the Company recorded debt
discount of $877 including both (i) the time value of money and
(ii) the discount related to the conversion feature underlying the
debt instrument. The Company obtained a waiver from the holder of
June 2019 Note. Subsequent to June 30, 2020, the remaining amount
of this note was fully converted into common shares (refer to Note
11 - Subsequent Events).
The
holder of the June 2018 Note also acquired 17,500,000 shares of the
Company’s common stock on April 12, 2019, and is an affiliate of
the acquirer of 160 shares of Series C Convertible Preferred Stock
with a par value of $0.001 and a stated value of $10,000 per share
(“Preferred Shares”) acquired during 2019, of which 115 Preferred
Shares remain outstanding as of June 30, 2020. See Note 7 below for
a further description of the Preferred Shares. The holder of the
June 2018 Note and its affiliates are collectively subject to a
maximum beneficial ownership of 9.99%.
During
the six months ended June 30, 2020, the Company issued 75,913,760
shares of its common stock upon the conversion of $775 in
outstanding principal, reducing the outstanding principal balance
to $154 as of June 30, 2020. The Company obtained a waiver from the
holder of the June 2018 Note. Subsequent to June 30, 2020, the
remaining amount of this note was fully converted into common
shares (refer to Note 11 - Subsequent Events).
December
2018 Note
On
December 6, 2018, the Company entered into a note purchase
agreement with an accredited investor, pursuant to which the
Company issued an unsecured promissory note in the amount of $598
(the “December 2018 Note”) for consideration of $500, with an
interest rate of 8% per annum and a maturity date of May 6, 2019.
The note was paid in full in March 2019.
The
PPP Loan
On
April 16, 2020, the Company entered into a promissory note with
Aquesta Bank for $108 in connection with the Paycheck Protection
Program offered by the U.S. Small Business Administration. The note
bears interest at 1% per annum, with monthly installments of $6
commencing on November 1, 2021 for 18 months through its maturity
on April 1, 2023. The principal amount of the loan will be forgiven
if the loan proceeds are used to pay for payroll costs, rent and
utilities costs over the 24-week period after the loan is made. Not
more than 25% of the forgiven amount may be used for non-payroll
costs. The amount of the loan forgiveness will be reduced if the
Company reduces its full-time head count. As of June 30, 2020, the
Company has included in current and non-current liabilities $48 and
$60, respectively. The Company has started the process to request
loan forgiveness and expects to be successful based on the stated
criteria.
Notes
payable consisted of the following:
|
|
As of June
30, 2020 |
|
|
|
Principal |
|
|
Discount |
|
|
Net |
|
Total notes
payable-June 2018 Note |
|
$ |
154 |
|
|
$ |
- |
|
|
$ |
154 |
|
|
|
As of
December 31, 2019 |
|
|
|
Principal |
|
|
Discount |
|
|
Net |
|
Total
notes payable-June 2018 Note |
|
$ |
929 |
|
|
$ |
(877 |
) |
|
$ |
52 |
|
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Dollars
in thousands, except per–share amounts)
During
the three months ended June 30, 2020 and 2019, the Company recorded
accretion of debt discount of $456 and $3,073,
respectively.
During
the six months ended June 30, 2020 and 2019, the Company recorded
accretion of debt discount of $877 and $4,164,
respectively.
Note
6. Leases
In
December 2019, the Company entered a new office lease in connection
with the relocation of its executive office to Raleigh, North
Carolina. The Company accounted for its new office lease as an
operating lease under the guidance of Topic 842. Rent expense under
the new lease is $3 per month, with annual increases of 3% during
the three-year term. The Company used an incremental borrowing rate
of 29.91% based on the weighted average effective interest rate of
its outstanding debt. In December 2019, the Company recorded a
Right of Use Asset of $79 and a corresponding Lease Liability of
$79. The Right to Use Asset is accounted for as an operating lease
and has a balance, net of amortization, of $65 as of June 30,
2020.
Total
future minimum payments required under the lease agreement are as
follows:
|
|
Amount |
|
Remainder of 2020 |
|
$ |
18 |
|
2021 |
|
|
38 |
|
2022 |
|
|
38 |
|
Total undiscounted minimum future
lease payments |
|
$ |
94 |
|
Less Imputed interest |
|
|
(29 |
) |
Present value of operating lease
liabilities |
|
$ |
65 |
|
Disclosed as: |
|
|
|
|
Current portion |
|
$ |
18 |
|
Non-current portion |
|
|
47 |
|
|
|
$ |
65 |
|
The
Company’s former executive office was located in Durham, North
Carolina under a sublease agreement that was terminated in December
2019, with monthly rent of $7 in the final year of the sublease
agreement. The Company recorded rent expense of $9 and $20 for the
three months ended June 30, 2020 and 2019, respectively, and $18
and $40 for the six months ended June 30, 2020 and 2019,
respectively.
At
June 30, 2020, the weighted average remaining lease term for
operating lease was 2.45 years. The Company’s lease agreement does
not contain any material residual value guarantees or material
restrictive covenants.
Note
7. Common Stock and Preferred Stock
Common stock
Equity
Purchase Agreement under Form S-3
On
August 30, 2018, the Company and L2 Capital, LLC (“L2 Capital”)
entered into an equity purchase agreement, which was later amended
on November 30, 2018, whereby the Company could issue and sell to
L2 Capital from time to time up to $50,000 of the Company’s common
stock that was registered with the SEC under a registration
statement on Form S–3. Subject to the terms of the equity purchase
agreement, the Company provided notices (a “Put Notice”) requiring
L2 Capital to purchase a number of shares (the “Put Shares”) of the
common stock equal to the lesser of $500 and 200% of the average
trading volume of the common stock in the ten trading days
immediately preceding the date of such Put Notice. The terms also
provided the purchase price for such Put Shares to be the lowest
traded price on a principal market for any trading day during the
five trading days either following or beginning on the date on
which L2 Capital receives delivery of the Put Shares, multiplied by
95.0%.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Dollars
in thousands, except per–share amounts)
During
the three and six months ended June 30, 2019, the Company issued
23,900,000 and 67,000,000 shares of its common stock in exchange
for $1,575 and $3,731, respectively. Of the proceeds received
during the three months ended March 31, 2019, $354 was applied
directly as payment against the December 2018 Note.
On
April 16, 2019, the Company became ineligible to issue shares under
its registration statement on Form S-3 as the aggregate market
value of the Company’s common stock held by non-affiliates was
below the regulatory threshold of $75,000. In connection with this
ineligibility, the equity purchase agreement was
terminated.
Equity
Purchase Agreement under Form S-1
On
June 3, 2019, the Company entered into an equity purchase agreement
with Oasis Capital, whereby the Company had the right, but not the
obligation, to direct Oasis Capital to purchase shares of the
Company’s common stock (the “New Put Shares”) in an amount in each
instance up to the lesser of $1,000 or 250% of the average daily
trading volume by delivering a notice to Oasis Capital (the “New
Put Notice”). The purchase price (the “Purchase Price”) for the New
Put Shares shall equal 95% of the one lowest daily volume weighted
average price on a principal market during the five trading days
immediately following the date Oasis receives the New Put Shares
via DWAC associated with the applicable New Put Notice (the
“Valuation Period”). The closing of a New Put Notice shall occur
within one trading day following the end of the respective
Valuation Period, whereby (i) Oasis shall deliver the Investment
Amount (as defined below) to the Company by wire transfer of
immediately available funds and (ii) Oasis shall return surplus New
Put Shares if the value of the New Put Shares delivered to Oasis
causes the Company to exceed the maximum commitment amount. The
Company shall not deliver another New Put Notice to Oasis within
ten trading days of a prior New Put Notice. The “Investment Amount”
means the aggregate Purchase Price for the New Put Shares purchased
by Oasis, minus clearing costs payable to Oasis’s broker or to the
Company’s transfer agent for the issuance of the New Put Shares.
