Note
2. Going concern and management plans
The
accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates
the realization of assets and the satisfaction of liabilities in the normal course of business. As of September 30, 2017, the
Company had incurred significant operating losses since inception and continues to generate losses from operations and as of September
30, 2017, has an accumulated deficit of $355,057. At September 30, 2017, MGT’s cash and cash equivalents were $43. These
matters raise substantial doubt about the Company’s ability to continue as a going concern. The unaudited condensed consolidated
financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the
classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Commercial
results have been limited and the Company has not generated significant revenues. The Company’s primary source of operating
funds since inception has been debt and equity financings. The Company intends to raise additional capital through debt and equity
financings. Management believes that it can be successful in obtaining additional capital; however, no assurance can be provided
that the Company will be able to do so. There is no assurance that any funds raised will be sufficient to enable the Company to
attain profitable operations or continue as a going concern. To the extent that the Company is unsuccessful, the Company may need
to curtail or cease its operations and implement a plan to extend payables or reduce overhead until sufficient additional capital
is raised to support further operations. There can be no assurance that such a plan will be successful.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
3. Summary of significant accounting policies
Basis
of presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions
to Form 10–Q and Rule 10 of Regulation S–X. Accordingly, they do not include all of the information and notes required
by U.S. GAAP. However, in the opinion of the management of the Company, all adjustments necessary for a fair presentation of the
financial position and operating results have been included in these statements. These unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s
Annual Report on Form 10–K for the fiscal year ended December 31, 2016, as filed with the SEC on April 20, 2017. Operating
results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected
for any subsequent quarters or for the year ending December 31, 2017.
Use
of estimates and assumptions and critical accounting estimates and assumptions
The
preparation of financial statements, in conformity with U.S. GAAP, requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date(s) of the
financial statements and the reported amounts of revenues and expenses during the reporting period(s).
Critical
accounting estimates are estimates for which (a) the nature of the estimate is material due to the levels of subjectivity and
judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact
of the estimate on financial condition or operating performance is material. The Company’s critical accounting estimates
and assumptions affecting the financial statements were:
(1)
Fair value of long–lived assets
: Fair value is generally determined using the asset’s expected future discounted
cash flows or market value, if readily determinable. If long–lived assets are determined to be recoverable, but the newly
determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long–lived
assets are depreciated over the newly determined remaining estimated useful lives. The Company considers the following to be some
examples of important indicators that may trigger an impairment review: (i) significant under–performance or losses of assets
relative to expected historical or projected future operating results; (ii) significant changes in the manner or use of assets
or in the Company’s overall strategy with respect to the manner or use of the acquired assets or changes in the Company’s
overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a
significant decline in the Company’s stock price for a sustained period of time; and (vi) regulatory changes. The Company
evaluates acquired assets for potential impairment indicators at least annually and more frequently upon the occurrence of such
events.
(2)
Valuation allowance for deferred tax assets
: Management assumes that the realization of the Company’s net deferred
tax assets, resulting from its net operating loss (“NOL”) carry–forwards for Federal income tax purposes that
may be offset against future taxable income, was not considered more likely than not and accordingly, the potential tax benefits
of the net loss carry–forwards are offset by a full valuation allowance. Management made this assumption based on (a) the
Company has incurred recurring losses, (b) general economic conditions, and (c) its ability to raise additional funds to support
its daily operations by way of a public or private offering, among other factors.
(3)
Estimates and assumptions used in valuation of equity instruments and debt instruments
: Management estimates the expected
term of embedded conversion features, share options and similar instruments, expected volatility of the Company’s common
shares and the method used to estimate it, expected annual rate of quarterly dividends, and risk free rate(s) to value derivative
financial instruments, share options and similar instruments.
These
significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached
to these estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.
Management
bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the
financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources.
Management
regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes
in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those
estimates are adjusted accordingly. Actual results could differ from those estimates.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
3. Summary of significant accounting policies, continued
Principles
of consolidation
All
intercompany transactions and balances have been eliminated. Non–controlling interest represented the minority equity investment
in MGT subsidiaries, plus the minority investors’ share of the net operating results and other components of equity relating
to the non–controlling interest.
Fair
value of financial instruments
The
Company follows ASC 820–10 of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards
Codification to measure the fair value of its financial instruments and disclosures about fair value of its financial instruments.
ASC 820–10 establishes a framework for measuring fair value and expands disclosures about fair value measurements. To increase
consistency and comparability in fair value measurements and related disclosures, ASC 820–10 establishes a fair value hierarchy
which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The three (3) levels
of fair value hierarchy defined by ASC 820–10 are described below:
Level
1
|
|
Quoted
market prices available in active markets for identical assets or liabilities as of the reporting date.
|
|
|
|
Level
2
|
|
Pricing
inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable
as of the reporting date.
|
|
|
|
Level
3
|
|
Pricing
inputs that are generally unobservable inputs and not corroborated by market data.
|
Financial
assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or
similar techniques and at least one significant model assumption or input is unobservable.
The
fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within
more than one level described above, the categorization is based on the lowest level input that is significant to the fair value
measurement of the instrument.
The
carrying amounts of the Company’s financial assets and liabilities, such as cash, prepaid expenses and other current assets,
accounts payable and accrued expenses approximate their fair values because of the short maturity of these instruments.
The
Company had no Level 3 financial assets or liabilities as of September 30, 2017 and December 31, 2016.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
3. Summary of significant accounting policies, continued
Fair
value of financial assets and liabilities measured on a recurring basis
The
Company uses Level 1 of the fair value hierarchy to measure the fair value of digital currencies and revalues its digital currencies
at every reporting period and recognizes gains or losses in the consolidated statements of operations that are attributable to
the change in the fair value of the digital currency.
Financial
assets and liabilities measured at fair value on a recurring basis are summarized below and disclosed on the balance sheets as
follows:
The
following table provides the investments carried at fair value measured on a recurring basis as of September 30, 2017:
|
|
|
|
|
Fair
value measurement using
|
|
|
|
Carrying
value
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Digital
currencies
|
|
$
|
17
|
|
|
$
|
17
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
17
|
|
The
following table provides the investments carried at fair value measured on a recurring basis as of December 31, 2016:
|
|
Carrying
Value
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Investments
– FNCX common shares
|
|
$
|
44
|
|
|
$
|
44
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
44
|
|
Digital
currencies
|
|
|
10
|
|
|
|
10
|
|
|
|
–
|
|
|
|
–
|
|
|
|
10
|
|
Beneficial
conversion feature of convertible notes payable
The
Company accounts for convertible notes payable in accordance with the guidelines established by the FASB Accounting Standards
Codification (“ASC”) Topic 470-20, Debt with Conversion and Other Options. The beneficial conversion feature of a
convertible note is normally characterized as the convertible portion or feature of certain notes payable that provide a rate
of conversion that is below market value or in-the-money when issued. The Company records a beneficial conversion feature related
to the issuance of a convertible note when issued and also records the estimated fair value of any warrants issued with those
convertible notes. The beneficial conversion features that are contingent upon the occurrence of a future event are recorded when
the contingency is resolved.
The
beneficial conversion feature of a convertible note is measured by first allocating a portion of the note’s proceeds to
any warrants, if applicable, as a discount on the carrying amount of the convertible on a relative fair value basis. The discounted
face value is then used to measure the effective conversion price of the note. The effective conversion price and the market price
of the Company’s common stock are used to calculate the intrinsic value of the conversion feature. The intrinsic value is
recorded in the financial statements as a debt discount from the face amount of the note and such discount is amortized over the
expected term of the convertible note (or to the conversion date of the note, if sooner) and is charged to interest expense.
Revenue
recognition
The
Company recognizes revenue when it is realized or realizable and earned. We consider revenue realized or realizable and earned
when there is persuasive evidence of an arrangement and that the product has been shipped or the services have been provided to
the customer, the sales price is fixed or determinable and collectability is probable. Our material revenue stream is related
to the mining of digital currencies. The Company derives its revenue by providing transaction verification services within the
digital currency networks of crypto-currencies, such as Bitcoin and Ethereum, commonly termed “crypto- currency 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 at their fair value
and re–measured at each reporting date. Revaluation gains or losses, as well gains or losses on sale of Coins are recorded
in the statement of operations. Expenses associated with running the crypto-currency mining business, such as equipment deprecation,
rent and electricity cost are recorded as cost of revenues.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
3. Summary of significant accounting policies, continued
Loss
per share
Basic
loss per share is calculated by dividing net loss applicable to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted loss per share is calculated by dividing the net loss attributable to common shareholders
by the sum of the weighted average number of common shares outstanding plus potential dilutive common shares outstanding during
the period. Potential dilutive securities, comprised of unvested restricted shares, convertible debt stock warrants and stock
options, are not reflected in diluted net loss per share because such shares are anti–dilutive.
The
computation of diluted loss per share for the three and nine months ended September 30, 2017, excludes 4,100,000 unvested restricted
shares, 6,000,000 shares issuable under options, 4,357,143 shares issuable from the conversion of notes payable and 13,196,699
shares issuable under warrants. The computation of diluted loss per share for the three and nine months ended September 30, 2016,
excluded 3,000,000 unvested restricted shares and 560,000 shares issuable under warrants, as they were anti–dilutive due
to the Company’s net loss.
Segment
reporting
Operating
segments are defined as components of an enterprise about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision–making group in deciding how to allocate resources and in assessing
performance. Our chief operating decision–making group is composed of the chief executive officer. We currently operate
in the Cybersecurity and Crypto-Currency Mining segments. Certain corporate expenses are not allocated to segments.
Stock–based
compensation
The
Company recognizes compensation expense for all equity–based payments in accordance with ASC 718 “Compensation –
Stock Compensation”. Under fair value recognition provisions, the Company recognizes equity–based compensation net
of an estimated forfeiture rate and recognizes compensation cost only for those shares expected to vest over the requisite service
period of the award.
Restricted
stock awards are granted at the discretion of the Company. These awards are restricted as to the transfer of ownership and generally
vest over the requisite service periods, typically over an 18 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 Company 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 input into the model. These assumptions are the expected
stock volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock
and the expected forfeiture rate. Expected volatility is calculated based on the historical volatility of our common stock over
the expected option life and other appropriate factors. Risk–free interest rates are calculated based on continuously compounded
risk–free rates for the appropriate term. The dividend yield is assumed to be zero as the Company has never paid or declared
any cash dividends on our common stock and does not intend to pay dividends on our common stock in the foreseeable future. The
expected forfeiture rate is estimated based on historical experience.
Determining
the appropriate fair value model and calculating the fair value of equity–based payment awards requires the input of the
subjective assumptions described above. The assumptions used in calculating the fair value of equity–based payment awards
represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment.
As a result, if factors change and the Company uses different assumptions, our equity–based compensation could be materially
different in the future. In addition, the Company is required to estimate the expected forfeiture rate and recognize expense only
for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the equity–based
compensation could be significantly different from what the Company has recorded in the current period.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
3. Summary of significant accounting policies, continued
Stock–based
compensation, continued
The
Company accounts for share–based payments granted to non–employees in accordance with ASC 505–40, “Equity
Based Payments to Non–Employees”. The Company determines the fair value of the stock–based payment as either
the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.
If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions
as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments
is reached, or (2) the date at which the counterparty’s performance is complete. The fair value of unvested equity instruments
is re–measured each reporting period and such re-measured value is amortized over the requisite remaining service period.
Reclassification
Certain
amounts in prior periods have been reclassified to conform to current period presentation. These reclassifications had no effect
on the previously reported net loss.
Recent
accounting pronouncements
Management
does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material
effect on the accompanying consolidated financial statements, other than those disclosed below and in the Annual Report on Form
10–K.
In
May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers
(Topic 606).” The guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for
the transfer of promised goods or services to customers. The FASB delayed the effective date to annual reporting periods beginning
after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only
as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
In addition, in March and April 2016, the FASB issued new guidance intended to improve the operability and understandability of
the implementation guidance on principal versus agent considerations. Both amendments permit the use of either a retrospective
or cumulative effect transition method and are effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2017, with early application permitted. The Company is assessing the impact of this new standard on its financial
statements and has not yet selected a transition method.
