As of April 15, 2019, the registrant
had outstanding 195,770,183 shares of common stock, $0.001 par value. (the “Common Stock”)
PART
I
Item
1. Business
MGT
Capital Investments, Inc. is a Delaware corporation, incorporated in 2000. The predecessor of the Company was originally incorporated
in Utah in 1977. Our corporate office is located in Durham, North Carolina. MGT was formerly comprised of the parent company and
its wholly–owned subsidiaries MGT Cybersecurity, Inc., Medicsight, Inc., MGT Sports, Inc. MGT Studios, Inc. (“MGT
Studios”), MGT Interactive, LLC, MGT Gaming, Inc., MGT Mining One, Inc. and MGT Mining Two, Inc., and MGT Sweden AB. MGT
Studios also owned a controlling minority interest in the subsidiary M2P Americas, Inc. During the first quarter of 2019, MGT
dissolved all its wholly-owned subsidiaries excluding MGT Sweden AB.
Cryptocurrency
Mining Business
Industry
Summary
Bitcoin
is a world–recognized cryptocurrency, which can be traded and converted into major fiat currencies on cryptocurrency exchanges.
Cryptocurrencies are a medium of exchange that are transacted through and recorded on a decentralized distributed ledger system,
called the “Blockchain.” The Blockchain is built by a chronological addition of transactions, which are grouped into
blocks. Each new block requires a mathematical problem to be solved before it can be confirmed and added to the Blockchain. The
speed at which these mathematical problems are solved is called Hash Rate. It represents the overall computing power of the network
and is measured in Hashes per second (“H/s”). The complexity of these problems, also referred to as mining difficulty,
increases with the network’s growing Hash Rate.
Bitcoin
mining entails solving these complex mathematical problems using custom designed and programmed application-specific integrated
circuit (“ASIC”) computers (also referred to as “miners”). Bitcoin miners perform a vital function on
the Bitcoin Blockchain network, by performing these Hash calculations and adding transactions blocks to the Blockchain ledger.
When a miner is successful in adding a block to the Blockchain, it is rewarded with a fixed number of Bitcoin; a miner can also
be compensated by network transaction fees.
Additional
information about Bitcoin, Blockchain and cryptocurrencies can be found on publicly available educational sources such as
www.Bitcoin.org
.
Our
Operations
In
September 2016, we commenced our Bitcoin mining operations in the Wenatchee Valley area of central Washington. Throughout 2017,
we expanded our mining capacity with the purchase of additional Bitcoin mining machines and by entering into hosting and power
agreements with Washington facilities owners. We have also entered into management agreements with third party investors whereby
the investors purchased the mining hardware, and we receive both a fee to manage the mining operations plus one-half of the net
operating profit.
Towards
the end of 2017, we determined that there was inadequate electric power in Washington to support our growth, and we moved swiftly
to find a new facility to conduct our mining operations. By the end of 2017, we made the decision to move our principal mining
operations to northern Sweden, a geographic location with historically low ambient temperatures and available inexpensive electricity.
We entered into a hosting agreement (the “Hosting Agreement”) with Beacon Leasing LLC (“Beacon”), pursuant
to which Beacon agreed to deliver a turn-key solution in northern Sweden with up to 15 megawatts of electricity capacity, including
a facility with power, cooling, and hosting services for a fixed price of $810 per month. The facility in Sweden is owned by the
city of Älvsbyn and leased by a subsidiary of Beacon. Beacon committed to provide a fully functional facility by the end
of March 2018. The Hosting Agreement required us to pay $1,620 to Beacon, representing the first and last month of service. During
the first quarter of 2018, we took delivery of an additional 2,000 Bitcoin mining machines in Sweden and moved 4,300 machines
(including 2,100 investor-owned machines) from Washington to Sweden.
Beacon
failed to deliver the fully built out facility and necessary power supply levels required by us by the end of March 2018. Through
the first quarter of 2018 and into the second quarter, our personnel made visits to Sweden and assisted Beacon with efforts to
get the facility up and running. We also advanced additional funds to Beacon to maximize operational capacity as quickly as possible.
During April 2018, we became involved in the design and setup of the Sweden facility due to concern that Beacon may have overstated
their construction abilities and financial capacity.
On
May 16, 2018, we were informed that none of the amounts due from Beacon to the electric utility serving the Älvsbyn facility
had been paid and that the utility would begin shutting down the electricity to the Älvsbyn facility. On the same day, we
notified Beacon that it was in material breach of the Hosting Agreement. In order to avoid a shutdown of the facility and a suspension
of mining operations, we paid the utility provider $368, as a good faith deposit. During the three months ended September 30,
2018, we paid an additional aggregate of $947 to the utility provider for power consumed.
Subsequent
to May 16, 2018, we intensified our efforts to determine the extent of Beacon’s non-performance under the Hosting Agreement.
Management made several more trips to Sweden to supervise the completion of the facility as well as investigate Beacon’s
accounting records. We determined that Beacon also was faced with unpaid invoices from various material and service providers
to the facility.
Beginning
in late May 2018, we took steps to become the direct operator of the Swedish facility to gain control of the situation, protect
our assets, and maximize operational capacity as quickly as possible. These actions included paying some of the outstanding amounts
owed by Beacon in order to maintain key vendor relationships needed to complete the facility. We also formed MGT Sweden AB in
anticipation of assuming the building lease and the power agreements.
Continuing
issues arising from poor engineering and demands from the electric utility forced us to devote a significant amount of time and
effort to the operations in Sweden. Further, we determined that the financial investment to fully assume the position of Beacon
was excessive. Simultaneously, based on an analysis of available facilities in the United States, we concluded that the United
States provided hosting opportunities for us. On September 24, 2018, the combination of these factors led us to decide to forgo
any further monetary investment in Sweden. We have subsequently relocated all of the miners in Sweden to facilities in Colorado
and Ohio.
As
of December 31, 2018, MGT owned and operated approximately 500 miners located in a leased facility in Quincy, Washington. Prior
to the relocation of the mining assets to the United States, the Company conducted a physical observation concluding there were
approximately 5,750 operating machines in Sweden. In connection with the relocation to the U.S., approximately 3,000 machines
were shipped to Colorado and 2,750 machines were shipped to Ohio. Of the 5,750 machines relocated to the U.S, 3,800 of these machines
are owned by the Company, while the remaining are investor owned. All miners owned or managed by us are S9 Antminers sold by Bitmain
Technologies LTD. In addition to the S9 Antminers, we own 50 custom designed GPU-based Ethereum mining rigs. During the year ended
December 31, 2018, we mined 245 Bitcoin for total revenue of $2,010. In addition, the miners we operate pursuant to the management
agreements mined 184 Bitcoin during the same period.
Because
the price of Bitcoin has steadily decreased during 2018, and throughout the first quarter of 2019, the Company decided it is not
economically feasible to commence mining operations in Colorado or Ohio. Until the price of Bitcoin rises, the Company does not
plan to commence mining with these machines.