The shares issuable under the equity purchase agreement are
registered with the SEC under a registration statement on Form S-1
that was declared effective on June 25, 2019 covering up to
76,558,643 shares of common stock (the “S-1”), and are subject to a
maximum beneficial ownership by Oasis Capital of 9.99%.
Through
December 31, 2019, the Company sold 52,000,000 shares of its common
stock under the Form S-1 and no shares were sold during the six
months ended June 30, 2020.
By
way of a post-effective amendment on June 25, 2020, the company
filed to terminate the effectiveness of the S-1 and to deregister
all shares of common stock that remained unsold. The SEC permitted
this post-effective amendment to go effective July 2,
2020.
Other
Common Stock Issuances
On
April 12, 2019, the Company entered into a purchase agreement with
an accredited investor whereby it sold 17,500,000 shares of its
common stock for $525 pursuant to the Company’s then-effective
registration statement on Form S-3. The holder of these shares is
also the holder of the June 2018 Note and an affiliate of the
acquirer of 150 shares of the Preferred Shares acquired on April
12, 2019 described below.
During
the six months ended June 30, 2019, the Company issued 160,500
shares of its common stock to consultants in exchange for services.
These services were valued at $60 based upon the value of the
shares issued. No shares were issued to consultants during the six
months ended June 30, 2020.
Preferred Stock
On
January 11, 2019, the Company’s Board of Directors approved the
authorization of 10,000 shares of Series B Preferred Stock with a
par value of $0.001 (“Series B Preferred Shares”). The holders of
the Series B Preferred Shares shall be entitled to receive, when,
as, and if declared by the Board of Directors of the Company, out
of funds legally available for such purpose, dividends in cash at
the rate of 12% of the stated value per annum on each Series B
Preferred Share. Such dividends shall be cumulative and shall
accrue without interest from the date of issuance of the respective
share of the Series B Preferred Shares. Each holder shall also be
entitled to vote on all matters submitted to stockholders of the
Company and shall be entitled to 55,000 votes for each Series B
Preferred Share owned at the record date for the determination of
stockholders entitled to vote on such matter or, if no such record
date is established, at the date such vote is taken or any written
consent of stockholders is solicited. In the event of a liquidation
event, any holders of the Series B Preferred Shares shall be
entitled to receive, for each Series B Preferred Shares, the stated
value in cash out of the assets of the Company, whether from
capital or from earnings available for distribution to its
stockholders. The Series B Preferred Shares are not convertible
into shares of the Company’s common stock. No shares of Series B
Preferred Shares have been issued or are outstanding.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Dollars
in thousands, except per–share amounts)
On
April 12, 2019, the Company’s Board of Directors approved the
authorization of 200 Series C Preferred Shares with a par value of
$0.001 (“Series C Preferred Shares”). The holders of the Series C
Preferred Shares have no voting rights, receive no dividends, and
are entitled to a liquidation preference equal to the stated value.
At any time, the Company may redeem the Series C Preferred Shares
at 1.2 times the stated value. Given the right of redemption is
solely at the option of the Company, the Series C Preferred Shares
are not considered mandatorily redeemable, and as such are
classified in shareholders’ equity on the Company’s consolidated
balance sheet.
Each
Series C Preferred Share is convertible into shares of the
Company’s common stock in an amount equal to the greater of: (a)
200,000 shares of common stock or (b) the amount derived by
dividing the stated value by the product of 0.7 times the market
price of the Company’s common stock, defined as the lowest trading
price of the Company’s common stock during the ten day period
preceding the conversion date. The holder may not convert any
Series C Preferred Shares if the total amount of shares held,
together with holdings of its affiliates, following a conversion
exceeds 9.99% of the Company’s common stock.
The
common shares issued upon conversion of the Series C Preferred
Shares have been registered under the Company’s then-effective
registration statement on Form S-3. On April 12, 2019, the Company
sold 190 Series C Preferred Shares for $1,890, net of issuance
costs and on July 15, 2019 sold 10 Series C Preferred Shares for
$100. During the second and third quarters of 2019, holders
converted 50 Series C Preferred Shares into 14,077,092 shares of
common stock and 35 Series C Preferred Shares into 13,528,575
shares of common stock, respectively. 115 shares of Series C
Preferred Stock are issued and outstanding as of June 30, 2020 and
December 31, 2019.
Upon
issuance of the Series C Preferred Shares during the second and
third quarters of 2019, the Company recorded a deemed dividend
based on the beneficial conversion feature underlying the Preferred
Shares, measured as the difference between the conversion price of
the Series C Preferred Shares and the fair value of the underlying
common stock Accordingly, on April 12, 2019 and July 2019
issuances, the Company recorded deemed dividends of $959 and $46,
respectively.
Note
8. Stock–Based Compensation
Issuance of restricted common stock – directors, officers and
employees
The
Company’s activity in restricted common stock was as follows for
the six months ended June 30, 2020:
|
|
Number of
shares |
|
|
Weighted
average
grant date fair
value |
|
Non–vested at January 1, 2020 |
|
|
650,000 |
|
|
$ |
1.24 |
|
Granted |
|
|
- |
|
|
$ |
- |
|
Vested |
|
|
(583,333 |
) |
|
$ |
1.48 |
|
Non–vested at June 30, 2020 |
|
|
66,667 |
|
|
$ |
0.04 |
|
For
the three months ended June 30, 2020 and 2019, the Company has
recorded $2 and $730, in employee and director stock–based
compensation expense, which is a component of general and
administrative expenses in the consolidated statement of
operations.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Dollars
in thousands, except per–share amounts)
For
the six months ended June 30, 2020 and 2019, the Company has
recorded $222 and $1,679, in employee and director stock–based
compensation expense, which is a component of general and
administrative expenses in the consolidated statement of
operations.
As of
June 30, 2020, unamortized stock-based compensation costs related
to restricted share arrangements was $2 and will be recognized over
a weighted average period of 0.58 years.
Stock options
As of
December 31, 2019, the Company had 6,000,000 stock options with a
weighted average exercise price of $0.71 and a weighted average
grant date fair value of $1.29. All the stock options were fully
vested and there were no unrecognized costs. Under the terms of the
stock option agreement, all options expired on January 31, 2020. As
of June 30, 2020, there are no outstanding or exercisable stock
options.