In
February 2016, FASB issued ASU No. 2016–02, “Leases (Topic 842)”, which creates new accounting and reporting
guidelines for leasing arrangements. The new guidance requires organizations that lease assets to recognize assets and liabilities
on the balance sheet related to the rights and obligations created by those leases, regardless of whether they are classified
as finance or operating leases. Consistent with current guidance, the recognition, measurement, and presentation of expenses and
cash flows arising from a lease primarily will depend on its classification as a finance or operating lease. The guidance also
requires new disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows
arising from leases. The new standard is effective for annual reporting periods beginning after December 15, 2018, including interim
periods within that reporting period, with early application permitted. The new standard is to be applied using a modified retrospective
approach. The Company is currently evaluating the impact of the new pronouncement on its financial statements.
In
August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-15—Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 provides
guidance for eight specific cash flow issues with respect to how cash receipts and cash payments are classified in the statements
of cash flows, with the objective of reducing diversity in practice. The effective date for ASU 2016-15 is for annual periods
beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is
currently assessing the impact of this new standard on its financial statements.
In
January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-04, Intangibles – Goodwill and Other
(Topic 350). The amendments in this update simplify the test for goodwill impairment by eliminating Step 2 from the impairment
test, which required the entity to perform procedures to determine the fair value at the impairment testing date of its assets
and liabilities following the procedure that would be required in determining fair value of assets acquired and liabilities assumed
in a business combination. The amendments in this update are effective for public companies for annual or any interim goodwill
impairment tests in fiscal years beginning after December 15, 2019. We are evaluating the impact of adopting this guidance on
our Consolidated Financial Statements.
Note
3. Summary of significant accounting policies, continued
Recent
accounting pronouncements, continued
In
January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805); Clarifying the Definition of a Business. The amendments
in this update clarify the definition of a business to help companies evaluate whether transactions should be accounted for as
acquisitions or disposals of assets or businesses. The amendments in this update are effective for public companies for annual
periods beginning after December 15, 2017, including interim periods within those periods. We are evaluating the impact of adopting
this guidance on our Consolidated Financial Statements.
In
July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480)
and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement
of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Noncontrolling Interests with a Scope Exception”. Part I of this update addresses the complexity of accounting
for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments
(or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current
accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible
instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part
II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence
of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite
deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain
mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. ASU
2017-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company
has adopted the ASU beginning with these condensed consolidated financial statements. As a result, the conversion features of
certain of its convertible notes payable and equity instruments that contain “down round” provisions will not be bifurcated
and will not be recorded as a derivative liability.
Note
4. Prepaid expenses and other current assets
Prepaid
expenses and other current assets consisted of the following:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Prepaid
expenses
|
|
$
|
1,005
|
|
|
$
|
153
|
|
Deferred
offering costs (see Note 9)
|
|
|
160
|
|
|
|
–
|
|
Total
prepaid expenses and other current assets
|
|
$
|
1,165
|
|
|
$
|
153
|
|
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
5. Investments
Equity
security investments available for sale, at market value, reflect unrealized appreciation and depreciation, as a result of temporary
changes in market value during the period, in shareholders’ equity, net of income taxes in “accumulated other comprehensive
loss” in the condensed consolidated balance sheets. For publicly traded securities, market value is based on quoted market
prices or valuation models that use observable market inputs.
Investments
available for sale
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
FNCX
common shares
|
|
$
|
–
|
|
|
$
|
44
|
|
For
non–public, non–controlled investments in equity securities, the Company uses the cost–method of accounting.
Investments
at cost
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
DDGG
common shares
|
|
$
|
–
|
|
|
$
|
287
|
|
During
the three and nine months ended September 30, 2017, the Company recognized an impairment charge of $0 and $287, respectively,
related to its investment in DDGG.
Note
6. Intangible assets
The
Company’s intangible assets consisted of the following:
|
|
Intangible
assets
|
|
January
1, 2017
|
|
$
|
468
|
|
Impairment
|
|
|
–
|
|
Amortization
|
|
|
(124
|
)
|
September
30, 2017
|
|
$
|
344
|
|
The
Company recorded amortization expense of $41 and $0 for the three months ended September 30, 2017 and 2016, respectively. The
Company recorded amortization expense of $124 and $57, for the nine months ended September 30, 2017 and 2016, respectively.
The
following table outlines estimated future annual amortization expense for the next three years:
Years
ended December 31,
|
|
Amount
|
|
2017
(three months)
|
|
$
|
42
|
|
2018
|
|
|
165
|
|
2019
|
|
|
137
|
|
|
|
$
|
344
|
|
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
7. Property and equipment
Property
and equipment consisted of the following:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Computer
hardware and software
|
|
$
|
10
|
|
|
$
|
10
|
|
Crypto-currency
machines
|
|
|
4,223
|
|
|
|
708
|
|
Property
and equipment, gross
|
|
|
4,233
|
|
|
|
718
|
|
Less:
Accumulated depreciation
|
|
|
(502
|
)
|
|
|
(116
|
)
|
Property
and equipment, net
|
|
$
|
3,731
|
|
|
$
|
602
|
|
Property
and equipment, net includes $180 of crypto-currency machines not yet received. This equipment is expected to be received and placed
into service by December 31, 2017.
The
Company recorded depreciation expense of $189 and $19 for the three months ended September 30, 2017, and 2016, respectively. The
Company recorded depreciation expense of $385 and $30 for the nine months ended September 30, 2017, and 2016, respectively.
During
the second quarter of 2017, the Company sold bitcoin machines with a book value of $262 for gross proceeds of $310 and recorded
a gain on sale of $48.
During
the third quarter of 2017, the Company sold Bitcoin machines with a book value of $121 for gross proceeds of $130 and recorded
a gain on sale of $9.
Note
8. Accrued expenses
Accrued
expenses consisted of the following:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Interest
on notes payable
|
|
$
|
100
|
|
|
$
|
–
|
|
Legal,
consulting, and other fees
|
|
|
223
|
|
|
|
124
|
|
Total
|
|
$
|
323
|
|
|
$
|
124
|
|
Note
9. Convertible notes payable
As
of September 30, 2017, the Company’s convertible notes payable consisted of the following:
|
|
Gross
|
|
|
Discount
|
|
|
Net
|
|
|
Current
|
|
|
Long
Term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iliad
Note
|
|
$
|
1,355
|
|
|
$
|
(1,352
|
)
|
|
$
|
3
|
|
|
$
|
–
|
|
|
$
|
3
|
|
August 2017
Notes
|
|
|
330
|
|
|
|
(316
|
)
|
|
|
14
|
|
|
|
11
|
|
|
|
3
|
|
UAHC
Note
|
|
|
2,410
|
|
|
|
(2,408
|
)
|
|
|
2
|
|
|
|
–
|
|
|
|
2
|
|
September
2017 Note
|
|
|
480
|
|
|
|
(479
|
)
|
|
|
1
|
|
|
|
–
|
|
|
|
1
|
|
Total
|
|
$
|
4,575
|
|
|
$
|
(4,555
|
)
|
|
$
|
20
|
|
|
$
|
11
|
|
|
$
|
9
|
|
As
of December 31, 2016, the Company’s notes payable consisted of the following:
|
|
Gross
|
|
|
Discount
|
|
|
Net
|
|
|
Current
|
|
|
Long
Term
|
|
August
2016 Notes
|
|
$
|
2,300
|
|
|
$
|
-
|
|
|
$
|
2,300
|
|
|
$
|
-
|
|
|
$
|
2,300
|
|
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
9. Notes payable
August
2016 Notes
On
August 2, 2016, the Company sold $2,300 in unsecured promissory notes in a private placement, which were subsequently exchanged
for new notes in the same principal amount (the “August 2016 Notes”). The August 2016 Notes are convertible, at the
option of the holder thereof, into shares of the Company’s common stock at a conversion price of $1.00 per share, which
was to be adjusted for any future issuances of equity. During the first quarter of 2017, the conversion price of the August 2016
Notes was adjusted down to $0.75 per share.
During
February and March 2017, holders of the Company’s August 2016 Notes converted a total of $1,800 principal value into a total
of 1,900,000 shares of the Company’s common stock.
On
June 27, 2017, holders of the Company’s August 2016 Notes converted a total of $75 principal value into a total of 100,000
shares of the Company’s common stock.
On
July 7, 2017, holders of the Company’s August 2016 Notes converted a total of $175 principal value into a total of 233,334
shares of the Company’s common stock.
On
August 14, 2017, holders of the Company’s August 2016 Notes converted a total of $250 principal value into a total of 333,334
shares of the Company’s common stock.
For
each conversion, the book value of the notes was recorded as equity.
10%
convertible promissory notes
During
February and March 2017, the Company issued two $50, 10% convertible promissory notes. Both notes mature one year from the date
of issuance. Both notes are convertible at a fixed rate of $0.25 per share. Management recorded a beneficial conversion feature
on both of the notes in the aggregate of $100 and recorded that amount to additional paid in capital. The debt discounts are being
accreted using the effective interest method over the one year life of the notes.
On
August 14 and September 6, 2017, the holder of the notes converted an aggregate of $100 principal into a total of 400,000 shares
of the Company’s common stock. In connection with the conversion, the Company charged the remaining discount in the amount
of $92 to accretion of debt discount.
During
the three and nine months ended September 30, 2017, the Company charged to operations $97 and $100, respectively as accretion
of debt discount on this note.
Iliad
Note
On
May 18, 2017, the Company sold to Iliad Research and Trading, L.P., (“Iliad”), a Utah limited partnership, a secured
convertible note (the “Iliad Note”) in the original principal amount of $1,355, with an original issuance discount
of $225 and reimbursed legal and accounting expenses of $5, and a warrant to purchase 1,231,819 shares of common stock of the
Company.
The
principal and all accrued and unpaid interest on the outstanding balance on the date that is twenty-four (24) months from the
issuance date. The Iliad Note is secured with the Company’s ownership of Mining One and all assets of Mining One. The Iliad
Note bears an interest rate of 10% per annum, provided that at any time on or after the occurrence of an Event of Default, the
interest rate shall be adjusted to 22% per annum. Subject to the terms and conditions set forth in the Iliad Note, the Company
may prepay the outstanding balance of the Iliad Note in part or in full in cash of an amount equal to 125% multiplied by the outstanding
balance of the Iliad Note.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
9. Notes payable, continued
Iliad
Note, continued
At
any time beginning on the date that is six months from the issuance date until the outstanding balance of the Iliad Note has been
paid in full, Iliad may, at its option, convert all or any portion of the outstanding balance into shares of common stock of the
Company on a cashless basis at a price of $1.05 per share, which will be adjusted for any future issuances of equity that contain
a lower per-share exercise price. In addition, beginning three months after the issuance date, Iliad has the right to redeem a
portion of the outstanding balance of the Iliad Note in any amount that is less than $90 per calendar month. The Company has the
right to fund each redemption using cash or shares of the Company’s common stock at a price that is the lower of $1.05 per
share and the price that is 65% of the Company’s market price.
Management
recorded a debt discount for (a) the original issue discounts (b) the relative fair value of the warrants issued and (c) the intrinsic
value of the beneficial conversion feature on the Iliad Note in the amounts of $230, $202 and $923, respectively. The debt discounts
will be accreted using the effective interest method over the term of the Iliad Note. During the three months ended September
30, 2017 and 2016, the Company recorded accretion of the debt discount on the Iliad Note of $2 and $0, respectively. During the
nine months ended September 30, 2017 and 2016 the Company recorded accretion of the debt discount on the Iliad Note of $3 and
$0, respectively.
March
2017 equity purchase agreement
On
March 10, 2017, the Company and L2 Capital, LLC (“L2 Capital”), a Kansas limited liability company, entered into an
equity purchase agreement (the “Equity Purchase Agreement”), pursuant to which the Company may issue and sell to L2
Capital from time to time up to $5,000 of the Company’s common stock that will be registered with the Securities and Exchange
Commission (the “SEC”) under a registration statement on a form S–1. Pursuant to the Equity Purchase Agreement,
the Company may require L2 Capital to purchase shares of common stock in a minimum amount of $25 and maximum of the lesser of
(a) $1,000 or (b) 150% of the Average Daily Trading Value, upon the Company’s delivery of a Put Notice to L2 Capital. L2
Capital shall purchase such number of shares of common stock at a per share price that equals to the lowest closing bid price
of the common stock during the Pricing Period multiplied by 90%. Before the expiration of the term of the Equity Purchase Agreement,
the Company may terminate the Equity Purchase Agreement at any time by a written notice from the Company to L2 Capital.