Management
Agreements
On
October 12, 2017, we entered into two management agreements (each, a “Management Agreement”, collectively “Management
Agreements”) with two accredited investors, Deep South Mining LLC and BDLM, LLC. On November 21, 2017, we entered into a
third management agreement with another accredited investor, Buckhead Crypto, LLC (all three accredited investors together are
“Users”). Each of the Users agreed on substantially similar terms to purchase an aggregate of 2,376 Bitmain Antminer
S9 mining computers (the “Bitcoin Hardware”) for a total of $3,650 to mine Bitcoin with us acting as the exclusive
manager for each of the Users. In addition, the Users have agreed to pay to us, in advance, the first three months of expected
electricity costs of the Bitcoin mining operations in the sum of $691. Initial electricity cost for the first three months following
delivery of the Bitcoin Hardware was reimbursed to the Users within the first three months of operations. Each Management Agreement
is in effect for 24 months from the date that the Bitcoin Hardware begins mining operations, and may be terminated by mutual written
agreement.
Pursuant
to the Management Agreements, the Company shall provide for installation, hosting, maintenance and repair and provide ancillary
services necessary to operate the Bitcoin Hardware. In accordance with each of the Management Agreements, each of the Users will
gain a portion of the Bitcoin mined called the User Distribution Portion. The User Distribution Portion is 50% of the amount of
Bitcoin mined net of the operating fee (10% of the total Bitcoin mined) and the electricity cost.
On
February 13, 2018, the Company entered into a new management agreement with a third party with substantially the same terms as
the other Management Agreements. The third party agreed to purchase 200 Bitmain Antminer S9 mining computers for a total of $428
to mine Bitcoin with the Company acting as the exclusive manager. This management agreement is in effect for 24 months from the
date that the Bitcoin Hardware begins mining operations, and may be terminated by mutual written agreement.
On
February 28, 2018, the Company and Buckhead Crypto, LLC terminated their Management Agreement. The Company agreed to purchase
the Bitcoin mining machines and the prepaid electricity from Buckhead Crypto, LLC for an aggregate amount of $767.
Bitcoin
And Blockchain Overview
A
Bitcoin is one type of a digital asset that is issued by, and transmitted through, an open source, math-based protocol platform
using cryptographic security (the “Bitcoin Network”). The Bitcoin Network is an online, peer-to-peer user network
that hosts the public transaction ledger, known as the “Blockchain,” and the source code that comprises the basis
for the cryptography and math-based protocols governing the Bitcoin Network. No single entity owns or operates the Bitcoin Network,
the infrastructure of which is collectively maintained by a decentralized user base. Bitcoin can be used to pay for goods and
services or can be converted to fiat currencies, such as the US Dollar, at rates determined on Bitcoin exchanges or in individual
end-user-to-end-user transactions under a barter system.
Bitcoins
are “stored” or reflected on the digital transaction ledger known as the “Blockchain,” which is a digital
file stored in a decentralized manner on the computers of each Bitcoin Network user. The Blockchain records the transaction history
of all Bitcoin in existence and, through the transparent reporting of transactions, allows the Bitcoin Network to verify the association
of each Bitcoin with the digital wallet that owns them. The Bitcoin Network and Bitcoin software programs can interpret the Blockchain
to determine the exact Bitcoin balance, if any, of any digital wallet listed in the Blockchain as having taken part in a transaction
on the Bitcoin Network.
The
Bitcoin Network is decentralized and does not rely on either governmental authorities or financial institutions to create, transmit
or determine the value of Bitcoin. Rather, Bitcoin are created and allocated by the Bitcoin Network protocol through a “mining”
process subject to a strict, well-known issuance schedule. The value of Bitcoin is determined by the supply and demand of Bitcoin
in the Bitcoin exchange market (and in private end-user-to-end-user transactions), as well as the number of merchants that accept
them. As Bitcoin transactions can be broadcast to the Bitcoin Network by any user’s Bitcoin software and Bitcoin can be
transferred without the involvement of intermediaries or third parties, there are little or no transaction costs in direct peer-to-peer
transactions on the Bitcoin Network. Third party service providers such as Bitcoin Exchanges and Bitcoin third party payment processing
services may charge significant fees for processing transactions and for converting, or facilitating the conversion of, Bitcoin
to or from fiat currency.
Miners
dedicate substantial resources to mining. Given the increasing difficulty of the target established by the Bitcoin Network, current
miners must invest in expensive mining devices with adequate processing power to hash at a competitive rate.
Bitcoin
is an example of a digital asset that is not a fiat currency (i.e., a currency that is backed by a central bank or a national,
supra-national or quasi-national organization) and are not backed by hard assets or other credit. As a result, the value of Bitcoin
is determined by the value that various market participants place on Bitcoin through their transactions.
The
cryptocurrency markets have grown rapidly in both popularity and market size. These markets are local, national and international
and include an ever-broadening range of products and participants. The United States Securities and Exchange Commission (the “SEC”),
and other governmental agencies around the world, are evaluating the cryptocurrency markets and are likely to institute new rules
and regulations within this market to protect investors and such regulations could result in the restriction of the acquisition,
ownership, holding, selling, use or trading of our common stock.
Legacy
Businesses
Cybersecurity
On
May 9, 2016, MGT entered into an asset purchase agreement to acquire certain assets owned by D–Vasive, Inc. (“D-Vasive”),
a company in the business of developing and marketing certain privacy and anti–spy applications. Pursuant to the terms of
the agreement, the Company would purchase assets including applications for use on mobile devices, intellectual property, customer
lists, databases, project files and licenses. The proposed purchase price for D–Vasive was $300 in cash and 23.8 million
shares of MGT common stock.
On
May 26, 2016, the Company agreed to acquire certain technology and assets of Demonsaw LLC (“Demonsaw”), a company
in the business of developing and marketing secure and anonymous information sharing applications. Pursuant to the terms of this
agreement, the Company would purchase assets including the source code for the Demonsaw solution, intellectual property, customer
lists, databases, project files and licenses. 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 their agreement.
Simultaneously, D–Vasive entered an agreement with the holders of Demonsaw’s outstanding membership interests, whereby
D–Vasive would purchase all such membership interests. Accordingly, the proposed purchase price for D–Vasive (inclusive
of the Demonsaw assets) was increased to 43.8 million shares of MGT common stock.
Both
D-Vasive and Demonsaw were partly owned by Future Tense Secure Systems (“FTS”), an entity controlled by the wife of
cybersecurity pioneer John McAfee, and as an integral part of the acquisition, Mr. McAfee would become Chairman and Chief Executive
Officer of MGT, and the Company would enter into a consulting agreement with FTS.
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 Annual Meeting of Stockholders. On September 8, 2016, shareholder approval was obtained. However, on September
19, 2016, the New York Stock Exchange (the “Exchange”) informed the Company that it would not approve for listing
on the Exchange the 43.8 million shares required to be issued to complete the closing of the D–Vasive acquisition, resulting
in the termination of the acquisition.
In
March 2017, MGT purchased 46% of the outstanding membership interests of Demonsaw from FTS for 2.0 million shares of MGT common
stock.
Notwithstanding
the termination of the D-Vasive acquisition, John McAfee agreed to join MGT in November 2016 and served as Chairman and CEO until
August 2017, at which time he was appointed Chief Cybersecurity Visionary, a position he held until his relationship with the
Company ended in January 2018.