Note
9. Commitments and Contingencies
Bitcoin Production Equipment and Operations
On
August 14, 2018, the Company entered a collaborative venture with
Bit5ive, LLC to develop a fully contained crypto currency mining
pod (the “POD5 Agreement”) for a term of five years. Pursuant to
the POD5 Agreement, the Company assists with the design and
development of the POD5 Containers. The Company retains naming
rights to the pods and receives royalty payments from Bit5ive, LLC
in exchange for providing capital as well as engineering and design
expertise. During the three and six months ended June 30, 2020 the
Company received royalties and recognized revenue under this
agreement of $3 for both periods. During the three and six months
ended June 30, 2019, revenues recognized under this agreement was
$47 for both periods.
Electricity Contract
In
June 2019, the Company entered into a two-year contract for
electric power with the City of Lafayette, Georgia, a municipal
corporation of the State of Georgia (“the City”). The Company makes
monthly payments based upon electricity consumed, at a negotiated
kilowatt per hour rate, inclusive of transmission charges and
exclusive of state and local sales taxes. Over time, the Company is
entitled to utilize a load of 10 megawatts. For each month, the
Company estimates its expected electric load, and should the actual
load drop below 90% of this estimate, the City reserves the right
to impose a modest penalty to the hourly kilowatt rate for
electricity consumed.
In
connection with this agreement, the Company paid a $154 security
deposit, which was reduced to $120 in June 2020. The new amount is
classified as Other Assets in the Company’s consolidated balance
sheet as of June 30, 2020.
Management Agreement Termination Liability
On
August 31, 2019, the Company entered into two Settlement and
Termination Agreements (the “Settlement Agreements”) to management
agreements it entered in 2017 with two accredited investors
(together the “Users”). Under the terms of the Settlement
Agreements, the Company will pay the Users a percentage of profits
(“Settlement Distribution”) of Bitcoin mining as defined in the
Settlement Agreements. The estimated present value of the
Settlement Distributions of $337 was recorded as termination
expense with an offsetting liability on August 31, 2019. Since two
of the components of the Settlement Distribution, Bitcoin price and
Difficulty Rate, as defined in the Settlement Agreements, are based
on market conditions, the liability will be adjusted to fair value
on a quarterly basis and any changes will be recorded in the
statement of operations. As such, the liability is considered a
Level 3 financial instrument. During 2019, the Company recognized a
gain on the change in the fair value of $176 based on the change of
Bitcoin price and Difficulty Rate, and along with the monthly
Settlement Distributions valued at $45, the liability was reduced
to $116 as of December 31, 2019. During the three and six months
ended June 30, 2020, the Company recognized a gain on the change in
the fair value of $23 and $38, respectively, based on the change of
Bitcoin price and Difficulty Rate, and along with the monthly
Settlement Distributions valued at $25, the liability was reduced
to $10 as of June 30, 2020. Based on the terms of the Settlement
Agreements, Settlement Distributions are scheduled to terminate on
September 30, 2020.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Dollars
in thousands, except per–share amounts)
Legal
The
Company has resolved all shareholder legal actions formerly pending
in state and federal courts.
On
January 24, 2017, the Company was served with a summons and
complaint filed by plaintiff shareholder Atul Ojha in New York
state court against certain officers and directors of the Company
and naming the Company as a nominal defendant. The lawsuit is
styled as a derivative action (the “Ojha Derivative Action”) and
was originally filed (but not served on any defendant) on October
15, 2016. The Ojha 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 Ojha Derivative Action
asserts claims including, but not limited to, breach of fiduciary
duties, unjust enrichment and waste of corporate assets.
On
December 12, 2018, a shareholder derivative action was filed by
shareholder Bob Thomas against certain current and former
directors, officers and shareholders of the Company, and naming the
Company as a nominal defendant, in New York state court, alleging
breach of fiduciary duties, unjust enrichment, abuse of control,
gross mismanagement, and waste and seeking declaratory relief and
damages (the “Thomas Derivative Action”). The underlying
allegations in the Thomas Derivative Action largely repeat the
allegations of wrongdoing in the 2018 Securities Class Actions, as
defined in the Company’s 2019 Form 10-K filed with the SEC on March
30, 2020.
On
April 23, 2020, the Company entered into a stipulation of
settlement (the “Stipulation”) in connection with the Ojha
Derivative Action and the Thomas Derivative Action (together, the
“Derivative Actions”). The consideration for the settlement of the
Derivative Actions is as follows: (i) adoption by the Company of
certain corporate governance reforms, the terms of which are fully
set forth in Exhibits A and B to the Stipulation; (ii) Robert B.
Ladd, H. Robert Holmes, Michael Onghai, and Nolan Bushnell shall
collectively pay or cause to be paid $75 to the Company; and (iii)
Barry C. Honig, John Stetson, Michael Brauser, John O’Rourke III,
and Mark Groussman shall collectively pay or cause to be paid $150
to the Company. Further, the Company shall, subject to court
approval, pay a fee and expense award to plaintiffs’ counsel in the
Derivative Actions of $150 and service awards to each of the two
plaintiffs in the Derivative Actions of $1.5 each, to be paid from
the fee and expense award. On April 24, 2020, the New York state
court entered an order preliminarily approving the Stipulation and
the settlement contemplated therein and providing for the notice of
the settlement to be made to current MGT Stockholders. The
Preliminary Approval Order further provides that the Court will
hold a hearing on the settlement on June 26, 2020. On May 4, 2020,
pursuant to the Preliminary Approval Order, MGT provided notice of
the settlement on its website, by press release and by filing a
Form 8-K with the Securities and Exchange Commission.
Final
approval of the settlement of the State Derivative Actions was
granted on July 2, 2020.
On
August 28, 2019, a shareholder derivative action was filed by
shareholder Tyler Tomczak against the certain directors, officers
and shareholders of the Company, and naming the Company as a
nominal defendant, in the United States District Court for the
Southern District of New York, alleging breach of fiduciary duties,
waste and unjust enrichment and seeking declaratory relief and
damages (the “Tomczak Derivative Action”). The underlying
allegations in the Tomczak Derivative Action largely repeat the
allegations of wrongdoing in the 2018 Securities Class
Actions.
On
September 11, 2019, a shareholder derivative action was filed by
shareholder Arthur Aviles against certain directors, officers and
shareholders of the Company, and naming the Company as a nominal
defendant, in the United States District Court for the District of
Delaware, alleging breach of fiduciary duties, waste and unjust
enrichment and seeking declaratory relief and damages (the “Aviles
Derivative Action”). The underlying allegations in the Aviles
Derivative Action largely repeat the allegations of wrongdoing in
the 2018 Securities Class Actions.
On
May 7, 2020, the Company entered into a stipulation of settlement
(the “Federal Stipulation”) in connection with the Tomczak
Derivative Action and the Aviles Derivative Action (together, the
“Federal Derivative Actions”). The consideration for the settlement
of the Federal Derivative Actions is as follows: (i) adoption by
the Company of a certain corporate governance reform, the terms of
which are fully set forth in Exhibit A to the Federal Stipulation;
and (ii) Robert B. Ladd, H. Robert Holmes, and Michael Onghai shall
collectively pay or cause to be paid $65 to the Company. Further,
the Company shall, subject to court approval, pay a fee and expense
award to plaintiffs’ counsel in the Federal Derivative Actions of
$30 and incentive awards to each of the two plaintiffs in the
Federal Derivative Actions of $0.4 each. The parties to the Federal
Stipulation presently intend to file the Federal Stipulation with
the appropriate federal court after final approval of the
settlement of the two state Derivative Actions referred to
above.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Dollars
in thousands, except per–share amounts)
Final
approval of the settlement of the Federal Derivative Actions was
granted on August 5, 2020.