In
connection with the Equity Purchase Agreement, the Company has issued to L2 Capital an 8% convertible promissory note (the “Commitment
Note”) in the principal amount of $160 in consideration of L2 Capital’s contractual commitment to the Equity Purchase
Agreement. The Commitment Note matures six months after the Issue Date. All or part of the Commitment Note is convertible into
the common stock of the Company upon the occurrence of any of the Events of Default at a Variable Conversion Price that equals
to 75% of the lowest Trading Price for the common stock during a thirty–day Trading Day period immediately prior to the
Conversion Date.
The
Company recorded the Commitment Note as a deferred offering costs as the Company is yet to receive equity proceeds from the Equity
Purchase Agreement. The Company is yet to file a registration statement on the offering. Management analyzed the contingent variable
conversion price and concluded that the contingent conversion features should be bifurcated and accounted for as a derivative
liability only upon the triggering of a default event. Because all default events were cured prior to the release of the financial
statements, no derivative liability was recognized.
On
May 18, 2017, the Company amended the Equity Purchase Agreement to (a) facilitate the issuance of the Iliad Note and (b) to increase
the capacity of the Equity Purchase Agreement to $6,500.
On
September 6, 2017, the Company further amended the Equity Purchase Agreement to increase the capacity of the Equity Purchase Agreement
to the lesser of (a) 12,319,159 shares or (b) the maximum number of shares the Company is able to include in a registration statement.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
9. Notes payable, continued
March
2017 securities purchase agreement
In
addition, on March 10, 2017, the Company and L2 Capital entered into a securities purchase agreement (the “Securities Purchase
Agreement”), which was subsequently amended on March 15, 2017 pursuant to which the Company issued two 10% convertible notes
(the “Convertible Notes”) in an aggregate principal amount of $1 million with a 20% original issue discount, of which
the first convertible note was funded on March 14, 2017. The Company received gross proceeds of $393 (which represents the deduction
of the 20% original discount and $7 for L2 Capital’s legal fees) in exchange for issuance of the first Convertible Note
(the “First Note”) in the Principal Amount of $500. The First Note matures six months from the Issue Date and the
accrued and unpaid interest at a rate of 10% per annum is due on such date. At any time on or after the occurrence of an Event
of Default, the Holder of the First Note shall have the right to convert all or part of the unpaid and outstanding Principal Amount
and the accrued and unpaid interest to shares of common stock at a conversion price that equals 65% multiplied by the lowest Trading
Price for the common stock during a thirty–day Trading Day period immediately prior to the Conversion Date (the “Market
Price”).
Management
analyzed the contingent variable conversion price and concluded that the contingent conversion features should be bifurcated and
accounted for as a derivative liability only upon the triggering of a default event. A default event occurred on May 15, 2017.
However, on May 18, 2017, the Company and L2 Capital amended the note in order to waive all rights resulting from default events
under the note. Therefore, no derivative liability was recognized.
The
Company received a L2 Capital Back End Note (“L2 Collateralized Note”) secured with the First Note for its issuance
of a $500 note to L2 Capital with substantially similar terms to the First Note (the “Second Note”). In accordance
with the Second Note, the Company shall pay to the order of L2 Capital a Principal Amount of $500 and the accrued and unpaid interest
at a rate of 10% per annum on the Maturity Date, which is eight months from the Issue Date. At any time on or after the occurrence
of an Event of Default, the Holder of the Second Note shall have the right to convert all or part of the unpaid and outstanding
Principal Amount and the accrued and unpaid interest into shares of common stock at a conversion price that equals to 65% multiplied
by the Market Price. Pursuant to the L2 Collateralized Note, L2 Capital promises to pay the Company the Principal Amount of $500
(consisting $393 in cash, legal fees of $7 and an original issuance discount of $100) no later than November 10, 2017.
In
connection with the issuance of the First Note, the Company also issued to L2 Capital Warrants to purchase up to 400,000 shares
of common stock (the “Warrant Shares”) pursuant to the common stock purchase warrant (the “Common Stock Purchase
Warrant”) executed by the Company. The Warrant shall be exercisable at a price of 110% multiplied by the closing bid price
of the common stock on the issuance date (the “Exercise Price”), subject to adjustments and exercisable from the Issue
Date until the seven–year anniversary. At the time that the Second Note is funded by the Holder thereof in cash, then on
such funding date, the Warrant Shares shall immediately and automatically be increased by the quotient (the “Second Warrant
Shares”) of $375 divided by the lesser of (i) the Exercise Price and (ii) 110% multiplied by the closing bid price of the
common stock on the funding date of the Second Note. With respect to the Second Warrant Shares, the Exercise Price hereunder shall
be redefined to equal the lesser of (i) the Exercise Price and (ii) 110% multiplied by the closing bid price of the common stock
on the funding date of the Second Note. L2 Capital may exercise the Warrant cashless unless the underlying shares of common stock
have been registered with the SEC prior to the exercise.
On
September 1, 2017, the Company received net proceeds of $392 for the funding of the Second Note, in satisfaction of the L2 Collateralized
Note. Upon receipt of the proceeds, the warrant shares were increased by 417,975. All other terms under the warrant remained the
same.
The
Company recorded an initial debt discount of $500, representing (a) an original issue discounts of $108 and (b) a beneficial conversion
feature of $392. The debt discounts will be amortized using the effective interest method.
Management
recorded the warrants at relative fair value to additional paid in capital. The corresponding debt discount is being amortized
over the life of the note using the effective interest method. During the three and nine months ended September 30, 2017, the
Company charged to operations $49 and $82, respectively, as accretion of debt discount on this note and warrants issued concurrent
with this note.
On
September 5, 2017, L2 notified the Company regarding certain matters which might have impacted the Company’s compliance
covenants under the terms of the Commitment Note, the First Note, and the Second Note.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
9. Notes payable, continued
March
2017 securities purchase agreement, continued
The
Company discussed these matters with L2 Capital, and without prejudice, induced L2 Capital to accept 2,166,850 additional shares
of the Company’s common stock in connection with the conversion of the full balance of the L2 Capital notes outstanding.
Accordingly, on September 8, 2017, L2 Capital converted all of their notes and accrued interest of $32 into a total of 3,853,553
shares of the Company’s common stock. On the date of conversion, the Company (a) recorded the remaining discount of the
note in the amount of $709 as accretion of debt discount, and (b) recorded the fair value of the additional shares issued to L2
Capital in the amount of $5,764 as inducement expense.
May
2017 Notes
On
May 1, 2017, the Company issued notes payable to two investors in the aggregate amount of $330 (the “May 2017 Notes”).
The May 2017 Notes mature on October 1, 2018, with mandatory repayments beginning on October 1, 2017 in the amount of $25 and
continuing monthly thereafter. The May 2017 Notes accrue interest at a rate of 10% per annum.
The
May 2017 Notes are convertible into the Company’s common stock only after an event of default. Events of default include
failure to pay payments due under the May 2017 Notes, entrance into any bankruptcy or insolvency proceedings, failure to meet
the obligations of any other notes payable in an amount exceeding $100, the Company’s stock being suspending for trading
or delisted, losing the Company’s ability to deliver shares, or becoming more than 15 days delinquent on any filings required
with the SEC.
The
May 2017 Notes feature a “most favored nation” clause, in which, if the Company were to issue convertible notes with
more favorable terms to another investor, the holders of the May 2017 Notes can elect to replace their notes with new notes with
the same terms as the more favorable notes. As of the date of the issuance of this report, the Company has not replaced the May
2017 Notes under this clause.
The
Company recorded an initial debt discount of $165, representing $65 related to an original issue discount and $100 representing
the relative fair value of warrants issued to the note holders. The debt discount will be amortized using the effective interest
method.
On
September 29, 2017, the holders of the May 2017 Notes converted their notes with principal value of $330 and the related accrued
interest of $14 into 327,382 shares of common stock. In connection with the conversion, the Company recorded the remaining note
discount of $110 to accretion of debt discount.
During
the three and nine months ended September 30, 2017, the Company recorded accretion of debt discount of $151 and $165, respectively,
on the May 2017 Notes.
August
2017 Notes
On
August 9, 2017, the Company issued notes payable to two investors in the aggregate amount of $330 (the “August 2017 Notes”)
with an aggregate original issuance discount of $35. The August 2017 Notes mature on December 8, 2018, with mandatory repayments
beginning on January 8, 2018 in the amount of $26 and continuing monthly thereafter. The August 2017 Notes accrue interest at
a rate of 10% per annum.
At
any time the August 17 Notes are outstanding the two investors are entitled to convert any outstanding principal and accrued but
unpaid interest into shares of the Company’s common stock at $1.05 per share.
The
Company recorded a debt discount for (a) the original issue discount, (b) the relative fair value of the warrants issued, and
(c) the intrinsic value of the beneficial conversion feature on the August 2017 Notes in the amounts of $35, $135, and $160, respectively.
During
the three and nine months ended September 30, 2017, the Company recorded amortization of debt discount of $14 and $14, respectively,
on the August 2017 Notes.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
9. Notes payable, continued
UAHC
Note
On
August 18, 2017, the Company sold to UAHC Ventures, LLC, a Nevada limited liability company, a secured convertible note (the “UAHC
Note”) in the original principal amount of $2,410, with an original issuance discount of $400 and reimbursed legal and accounting
expenses of $10, and a warrant to purchase 861,905 shares of common stock of the Company.
The
principal and all accrued and unpaid interest is due on August 18, 2019. The UAHC Note is secured with the Company’s ownership
of Mining Two and all assets of Mining Two. The Note bears an interest rate of 10% per annum, provided that at any time on or
after the occurrence of an event of default, the interest rate shall be adjusted to 22% per annum. Subject to the terms and conditions
set forth in the UAHC Note, the Company may prepay the outstanding balance of the UAHC Note in part or in full in cash in an amount
equal to 125% multiplied by the outstanding balance of the UAHC Note.
At
any time beginning on the date that is six months from the issuance date until the outstanding balance of the UAHC Note has been
paid in full, UAHC may, at its option, convert all or any portion of the outstanding balance into shares of common stock of the
Company on a cashless basis at a price of $1.05 per share, which will be adjusted for any future issuances of equity that contain
a lower per-share exercise price. In addition, beginning three months after the issuance date, UAHC has the right to redeem a
portion of the outstanding balance of the UAHC Note in any amount that is less than $90 per calendar month. The Company has the
right to fund each redemption using cash or shares of the Company’s common stock at a price of $1.05 per share.
Management
recorded a debt discount for (a) the original issue discount, (b) the relative fair value of the warrants issued and (c) the intrinsic
value of the beneficial conversion feature on the UAHC Note in the amounts of $410, $819, and $1,181, respectively. The debt discounts
will be accreted using the effective interest method over the term of the UAHC Note. During the three months ended September 30,
2017 and 2016, the Company recorded accretion of the debt discount on the UAHC Note of $2 and $0, respectively. During the nine
months ended September 30, 2017 and 2016 the Company recorded accretion of the debt discount on the UAHC Note of $2 and $0, respectively.
September
2017 Note
On
September 12, 2017, the Company issued a note payable to an investor in the amount of $480 (the “September 2017 Note”)
with an original issue discount of $80, and a warrant to purchase 1,000,000 shares of the Company’s common stock. The principal
and all accrued and unpaid interest on the outstanding balance is due on September 12, 2019.
From
March 12, 2018 until the outstanding balance of the September 2017 Note has been paid in full, the holder may, at its option,
convert all or any portion of the outstanding balance into shares of common stock of the Company at a price of $1.05 per share,
which will be adjusted for any future issuances of equity that contain a lower per-share exercise price. In addition, beginning
December 12, 2017, the holder has the right to redeem a portion of the outstanding balance of the September 2017 Note in any amount
that is less than $25 per calendar month. The Company has the right to fund each redemption using cash or shares of the Company’s
common stock at a price of $1.05 per share.
Management
recorded a debt discount for (a) the original issue discount, (b) the relative fair value of the warrants issued and (c) the intrinsic
value of the beneficial conversion feature on the September 2017 Note in the amounts of $80, $275 and $125, respectively. The
debt discounts will be accreted using the effective interest method over the term of the September 2017 Note. During the three
months ended September 30, 2017 and 2016, the Company recorded accretion of the debt discount on the September 2017 Note of $1
and $0, respectively. During the nine months ended September 30, 2017 and 2016 the Company recorded accretion of the debt discount
on the September 2017 Note of $1 and $0, respectively.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
10. Common stock issuances
Sale
of common stock
During
February and March 2017, the Company sold 1,625,000 shares of its common stock to accredited investors at a purchase price of
$0.40 per Share for aggregate proceeds received of $650. In addition, for every Share purchased, the Investors received detachable
warrants, as follows: (i) one Series A Warrant; (ii) one Series B Warrant; and (iii) one Series C Warrant.