Prior
to the expected September 2016 closing of the above transaction, the Company added employees and consultants to develop a cybersecurity
business, and position itself to address various cyber threats through advanced protection technologies for mobile devices and
corporate networks. In November 2016, we acquired intellectual property from a third party for 150,000 shares of our common stock
for a total acquisition price of $495. In August 2017, we commenced commercial development of our cybersecurity business, including
Sentinel, a network intrusion detector released in October 2017. We incurred $47 and $346 in research and development expenses
in 2018 and 2017, respectively. Prior to the sale described below, we realized nominal revenue from our cybersecurity business.
On
March 19, 2018, we announced the end of our cybersecurity operations by selling the Sentinel product line to a new entity formed
by the unit’s management team and stopping development of a secure mobile phone. The Sentinel assets were sold for consideration
of $60 in cash and a $1,000 promissory note, convertible into a 20% equity interest of the buyer.
Online
and Mobile Gaming
Prior
to the second quarter ending June 30, 2016, the Company and its subsidiaries were principally engaged in the business of acquiring,
developing and monetizing assets in the online and mobile gaming space as well as the social casino industry.
Strategy
MGT’s
strategy is to oversee the operation of approximately 5,750 cryptocurrency mining machines in Colorado and Ohio and continue to
execute on an expansion model to secure low cost power and grow its cryptocurrency assets. The Company’s immediate focus
is to grow free cash flow. Our longer-term objective is focused towards vertical integration of our cryptocurrency mining business
as well as diversification into other areas of the rapidly emerging Blockchain and cryptocurrency industry.
Competition
Our
industry is extremely new and subject to rapid change and constant innovation. We face significant competition, including from
companies that have entered this space much earlier than us and are better capitalized, with vertically integrated business models.
Some of these companies are our suppliers. We compete to attract, engage, and retain personnel, educated and skilled in the Blockchain
and cryptocurrency mining space.
We
compete with vertically integrated companies such as Bitfury Group Limited and Bitmain Technologies LTD that engage in both the
design and distribution of mining machines, as well as cryptocurrency mining. We also compete with many other companies that are
engaged in cryptocurrency mining, some of which may have lower operating costs or cost of capital than MGT.
Employees
Currently,
the Company and its subsidiaries have 4 full–time employees. None of our employees are represented by a union and we believe
our relationships with our employees are good.
Available
Information
MGT
maintains a website at www.mgtci.com. The Company makes available free of charge our annual reports on Form 10–K, quarterly
reports on Form 10–Q and current reports on Form 8–K, including any amendments to the foregoing reports, as soon as
is reasonably practicable after such material is electronically filed with, or furnished to, the SEC. These materials along with
our Code of Business Conduct and Ethics are also available through our corporate website at www.mgtci.com. A copy of this Annual
Report is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation
of the Public Reference Room can be obtained by calling the SEC at 1–800–SEC–0330. The public may also download
these materials from the SEC’s website at http://www.sec.gov. Any amendments to, and waivers of, our Code of Business Conduct
and Ethics will be posted on our corporate website. The Company is not including the information contained at
mgtci.com
as a part of this Annual Report.
Item
1A. Risk Factors
Discussion
of our business and operations included in this Annual Report should be read together with the risk factors set forth below. They
describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties, together with other
factors described elsewhere in this report, have the potential to affect our business, financial condition, results of operations,
cash flows, strategies or prospects in a material and adverse manner. New risks may emerge at any time, and we cannot predict
those risks or estimate the extent to which they may affect our financial performance. Each of the risks described below could
adversely impact the value of our securities. These statements, like all statements in this report, speak only as of the date
of this Annual Report (unless another date is indicated), and we undertake no obligation to update or revise the statements in
light of future developments.
The
Company generates limited revenue from operations upon which an evaluation of our prospects can be made. The Company’s prospects
must be considered keeping in mind the risks, expenses and difficulties frequently encountered in the establishment of a new business
in a constantly changing industry. There can be no assurance that the Company will be able to achieve profitable operations in
the foreseeable future, if at all.
The
Company has identified a number of specific risk areas that may affect our operations and results in the future:
Risks
Related to Our Business
We
have had limited commercial results and revenues, and we may be required to curtail operations if adequate funds are not available
to us.
Our
commercial results have been limited. Historically, the Company has not generated significant revenues to fund its operations,
and the Company cannot be certain that revenues will be sufficient to fund operations for the foreseeable future. The Company’s
primary source of operating funds since inception has been debt and equity financings. The Company has also earned a limited amount
of revenue through its Bitcoin operations. At December 31, 2018, MGT’s cash and cash equivalents were approximately $96.
The
Company may raise additional capital, either through debt or equity financings, in order to achieve its business plan objectives.
Management believes that it can be successful in obtaining additional capital; however, no assurance can be provided that the
Company will be able to do so. There is no assurance, moreover, that any funds raised will be sufficient to enable the Company
to attain profitable operations or continue as a going concern. To the extent that the Company is unsuccessful, the Company may
need to curtail its operations and implement a plan to extend payables or reduce overhead until sufficient additional capital
is raised to support further operations. The Company may also attempt to obtain funds through entering into arrangements with
collaborative partners or others that may require the Company to relinquish rights to certain of our technologies or products
that the Company would not otherwise relinquish. There can be no assurance that any such plan will be successful.
The
Company’s consolidated financial statements have been prepared on a going concern basis, and do not include adjustments
that might be necessary if the Company is unable to continue as a going concern.
The
Company’s consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. As of December 31, 2018, the Company had incurred
significant operating losses since inception, and continues to generate losses from operations, and has an accumulated deficit
of $405,285. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated
financial statements incorporated in this Annual Report do not include any adjustments relating to the recoverability and classification
of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going
concern.
The
further development and acceptance of Bitcoin and other cryptographic and algorithmic protocols governing the issuance of transactions
in Bitcoin and other digital currencies, which represent a new and rapidly changing industry, are subject to a variety of factors
that are difficult to evaluate. The slowing or stopping of the development or acceptance of Bitcoin may adversely affect our results
of operations.
The
use of digital currencies such as Bitcoin to, among other things, buy and sell goods and services, and the acquisition of digital
currencies as an investment, is part of a new and rapidly evolving industry that employs digital assets based upon a computer-generated
mathematical and/or cryptographic protocol. Bitcoin is a prominent, but not a unique part of this industry. The growth of this
industry in general, and Bitcoin in particular, is subject to a high degree of uncertainty. The factors affecting the further
development of this industry, include, but are not limited to:
|
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continued
worldwide growth in the adoption and use of Bitcoin and other digital currencies;
|
|
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|
government
and quasi-government regulation of Bitcoin and other digital assets and their use, or restrictions on or regulation of access
to and operation of the Bitcoin network or similar digital asset systems;
|
|
●
|
changes
in consumer demographics and public tastes and preferences;
|
|
●
|
the
maintenance and development of the open-source software protocol of the Bitcoin network;
|
|
●
|
the
availability and popularity of other forms or methods of buying and selling goods and services, including new means of using
fiat currencies;
|
|
●
|
general
economic conditions and the regulatory environment relating to digital assets; and
|
|
●
|
negative
consumer perception of Bitcoin specifically and cryptocurrencies generally.
|
A
decline in the popularity or acceptance of Bitcoin may adversely affect our results of operations.