In September 2018 and October 2018, various shareholders of the
Company filed putative class action lawsuits against the Company,
its Chief Executive Officer and certain of its individual officers
and shareholders, alleging violations of federal securities laws
and seeking damages (the “2018 Securities Class Actions”). The 2018
Securities Class Action followed and referenced the allegations
made against the Company’s Chief Executive Officer and others in
the SEC Action. The first putative class action lawsuit was filed
on September 28, 2018, in the United States District Court for the
District of New Jersey, and alleges that the named defendants
engaged in a pump-and-dump scheme to artificially inflate the price
of the Company’s stock and that, as a result, defendants’
statements about the Company’s business and prospects were
materially false and misleading and/or lacked a reasonable basis at
relevant times. The second putative class action was filed on
October 9, 2018, in the United States District Court for the
Southern District of New York and makes similar allegations.
On May 28, 2019, the parties to the 2018 Securities Class Actions
entered into a binding settlement term sheet, and on September 24,
2019, the parties entered into a stipulation of settlement. On
August 7, 2019, the lead plaintiff in the first class action filed
a notice and order of voluntary dismissal with prejudice, and on
October 11, 2019, the lead plaintiff in the second class action
filed in the federal court in New York an unopposed motion for
preliminary approval of the proposed class action settlement. On
December 17, 2019, the court issued an order granting preliminary
approval of the settlement.
Final approval of the settlement of the 2018 Securities Class
Actions was granted on May 27, 2020. The plaintiff shareholder
class received $750 in cash settlement, inclusive of attorney fees.
This amount was paid by the Company’s insurance carrier.
In
November 2018, the Company’s board received a shareholder demand
letter dated November 6, 2018, from shareholders Nicholas Fulton
and Kelsey Thacker (the “Fulton Demand”). The Fulton Demand
referenced the SEC Action, as defined in the Company’s 2019 Form
10-K filed with the SEC on March 30, 2020, and the allegations
therein, and demanded that the board take action to investigate,
address and remedy the allegations raised in the SEC Action.
Shortly after the New York state court entered the order
preliminarily approving the stipulation of settlement in connection
with the Ojha Derivative Action and the Thomas Derivative Action,
counsel for the Company informed counsel for shareholders Nicholas
Fulton and Kelsey Thacker of that stipulation of settlement and of
counsel for the Company’s view that the releases in the settlement
covered the matters raised in the Fulton Demand.
Note
10. Employee Benefit Plans
The
Company maintains defined contribution benefit plans under Section
401(k) of the Internal Revenue Code covering substantially all
qualified employees of the Company (the “401(k) Plan”). Under the
401(k) Plan, the Company may make discretionary contributions of up
to 100% of employee contributions. During the six months ended June
30, 2020 and 2019, the Company made contributions to the 401(k)
Plan of $8 and $9, respectively.
Note
11. Subsequent Events
As detailed in Note 9, Final approval of the settlement of the
State Derivative Actions was granted on July 2, 2020, and final
approval of the settlement of the Federal Derivative Actions was
granted on August 5, 2020.
On
July 28, 2020, the holder of the June 2018 Note converted $154 of
debt principal into 17,164,732 shares of common stock, reducing the
outstanding principal to zero.
As
previously disclosed, in October 2019, the Company and its then
officers and directors received subpoenas from the SEC requesting
information, including but not limited to, with respect to risk
factors contained in certain of the Company’s filings with the SEC.
On October 21, 2020, the SEC notified the Company this
investigation concluded, and it does not intend to recommend an
enforcement action by the Commission against MGT in this matter.
This notice was sent pursuant to guidelines set out in Securities
Acts Release 5310, which states in part that the notice “must in no
way be construed as indicating that the party has been exonerated
or that no action may ultimately result from the Staff’s
investigation.”
On
December 8, 2020, the Company entered into a securities purchase
agreement with Buckhead Capital LLC, pursuant to which it issued a
convertible promissory note in the principal amount of $230 which
is convertible, at the option of the holder, into shares of common
stock at a conversion price equal to 70% of the lowest price for a
share of common stock during the ten trading days immediately
preceding the applicable conversion. The holder gave consideration
of $200 for the convertible promissory note. The note bears
interest at a rate of 8% per annum and will mature in twelve
months.
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 for the fiscal year ended December 31, 2019 as filed with the
Securities and Exchange Commission (“SEC”) on March 30, 2020, in
addition to other public reports we filed with the 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” or the “Company”) was incorporated
in Delaware in 2000. MGT was originally incorporated in Utah in
1977. MGT is comprised of the parent company and its wholly owned
subsidiary MGT Sweden AB. MGT’s corporate office is in Raleigh,
North Carolina.
All
dollar figures set forth in this Quarterly Report on this Form 10-Q
are in thousands, except per-share amounts.
Current
Operations
The
Company owns approximately 924 and 669 S17 Antminer Pro Bitcoin
miners at its Company-owned and managed facility located in
LaFayette, GA as of June 30 2020 and January 11 ,2021,
respectively. All miners were purchased from Bitmaintech Pte. Ltd.,
a Singapore limited company (“Bitmain”), and are collectively rated
at approximately 30 Ph/s in computing power. Bitmain has
acknowledged manufacturing defects, combined with inadequate repair
facilities, rendering approximately one half of our miners in need
of repair or replacement. The Company’s miners are housed in four
modified shipping containers including one manufactured by Bit5ive
LLC of Miami, Florida (“Pod5ive Containers”). A utility substation,
adjacent to the several acre property, has access to over 20
megawatts (MW) of low-cost power. The Company’s current electrical
load is estimated at slightly over 1.0 MW. The entire facility,
including the land, two 2500 KVA 3-phase transformers, the mining
containers, and miners, are owned by MGT. As the Company is
presently using only a portion of the built-out available
electrical load, it is exploring ways to grow and maintain its
current operations including but not limited to further equipment
sales, leasing space to other Bitcoin miners, and raising capital
to acquire newest generation miners.
Currently,
there are approximately 18.5 million Bitcoin in circulation, or
almost 90% of the total supply of Bitcoin. Within the Bitcoin
protocol is an event referred to as Halving where the Bitcoin
reward provided upon mining a block is periodically reduced by 50%.
Halvings are scheduled to occur once every 210,000 blocks, or
roughly every four years, until the maximum supply of 21 million
Bitcoin is reached. The third Halving occurred on May 11, 2020,
with a revised reward payout of 6.25 Bitcoin per block, down from
the previous reward payout of 12.5 Bitcoin per block
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 unaudited condensed consolidated financial
statements contained in this Quarterly Report describe our
significant accounting policies used in the preparation of the
unaudited condensed 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 unaudited condensed consolidated financial
statements.