During
May 2017, the Company sold 1,250,000 shares of its common stock at $0.40 per share for total proceeds of $500. In addition, for
every Share purchased, the Investors received detachable warrants, as follows: (i) one Series A Warrant; (ii) one Series B Warrant;
and (iii) one Series C Warrant.
Each
Series A Warrant is exercisable for one share of common stock, for a period of three years at a price of $0.50 per share. Each
Series B Warrant is exercisable for one share of common stock, for a period of three years at a price of $0.75 per share, and
each Series C Warrant is exercisable is exercisable for one share of common stock, for a period of three years at a price of $1.00
per share.
Management
evaluated the terms of the warrants and determined that each were considered “fixed for fixed” and that they were
properly classified as equity instruments.
During
the three and nine months ended September 30, 2017, the Company issued 845,000 and 1,855,000, respectively, shares of its common
stock to consultants in exchange for services. For the three and nine months ended September 30, 2017, the Company charged $1,712
and $2,681 to stock based compensation, which is a component of selling, general and administrative expenses in the Company’s
Statements of Operations and Comprehensive Loss.
During
the three and nine months ended September 30, 2017, the Company issued 846,948 shares of its common stock from the cashless exercise
of warrants to purchase 1,160,000 shares of common stock.
Note
11. Stock–based compensation
Issuance
of restricted shares – directors, officers and employees
During
the nine months ended September 30, 2017, the Company issued 3,800,000 shares of restricted common stock to certain employees.
The Company valued each award on its grant date and is expensing the grant date fair value over the 16-24 month vesting period.
The
Company’s activity in restricted shares was as follows for the nine months ended September 30, 2017:
|
|
Number
of shares
|
|
|
Weighted
average
grant date fair
value
|
|
Non–vested at December
31, 2016
|
|
|
1,000,000
|
|
|
$
|
2.31
|
|
Granted
|
|
|
4,000,000
|
|
|
$
|
1.25
|
|
Vested
|
|
|
(900,000
|
)
|
|
$
|
1.74
|
|
Forfeited
|
|
|
–
|
|
|
|
|
|
Non–vested
at September 30, 2017
|
|
|
4,100,000
|
|
|
$
|
1.40
|
|
For
the three and nine months ended September 30, 2017 the Company has recorded $1,248 and $2,253, in employee and director stock–based
compensation expense, which is a component of selling, general and administrative expense in the condensed consolidated statement
of operations and comprehensive loss.
As
of September 30, 2017, unamortized stock-based compensation costs related to restricted share arrangements was $4,135, and will
be recognized over a weighted average period of 1.51 years.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
11. Stock–based compensation, continued
Stock
options
The
following is a summary of the Company’s stock option activity for the nine months ended September 30, 2017:
|
|
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average Grant Date Fair Value
|
|
|
Weighted
Average Remaining Life
|
|
|
Intrinsic
Value
|
|
Outstanding
– January 1, 2017
|
|
|
6,000,000
|
|
|
$
|
0.71
|
|
|
$
|
1.28
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
– September 30, 2017
|
|
|
6,000,000
|
|
|
$
|
0.71
|
|
|
$
|
1.29
|
|
|
|
4.87
|
|
|
$
|
12,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
– September 30, 2017
|
|
|
6,000,000
|
|
|
$
|
0.71
|
|
|
$
|
1.29
|
|
|
|
4.87
|
|
|
$
|
12,550
|
|
On
August 14, 2017, in connection with the new employment agreement with Mr. McAfee, the Company modified his stock options to (a)
extend the term of the stock options to August 14, 2022 and (b) to make the stock options immediately exercisable. In connection
with this modification, the Company recognized the incremental value of the modified stock options of $37 as stock-based compensation,
which is included below.
For
the three months ended September 30, 2017 and 2016, the Company has recorded $5,169 and $0, respectively, in employee and director
stock–based compensation expense, which is a component of selling, general and administrative expense in the condensed consolidated
statement of operations.
For
the nine months ended September 30, 2017 and 2016, the Company has recorded $7,094 and $0, respectively, in employee and director
stock–based compensation expense, which is a component of selling, general and administrative expense in the condensed consolidated
statement of operations.
As
of September 30, 2017, there were no unrecognized compensation costs related to non–vested stock options.
Warrants
During
February and March, 2017, the Company issued warrants to purchase 4,875,000 shares of the Company’s common stock in connection
with private placements. One third of the warrants have an exercise price of $0.50 per share, one third of the warrants have an
exercise price of $0.75 per share and one third of the warrants have an exercise price of $1.00 per share. All of the warrants
expire three years from the date of issuance.
On
March 10, 2017, the Company issued a warrant to purchase 400,000 shares of the Company’s common stock to L2 Capital in connection
with the March 2017 Equity Purchase Agreement. These warrants have an exercise price of $0.957 per share and expire on March 10,
2024.
On
May 1, 2017, the Company issued warrants to purchase 360,000 shares of the Company’s common stock to the holders of the
May 2017 Notes. These warrants have an exercise price of $0.50 per share and expire on May 31, 2022.
On
May 18, 2017, the Company issued warrants to purchase 1,231,819 shares of the Company’s common stock to Iliad, in connection
with the issuance of the Iliad Note. These warrants have an exercise price of $1.05 per share and expire on May 31, 2022.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
11. Stock–based compensation, continued
Warrants,
continued
On
May 1, 2017, the Company issued warrants to purchase 3,750,000 shares of the Company’s common stock in connection with a
private placement. One third of the warrants have an exercise price of $0.05 per share, one third of the warrants have an exercise
price of $0.75 per share and one third of the warrants have an exercise price of $1.00 per share. All of the warrants expire three
years from the date of issuance.
In
June 2017, the Company issued warrants to purchase 1,000,000 shares of the Company’s common stock in connection with a private
placement. The warrants have an exercise price of $1.25 per share. All of the warrants expire three years from the date of issuance.
On
August 9, 2017, the Company issued warrants to purchase 360,000 shares of the Company’s common stock to the holders of the
August 2017 Notes. The warrants have an exercise price of $1.05 per share and expire five years from the date of issuance.
On
August 18, 2017, the Company issued warrants to purchase 861,905 shares of the Company’s common stock to the holder of the
UAHC Note. The warrant has an exercise price of $1.05 per share and expires five years from the date of issuance.
On
September 1, 2017, in accordance with the terms of the warrant (see Note 9) upon the funding of the Second Note, the shares issuable
under the warrants issued to L2 Capital on March 10, 2017 increased by 417,975 shares. All other terms remained the same.
On
September 8, 2017, L2 Capital exercised warrants to purchase 800,000 common shares on a cashless basis and the Company issued
620,282 shares.
On
September 12, 2017, the Company issued a warrant to purchase 1,000,000 shares of the Company’s common stock to the holder
of the September 2017 Note. The warrant has an exercise price of $2.00 per share and expires three years from the date of issuance.
On
September 29, 2017, the holders of the May 2017 Notes exercised their warrants to purchase 360,000 shares of the Company’s
common stock on a cashless basis. The Company issued 226,666 shares of its common stock to these holders.
The
following table summarizes information about shares issuable under warrants outstanding at September 30, 2017:
|
|
Warrant
shares
outstanding
|
|
|
Weighted
average
exercise price
|
|
|
Weighted
average remaining life
|
|
|
Intrinsic
Value
|
|
Outstanding at January 1,
2017
|
|
|
100,000
|
|
|
$
|
3.75
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
14,256,699
|
|
|
$
|
0.93
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,160,000
|
)
|
|
$
|
0.82
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
September 30, 2017
|
|
|
13,196,699
|
|
|
$
|
0.96
|
|
|
|
2.95
|
|
|
$
|
24,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at
September 30, 2017
|
|
|
13,196,699
|
|
|
$
|
0.96
|
|
|
|
2.95
|
|
|
$
|
24,358
|
|
Note
12. Non–controlling interest
At
September 30, 2017, the Company’s non–controlling interest was as follows:
|
|
M2P
Americas
|
|
At
January 1, 2017
|
|
$
|
(22
|
)
|
Non–controlling
share of net loss
|
|
|
-
|
|
At
September 30, 2017
|
|
$
|
(22
|
)
|
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
13. Operating leases, commitments and legal
Operating
leases
On
October 26, 2015, the Company entered into an Office License Agreement commencing December 1, 2015. The term expired on November
30, 2016 and carried a monthly fee of $4, with one month (January) rent free. The Company paid a refundable service retainer of
$6 and a non–refundable set up fee of $1.
On
August 9, 2016, the Company entered into a Sublease Agreement for an office lease in Durham, North Carolina. The lease commenced
on September 1, 2016 and expires on January 31, 2020. Monthly rent will be $6 for the first 12–month period, $7 for the
second 12–month period, $7 for the third 12–month period and $7 per month for the remaining months until expiration
of the lease. A security deposit of $13 was required upon execution of the sublease.
Total
lease rental expense totaled $27 and $32 during the three months ended September 30, 2017 and 2016, respectively, and $87 and
$53 for the nine months ended September 30, 2017 and 2016, respectively.
Total
future minimum payments required under the new operating lease are as follows.
Years
ended December 31,
|
|
Amount
|
|
2017
(three months)
|
|
$
|
21
|
|
2018
|
|
|
85
|
|
2019
|
|
|
85
|
|
2020
|
|
|
7
|
|
|
|
$
|
198
|
|
Commitments
On
July 7, 2016, the Company entered into an employment agreement with Robert B. Ladd, to act as its President and Chief Operating
Officer. The terms of his agreement were reviewed and approved by the Company’s Nominations and Compensation Committee.
Under the terms of the agreement, Mr. Ladd will serve as President and Chief Operating Officer receives a salary of $240 per year
and is eligible for a cash and/or equity bonus as determined by the Nomination and Compensation Committee. Further, Mr. Ladd received
2,000,000 shares of the Company’s common stock, 1/3 of which shall vest within 12 months from the execution of the agreement,
another 1/3 within 18 months, and the remaining 1/3 within 24 months from the execution of the agreement. Lastly, the agreement
also provides for certain rights granted to Mr. Ladd in the event of his death, permanent incapacity, voluntary termination or
discharge for cause.
On
November 18, 2016, the Company entered into an employment agreement with John McAfee pursuant to which Mr. McAfee joined the Company
as Executive Chairman of the Board of Directors and Chief Executive Officer of the Company. Mr. McAfee has a base annual salary
of $1.00 per day; payable at such times as the Company customarily pays is other senior level employees. In addition, Mr. McAfee
was granted Executive options (the “Options”) to purchase an aggregate of six million (6,000,000) shares of the Company’s
common stock (the “Option Shares”), which shall be exercisable for a period of five (5) years as follows:
|
●
|
options
to purchase 1,000,000 shares of the Company’s common stock at a purchase price of $0.25 per share;
|
|
|
|
|
●
|
options
to purchase 2,000,000 shares of the Company’s common stock at a purchase price of $0.50 per share; and
|
|
|
|
|
●
|
options
to purchase 3,000,000 shares of the Company’s common stock at a purchase price of $1.00 per share.
|
Mr.
McAfee is also eligible to earn a cash and/or equity bonus as the Compensation Committee may determine, from time to time, based
on meeting performance objectives and bonus criteria to be mutually identified by Mr. McAfee and the Nomination and Compensation
Committee. Such objectives and criteria may be based on a favorable sale or merger of the Company, in addition to operating metrics.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
13. Operating leases, commitments and legal, continued
Commitments,
continued
On
August 16, 2017, Mr. McAfee resigned as the Executive Chairman of the Board and as the Chief Executive Officer of the Company,
effective on August 15, 2017. On August 16, 2017, Mr. McAfee accepted the appointment as the Chief Cybersecurity Visionary of
the Company overseeing the design of the Company’s cybersecurity platforms, effective immediately. In connection with Mr.
McAfee’s new appointment as Chief Cybersecurity Visionary, Mr. McAfee entered into a new employment, effective August 14,
2017. Mr. McAfee’s new agreement is for a term of 24 months at a rate pf $7.25 or the minimum wage of the state of North
Carolina, whichever is higher. Upon execution, the Company notified Mr. McAfee’s previously granted stock options to (a)
extend their term to August 4, 2022 and (b) cause them to be immediately exercisable.