Currently,
there is relatively small use of Bitcoin in the retail and commercial marketplace in comparison to relatively large use by speculators,
thus contributing to price volatility that could adversely affect our results of operations.
Bitcoin
has only recently become accepted as a means of payment for goods and services by certain major retail and commercial outlets,
and use of Bitcoin by consumers to pay such retail and commercial outlets remains limited. Conversely, a significant portion of
Bitcoin demand is generated by speculators and investors seeking to profit from the short- or long-term holding of Bitcoin. Many
industry commentators believe that Bitcoin’s best use case is as a store of wealth, rather than as a currency for transactions,
and that other cryptocurrencies having better scalability and faster settlement times will better serve as currency. This could
limit Bitcoin’s acceptance as transactional currency. A lack of expansion by Bitcoin into retail and commercial markets,
or a contraction of such use, may result in increased volatility or a reduction in the Bitcoin Index Price, either of which could
adversely affect our results of operations.
Security
threats could result in the halting of our operations and a loss of assets or damage to our reputation, each of which could have
a material adverse effect on our business.
Security
breaches, computer malware and computer hacking attacks have been a prevalent concern in the Blockchain industry. Any security
breach caused by hacking, which involves efforts to gain unauthorized access to information or systems, or to cause intentional
malfunctions or loss or corruption of data, software, hardware or other computer equipment, and the inadvertent transmission of
computer viruses, could harm our business operations or result in loss of our assets. Any breach of our infrastructure could result
in damage to our reputation.
Any
Bitcoin we mine may be subject to loss, damage, theft or restriction on access.
There
is a risk that some or all of the Bitcoin we mine could be lost, stolen or destroyed. Although we will seek to use various technology
to minimize the risk of loss, damage and theft, we cannot guarantee the prevention of such loss, damage or theft, whether caused
intentionally, accidentally or by an act of God. Access to our Bitcoin could also be restricted by natural events (such as an
earthquake or flood) or human actions (such as a terrorist attack). Any of these events may adversely affect our operations. In
addition, government regulations in the United States and abroad could materially alter the landscape for Bitcoin and other cryptocurrencies
use and accessibility, including through tax regulations, restrictions on use in transactions and regulation or prohibition of
cryptocurrency exchanges.
If
we do not keep pace with technological changes, our solutions may become less competitive and our business may suffer.
The
market for Bitcoin technology is characterized by rapid technological change, frequent product and service innovation and evolving
industry standards. We may need to continuously modify and enhance our solutions to keep pace with changes in internet-related
hardware, software, communication, browser and database technologies. We may not be successful in either developing these modifications
and enhancements. Furthermore, uncertainties about the timing and nature of new network platforms or technologies, or modifications
to existing platforms or technologies, could increase our research and development expenses. Any failure of our solutions to keep
pace with technological changes or operate effectively with future network platforms and technologies could adversely affect our
business.
Adverse
economic conditions or reduced technology spending may adversely impact our business.
Our
business depends on the overall demand for technology and on the economic health of our prospective customers. In general, worldwide
economic conditions remain unstable, and these conditions may make it difficult for our prospective customers and us to forecast
and plan future business activities accurately. Weak global economic conditions, or a reduction in technology spending even if
economic conditions improve, could adversely impact our business, financial condition and results of operations in a number of
ways, including longer sales cycles, lower prices for our solutions, reduced bookings and lower or no growth.
Our
ability to attract, train and retain qualified employees is crucial to our results of operations and any future growth.
To
execute our growth plan, we must attract and retain highly qualified personnel. Competition for these individuals is intense,
especially for engineers with high levels of experience in designing and developing software and internet-related services, and
professional services personnel with appropriate financial reporting experience. We have, from time to time, experienced, and
we expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications. Many of the
companies with which we compete for experienced personnel have greater resources than we have. If we hire employees from competitors
or other companies, their former employers may attempt to assert that these employees have breached their legal obligations or
that we have induced such breaches, resulting in a diversion of our time and resources. If we fail to attract new personnel or
fail to retain and motivate our current personnel, our business and future growth prospects could be adversely affected.
Regulatory
changes or actions may alter the nature of an investment in the Company or restrict the use of cryptocurrencies in a manner that
adversely affects the Company’s business, prospects or operations.
Governments
around the world have reacted differently to cryptocurrencies, with certain governments deeming them illegal while others have
allowed their use and trade. On-going and future regulatory actions may impact the ability of the Company to continue to operate
and such actions could affect the ability of the Company to continue as a going concern or to pursue this segment at all, which
could have a material adverse effect on the business, prospects or operations of the Company.
The
effect of any future regulatory change on the Company or any cryptocurrency that the Company may mine or hold for others is impossible
to predict, and such change could have a material adverse effect on the ability of the Company to continue as a going concern
or to pursue this segment at all, which would have a material adverse effect on the business, prospects or operations of the Company.
Governments
may in the future curtail or outlaw the acquisition, use or redemption of cryptocurrencies. Ownership of, holding or trading in
cryptocurrencies may then be considered illegal and subject to sanction. Governments may also take regulatory action that may
increase the cost and/or subject cryptocurrency companies to additional regulation.
On
July 25, 2017, the SEC released an investigative report which states that the United States would, in some circumstances, consider
the offer and sale of Blockchain tokens pursuant to an initial coin offering (“ICO”) subject to federal securities
laws. Thereafter, China released statements and took similar actions. Although the Company does not participate in ICOs, its clients
and customers may participate in ICOs and these actions may be a prelude to further action which chills widespread acceptance
of Blockchain and cryptocurrency adoption and have a material adverse effect on the ability of the Company to continue as a going
concern or to pursue this segment at all, which would have a material adverse effect on the business, prospects or operations
of the Company.
Governments
may in the future take regulatory actions that prohibit or severely restrict the right to acquire, own, hold, sell, use or trade
cryptocurrencies or to exchange cryptocurrencies for fiat currency. Similar actions by governments or regulatory bodies (such
as an exchange on which the Company’s securities are listed, quoted or traded) could result in restrictions of the acquisition,
ownership, holding, selling, use or trading in the Company’s securities. Such a restriction could result in the Company
liquidating its inventory at unfavorable prices and may adversely affect the Company’s shareholders and have a material
adverse effect on the ability of the Company to continue as a going concern or to pursue this segment at all, raise new capital
or maintain a securities listing with an exchange which could have a material adverse effect on the business, prospects or operations
of the Company and harm investors in the Company’s securities.
Terrorist
actions and attacks may have a negative impact on economic conditions and market liquidity.
There
is a risk of terrorist attacks on the United States and elsewhere causing significant loss of life and property damage and disruptions
in the global market. Economic and diplomatic sanctions may be in place or imposed on certain states and military action may be
commenced. The impact of such events is unclear, but could have a material effect on general economic conditions and market liquidity.
Reliance
on third parties to operate our mining machines may cause delays in production and mining and could have an impact on our business,
financial condition and prospects.