Revenue recognition
The
Company’s primary revenue stream is related to the mining of
digital currencies. The Company derives its revenue by solving
“blocks” to be added to the blockchain and providing transaction
verification services within the digital currency network of
Bitcoin, commonly termed “cryptocurrency mining.” In consideration
for these services, the Company receives digital currency
(“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 as an intangible digital asset valued
at the lower of cost or net realizable value. Net realizable value
adjustments, to adjust the value of Coins to market value, are
included in cost of revenue on the Company’s consolidated statement
of operations. Further, any gain or loss on the sale of Coins would
be recorded to costs of revenue. Costs of revenue include
electricity costs, equipment and infrastructure depreciation, and
net realizable value adjustments. During 2019, costs of revenues
also included hosting fees based on third-party hosting agreements,
all of which were terminated as of December 31, 2019.
The
Company also recognizes a royalty participation upon the sale of
Pod5ive Containers by Bit5ive LLC under the terms of a
collaboration agreement entered in August 2018.
Property and Equipment
Property
and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated using the straight–line method on the
various asset classes over their estimated useful lives, which
range from one to ten years when placed in service. The cost of
repairs and maintenance is expensed as incurred; major replacements
and improvements are capitalized. When assets are retired or
disposed of, the cost and accumulated depreciation are removed from
the accounts, and any resulting gains or losses are included in
income in the year of disposition. Deposits on property and
equipment are initially classified as Other Assets and upon
delivery, installation and full payment, the assets are classified
as property and equipment on the consolidated balance
sheet.
Impairment of long-lived assets
Long-lived
assets are reviewed for impairment whenever facts or circumstances
either internally or externally may suggest that the carrying value
of an asset may not be recoverable, Should there be an indication
of impairment, we test for recoverability by comparing the
estimated undiscounted future cash flows expected to result from
the use of the asset to the carrying amount of the asset or asset
group. Any excess of the carrying value of the asset or asset group
over its estimated fair value is recognized as an impairment
loss.
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 compensation
committee of the board of directors of the Company (the “Board of
Directors”). These awards are restricted as to the transfer of
ownership and generally vest over the requisite service periods,
typically over a 12 to 24-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 the Company’s common stock on the grant
date.
The
fair value of an 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 inputs 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 the Company’s common stock over the
expected term of the option. Risk–free interest rates are
calculated based on continuously compounded risk–free rates for the
appropriate term.
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. The Company is
required to estimate the expected forfeiture rate and recognize
expense only for those shares expected to vest.
The
Company accounts for share–based payments granted to non–employees
in accordance with ASC 505–50, “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 readily determinable. 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.
Recent accounting pronouncements
Note
3 to our unaudited condensed consolidated financial statements
appearing elsewhere in this report includes Recent Accounting
Pronouncements.
Results of operations
Three months ended June 30, 2020 and 2019
Revenues
Our
revenues for the three months ended June 30, 2020 increased by $390
to $460 as compared to $70 for the three months ended June 30,
2019. Our revenue is derived from cryptocurrency mining. Revenue
during the three months ended June 30, 2020 were generated from the
Company-owned and managed facility located in LaFayette, GA.
Revenue during the three months ended June 30, 2019 were generated
from a third-party hosting arrangement in Washington which was
terminated on March 22, 2019. Due to the steadily declining price
of Bitcoin throughout the first quarter of 2019, the Company
decided it was not economically responsible to continue mining
operations until Bitcoin economics improved, which occurred in May
2019.
Operating
Expenses
Operating
expenses for the three months ended June 30, 2020 decreased by
$937, or 45%, to $1,155 as compared to $2,092 for the three months
ended June 30, 2019. The decrease in operating expenses was
primarily due to a decrease in general and administrative expenses
of $1,451, offset by an increase of $514 in cost of revenue from
cryptocurrency mining resulting from the ramp up of the Company’s
mining operations in Georgia during the three months ended June 30,
2020.
The
decrease in general and administrative expenses of $1,451 or 70% to
$623 as compared to $2,074 for the three months ended June 30,
2020, was primarily due to a decrease in stock-based compensation
of $728 based on fewer shares issued or vested and a lower stock
price in 2020 compared to 2019, a decrease in payroll and related
expenses of $86, a decrease in legal and professional fees of $232,
offset by costs related to the Company’s mining facility in Georgia
of $49.
Other
Income and Expense
For
the three months ended June 30, 2020, non–operating income and
expenses consisted of accretion of debt discount of $456, income
from the change in the fair value of the liability associated with
the termination of the management agreements of $23, and a loss on
sale of property and equipment of $288. During the comparable
period ended June 30, 2019, non–operating income and expenses
consisted of interest income of $3, accretion of debt discount of
$3,073, and a gain on extinguishment of debt of $1,473.
Six months ended June 30, 2020 and 2019
Revenues
Our
revenues for the six months ended June 30, 2020 increased by $1,039
to $1,137 as compared to $98 for the six months ended June 30,
2019. Our revenue is derived from cryptocurrency mining. Revenue
during the six months ended June 30, 2020 were generated from the
Company-owned and managed facility located in LaFayette, GA.
Revenue during the six months ended June 30, 2019 were generated
from a third-party hosting arrangement in Washington which was
terminated on March 22, 2019. Due to the steadily declining price
of Bitcoin throughout the first quarter of 2019, the Company
decided it was not economically responsible to continue mining
operations until Bitcoin economics improved, which occurred in May
2019.
Operating
Expenses
Operating
expenses for the six months ended June 30, 2020 decreased by
$1,302, or 32%, to $2,790 as compared to $4,092 for the six months
ended June 30, 2019. The decrease in operating expenses was
primarily due to a decrease in general and administrative expenses
of $2,335, offset by an increase of $1,033 in cost of revenue from
cryptocurrency mining resulting from the ramp up of the Company’s
mining operations in Georgia during the six month ended June 30,
2020. Cost of revenue during the six months ended June 30, 2019
consisted of fees under a third-party hosting arrangement in
Washington which it terminated on March 22, 2019.
The
decrease in general and administrative expenses of $2,335 or 59% to
$1,653 as compared to $3,988 for the six months ended June 30,
2020, was primarily due to a decrease in stock-based compensation
of $1,457 based on fewer shares issued or vested and a lower stock
price in 2020 compared to 2019, a decrease in payroll and related
expenses of $158, a recovery of $431 of Swedish energy taxes,
offset by an increase in legal and professional fees of $86, and
costs related to the Company’s mining facility in Georgia of
$146.
Other
Income and Expense
For
the six months ended June 30, 2020, non–operating income and
expenses consisted of interest income of $10, accretion of debt
discount of $877, income from a change in the fair value of the
liability associated with the termination of the management
agreements of $38 and a loss on sale of property and equipment of
$258. During the comparable period ended June 30, 2019,
non–operating expenses consisted of accretion of debt discount of
$4,164, gain on extinguishment of debt of $2,748 and a gain on sale
of property and equipment of $82.
Liquidity and capital resources
Sources
of Liquidity
We
have historically financed our business through the sale of debt
and equity interests. We have incurred significant operating losses
since inception and continue to generate losses from operations and
as of June 30, 2020 have an accumulated deficit of $417,242. At
June 30, 2020, our cash and cash equivalents were $58, and our
working capital deficit was $1,465. As of June 30, 2020, we had one
note payable outstanding with a principal amount of $154, after
conversion of $775 of debt principal into 75,913,760 shares of
common stock during the six months ended June 30, 2020.