In
connection with Mr. McAfee’s resignation, on August 16, 2017, the Board appointed Mr. Robert Ladd, the current President
of the Company as the Chief Executive Officer of the Company and H. Robert Holmes, a member of the Board, as the Chairman of the
Board, effective up appointment.
During
the year ended December 31, 2016, the Company purchased 400 bitcoin mining machines from Bitmain Technologies Limited for $630
and power supplies from Hash The Planet (“HTP”) for $53. The Company also entered a 12–month agreement with
HTP to host, power, connect, monitor and service the machines for $136. The hosting data center is located in Cashmere, WA. MGT
launched its bitcoin mining operations and earned its first BTC on September 3, 2016.
On
July 31, 2017, the Company’s agreement with HTP expired and the Company entered into a new agreement with Zoom Hash for
the same services expiring July 31, 2018. The cost of those services is $131.
Legal
On
September 2, 2016, the Company and John McAfee filed an action (the “Action”) against Intel Corporation (“Intel”)
in the United States District Court for the Southern District of New York (the “Court”) seeking a declaration that
the use of or reference to the personal name of John McAfee and/or McAfee in its business, and specifically in the context of
renaming the Company to “John McAfee Global Technologies, Inc.,” does not infringe upon Intel’s trademark rights
or breach any agreement between the parties. Following a series of motions and counter-motions, both parties agreed to a court-supervised
mediation process.
On
June 30, 2017, the Company entered into a settlement agreement (the “Settlement Agreement”) with Intel in which the
Company agreed not to use “John McAfee Global Technologies,” “John McAfee Privacy Phone,” “John
McAfee” or “McAfee” as (or as part of) a trademark, logo, trade name, business name, slogan, service mark or
brand name in connection with cybersecurity related products or services. Notwithstanding, the Company is permitted to use the
name “John McAfee” in promotional and advertising materials and on product packages, provided that the name is used
in a descriptive manner and in compliance with the specifications set forth in the Settlement Agreement. Additionally, the Company
may use John McAfee’s likeness without restrictions.
On
July 5, 2017, the Court dismissed with prejudice all claims and counterclaims filed in the Action.
Based
upon a stipulation of voluntary dismissal (the “Stipulation”) entered into by the parties of the Action pursuant to
the Settlement Agreement dated June 30, 2017. The Court will retain jurisdiction over the Parties for purposes of enforcing this
Settlement Agreement.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
13. Operating leases, commitments and legal, continued
Legal,
continued
A
number of law firms have issued press releases announcing that they are investigating claims on behalf of shareholders of the
Company regarding potential violations of the Exchange Act.
On
September 15, 2016, the Company received a subpoena from the U.S. Securities and Exchange Commission. The Company has cooperated
fully with the Commission and its Staff in a timely manner. The Company intends to fully comply with any additional requests the
Company may receive from the SEC in the future.
In
September 2016, various shareholders in the Company filed putative class action lawsuits against the Company, its president and
certain of its individual officers and directors. The cases were filed in the United States District Court for the Southern District
of New York and alleged violations of federal securities laws and seek damages. On April 11, 2017 those cases were consolidated
into a single action (the “Securities Action”) and two individual shareholders were appointed lead plaintiffs by the
Court. On June 30, 2017, the lead plaintiffs filed an amended complaint. On August 29, 2017, the defendants moved to dismiss the
plaintiffs’ amended complaint, which the plaintiffs opposed on October 13, 2017. On November 3, 2017, the defendants filed
a reply brief in support of their motion to dismiss the amended complaint. The Company is vigorously defending the lawsuits and
believes it has meritorious defenses against the claims alleged in the amended complaint.
On
January 24, 2017, the Company was served with a copy of a summons and complaint filed by plaintiff Atul Ojha in New York state
court against certain officers and directors of the Company and the Company as a nominal defendant. The lawsuit is styled as a
derivative action (the “Derivative Action”) and was originally filed on October 15, 2016. The Derivative Action substantively
alleges that the defendants, collectively or individually, inadequately managed the business and assets of the Company resulting
in the deterioration of the Company’s financial condition. The Derivative Action asserts claims including but not limited
to breach of fiduciary duties, unjust enrichment and waste of corporate assets. On February 27, 2017, the parties to the Derivative
Action executed a stipulated stay of proceedings pending full or partial resolution of the Securities Action. Thereafter, the
Company plans to address the Derivative Action.
On
March 3, 2017 and April 4, 2017 respectively, two additional actions were filed against the Company by its shareholder Barry Honig
(“Honig”). The first action was filed in federal court in North Carolina (the “North Carolina Action”)
against the Company and its president and alleges claims for libel, slander, conspiracy, interference with prospective economic
advantage, and unfair trade practices. The North Carolina Action substantively alleges that the defendants defamed Honig by causing
or allowing certain statements to be published about Honig in news blogs and articles authored by a journalist, who is also a
defendant in the case. On June 5, 2017, the Company filed a motion to dismiss the lawsuit, and on July 17, 2017 the plaintiff
filed on opposition brief to the motion to dismiss. The Company and its president are vigorously defending the suit and believe
they have good and meritorious defenses.
The
second action was brought by Honig and certain shareholders in the United States District Court for the Southern District of New
York (the “Breach of Contract Action”) against the Company and certain of its officers and directors. The Breach of
Contract Action alleges claims for tortious interference with contractual relations, breach of contract, and unjust enrichment
related to the Company’s unsuccessful attempt to acquire D–Vasive and Demonsaw in 2016 and the alleged resulting harm
to certain D–Vasive and Demonsaw noteholders. The damages claimed include (a) an amount of $46,750, (b) together with interest,
costs and reasonable attorneys’ fees as provided by law and relevant agreements, and (c) any further or different relief
as this Court deems lawful and proper under the circumstances. The Company filed a motion to dismiss on June 5, 2017 and the plaintiffs
filed an amended complaint on June 26, 2017. On June 30, 2017, the court granted a motion for extension of time filed by the Company
and granted the Company until August 28, 2017 to file its response. On August 24, 2017, the court partially granted the Company’s
motion to dismiss and allowed some of the plaintiff’s claims to proceed. The case has moved to the discovery phase. On September
28, 2017, the plaintiffs and defendants completed their briefing on the defendants’ motion to dismiss the amended complaint.
The defendants’ motion to dismiss is currently under review by the court. The Company and its officers and directors believe
that they have meritorious defense against the claims alleged in the amended complaint.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
13. Operating leases, commitments and legal, continued
Legal,
continued
The
Company believes that there is little merit to each of the above actions and has no indication or reason to believe that it is
or will be liable for any alleged wrongdoing. The Company is consulting with its counsel to determine the appropriate legal strategy
but intends to defend against the actions vigorously. The Company cannot presently rule out that adverse developments in one or
more of the above actions could have a materially adverse effect on the Company, and has notified its Director’s and Officer’s
Liability Insurance carrier.
Note
14. Related Party Transactions
Janice
Dyson, wife of John McAfee, the Company’s Chief Cybersecurity Visionary is the sole director of Future Tense Secure Systems,
Inc. (“FTS”) and owns 33% of the currently outstanding shares of common stock of such company. On March 3, 2017, the
Company and FTS entered into the Demonsaw LLC Membership Interest Purchase Agreement (the “Purchase Agreement”). Pursuant
to the Purchase Agreement, Future Tense sold its 46% membership interest in Demonsaw, LLC, a Delaware limited liability company
for 2,000,000 unregistered shares of MGT’s common stock.
On
May 9, 2016, the Company entered a consulting agreement with FTS, pursuant to which FTS would provide advice, consultation, information
and services to the Company including assistance with executive management, business and product development and potential acquisitions
or related transactions. During the three months ended September 30, 2017 and 2016, the Company recorded consulting fees of $63
and $83, respectively, to FTS for such services. During the nine months ended September 30, 2017 and 2016, the Company recorded
consulting fees of $197 and $349, respectively, to FTS for such services. As of September 30, 2017, the Company owed $0 to FTS.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
15. Segment reporting
Operating
segments are defined as components of an enterprise about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision–making group in deciding how to allocate resources and in assessing
performance. The Company’s chief operating decision–making group is composed of the Chief Executive Officer. The Company
operates in two segments, Cybersecurity and Crypto-Currency Mining. Certain corporate expenses are not allocated to segments.
The
Company evaluates performance of its operating segments based on revenue and operating loss. The following table summarizes our
segment information as of and for the three and nine months ended September 30, 2017 and 2016:
|
|
Intellectual
Property
|
|
|
Gaming
|
|
|
Cybersecurity
|
|
|
Crypto-Currency
Mining
|
|
|
Unallocated
corporate/
other
|
|
|
Total
|
|
Three months ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
515
|
|
|
$
|
–
|
|
|
$
|
515
|
|
Cost of revenue
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(365
|
)
|
|
|
–
|
|
|
|
(365
|
)
|
Gross margin
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
150
|
|
|
|
–
|
|
|
|
150
|
|
Operating (loss) income
|
|
|
–
|
|
|
|
–
|
|
|
|
(112
|
)
|
|
|
150
|
|
|
|
(9,614
|
)
|
|
|
(9,576
|
)
|
Three months ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
53
|
|
|
$
|
–
|
|
|
$
|
53
|
|
Cost of revenue
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(31
|
)
|
|
|
–
|
|
|
|
(31
|
)
|
Gross margin
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
22
|
|
|
|
–
|
|
|
|
22
|
|
Operating income (loss)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
22
|
|
|
|
(10,866
|
)
|
|
|
(10,844
|
)
|
Nine months ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
1,215
|
|
|
$
|
–
|
|
|
$
|
1,215
|
|
Cost of revenue
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(754
|
)
|
|
|
–
|
|
|
|
(754
|
)
|
Gross margin
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
461
|
|
|
|
–
|
|
|
|
461
|
|
Operating (loss) income
|
|
|
–
|
|
|
|
–
|
|
|
|
(481
|
)
|
|
|
461
|
|
|
|
(16,621
|
)
|
|
|
(16,641
|
)
|
Nine months ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
53
|
|
|
$
|
–
|
|
|
$
|
53
|
|
Cost of revenue
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(31
|
)
|
|
|
–
|
|
|
|
(31
|
)
|
Gross margin
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
22
|
|
|
|
–
|
|
|
|
22
|
|
Operating income (loss)
|
|
|
(673
|
)
|
|
|
(1,510
|
)
|
|
|
–
|
|
|
|
22
|
|
|
|
(15,275
|
)
|
|
|
(17,436
|
)
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
43
|
|
|
$
|
43
|
|
Property and equipment
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
3,727
|
|
|
|
4
|
|
|
|
3,731
|
|
Intangible assets
|
|
|
–
|
|
|
|
–
|
|
|
|
344
|
|
|
|
–
|
|
|
|
–
|
|
|
|
344
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
345
|
|
|
$
|
345
|
|
Property and equipment
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
594
|
|
|
|
8
|
|
|
|
602
|
|
Intangible assets
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
468
|
|
|
|
468
|
|
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
16. Subsequent events
The
Company has evaluated the impacts of subsequent events through November 9, 2017, and has determined that no such events occurred
that were required to be reflected in the condensed consolidated financial statements, except as described below.
Management Agreement
On
October 12, 2017, the Company, entered into two management agreements (collectively “Management Agreements”) with
two accredited investors (“Users”), respectively, on substantially similar terms whereby Users agreed to purchase
a total number of 1,944 Bitmain Antminer S9 mining computers (the “Bitcoin Hardware”) to mine bitcoins with the Company
acting as the exclusive manager for each of the Users. Pursuant to the Management Agreements, the Company shall install, host,
maintain, repair and provide ancillary services necessary to operate the Bitcoin Hardware. In accordance with each of the Management
Agreements, the Company will receive a management fee that equals 10% of the total bitcoins produced by each User’s Bitcoin
Hardware and share the respective net profits of such bitcoin mining operation with each User. In connection with the Management
Agreements, the Company issued 193,000 shares of the Company’s common stock and a Series F Warrant to purchase 193,000 shares
of the Company’s common stock at an initial exercise price of $2.00 per share exercisable for a period of three years to
one User and 154,400 shares of the Company’s common stock and another Series F Warrant to purchase 154,400 shares of the
Company’s common stock at an initial exercise price of $2.00 per share exercisable for a period of three years to the other
User.