The
Company relies on third parties to operate its Bitcoin mining machinery. These third parties are not our employees and, except
for restrictions imposed by our contracts with such third parties, we have limited ability to control the amount or timing of
resources that they devote to our programs. Although we rely on these third parties to operate our mining machinery, we remain
responsible for the overall mining operations. Many of the third parties with whom we contract may also have relationships with
other commercial entities, some of which may compete with us. If the third parties operating our machinery do not perform their
contractual duties or obligations we may need to enter into new arrangements with alternative third parties. This could be costly,
and mining operations may be delayed or terminated. If any of our relationships with these third parties terminate, we may not
be able to enter into arrangements with alternative third party contractors or to do so on commercially reasonable terms. Though
we carefully manage our relationships with our contract machinery operators, there can be no assurance that we will not encounter
similar challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business,
financial condition and prospects.
The
Company’s reliance on a third-party mining pool service provider, such as Slush Pool or Antpool, for our mining revenue
payouts may have a negative impact on the Company operations.
We
use a third–party mining pool to receive our mining rewards from the network. Bitcoin mining pools allow miners to combine
their computing power, increasing their chances of solving a block and getting paid by the network. The rewards are distributed
by the pool operator, proportionally to our contribution to the pool’s overall mining power, used to generate each block.
Should the pool operator’s system suffer downtime due to a cyber-attack, software malfunction or other similar issues, it
will negatively impact our ability to mine and receive revenue.
Banks
and financial institutions may not provide banking services, or may cut off services, to businesses that provide cryptocurrency-related
services or that accept cryptocurrencies as payment, including financial institutions of investors in the Company’s securities.
A
number of companies that provide Bitcoin and/or other cryptocurrency-related services have been unable to find banks or financial
institutions that are willing to provide them with bank accounts and other services. Similarly, a number of companies and individuals
or businesses associated with cryptocurrencies may have had and may continue to have their existing bank accounts closed or services
discontinued with financial institutions. We also may be unable to obtain or maintain these services for our business. The difficulty
that many businesses that provide Bitcoin and/or other cryptocurrency-related services have and may continue to have in finding
banks and financial institutions willing to provide them services may be decreasing the usefulness of cryptocurrencies as a payment
system and harming public perception of cryptocurrencies and could decrease its usefulness and harm its public perception in the
future. Similarly, the usefulness of cryptocurrencies as a payment system and the public perception of cryptocurrencies could
be damaged if banks or financial institutions were to close the accounts of businesses providing Bitcoin and/or other cryptocurrency-related
services. This could occur as a result of compliance risk, cost, government regulation or public pressure. The risk applies to
securities firms, clearance and settlement firms, national stock and commodities exchanges, the over the counter market and the
Depository Trust Company, which, if any of such entities adopts or implements similar policies, rules or regulations, could result
in the inability of our investors to open or maintain stock or commodities accounts, including the ability to deposit, maintain
or trade the Company’s securities. Such factors would have a material adverse effect the ability of the Company to continue
as a going concern or to pursue this segment at all, which could have a material adverse effect on the business, prospects or
operations of the Company and harm investors.
To
the extent that the profit margins of Bitcoin mining operations are not high, operators of Bitcoin mining operations are more
likely to immediately sell Bitcoin earned by mining in the market, resulting in a reduction in the price of Bitcoin that could
adversely impact the Company and similar actions could affect other cryptocurrencies.
Over
the past two years, Bitcoin mining operations have evolved from individual users mining with computer processors, graphics processing
units and first generation ASIC servers. Currently, new processing power is predominantly added by incorporated and unincorporated
“professionalized” mining operations. Professionalized mining operations may use proprietary hardware or sophisticated
ASIC machines acquired from ASIC manufacturers. They require the investment of significant capital for the acquisition of this
hardware, the leasing of operating space (often in data centers or warehousing facilities), incurring of electricity costs and
the employment of technicians to operate the mining farms. As a result, professionalized mining operations are of a greater scale
than prior miners and have more defined, regular expenses and liabilities. These regular expenses and liabilities require professionalized
mining operations to more immediately sell Bitcoin earned from mining operations, whereas it is believed that individual miners
in past years were more likely to hold newly mined Bitcoin for more extended periods. The immediate selling of newly mined Bitcoins
greatly increases the supply of Bitcoin, creating downward pressure on the price of Bitcoin.
The
extent to which the value of Bitcoin mined by a professionalized mining operation exceeds the allocable capital and operating
costs determines the profit margin of such operation. A professionalized mining operation may be more likely to sell a higher
percentage of its newly mined Bitcoin rapidly if it is operating at a low profit margin—and it may partially or completely
cease operations if its profit margin is negative. In a low profit margin environment, a higher percentage could be sold more
rapidly, thereby potentially reducing Bitcoin prices. Lower Bitcoin prices could result in further tightening of profit margins,
particularly for professionalized mining operations with higher costs and more limited capital reserves, creating a network effect
that may further reduce the price of Bitcoin until mining operations with higher operating costs become unprofitable and remove
mining power. The network effect of reduced profit margins resulting in greater sales of newly mined Bitcoin could result in a
reduction in the price of Bitcoin that could adversely impact the Company.
The
foregoing risks associated with Bitcoin could be equally applicable to other cryptocurrencies, existing now or introduced in the
future. Such circumstances would have a material adverse effect on the ability of the Company to continue as a going concern or
to pursue this segment at all, which could have a material adverse effect on the business, prospects or operations of the Company
and potentially the value of any cryptocurrencies the Company holds or expects to acquire for its own account.
Political
or economic crises may motivate large-scale sales of Bitcoin and Ethereum, or other cryptocurrencies, which could result
in a reduction in value and adversely affect the Company.
As
an alternative to fiat currencies that are backed by central governments, digital assets such as Bitcoin and Ethereum,
which are relatively new, are subject to supply and demand forces based upon the desirability of an alternative, decentralized
means of buying and selling goods and services, and it is unclear how such supply and demand will be impacted by geopolitical
events. Nevertheless, political or economic crises may motivate large-scale acquisitions or sales of Bitcoins and Ethereum
and other cryptocurrencies either globally or locally. Large-scale sales of Bitcoin and Ethereum or other cryptocurrencies
would result in a reduction in their value and could adversely affect the Company. Such circumstances could have a material adverse
effect on the ability of the Company to continue as a going concern or to pursue this segment at all, which would have a material
adverse effect on the business, prospects or operations of the Company and potentially the value of any cryptocurrencies the Company
holds or expects to acquire for its own account.
It
may be illegal now, or in the future, to acquire, own, hold, sell or use Bitcoin, Ethereum, or other cryptocurrencies,
participate in the Blockchain or utilize similar digital assets in one or more countries, the ruling of which could adversely
affect the Company.
Although
currently Bitcoin, Ethereum, and other cryptocurrencies, the Blockchain and digital assets generally are not regulated or are
lightly regulated in most countries, including the United States, one or more countries such as China and Russia may take regulatory
actions in the future that could severely restrict the right to acquire, own, hold, sell or use these digital assets or to exchange
for fiat currency. Such restrictions may adversely affect the Company. Such circumstances could have a material adverse effect
on the ability of the Company to continue as a going concern or to pursue this segment at all, which could have a material adverse
effect on the business, prospects or operations of the Company and potentially the value of any cryptocurrencies the Company holds
or expects to acquire for its own account and harm investors.