In
January 2020, management completed the initial phase of its plan to
consolidate its activities in Company-owned and managed facilities,
executing on its expansion model to secure low cost power and grow
its cryptocurrency assets. In connection with this plan, the
Company terminated its management agreements and its third-party
hosting arrangements in 2019. The Company will need to raise
additional funding to grow its operations and to pay current
maturities of debt. There can be no assurance however that the
Company will be able to raise additional capital when needed, or at
terms deemed acceptable, if at all. The Company’s ability to raise
additional capital will also be impacted by the volatility of
Bitcoin and the ongoing SEC enforcement action against our Chief
Executive Officer, both of which are highly uncertain, cannot be
predicted and could have an adverse effect on the Company’s
business and financial condition. The issuance of any additional
shares of Common Stock, preferred stock or convertible securities
could be substantially dilutive to our shareholders. Such factors
raise substantial doubt about the Company’s ability to sustain
operations for at least one year from the issuance of these
unaudited condensed consolidated financial statements. The
accompanying unaudited condensed consolidated financial statements
do not include any adjustments related 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.
The
price of Bitcoin is volatile, and fluctuations are expected.
Declines in the price of Bitcoin have had a negative impact on our
operating results and liquidity and could harm the price of our
common stock. Movements may be influenced by various factors,
including, but not limited to, government regulation, security
breaches experienced by service providers, as well as political and
economic uncertainties around the world. Since we record revenue
based on the price of earned Bitcoin and we may retain such Bitcoin
as an asset or as payment for future expenses, the relative value
of such revenues may fluctuate, as will the value of any Bitcoin we
retain. The low and high exchange price per Bitcoin for the year
ending December 31, 2019, as reported by Blockchain.info, were
approximately $3 and $14 respectively. During the period January 1,
2020 through June 30, 2020, the price of Bitcoin remained volatile,
with a low and high exchange price per Bitcoin of approximately $5
and $10, respectively.
The
supply of Bitcoin is finite. Once 21 million Bitcoin are generated,
the network will stop producing more. Currently, there are
approximately 18.5 million Bitcoin in circulation, or 90% of the
total supply of Bitcoin. Within the Bitcoin protocol is an event
referred to as Halving where the Bitcoin reward provided upon
mining a block is reduced by 50%. Halvings are scheduled to occur
once every 210,000 blocks, or roughly every four years, until the
maximum supply of 21 million Bitcoin is reached. The third Halving
occurred on May 11, 2020, with a revised reward payout of 6.25
Bitcoin per block, down from the previous reward payout of 12.5
Bitcoin per block
Given
a stable hash rate, a Halving reduces the number of new Bitcoin
being generated by the network. While the effect is to limit the
supply of new coins, it has no impact on the quantity of total
Bitcoin outstanding. As a result, the price of Bitcoin could rise
or fall based on overall investor and consumer demand. The price of
Bitcoin has increased following the Halving on May 11, 2020 but the
Company’s revenue has been reduced by nearly 50% as result of the
lower reward payout, as compared with the period immediately
preceding the Halving. The revenue decline, coupled with the
relatively fixed cost of revenue (principally electricity and
depreciation), creates a much larger negative impact to
profit.
Our
primary source of operating funds has been through debt and equity
financing.
COVID-19
pandemic:
The
COVID-19 pandemic represents a fluid situation that presents a wide
range of potential impacts of varying durations for different
global geographies, including locations where we have offices,
employees, customers, vendors and other suppliers and business
partners.
Like
most US-based businesses, the COVID-19 pandemic and efforts to
mitigate the same began to have impacts on our business in March
2020. By that time, much of our first fiscal quarter was
completed.
In
light of broader macro-economic risks and already known impacts on
certain industries, we have taken, and continue to take targeted
steps to lower our operating expenses because of the COVID-19
pandemic. We continue to monitor the impacts of COVID-19 on our
operations closely and this situation could change based on a
significant number of factors that are not entirely within our
control and are discussed in this and other sections of this
quarterly report on Form 10-Q.
To
date, travel restrictions and border closures have not materially
impacted our ability to operate. However, if such restrictions
become more severe, they could negatively impact those activities
in a way that would harm our business over the long term. Travel
restrictions impacting people can restrain our ability to operate,
but at present we do not expect these restrictions on personal
travel to be material to our business operations or financial
results.
Like
most companies, we have taken a range of actions with respect to
how we operate to assure we comply with government restrictions and
guidelines as well as best practices to protect the health and
well-being of our employees. We have also undertaken measures to
reduce our administrative and advisory costs required as a publicly
reporting company. Actions taken to date include salary reductions
for senior management and termination of certain consulting
agreements. However, the impacts of COVID-19 and efforts to
mitigate the same have remained unpredictable and it remains
possible that challenges may arise in the future.
The
actions we have taken so far during the COVID-19 pandemic include,
but are not limited to:
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requiring
all employees who can work from home to work from home; |
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increasing
our IT networking capability to best assure employees can work
effectively outside the office; and |
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for
employees who must perform essential functions in one of our
offices; |
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Having
employees maintain a distance of at least six feet from other
employees whenever possible; |
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|
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● |
Having
employees work in dedicated shifts to lower the risk all employees
who perform similar tasks might become infected by
COVID-19; |
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● |
Having
employees stay segregated from other employees in the office with
whom they require no interaction; and |
|
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● |
Requiring
employees to wear masks while they are in the office whenever
possible. |
U.S. Small Business Administration-Paycheck Protection
Plan
On
April 16, 2020, we entered into a promissory note with Aquesta Bank
for $108 in connection the Paycheck Protection Program offered by
the U.S. Small Business Administration. The note bears interest at
1% per annum, with monthly installments of $6 commencing on
November 1, 2021 for 18 months through its maturity on April 1,
2023. The principal amount of the loan will be forgiven if the loan
proceeds are used to pay for payroll costs, rent and utilities
costs over the 24-week period after the loan is made. Not more than
25% of the forgiven amount may be used for non-payroll costs. The
amount of the loan forgiveness will be reduced if we reduce our
full-time head count. The Company has started the process for
forgiveness and expects to be successful based on the stated
criteria.
Equity Purchase Agreements
In
August 2018, as amended in December 2018, we and Oasis Capital, LLC
(“Oasis”) entered into an equity purchase agreement pursuant to
which we issued and sold to Oasis from time to time 100,650,000
shares of our common stock for gross proceeds of $6,491, registered
with the SEC under a Form S–3. On April 16, 2019, our registration
statement on Form S–3 lost its effectiveness as the aggregate
market value of our common stock held by non-affiliates was below
the regulatory threshold of $75,000.
In
June 2019, we entered into a new equity purchase agreement pursuant
to which we may issue and sell to Oasis from time to time up to
76,558,643 shares of our common stock that are registered with the
SEC under a Form S-1 that went effective on June 25, 2019. Through
December 31, 2019, we sold 52,000,000 shares of our common stock
under the Form S-1 and no shares were sold during the six months
ended June 30, 2020. By way of a post-effective amendment on June
25, 2020, the company filed to terminate the effectiveness of the
S-1 and to deregister all shares of common stock that remained
unsold. The SEC permitted this post-effective amendment to go
effective July 2, 2020.