Shares
Issued to Consultants
Subsequent
to September 30, 2017 through November 7, 2017, the Company issued an aggregate of 437,000 shares of its common stock to consultants.
Warrant
Exercise
On
November 1, 2017 the Company received proceeds of $94 from the exercise of a warrant to purchase 125,000 shares at an exercise
price of $0.75 per share.
Shares
Issued to Employees
On
October 2, 2017, the Company issued 1,400,000 shares of common stock to an employee that were granted on August 15, 2017. These
shares were valued on the date of grant and are being amortized over a 24 - month vesting period.
Item
2. Management’s discussion and analysis of financial condition and results of operations
This
Quarterly Report on Form 10–Q contains forward–looking statements that involve risks and uncertainties, as well as
assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed
or implied by such forward–looking statements. The statements contained herein that are not purely historical are forward–looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). Forward–looking statements are often identified by the use of
words such as, but not limited to, “anticipate,” “estimates,” “should,” “expect,”
“guidance,” “project,” “intend,” “plan,” “believe” and similar expressions
or variations intended to identify forward–looking statements. These statements are based on the beliefs and assumptions
of our management based on information currently available to management. Such forward–looking statements are subject to
risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially
from future results expressed or implied by such forward–looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors”
included in our Annual Report on Form 10–K filed with the SEC on April 20, 2017, in addition to other public reports we
filed with the Securities and Exchange Commissions (“SEC”). The forward–looking statements set forth herein
speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward–looking
statements to reflect events or circumstances after the date of such statements.
Executive
summary
MGT
Capital Investments, Inc. (“MGT”, “the Company”, “we”, or “us”) is a Delaware
corporation, incorporated in 2000. The Company was originally incorporated in Utah in 1977. MGT is comprised of the parent company,
wholly–owned subsidiaries MGT Cybersecurity, Inc. (“MGT Cybersecurity”), Medicsight, Inc. (“Medicsight”),
MGT Sports, Inc. (“MGT Sports”), MGT Studios, Inc. (“MGT Studios”), MGT Interactive, LLC (“MGT Interactive”),
MGT Gaming, Inc. (“MGT Gaming”), and MGT Mining One, Inc. (“Mining One”) and MGT Mining Two, Inc. (“Mining
Two”). MGT Studios also owns a controlling minority interest in the subsidiary M2P Americas, Inc. Our corporate office is
located in Durham, North Carolina. Mining One was formed in April 2017 for the purpose of facilitating the issuance of the Iliad
Note. Mining Two was formed on August 1, 2017 for the purpose of facilitating the issuance of the UAHC Note.
The
Company is in the process of acquiring and developing a diverse portfolio of cybersecurity technologies.
Also,
as part of its corporate efforts in cryptocurrency technologies, MGT is growing its capacity in mining Bitcoin.
On
September 8, 2016, MGT stockholders voted to change the corporate name of MGT to “John McAfee Global Technologies, Inc.”
On September 2, 2016, the Company and John McAfee (“Plaintiffs”) commenced an action in the United States District
Court for the Southern District of New York seeking a declaratory judgment that the Company’s proposed name change to “John
McAfee Global Technologies, Inc.” does not infringe on Intel’s trademarks and does not breach any agreement between
John McAfee and Intel’s subsidiaries and/or predecessors. Following the judicial procedures, on June 30, 2017 the Company
and Intel entered into the Settlement Agreement based on which and a stipulation of voluntary dismissal, on July 5, 2017, the
Court dismissed with prejudice all claims and counterclaims filed in this case. Item 1 of Part II of this Quarterly Report on
Form 10-Q shall have more details relating to this Action.
All
figures set forth in this Quarterly Report as of and for the three and nine months ended September 30, 2017 on this Form 10-Q
are in thousands, except share and per-share amounts.
Cybersecurity
On
May 9, 2016, we, through our wholly owned subsidiary, MGT Cybersecurity, Inc., entered into an asset purchase agreement (the “D-Vasive
APA”) to acquire certain assets owned by D–Vasive, Inc., a Wyoming corporation in the business of developing and marketing
certain privacy and anti–spy applications. Pursuant to the terms of the D–Vasive APA, the Company had agreed to purchase
assets including, but not limited to, applications for use on mobile devices, intellectual property, customer lists, databases,
sales pipelines, proposals and project files, licenses and permits. The proposed purchase price for D–Vasive was $300 in
cash and 23.8 million shares of MGT common stock. On October 5, 2016, the Company paid a $70 refundable advance as part of a modification
of terms. The advance will be refundable if the APA is not closed within twelve months of the modification.
On
May 26, 2016, the Company entered into an asset purchase agreement with Demonsaw LLC, a Delaware company, for the purchase of
certain technology and assets (the “Demonsaw APA”). Demonsaw is in the business of developing and marketing secure
and anonymous information sharing applications. Pursuant to the terms of the Demonsaw APA, we had agreed to purchase assets including
the source code for the Demonsaw solution, intellectual property, customer lists, databases, sales pipelines, proposals and project
files, licenses and permits. The proposed purchase price for Demonsaw was 20.0 million shares of MGT common stock.
On
July 7, 2016, and prior to the closing of either of the above transactions, the Company and Demonsaw terminated the Demonsaw APA.
Simultaneously, D–Vasive entered an agreement with the holders of Demonsaw outstanding membership interests, whereby D–Vasive
would purchase all such membership interests. The closing of that transaction was contingent on the closing of the transaction
contemplated under the D–Vasive APA. Accordingly, the proposed purchase price for D–Vasive (inclusive of the Demonsaw
assets) was increased to 43.8 million shares of MGT common stock (the “Amended APA”).
On
August 8, 2016, the Company filed a Definitive Proxy Statement to solicit, among other things, shareholder approval of the D–Vasive
acquisition, at the upcoming Annual Meeting of Stockholders. On September 8, 2016, shareholder approval was obtained. However,
on September 19, 2016, the New York Stock Exchange informed the Company that it would not approve the listing on the Exchange
of the 43.8 million shares required to be issued to complete the closing of the D–Vasive acquisition. Not reaching this
critical closing condition resulted in the termination of the Amended APA.
On
October 24, 2016, the Company consummated the July 2016 asset purchase agreement with Cyberdonix, Inc., an Alabama corporation
for the purchase of the “Sentinel” network intrusion detection device, all underlying software and firmware, the server
contract, and case and circuit board inventory in exchange for 150,000 shares of MGT common stock.
On
March 3, 2017, MGT purchased from Future Tense Secure Systems, Inc. (“Future Tense”) 46% of the outstanding membership
interests in Demonsaw, LLC for 2.0 million unregistered MGT Common shares, which were issued to Future Tense on the same date.
On
April 3, 2017, the Company terminated the APA dated May 9, 2016, as amended on July 7, 2016, entered into by and among MGT, D–Vasive,
the shareholders of D–Vasive and MGT Cybersecurity. The termination of the APA was premised on Section 3.2(a)(ii) of the
APA that required as a condition of Closing, that Buyer and Sellers obtain from each Governmental Authority, including NYSE MKT,
all approvals, waivers, and consents necessary to the consummation of, or in connection with, the transactions contemplated by
the APA. On September 19, 2016, NYSE MKT denied the issuance of shares required to close the transaction. In addition, the termination
was premised on Section 3.4(b) of the APA which states that the APA may be terminated by either party thereto if the Closing contemplated
thereunder did not occur on or before a specified date and the same is not otherwise extended by the parties, in writing or otherwise.
Pursuant to the APA, as amended, MGT would have acquired certain technology and assets of D–Vasive if the Closing had occurred
on the terms of the APA, as amended.
On
May 5, 2017 the Company entered into a joint venture agreement with Nordic IT Souring Association Venture Partners (“Nordic
IT”), pursuant to which the Company and Nordic IT shall co-develop and market a new generation of secure mobile phones.
Nordic IT and the Company share equal equity interest in the joint venture, JMPP Oy, which is domiciled in Helsinki, Finland.
In accordance with the terms of the agreement with Nordic IT, the Company shall design, engineer and test mobile phones with certain
privacy features and Nordic IT will source strategic partners to manufacture such cell phones and conduct marketing and sales
of such mobile phones.
Crypto-Currency
Mining
In
September 2016, we began a crypto-currency mining operation. Crypto-currencies are a medium of exchange that uses decentralized
control (a block chain) as opposed to a central bank to track and validate transactions. We are currently involved in mining Bitcoin
and Ethereum, whereby we earn revenue by solving “blocks” to be added to the block chain.
On
September 13, 2016, we announced a launch of our 5.0 PH/s Bitcoin mining operation, based in central Washington. The facility
was subsequently being expanded with the addition of 13 PH/s Bitcoin mining in computing power.
On
September 6, 2017, we entered into an agreement to purchase 50 Ethereum mining machines, which we plan to deploy in order to begin
an Ethereum mining operation. We expect to take delivery of these machines during the fourth quarter of 2017. On September 8,
2017, the Company paid $180 for this purchase and recorded them as property and equipment on its unaudited condensed consolidated
balance sheet.
Critical
accounting policies and estimates
Our
discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”). The notes to the consolidated financial statements contained in this Quarterly Report describe our significant accounting
policies used in the preparation of the consolidated financial statements. The preparation of these financial statements requires
us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates. We continually evaluate our critical accounting policies and estimates.
We
believe the critical accounting policies listed below reflect significant judgments, estimates and assumptions used in the preparation
of our consolidated financial statements.
Beneficial
Conversion Feature of Convertible Notes Payable
The
Company accounts for convertible notes payable in accordance with the guidelines established by the Financial Accounting Standards
Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 470-20, Debt with Conversion and
Other Options. The beneficial conversion feature of a convertible note is normally characterized as the convertible portion or
feature of certain notes payable that provide a rate of conversion that is below market value or in-the-money when issued. The
Company records a beneficial conversion feature related to the issuance of a convertible note when issued and also records the
estimated fair value of any warrants issued with those convertible notes. Beneficial conversion features that are contingent upon
the occurrence of a future event are recorded when the contingency is resolved.
The
beneficial conversion feature of a convertible note is measured by first allocating a portion of the note’s proceeds to
any warrants, if applicable, as a discount on the carrying amount of the convertible on a relative fair value basis. The discounted
face value is then used to measure the effective conversion price of the note. The effective conversion price and the market price
of the Company’s common stock are used to calculate the intrinsic value of the conversion feature. The intrinsic value is
recorded in the financial statements as a debt discount from the face amount of the note and such discount is amortized over the
expected term of the convertible note (or to the conversion date of the note, if sooner) and is charged to interest expense.
Revenue
recognition
The
Company recognizes revenue when it is realized or realizable and earned. We consider revenue realized or realizable and earned
when there is persuasive evidence of an arrangement and that the product has been shipped or the services have been provided to
the customer, the sales price is fixed or determinable and collectability is probable. Our material revenue stream is related
to the mining of digital currencies. The Company derives its revenue by providing transaction verification services within the
digital currency networks of crypto-currencies, such as Bitcoin and Ethereum, commonly termed “Crypto-Currency Mining.”
In consideration for these services, the Company receives digital currency (“Coins”). The Coins are recorded as revenue,
using the average spot price of the Coins on the date of receipt. The Coins are recorded on the balance sheet at their fair value
and re–measured at each reporting date. Revaluation gains or losses, as well gains or losses on sale of Coins are recorded
in the statement of operations. Expenses associated with running the Crypto-Currency Mining business, such as equipment deprecation,
rent and electricity cost are recorded as cost of revenues.
Stock–based
compensation
The
Company recognizes compensation expense for all equity–based payments in accordance with ASC 718 “Compensation –
Stock Compensation”. Under fair value recognition provisions, the Company recognizes equity–based compensation net
of an estimated forfeiture rate and recognizes compensation cost only for those shares expected to vest over the requisite service
period of the award.
Restricted
stock awards are granted at the discretion of the Company. These awards are restricted as to the transfer of ownership and generally
vest over the requisite service periods, typically over an eighteen–month period (vesting on a straight–line basis).
The fair value of a stock award is equal to the fair market value of a share of common stock on the grant date.
The
fair value of option award is estimated on the date of grant using the Black–Scholes option valuation model. The Black–Scholes
option valuation model requires the development of assumptions that are input into the model. These assumptions are the expected
stock volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock
and the expected forfeiture rate. Expected volatility is calculated based on the historical volatility of our common stock over
the expected option life and other appropriate factors. Risk–free interest rates are calculated based on continuously compounded
risk–free rates for the appropriate term. The dividend yield is assumed to be zero as the Company has never paid or declared
any cash dividends on our common stock and does not intend to pay dividends on our common stock in the foreseeable future. The
expected forfeiture rate is estimated based on historical experience.