If
regulatory changes or interpretations require the regulation of Bitcoin or other digital assets under the securities laws of the
United States or elsewhere, including the Securities Act of 1933, the Securities Exchange Act of 1934 (the “Exchange Act”)
and the Investment Company Act of 1940 or similar laws of other jurisdictions and interpretations by the SEC, the Commodity Futures
Trading Commission (the “CFTC”), the Internal Revenue Service (“IRS”), Department of Treasury or other
agencies or authorities, the Company may be required to register and comply with such regulations, including at a state or local
level. To the extent that the Company decides to continue operations, the required registrations and regulatory compliance steps
may result in extraordinary expense or burdens to the Company. The Company may also decide to cease certain operations. Any disruption
of the Company’s operations in response to the changed regulatory circumstances may be at a time that is disadvantageous
to the Company.
Current
and future legislation and SEC rulemaking and other regulatory developments, including interpretations released by a regulatory
authority, may impact the manner in which Bitcoin or other cryptocurrency is viewed or treated for classification and clearing
purposes. In particular, Bitcoin and other cryptocurrency may not be excluded from the definition of “security” by
SEC rulemaking or interpretation requiring registration of all transactions, unless another exemption is available, including
transacting in Bitcoin or cryptocurrency amongst owners and require registration of trading platforms as “exchanges”
such as Coinsquare. The Company cannot be certain as to how future regulatory developments will impact the treatment of Bitcoin
and other cryptocurrencies under the law. If the Company fails to comply with such additional regulatory and registration requirements,
the Company may seek to cease certain of its operations or be subjected to fines, penalties and other governmental action. Such
circumstances could have a material adverse effect on the ability of the Company to continue as a going concern or to pursue this
segment at all, which could have a material adverse effect on the business, prospects or operations of the Company and potentially
the value of any cryptocurrencies the Company holds or expects to acquire for its own account and harm investors.
There
have been calls for Bitcoin and other cryptocurrency regulation in China, which might make Bitcoin mining uneconomical for us.
The
Peoples Bank of China has recently instituted restrictions on certain exchange trading in cryptocurrencies and ICOs. Further governmental
regulation could negatively impact pricing for Bitcoin. In addition, the Company’s sole source of mining computers is a
Chinese company, exposing the Company to risk if restrictions are placed on the export of such computers.
Demand
for Bitcoin is driven, in part, by its status as the most prominent and secure digital asset. It is possible that a digital asset
other than Bitcoin could have features that make it more desirable to a material portion of the digital asset user base, resulting
in a reduction in demand for Bitcoins.
Bitcoin
holds a “first-to-market” advantage over other digital currencies. This first-to-market advantage is driven in large
part by having the largest user base and, more importantly, the largest combined mining power in use. Having a large mining network
results in greater user confidence regarding the security and long-term stability of a digital asset’s network and its Blockchain;
as a result, the advantage of more users and miners makes a digital asset more secure, which makes it more attractive to new users
and miners, resulting in a network effect that strengthens the first-to-market advantage. Nonetheless, it is possible that another
form of digital currency could become materially popular due to either a perceived or exposed shortcoming of the Bitcoin network
or a perceived advantage of another form of digital currency. If another form of digital currency obtains significant market share,
this could reduce the profitability of our Bitcoin operations.
Because
the number of Bitcoin awarded for solving a block in the Bitcoin network Blockchain continually decreases, miners must invest
in increasing processing power to maintain their yield of Bitcoins, which might make Bitcoin mining uneconomical for the Company.
The
award of new Bitcoin for solving blocks continually declines, so that Bitcoin miners must invest in increasing processing power
in order to maintain or increase their yield of Bitcoin. The Company is committed to increasing its investment in its Bitcoin
mining operations, but if the pricing of Bitcoin were to decline significantly, there can be no assurance that the Company would
be able to recover its investment in the computer hardware and processing power required to upgrade its mining operations. There
can, moreover, be no assurance that the Company will have the resources to upgrade its processing power in order to maintain the
continuing profitability of its Bitcoin mining operations. Also, the developers of the Bitcoin network or other programmers could
propose amendments to the network’s protocols and software that, if accepted, might require the Company to modify its Bitcoin
operations, and increase its investment in Bitcoin, in order to maintain profitability. There can be no assurance, however, that
the Company will be able to do so.
The
Company continues to have discussions with potential investors to purchase more Bitcoin mining machines, but we cannot assure
you that we will be successful in obtaining the necessary financing.
The
Company is considering further increasing the processing power of its Bitcoin mining operations, as the Company seeks to leverage
its experience and expertise in this area of operations. To do so, however, the Company will need to raise additional investment
capital. While we are in discussions with potential investors to provide the necessary capital to purchase additional Bitcoin
mining machines, we cannot assure you that these discussions will lead to our obtaining additional capital or that we will otherwise
be successful in obtaining the necessary financing to expand our Bitcoin operations. If we are successful in raising capital to
expand our Bitcoin operations, the form in which the capital is invested could be different from the way we have traditionally
structured capital investments in the Company. For example, funds could be invested through a joint venture or similar arrangement,
in which the Company does not have the entire equity ownership interest.
A
number of claims have been filed against the Company alleging violations of federal securities laws.
A
number of law firms have filed claims, or announced an intention to file, on behalf of stockholders of the Company, alleging that
the company has violated the Exchange Act. While the Company believes that there are no merits to claims that the Company violated
applicable securities laws, the results of any investigation, or the outcome of any claims that may brought against us, if any,
cannot be predicted with certainty. Moreover, regardless of the outcome, investigations can have an adverse impact on us because
they may entail a significant amount of costs to defend the Company against any claims, such claims may negatively affect morale
of employees and may divert the attention of management.
A
claim has been filed against the Company’s former Chief Executive Officer alleging violations of federal securities laws.
On
September 7, 2018, the SEC commenced a legal action in the United States District Court for the Southern District of New York
(the “Court”) naming as defendant Robert Ladd, the Company’s then Chief Executive Officer and President, among
others. The SEC filed civil charges against multiple individuals and entities who are alleged to have violated the securities
laws in connection with certain microcap stocks. To our knowledge there is no other ongoing investigation by any government agency
related to the Company or any of its officers or directors. We cannot predict the outcome or impact of any ongoing matters, and
there exists the possibility that we could be subject to liability, penalties and other restrictive sanctions and adverse consequences
if the SEC, the Department of Justice, or any other government agency were to pursue legal action in the future. Moreover, we
expect to incur costs in responding to related requests for information and subpoenas, and if instituted, in defending against
any governmental proceedings.
The
Company has received a subpoena from the SEC.
On
September 15, 2016, the Company received a subpoena from the SEC requesting certain information from the Company, and in December
2017 our President and Chief Executive Officer also received a subpoena from the SEC. Except as detailed in the previous paragraph,
we have no indication or reason to believe that the Company or its officers or directors are or will be the subject of any enforcement
proceedings. The Company has publicly announced its receipt of the subpoena and is fully cooperating to comply with the SEC’s
request. Nevertheless, response to the subpoena has entailed, and may continue to entail legal costs and the diversion of management’s
attention, and the issuance of the subpoena may create a perception of wrongdoing that could be harmful to our business.
Risks
Related to Our Stock
The
Company is subject to the risks relating to penny stocks.