Property & Equipment Acquisitions and
Commitments
In
connection with our plans to consolidate our activities in a
Company-owned and managed facility in LaFayette, Georgia, we
acquired the following assets during 2019 and through June 30,
2020:
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● |
6
acres of land in Lafayette, Georgia for $57 |
|
● |
1,500
Bitcoin miners valued at $2,313 |
|
● |
Infrastructure
costs totaling $1,027 |
|
● |
5
customized Bitcoin mining containers for $782 |
The
Company has sold 532 and 787 miners, respectively through June 30,
2020 and January 11, 2021 respectively. It has also sold one mining
container as of January 11, 2021.
The
LaFayette site is structurally complete. The entire facility,
including the land, two 2500 KVA 3-phase transformers, the mining
containers and the miners, are owned by MGT. As we are presently
using a small portion of the available electrical load, we are
exploring ways to grow our current operations, including but not
limited to further equipment sales, leasing space to other Bitcoin
miners, and raising capital to acquire newest generation
miners.
Cash
Flows
|
|
Six Months ended June 30, |
|
|
|
2020 |
|
|
2019 |
|
Cash (used in) /
provided by |
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
(191 |
) |
|
$ |
(2,611 |
) |
Investing activities |
|
|
(75 |
) |
|
|
(72 |
) |
Financing activities |
|
|
108 |
|
|
|
5,646 |
|
Net (decrease)
increase in cash and cash equivalents |
|
$ |
(158 |
) |
|
$ |
2,963 |
|
Operating activities
Net
cash used in operating activities was $191 for the six months ended
June 30, 2020 as compared to net cash used in operating activities
of $2,611 for the six months ended June 30, 2019. Cash used in
operating activities for the six months ended June 30, 2020
primarily consisted of a net loss of $2,740, offset by non-cash
charges of $2,007 which includes depreciation of $658, stock-based
compensation of $222, amortization of note discount of $877, a loss
from sale of property and equipment of $288, offset by the change
in the fair value of the liability associated with the termination
of the management agreements of $38, and cash provided by a change
in working capital of $542.
Net
cash used in operating activities of $2,611 for the six months
ended June 30, 2019 primarily consisted of a net loss of $5,328,
offset by non-cash charges of $3,013, which includes stock-based
compensation of $1,679 and amortization of note discount of $4,164,
partially offset by a non-cash gain on debt extinguishment of
$2,748 and a gain from sale of property and equipment of $82, and
cash used from the change in working capital of $296.
Investing activities
Net
cash used in investing activities was $75 for the six months ended
June 30, 2020, consisting of purchases of property and equipment of
$370 and payment of a security deposit of $38, offset by proceeds
from the sale of property and equipment of $299 and refund of a
security deposit of $34. Net cash used in investing activities was
$72 for the six months ended June 30, 2019, consisting of purchases
of property and equipment.
Financing activities
During
the six months ended June 30, 2020, cash provided by financing
activities totaled $108 from proceeds of an SBA PPP loan. During
the six months ended June 30, 2019, cash provided by financing
activities totaled $5,646, consisting of $3,329 from the sale of
stock under our equity purchase agreement, $1,890 from the sale of
preferred stock, $525 from the sale of common stock, $120 from the
exercise of warrants, offset by $210 for the repayment of notes
payable and $8 for the payment of deferred offering
costs.
Off–balance
sheet arrangements
As of
June 30, 2020, we had 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.
Item 3. Quantitative and qualitative
disclosures about market risk
The
Company is not exposed to market risk related to interest rates on
foreign currencies.
Item 4. Controls and
procedures
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures designed to ensure that
the information we are required to disclose in reports that we file
or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified under the rules and
forms of the SEC. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that
such information is accumulated and communicated to our management,
including our Chief Executive Officer and our Chief Financial
Officer, as appropriate to allow timely decisions regarding
required disclosures. As required by paragraph (b) of Rules 13a-15
and 15d-15 under the Exchange Act, our Chief Executive Officer (our
principal executive) and Chief Financial Officer (our principal
financial officer and principal accounting officer) carried out an
evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures as of June 30, 2020. Based on
this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures (as
defined in paragraph (e) of Rules 13a-15 and 15d-15 under the
Exchange Act) were not effective as June 30, 2020.
Limitations
on Internal Control over Financial Reporting
An
internal control system over financial reporting has inherent
limitations and may not prevent or detect misstatements. Therefore,
even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may
deteriorate. However, these inherent limitations are known features
of the financial reporting process. Therefore, it is possible to
design into the process safeguards to reduce, though not eliminate,
this risk.
Management’s
Quarterly Report on Internal Control over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting, as defined in Exchange
Act Rule 13a-15(f) and 15d-15(f). Internal control over financial
reporting is a process used to provide reasonable assurance
regarding the reliability of our financial reporting and the
preparation of our financial statements for external purposes in
accordance with generally accepted accounting principles in the
United States. Internal control over financial reporting includes
policies and procedures that pertain to the maintenance of records
that in reasonable detail accurately and fairly reflect the
transactions and dispositions of our assets; provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of our financial statements in accordance with
generally accepted accounting principles in the United States, and
that our receipts and expenditures are being made only in
accordance with the authorization of our board of directors and
management; and provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on our financial
statements.
Under
the supervision and with the participation of our management,
including our Chief Executive Officer (our principal executive
officer) and Chief Financial Officer (our principal financial
officer and principal accounting officer), we performed a complete
documentation of the Company’s significant processes and key
controls, and conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework in
Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission in 2013. Based
on this evaluation, management concluded that our internal control
over financial reporting was not effective as of June 30,
2020.
Resignation
of Principal Financial and Accounting Officer
Effective
June 30, 2020, (1) our Board of Directors accepted the resignation
of Robert Lowrey as Principal Financial and Accounting Officer and
any other positions on which he served with respect to the Company
and its subsidiaries and affiliates, and (2) the appointment of
Robert Ladd, our Principal Executive Officer, as our new Principal
Financial and Accounting Officer, in each case effective as of June
30, 2020.
Changes
in Internal Control over Financial Reporting
Other
than the resignation of our Principal Financial and Accounting
Officer, during the quarter ended June 30, 2020, there were no
changes to internal control over financial reporting.
PART II. OTHER
INFORMATION
Item 1. Legal
proceedings
The
Company has resolved all shareholder legal actions formerly pending
in state and federal courts.
On
January 24, 2017, the Company was served with a summons and
complaint filed by plaintiff shareholder Atul Ojha in New York
state court against certain officers and directors of the Company
and naming the Company as a nominal defendant. The lawsuit is
styled as a derivative action (the “Ojha Derivative Action”) and
was originally filed (but not served on any defendant) on October
15, 2016. The Ojha 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 Ojha Derivative Action
asserts claims including, but not limited to, breach of fiduciary
duties, unjust enrichment and waste of corporate assets.
On
December 12, 2018, a shareholder derivative action was filed by
shareholder Bob Thomas against certain current and former
directors, officers and shareholders of the Company, and naming the
Company as a nominal defendant, in New York state court, alleging
breach of fiduciary duties, unjust enrichment, abuse of control,
gross mismanagement, and waste and seeking declaratory relief and
damages (the “Thomas Derivative Action”). The underlying
allegations in the Thomas Derivative Action largely repeat the
allegations of wrongdoing in the 2018 Securities Class Actions, as
defined in the Company’s 2019 Form 10-K filed with the SEC on March
30, 2020.