Determining
the appropriate fair value model and calculating the fair value of equity–based payment awards requires the input of the
subjective assumptions described above. The assumptions used in calculating the fair value of equity–based payment awards
represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment.
As a result, if factors change and the Company uses different assumptions, our equity–based compensation could be materially
different in the future. In addition, the Company is required to estimate the expected forfeiture rate and recognize expense only
for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the equity–based
compensation could be significantly different from what the Company has recorded in the current period.
The
Company accounts for share–based payments granted to non–employees in accordance with ASC 505–40, “Equity
Based Payments to Non–Employees”. The Company determines the fair value of the stock–based payment as either
the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.
If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions
as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments
is reached, or (2) the date at which the counterparty’s performance is complete. The fair value of the equity instruments
is re–measured each reporting period over the requisite service period.
Results
of operations
The
Company currently has two operational segments, Cybersecurity and Crypto-currency Mining. Intellectual property and Gaming are
no longer considered business segments. Certain corporate expenses are not allocated to a particular segment.
Three
months ended September 30, 2017 and 2016
The
Company achieved the following results for the three months ended September 30, 2017 and 2016, respectively:
|
●
|
Revenues
totaled $515 for the three months ended September 30, 2017 (2016: $53);
|
|
|
|
|
●
|
Costs
of revenues were $365 for the three months ended September 30, 2017 (2016: $31);
|
|
|
|
|
●
|
Operating
expenses were $9,726 for the three months ended September 30, 2017 (2016: $10,866);
|
|
|
|
|
●
|
Net
loss attributable to common shareholders was $16,464 for the three months ended September 30, 2017 (2016: $10,830) and resulted
in a basic and diluted loss per share of $0.43 for the three months ended September 30, 2017 (2016: $0.42).
|
The
Company’s revenue and cost of revenue increased by $462 and $334, respectively, during the three months ended September
30, 2017, as compared to the three months ended September 30, 2016. This was due to the expansion of the Company’s Crypto-Currency
Mining operations.
Our
operating expenses decreased approximately 10% during the three months ended September 30, 2017 compared to the comparable three
months ended September 30, 2016. The decrease is primarily attributed to decreases in investor relations and other professional
fees.
Cybersecurity
During
the three months ended September 30, 2017, the Company recognized operating expenses of $112 (2016: $0).
Crypto-Currency
Mining
During
the three months ended September 30, 2017, the Company recognized $515 in revenue for this segment (2016:$53). The Company’s
Crypto-Currency Mining operation commenced in September 2016 and the Company added additional Crypto-Currency Mining capacity
during 2017.
There
was $365 in cost of revenue for the three months ended September 30, 2017 (2016: $31). The increase in 2017 is attributed to a
full quarter of Crypto-Currency Mining in the 2017 quarter.
Unallocated
Corporate / Other
Operating
expenses during the three months ended September 30, 2017 were $9,614 (2016: $10,866). The decrease of $1,252 was primarily due
to a decrease in stock-based compensation of $1,166.
For
the three months ended September 30, 2017, non–operating expenses mainly consisted of, interest and other expenses of $110,
accretion of debt discount of $1,023 and inducement expense of $5,764. The inducement expense was due to the induced conversion
of the notes payable to L2 Capital. During the comparable period ended September 30, 2016, non–operating expenses mainly
consisted of an impairment of long-term investments of $276. This was offset by interest income of $221 and a gain on sale of
investment of $110.
Nine
months ended September 30, 2017 and 2016
The
Company achieved the following results for the nine months ended September 30, 2017 and 2016, respectively:
|
●
|
Revenues
totaled $1,215 for the nine months ended September 30, 2017 (2016: $53);
|
|
|
|
|
●
|
Costs
of revenues were $754 for the nine months ended September 30, 2017 (2016: $31);
|
|
|
|
|
●
|
Operating
expenses were $17,102 for the nine months ended September 30, 2017 (2016: $17,458);
|
|
|
|
|
●
|
Net
loss attributable to Common shareholders was $26,590 for the nine months ended September 30, 2017 (2016: $18,260) and resulted
in a basic and diluted loss per share of $0.77 for the nine months ended September 30, 2017 (2016: $0.84).
|
The
Company’s revenue and cost of revenue increased by $1,162 and $723, respectively, during the nine months ended September
30, 2017 as compared to the nine months ended September 30, 2016. This was due to the expansion of the Company’s Crypto-Currency
Mining operation during 2017.
Our
operating expenses decreased approximately 2% during the nine months ended September 30, 2017 compared to the comparable nine
months ended September 30, 2016. The decrease is primarily attributed to decreases in impairment of goodwill and intangible assets
offset by increases in stock-based compensation and legal and professional fees.
Intellectual
property
During
the nine months ended September 30, 2017 and 2016, the Company recognized no revenues in either period due to the discontinuation
of such business segment. Operating expenses for the nine months ended September 30, 2017 was $0 (2016: $673), consisting of impairment
of a gaming patent.
Gaming
During
the nine months ended September 30, 2017, the Company recognized operating expenses of $0 (2016: $1,510). During the nine months
ended September 30, 2016 the Company recognized an impairment charge of $1,496 related to goodwill and $14 related to intangible
assets.
Cybersecurity
During
the nine months ended September 30, 2017, the Company recognized operating expenses of $481 (2016: $0).
Crypto-Currency
Mining
During
the nine months ended September 30, 2017, the Company recognized $1,215 in revenue for this segment (2016: $53). Crypto-Currency
Mining operations commenced in September 2016. The Company deployed additional Crypto-Currency Mining capacity during 2017.
There
was $754 cost of revenue for the nine months ended September 30, 2017 (2016: $31). The increase in 2017 is attributed to a full
period of Crypto-Currency Mining during 2017.
Unallocated
Corporate / Other
Operating
expenses during the nine months ended September 30, 2017 was $16,621 (2016: $15,275). The increase of $1,346 was primarily due
an increase of $1,318 in stock-based compensation and an increase of $1,108 in legal and professional fees.
For
the nine months ended September 30, 2017, non–operating expenses mainly consisted of gain on sale of assets of $57, impairment
of equity method investments, related party of $2,500, impairment of long-term investments of $287, interest and other expenses
of $300, loss on sale of investments of $84, accretion of debt discount of $1,071 and inducement expense of $5,764. The inducement
expense was related to the induced conversion of the L2 Capital notes. During the comparable period ended September 30, 2016,
non–operating expenses mainly consisted of a loss on sale of investments of $1,083 and impairment of long-term investments
of $276. This was offset by interest income of $257.
Liquidity
and capital resources
|
|
As
of
|
|
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Working
capital summary
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
43
|
|
|
$
|
345
|
|
Other
current assets
|
|
|
1,165
|
|
|
|
153
|
|
Investments
– current
|
|
|
–
|
|
|
|
44
|
|
Digital
currencies
|
|
|
17
|
|
|
|
10
|
|
Current
liabilities
|
|
|
(1,811
|
)
|
|
|
(191
|
)
|
Working
capital (deficit) surplus
|
|
$
|
(586
|
)
|
|
$
|
361
|
|
|
|
Nine
months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cash
(used in) / provided by
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
(3,092
|
)
|
|
$
|
(3,772
|
)
|
Investing
activities
|
|
|
(3,431
|
)
|
|
|
799
|
|
Financing
activities
|
|
|
6,221
|
|
|
|
4,727
|
|
Net
(decrease)/ increase in cash and cash equivalents
|
|
$
|
(302
|
)
|
|
$
|
1,754
|
|
On
September 30, 2017, MGT’s cash and cash equivalents were $43. The Company continues to exercise discipline with respect
to current expense levels, as revenues remain limited. Our cash and cash equivalents decreased during the nine months ended September
30, 2017, primarily due to $3,092 used in operating activities, $3,431 used in investing activities offset by funds provided by
the sale of convertible notes and shares resulting in a net increase in cash provided by financing activities of $6,221.
Operating
activities
Our
net cash used in operating activities differs from the net loss predominantly because of various non–cash adjustments such
as depreciation, amortization and impairment of intangibles, inducement expense, stock–based compensation, loss on sale
of investments, impairment of investments, accretion of debt discount, and the movement in working capital.
Investing
activities
During
the nine months ended September 30, 2017, the Company used $3,431 in investing activities as compared to receiving $799 from investing
activities in the corresponding prior period. The cash used in investing activities during the nine months ended September 30,
2017 were primarily due to purchases of property and equipment of $3,897 offset by sale of property and equipment of $440 and
investments properties of $26. The cash provided by investing activities in 2016 were primarily a result of the sale of investments.
Financing
activities
Conversion
of Notes
During
the nine months ended September 30, 2017, holders of $3,890 in principal and $45 in accrued interest of the Company’s notes
payable converted their notes into 7,147,603 shares of common stock.
March
2017 Equity Purchase Agreement
On
March 10, 2017, the Company and L2 Capital, LLC (“L2 Capital”), a Kansas limited liability company, entered into an
equity purchase agreement (the “Equity Purchase Agreement”), which was subsequently amended on May 18, 2017, pursuant
to which the Company may issue and sell to L2 Capital from time to time up to $6,500 of the Company’s common stock that
will be registered with the Securities and Exchange Commission (the “SEC”) under a registration statement on a form
S–1. Pursuant to the Equity Purchase Agreement, the Company may require L2 Capital to purchase shares of common stock in
a minimum amount of $25 and maximum of the lesser of (a) $1 million or (b) 150% of the Average Daily Trading Value, upon the Company’s
delivery of a Put Notice to L2 Capital. L2 Capital shall purchase such number of shares of common stock at a per share price that
equals to the lowest closing bid price of the common stock during the pricing period multiplied by 90%. Before the expiration
of the term of the Equity Purchase Agreement, the Company may terminate the Equity Purchase Agreement, at any time by a written
notice from the Company to L2 Capital.
In
connection with the Equity Purchase Agreement, the Company has issued to L2 Capital an 8% convertible promissory note (the “Commitment
Note”) in the principal amount of $160 in consideration of L2 Capital’s contractual commitment to the Equity Purchase
Agreement. The Commitment Note matures six months after the Issue Date. All or part of the Commitment Note is convertible into
the common stock of the Company upon the occurrence of any of the Events of Default at a Variable Conversion Price that equals
to 75% of the lowest Trading Price for the common stock during a thirty–day Trading Day period immediately prior to the
Conversion Date.
In
addition, on March 10, 2017, the Company and L2 Capital entered into a securities purchase agreement (the “Securities Purchase
Agreement”), which was subsequently amended on March 15, 2017, pursuant to which the Company issued two 10% convertible
notes (the “Convertible Notes”) in an aggregate principal amount of $1 million with a 20% original issue discount,
of which first convertible note was funded on March 14, 2017. The Company received gross proceeds of $393 (which represents the
deduction of the 20% original discount and $7 for L2 Capital’s legal fees) in exchange for issuance of the first Convertible
Note (the “First Note”) in the Principal Amount of $500. The First Note matures six months from the Issue Date and
the accrued and unpaid interest at a rate of 10% per annum is due on such date. At any time on or after the occurrence of an Event
of Default, the Holder of the First Note shall have the right to convert all or part of the unpaid and outstanding principal amount
and the accrued and unpaid interest to shares of common stock at a conversion price that equals 65% multiplied by the lowest trading
price for the common stock during a thirty–day Trading Day period immediately prior to the Conversion Date (the “Market
Price”).
On
the date stated immediately above, the Company received a L2 Capital Back End Note (“L2 Collateralized Note”) secured
with the First Note for its issuance of the Second Note to L2 Capital. In accordance with the Second Note, the Company shall pay
to the order of L2 Capital a Principal Amount of $500 and the accrued and unpaid interest at a rate of 10% per annum on the Maturity
Date, which is eight months from the Issue Date. At any time on or after the occurrence of an Event of Default, the Holder of
the Second Note shall have the right to convert all or part of the unpaid and outstanding Principal Amount and the accrued and
unpaid interest into shares of common stock at a conversion price that equals to 65% multiplied by the Market Price. Pursuant
to the L2 Collateralized Note, L2 Capital promises to pay the Company the principal amount of $500 (consisting $393 in cash, legal
fees of $7 and an original issuance discount of $100) no later than November 10, 2017.