Trading
in our Common Stock is also subject to the requirements of certain rules promulgated under the Exchange Act. These rules require
additional disclosure by broker–dealers in connection with any trades involving a stock defined as a “penny stock”
and impose various sales practice requirements on broker–dealers who sell penny stocks to persons other than established
customers and accredited investors, generally institutions. These additional requirements may discourage broker–dealers
from effecting transactions in securities that are classified as penny stocks, which could severely limit the market price and
liquidity of such securities and the ability of purchasers to sell such securities in the secondary market. A penny stock is defined
generally as any non–exchange listed equity security that has a market price of less than $5.00 per share, subject to certain
exceptions.
Our
stock price and trading volume may be volatile, which could result in losses for our stockholders.
The
equity markets may experience periods of volatility, which could result in highly variable and unpredictable pricing of equity
securities. The market price of our Common Stock could change in ways that may or may not be related to our business, our industry
or our operating performance and financial condition and could negatively affect our share price or result in fluctuations in
the price or trading volume of our Common Stock. We cannot predict the potential impact of these periods of volatility on the
price of our Common Stock. The Company cannot assure you that the market price of our Common Stock will not fluctuate or decline
significantly in the future.
If
securities or industry analysts do not publish research or reports about our business, or if they publish inaccurate or unfavorable
research reports about our business, our share price and trading volume could decline.
The
trading market for our Common Stock will, to some extent, depend on the research and reports that securities or industry analysts
publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us
should downgrade our shares or change their opinion of our business prospects, our share price would likely decline. If one or
more of these analysts ceases coverage of our Company or fails to regularly publish reports on us, we could lose visibility in
the financial markets, which could cause our share price and volume to decline.
Offers
or availability for sale of a substantial number of shares of our Common Stock may cause the price of our Common Stock to decline.
If
our stockholders sell substantial amounts of our Common Stock in the public market, including upon the expiration of any statutory
holding period under Rule 144 under the Securities Act of 1933, as amended, or registration for resale, or the conversion of preferred
stock or exercise of warrants, circumstances commonly referred to as an “overhang” could result, in anticipation of
which the market price of our Common Stock could fall. The existence of an overhang, whether or not sales have occurred or are
occurring, could also make more difficult our ability to raise additional financing through the sale of equity or equity–related
securities in the future at a time and price that we deem reasonable or appropriate.
The
price of the Company’s shares could be subject to wide price swings since the value of cryptocurrencies may be subject to
pricing risk and have historically been subject to wide swings in value.
The
Company’s shares are subject to arbitrary pricing factors that are not necessarily associated with traditional factors that
influence stock prices or the value of non-cryptocurrency assets such as revenue, cashflows, profitability, growth prospects or
business activity levels since the value and price, as determined by the investing public, may be influenced by future anticipated
adoption or appreciation in value of cryptocurrencies or the Blockchain generally, factors over which the Company has little or
no influence or control. The Company’s share prices may also be subject to pricing volatility due to supply and demand factors
associated with few or limited public company options for investment in the segment.
Cryptocurrency
market prices are determined primarily using data from various exchanges, over-the-counter markets, and derivative platforms.
Furthermore, such prices may be subject to factors such as those that impact commodities, more so than business activities, which
could be subjected to additional influence from fraudulent or illegitimate actors, real or perceived scarcity, and political,
economic, regulatory or other conditions. Pricing may be the result of, and may continue to result in, speculation regarding future
appreciation in the value of cryptocurrencies, or the Company or its share price, inflating and making their market prices more
volatile or creating “bubble” type risks.
In
addition, the success of the Company, the Company’s share price, and the interest in investors and the public in the Company
as an early entrant into the Blockchain and cryptocurrency ecosystem may in large part be the result of the Company’s early
emergence as a publicly traded company in which holders of appreciated cryptocurrency have an opportunity to invest inflated cryptocurrency
profits for shares of the Company, which could be perceived as a way to maintaining investing exposure to the Blockchain and cryptocurrency
markets without exposing the investor to the risk in a particular cryptocurrency. Cryptocurrency holders have realized exponential
value due to large increases in the prices of cryptocurrencies and may seek to lock in cryptocurrency appreciation, which investing
in the Company’s securities may be perceived as a way to achieve that result, but may not continue in the future. As a result,
the value of the Company’s securities, and the value of cryptocurrencies generally may be more likely to fluctuate due to
changing investor confidence in future appreciation (or depreciation) in market prices, profits from related or unrelated investments
or holdings of cryptocurrency. Such factors or events would have a material adverse effect on the ability of the Company to continue
as a going concern or to pursue this segment at all, or on the price of the Company’s securities, which would have a material
adverse effect on the business, prospects or operations of the Company and potentially the value of any cryptocurrencies the Company
holds or expects to acquire for its own account.
Investor
relations activities, nominal “float” and supply and demand factors may affect the price of our stock.
The
Company may utilize various techniques such as non–deal road shows and investor relations campaigns in order to create investor
awareness for the Company. These campaigns may include personal, video and telephone conferences with investors and prospective
investors in which our business practices are described. The Company may provide compensation to investor relations firms and
pay for newsletters, websites, mailings and email campaigns that are produced by third–parties based upon publicly–available
information concerning the Company. The Company does not intend to review or approve the content of such analysts’ reports
or other materials based upon analysts’ own research or methods. Investor relations firms should generally disclose when
they are compensated for their efforts, but whether such disclosure is made or complete is not under our control. In addition,
investors in the Company may, from time to time, also take steps to encourage investor awareness through similar activities that
may be undertaken at their own expense. Investor awareness activities may also be suspended or discontinued, which may impact
the trading market for our Common Stock. Any of these activities could affect our stock price in a manner that is unrelated to
the underlying value of our Company.
The
ability of our board of directors (the “Board”) to issue additional stock may prevent or make more difficult certain
transactions, including a sale or merger of the Company.
Our
board of directors is authorized to issue up to 10,000,000 shares of preferred stock with powers, rights and preferences designated
by it. Shares of voting or convertible preferred stock could be issued, or rights to purchase such shares could be issued, to
create voting impediments or to frustrate persons seeking to effect a takeover or otherwise gain control of the Company. The ability
of the Board to issue such additional shares of preferred stock, with such rights and preferences it deems advisable, could discourage
an attempt by a party to acquire control of the Company by tender offer or other means. Such issuances could therefore deprive
stockholders of benefits that could result from such an attempt, such as the realization of a premium over the market price for
their shares in a tender offer or the temporary increase in market price that such an attempt could cause. Moreover, the issuance
of such additional shares of preferred stock to persons friendly to the board of directors could make it more difficult to remove
incumbent officers and directors from office even if such removal would be favorable to stockholders generally. In addition, the
Board is authorized to issue up to 2,500,000,000 shares of Common Stock. The issuance of these authorized but unissued shares
of Common Stock may dilute the ownership interests of existing stockholders and may have a dilutive effect on our Common Stock.
We
do not anticipate paying any cash dividends on our Common Stock in the foreseeable future.
We
have not declared or paid cash dividends on our Common Stock to date. We currently intend to retain our future earnings, if any,
to fund the development and growth of our business. In addition, the terms of any existing or future debt agreements may preclude
us from paying dividends.
Item
1B. Unresolved Staff Comments
Not
applicable.