On
April 23, 2020, the Company entered into a stipulation of
settlement (the “Stipulation”) in connection with the Ojha
Derivative Action and the Thomas Derivative Action (together, the
“Derivative Actions”). The consideration for the settlement of the
Derivative Actions is as follows: (i) adoption by the Company of
certain corporate governance reforms, the terms of which are fully
set forth in Exhibits A and B to the Stipulation; (ii) Robert B.
Ladd, H. Robert Holmes, Michael Onghai, and Nolan Bushnell shall
collectively pay or cause to be paid $75 to the Company; and (iii)
Barry C. Honig, John Stetson, Michael Brauser, John O’Rourke III,
and Mark Groussman shall collectively pay or cause to be paid $150
to the Company. Further, the Company shall, subject to court
approval, pay a fee and expense award to plaintiffs’ counsel in the
Derivative Actions of $150 and service awards to each of the two
plaintiffs in the Derivative Actions of $1.5 each, to be paid from
the fee and expense award. On April 24, 2020, the New York state
court entered an order preliminarily approving the Stipulation and
the settlement contemplated therein and providing for the notice of
the settlement to be made to current MGT Stockholders. The
Preliminary Approval Order further provides that the Court will
hold a hearing on the settlement on June 26, 2020. On May 4, 2020,
pursuant to the Preliminary Approval Order, MGT provided notice of
the settlement on its website, by press release and by filing a
Form 8-K with the Securities and Exchange Commission.
Final
approval of the settlement of the State Derivative Actions was
granted on July 2, 2020.
On
August 28, 2019, a shareholder derivative action was filed by
shareholder Tyler Tomczak against the certain directors, officers
and shareholders of the Company, and naming the Company as a
nominal defendant, in the United States District Court for the
Southern District of New York, alleging breach of fiduciary duties,
waste and unjust enrichment and seeking declaratory relief and
damages (the “Tomczak Derivative Action”). The underlying
allegations in the Tomczak Derivative Action largely repeat the
allegations of wrongdoing in the 2018 Securities Class
Actions.
On
September 11, 2019, a shareholder derivative action was filed by
shareholder Arthur Aviles against certain directors, officers and
shareholders of the Company, and naming the Company as a nominal
defendant, in the United States District Court for the District of
Delaware, alleging breach of fiduciary duties, waste and unjust
enrichment and seeking declaratory relief and damages (the “Aviles
Derivative Action”). The underlying allegations in the Aviles
Derivative Action largely repeat the allegations of wrongdoing in
the 2018 Securities Class Actions.
On
May 7, 2020, the Company entered into a stipulation of settlement
(the “Federal Stipulation”) in connection with the Tomczak
Derivative Action and the Aviles Derivative Action (together, the
“Federal Derivative Actions”). The consideration for the settlement
of the Federal Derivative Actions is as follows: (i) adoption by
the Company of a certain corporate governance reform, the terms of
which are fully set forth in Exhibit A to the Federal Stipulation;
and (ii) Robert B. Ladd, H. Robert Holmes, and Michael Onghai shall
collectively pay or cause to be paid $65 to the Company. Further,
the Company shall, subject to court approval, pay a fee and expense
award to plaintiffs’ counsel in the Federal Derivative Actions of
$30 and incentive awards to each of the two plaintiffs in the
Federal Derivative Actions of $0.4 each. The parties to the Federal
Stipulation presently intend to file the Federal Stipulation with
the appropriate federal court after final approval of the
settlement of the two state Derivative Actions referred to
above.
Final
approval of the settlement of the Federal Derivative Actions was
granted on August 5, 2020.
In September 2018 and October 2018, various shareholders of the
Company filed putative class action lawsuits against the Company,
its Chief Executive Officer and certain of its individual officers
and shareholders, alleging violations of federal securities laws
and seeking damages (the “2018 Securities Class Actions”). The 2018
Securities Class Action followed and referenced the allegations
made against the Company’s Chief Executive Officer and others in
the SEC Action. The first putative class action lawsuit was filed
on September 28, 2018, in the United States District Court for the
District of New Jersey, and alleges that the named defendants
engaged in a pump-and-dump scheme to artificially inflate the price
of the Company’s stock and that, as a result, defendants’
statements about the Company’s business and prospects were
materially false and misleading and/or lacked a reasonable basis at
relevant times. The second putative class action was filed on
October 9, 2018, in the United States District Court for the
Southern District of New York and makes similar allegations.
On May 28, 2019, the parties to the 2018 Securities Class Actions
entered into a binding settlement term sheet, and on September 24,
2019, the parties entered into a stipulation of settlement. On
August 7, 2019, the lead plaintiff in the first class action filed
a notice and order of voluntary dismissal with prejudice, and on
October 11, 2019, the lead plaintiff in the second class action
filed in the federal court in New York an unopposed motion for
preliminary approval of the proposed class action settlement. On
December 17, 2019, the court issued an order granting preliminary
approval of the settlement.
Final approval of the settlement of the 2018 Securities Class
Actions was granted on May 27, 2020. The plaintiff shareholder
class received $750 in cash settlement, inclusive of attorney fees.
This amount was paid by the Company’s insurance carrier.
In
November 2018, the Company’s board received a shareholder demand
letter dated November 6, 2018, from shareholders Nicholas Fulton
and Kelsey Thacker (the “Fulton Demand”). The Fulton Demand
referenced the SEC Action, as defined in the Company’s 2019 Form
10-K filed with the SEC on March 30, 2020, and the allegations
therein, and demanded that the board take action to investigate,
address and remedy the allegations raised in the SEC Action.
Shortly after the New York state court entered the order
preliminarily approving the stipulation of settlement in connection
with the Ojha Derivative Action and the Thomas Derivative Action,
counsel for the Company informed counsel for shareholders Nicholas
Fulton and Kelsey Thacker of that stipulation of settlement and of
counsel for the Company’s view that the releases in the settlement
covered the matters raised in the Fulton Demand.
Item 1A. Risk factors
There
are no additional risk factors other than those discussed in our
Annual Report on Form 10–K, as filed with the SEC on March 30,
2020.
Item 2. Unregistered sales of equity
securities and use of proceeds
On
May 7, 2020, June 2, 2020 and June 30, 2020, the Company issued
16,483,516, 14,778,325 and 11,904,762 shares of common stock to
Iliad Research and Trading, L.P. in connection with the conversion
of $150, $150 and $125 of outstanding principal.
In
issuing the securities described above, the Company relied upon the
exemption from registration provided by Section 4(a)(2) of the
Securities Act of 1933, as amended.
Item 3. Defaults upon senior
securities
None.
Item 4. Mine safety
disclosures
Not
applicable.
Item 5. Other
information
None.
Item 6. Exhibits
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
|
MGT
CAPITAL INVESTMENTS, INC |
|
|
|
Date:
January 12, 2021 |
By: |
/s/
Robert B. Ladd |
|
|
Robert
B. Ladd |
|
|
President,
Chief
Executive Officer and Acting Chief Financial Officer |
|
|
(Principal
Executive Officer, Principal Financial Officer and Principal
Accounting Officer) |