In
connection with the issuance of the First Note, the Company also issued to L2 Capital warrants to purchase up to 400,000 shares
of common stock (the “Warrant Shares”) pursuant to the common stock purchase warrant (the “Common Stock Purchase
Warrant”) executed by the Company. The Common Stock Purchase Warrant shall be exercisable at a price of 110% multiplied
by the closing bid price of the common stock on the Issuance Date (the “Exercise Price”), subject to adjustments and
exercisable from the Issue Date until the seven–year anniversary. At the time that the Second Note is funded by the Holder
thereof in cash, then on such funding date, the Warrant Shares shall immediately and automatically be increased by the quotient
(the “Second Warrant Shares”) of $375 divided by the lesser of (i) the Exercise Price and (ii) 110% multiplied by
the closing bid price of the common stock on the funding date of the Second Note. With respect to the Second Warrant Shares, the
Exercise Price hereunder shall be redefined to equal the lesser of (i) the Exercise Price and (ii) 110% multiplied by the closing
bid price of the common stock on the funding date of the Second Note. L2 Capital may exercise the Warrant cashless unless the
underlying shares of common stock have been registered with the SEC prior to the exercise.
On
May 18, 2017, the Company and L2 Capital entered into an amendment to the Equity Purchase Agreement and Registration Rights Agreement
(the “Amended Equity Purchase Agreement”) and an amendment to the Convertible Promissory Note (the “Amended
Convertible Promissory Note”), to facilitate the transactions of the Company and Iliad as descried below. Pursuant to the
Amended Equity Purchase Agreement, L2 Capital and the Company agreed to increase the amount of common stock issuable to L2 Capital
from $5,000 to $6,500. In accordance with the Amendment to the Convertible Promissory Note, L2 Capital agreed to waive all its
rights under the Convertible Promissory Note issued to it on March 10, 2017 with respect to certain events of default that would
or could have been triggered by the Company by entering into the Iliad financing. In consideration of such waiver, the Company
issued 200,000 shares of the Company’s common stock to L2 Capital.
On
September 1, 2017, in accordance with the terms of the warrant (see Note 9) upon the funding of the Second Note, the shares issuable
under the warrants issued to L2 Capital on March 10, 2017 increased by 417,975 shares. All other terms remained the same.
On
September 8, 2017, L2 Capital exercised warrants to purchase 800,000 common shares on a cashless basis and the Company issued
620,282 shares.
On
September 5, 2017, L2 notified the Company regarding certain matters which might have impacted the Company’s compliance
covenants under the terms of the Commitment Note, the First Note, and the Second Note.
The
Company discussed these matters with L2 Capital, and without prejudice, induced L2 Capital to accept 2,166,850 additional shares
of the Company’s common stock in connection with the conversion of the full balance of the L2 Capital notes outstanding.
Accordingly, on September 8, 2017, L2 Capital converted all of their notes and accrued interest of $32 into a total of 3,853,553
shares of the Company’s common stock.
Iliad
note
On
May 18, 2017, the Company together with MGT Mining One, Inc. (“Mining One”), a wholly-owned subsidiary of the Company,
and Iliad Research and Trading, L.P., (“Iliad”), a Utah limited partnership, entered into a securities purchase agreement
(the “Securities Purchase Agreement”), pursuant to which the Company issued and sold to Iliad a secured convertible
note (the “Note”) in the original principal amount (the “Original Principal Amount”) of $1,355, with an
original issuance discount (the “OID”) of $225 and legal and accounting expenses of $5, and a warrant (the “Warrant”)
to purchase shares of common stock of the Company. In accordance with the Securities Purchase Agreement, Iliad shall fund the
Company and Mining One (together the “Borrowers”) the purchase price (the “Purchase Price”) in an amount
of $1,125, which equals to the result of deducting the OID and legal and accounting expenses from the Original Principal Amount.
On
May 18, 2017, in connection with the Securities Purchase Agreement, the Company executed the secured convertible promissory note
(the “Secured Convertible Promissory Note” or the “Note”), promising to pay Iliad the Original Principal
Amount and all amounts of accrued and unpaid interest on the outstanding balance on the date that is twenty-four (24) months from
when Iliad transfers the funds in the amount of $1,125 to the Borrowers (the “Purchase Price Date”). The Note is secured
with all assets of the Mining One, currently owned and later acquired, and the Company’s three thousand (3,000) shares of
common stock of the Mining One. The Note bears an interest rate of ten per cent (10%) per annum. Subject to the terms and conditions
set forth in the Note, the Borrowers may prepay the outstanding balance of the Note in part or in full in cash of an amount equal
to 125% multiplied by the outstanding balance of the Note. At any time beginning on the date that is six (6) months from the Purchase
Price Date until the outstanding balance of the Note has been paid in full, Iliad may, at its option, convert all or any portion
of the outstanding balance into shares of common stock of the Company on a cashless basis at a price of $1.05 per share (the “Lender
Conversion Price”), as adjusted from time to time depending on circumstances as defined in the Secured Convertible Promissory
Note. In addition, beginning three (3) months after the Purchase Price Date, Iliad has the right to redeem a portion of the outstanding
balance of the Note in any amount that is less than $90 per month, in cash or, in the Event of Default by converting such Redemption
Amount, in full or in part, into shares of the Company’s common stock at a per share price that is the lower of the Lender
Conversion Price and the price that is sixty-five percent (65%) of Market Price.
In
connection with the issuance of the Note, the Company also issued to Iliad a Warrant to purchase up to 1,231,819 shares of Common
Stock of the Company in accordance with the terms of the warrant to purchase shares of common stock. The Warrant shall be exercisable
at a cash price of $1.05 per share for a term of five years.
May
2017 notes
On
May 1, 2017, the Company issued notes payable to two investors in the aggregate amount of $330,000 (the “May 2017 Notes”).
The May 2017 Notes mature on October 1, 2018, with mandatory repayments beginning on October 1, 2017 in the amount of $25 and
continuing monthly thereafter. The May 2017 Notes accrue interest at a rate of 10% per annum.
The
May 2017 Notes are convertible into the Company’s common stock only after an event of default. Events of default include
failure to pay payments due under the May 2017 Notes, entrance into any bankruptcy or insolvency proceedings, failure to meet
the obligations of any other notes payable in an amount exceeding $100, the Company’s stock being suspending for trading
or delisted, losing the Company’s ability to deliver shares, or becoming more than 15 days delinquent on any filings required
with the SEC.
The
May 2017 Notes feature a “most favored nation” clause, in which, if the Company were to issue convertible notes with
more favorable terms to another investor, the holders of the May 2017 Notes can elect to replace their notes with new notes with
the same terms as the more favorable notes. On September 29, 2017, the May 2017 Notes were converted into 327,382 shares of the
Company’s Common Stock.
UAHC
Note
On
August 18, 2017, the Company sold to UAHC Ventures, LLC, a Nevada limited liability company, a secured convertible note (the “UAHC
Note”) in the original principal amount of $2,410, with an original issuance discount of $400 and reimbursed legal and accounting
expenses of $10, and a warrant to purchase 861,905 shares of common stock of the Company.
The
principal and all accrued and unpaid interest is due on August 18, 2019. The UAHC Note is secured with the Company’s ownership
of Mining One and all assets of Mining One. The Note bears an interest rate of 10% per annum, provided that at any time on or
after the occurrence of an event of default, the interest rate shall be adjusted to 22% per annum. Subject to the terms and conditions
set forth in the UAHC Note, the Company may prepay the outstanding balance of the UAHC Note in part or in full in cash in an amount
equal to 125% multiplied by the outstanding balance of the UAHC Note.
At
any time beginning on the date that is six months from the issuance date until the outstanding balance of the UAHC Note has been
paid in full, UAHC may, at its option, convert all or any portion of the outstanding balance into shares of common stock of the
Company on a cashless basis at a price of $1.05 per share, which will be adjusted for any future issuances of equity that contain
a lower per-share exercise price. In addition, beginning three months after the issuance date, UAHC has the right to redeem a
portion of the outstanding balance of the UAHC Note in any amount that is less than $90 per calendar month. The Company has the
right to fund each redemption using cash or shares of the Company’s common stock at a price that is the lower of $1.05 per
share and the price that is 65% of the Company’s market price.
August
2017 Notes
On
August 9, 2017, the Company issued notes payable to two investors in the aggregate amount of $330,000 (the “August 2017
Notes”) with an aggregate original issuance discount of $35,000. The August 2017 Notes mature on December 8, 2018, with
mandatory repayments beginning on January 8, 2018 in the amount of $13 and continuing monthly thereafter. The August 2017 Notes
accrue interest at a rate of 10% per annum.
At
any time the August 2017 Notes are outstanding the two investors are entitled to convert any outstanding principal and accrued
but unpaid interest into shares of the Company’s common stock at $1.05 per share.
September
2017 Note
On
September 12, 2017, the Company issued a note payable to an investor in the amount of $480 (the “September 2017 Note”)
with an original issue discount of $80, and a warrant to purchase 1,000,000 shares of the Company’s common stock. The principal
and all accrued and unpaid interest on the outstanding balance on the date that is twenty-four (24) months from the issuance date.
At
any time beginning on the date that is six months from the issuance date until the outstanding balance of the September 2017 Note
has been paid in full, the holder may, at its option, convert all or any portion of the outstanding balance into shares of common
stock of the Company at a price of $1.05 per share, which will be adjusted for any future issuances of equity that contain a lower
per-share exercise price. In addition, beginning three months after the issuance date, the holder has the right to redeem a portion
of the outstanding balance of the September 2017 Note in any amount that is less than $25 per calendar month. The Company has
the right to fund each redemption using cash or shares of the Company’s common stock at a price that is the lower of $1.05
per share and the price that is 65% of the Company’s market price.
Sales
of stock
During
February and March 2017, the Company sold 1,625,000 shares of its common stock to investors at a purchase price of $0.40 per Share
for aggregate gross proceeds of $650. In addition, for every Share purchased, the Investors shall receive detachable warrants,
as follows (i) one Series A Warrant; (ii) one Series B Warrant; and (iii) one Series C Warrant.
During
May 2017, the Company sold 1,250,000 shares of its common stock at $0.40 per share for total proceeds of $500. In addition, for
every Share purchased, the Investors received detachable warrants, as follows: (i) one Series A Warrant; (ii) one Series B Warrant;
and (iii) one Series C Warrant.
Each
Series A Warrant is exercisable for one (1) Share, for a period of three (3) years at a price of $0.50 per Share. Each Series
B Warrant is exercisable for one (1) Share, for a period of three (3) years at a price of $0.75 per Share, and each Series C Warrant
is exercisable is exercisable for one (1) Share, for a period of three (3) years at a price of $1.00 per Share.
During
the three and nine months ended September 30, 2017, the Company issued 846,948 shares of its common stock from the cashless exercise
of warrants to purchase 1,160,000 shares of common stock.
Risks
and uncertainties related to our future capital requirements
The
accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates
the realization of assets and the satisfaction of liabilities in the normal course of business. As of September 30, 2017, the
Company had incurred significant operating losses since inception and continues to generate losses from operations and has an
accumulated deficit of $355,057.
These
matters raise substantial doubt about the Company’s ability to continue as a going concern. The unaudited condensed consolidated
financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the
classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Commercial
results have been limited and the Company has not generated significant revenues. The Company cannot assure its stockholders that
the Company’s revenues will be sufficient to fund its operations. If adequate funds are not available, the Company may be
required to curtail its operations significantly or to obtain funds through entering into arrangements with collaborative partners
or others that may require the Company to relinquish rights to certain of our technologies or products that the Company would
not otherwise relinquish.
As
of September 30, 2017, MGT’s cash, cash equivalents and restricted cash were $43. The Company intends to raise additional
capital, either through debt or equity financings or through the continued sale of the Company’s assets in order to achieve
its business plan objectives. Management believes that it can be successful in obtaining additional capital; however, no assurance
can be provided that the Company will be able to do so. There is no assurance that any funds raised will be sufficient to enable
the Company to attain profitable operations or continue as a going concern. To the extent that the Company is unsuccessful, the
Company may need to curtail or cease its operations and implement a plan to extend payables or reduce overhead until sufficient
additional capital is raised to support further operations. There can be no assurance that such a plan will be successful.
Off–balance
sheet arrangements
As
of September 30, 2017 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.
Inflation
The
effect of inflation on the Company’s operating results was not significant.