Item
2. Properties
Our
principal corporate office is located at 512 S. Mangum Street, Suite 408 Durham, NC 2770, under a sublease that expires on January
31, 2020. Monthly rent is $7 until expiration of the lease. A security deposit of $13 was required upon execution of the sublease.
The Company believes our office is in good condition and is sufficient to conduct our operations.
The
Company has a mining operation in the state of Colorado under a lease that expires on November 1, 2010. The Company
is in the process of negotiating a formal management agreement with respect to a mining operation in Ohio. The Company had a month-to-month
mining operation in Washington which it terminated on March 22, 2019.
Item
3. Legal Proceedings
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 “2016 Securities Class 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 amended complaint, which the plaintiffs opposed. The Court heard oral argument
on the motion to dismiss on February 7, 2018. On February 27, 2018, the Court issued a Memorandum and Order dismissing the 2016
Securities Class Action in its entirety, with prejudice. The time for plaintiffs to file a notice of appeal expired on March 30,
2018.
Separately,
on September 15, 2016, the Company received a subpoena from the SEC and in December 2017, the Company’s former Chief Executive
Officer and President received a subpoena from the SEC. The Company has cooperated fully with the SEC 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.
On
January 24, 2017, the Company was served with a summons and complaint filed by plaintiff shareholder Atul Ojha in New York state
court against certain officers and directors of the Company, and naming the Company as a nominal defendant. The lawsuit is styled
as a derivative action (the “Ojha Derivative Action”) and was originally filed (but not served on any defendant) on
October 15, 2016. The Ojha Derivative Action substantively alleges that the defendants, collectively or individually, inadequately
managed the business and assets of the Company resulting in the deterioration of the Company’s financial condition. The
Ojha Derivative Action asserts claims including, but not limited to, breach of fiduciary duties, unjust enrichment and waste of
corporate assets. On February 27, 2017, the parties to the Ojha Derivative Action executed a stipulated stay of proceedings pending
resolution of the 2016 Securities Class Action. Shortly after issuance of the February 27, 2018, ruling dismissing the 2016 Securities
Class Action, the parties to the Ojha Derivative Action agreed to extend the stay indefinitely, with the plaintiff having the
option to vacate the stay on thirty days’ notice. Should the plaintiff seek to vacate the stay, the Company will address
and defend the Ojha Derivative Action.
On
September 7, 2018, the SEC commenced a legal action in the United States District Court for the Southern District of New York
(the “SEC Action”) which asserts civil charges against multiple individuals and entities who are alleged to have violated
the securities laws by engaging in pump-and-dump schemes in connection with certain microcap stocks and three unidentified companies.
The Company is one of the three unidentified companies but is not named as a defendant. However, the SEC named as defendants Robert
Ladd, the Company’s former Chief Executive Officer and President, as well as certain individuals alleged to have participated
in the schemes while they were stockholders in the Company, among others. The SEC filed an amended complaint in the SEC Action
on March 8, 2019. The Company, through its counsel, is monitoring the progress of the SEC Action.
In
September 2018 and October 2018, various shareholders of the Company filed putative class action lawsuits against the Company,
its former Chief Executive Officer and certain of its individual officers and shareholders, alleging violations of federal securities
laws and seeking damages (the “2018 Securities Class Actions”). The 2018 Securities Class Action followed and referenced
the allegations made against the Company’s former Chief Executive Officer and others in the SEC Action. The first putative
class action lawsuit was filed on September 28, 2018, in the United States District Court for the District of New Jersey, and
alleges that the named defendants engaged in a pump-and-dump scheme to artificially inflate the price of the Company’s stock
and that, as a result, defendants’ statements about the Company’s business and prospects were materially false and
misleading and/or lacked a reasonable basis at relevant times. The second putative class action was filed on October 9, 2018,
in the United States District Court for the Southern District of New York and makes similar allegations. The Company intends to
defend against the 2018 Securities Class Actions vigorously.
In
November 2018, the Company’s board received a shareholder demand letter dated November 6, 2018, from shareholders Nicholas
Fulton and Kelsey Thacker (the “Fulton Demand”). The Fulton Demand referenced the SEC Action and the allegations therein,
and demanded that the board take action to investigate, address and remedy the allegations raised in the SEC Action. The Company’s
counsel has communicated with counsel for the shareholders, advising them concerning the existence and status of the 2018 Securities
Class Actions, the Ojha Derivative Action, and the Thomas Derivative Action (defined below). Shareholders’ counsel has indicated
a general willingness to defer further action until resolution of the 2018 Securities Class Actions, and counsel continue to communicate
concerning the details.
On
December 12, 2018, a shareholder derivative action was filed by shareholder Bob Thomas against the Company and certain of its
current and former directors, officers and shareholders in New York state court, alleging breach of fiduciary duties, unjust enrichment,
abuse of control, gross mismanagement, and waste and seeking declaratory relief and damages (the “Thomas Derivative Action”).
The underlying allegations in the Thomas Derivative Action largely repeat the allegations of wrongdoing in the 2018 Securities
Class Actions. Based on recent communications between the Company’s counsel and plaintiff’s counsel in the Thomas
Derivative Action, plaintiff intends to seek consolidation of this case with the Ojha Derivative Action, and then to stay the
consolidated derivative action pending resolution of the 2018 Securities Class Actions. The Company-related defendants’
time to respond to the Thomas Derivative Action has been extended until thirty days after the Court rules on plaintiff’s
motion.
With
respect to the Thomas Derivative Action, plaintiffs’ counsel have indicated that they intend to move for an
order consolidating the Thomas Derivative Action with the shareholder derivative action captioned Oiha v. Ladd,
et al., Index No. 65647/2016 (New York Supreme Court, Westchester County) and staying the consolidated action pending
resolution of the pending parallel class actions captioned Klinabera v. MGT Capital Investments, et al.. No. 2:18-cv-14380
(United States District Court, District of New Jersey), and Guver v. MGT Capital Investments. Inc., et al.. No. 1:18-cv-09228
(United States District Court, Southern District of New York). Plaintiffs’ counsel in the Thomas Derivative Action have also extended
the Company’s time to respond to the complaint until 30 days after the Court rules on that motion.
The
Company believes that the claims in the actions filed against the Company are without merit and intends to vigorously defend against
these actions.
Item
4. Mine Safety Disclosures
None.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
1. Organization and Basis of Presentation
Organization
MGT
Capital Investments, Inc. (“MGT Capital”) is a Delaware corporation, incorporated in 2000. MGT Capital was originally
incorporated in Utah in 1977. “MGT” or the “Company” was formerly comprised of the parent company and
its wholly–owned subsidiaries MGT Cybersecurity, Inc., Medicsight, Inc., MGT Sports, Inc., MGT Studios, Inc. (“MGT
Studios”), MGT Interactive, LLC, MGT Gaming, Inc., MGT Mining One, Inc., MGT Mining Two, Inc., and MGT Sweden AB. MGT Studios
also owned a controlling minority interest in the subsidiary M2P Americas, Inc. During the first quarter of 2019, the Company
filed certificates of dissolution for all of its wholly-owned subsidiaries except MGT Sweden AB.
MGT’s
corporate office is located in Durham, North Carolina.
On
March 23, 2018, the Company’s stockholders approved an increase in the Company’s authorized common stock from 75,000,000
shares to 125,000,000 shares. On March 23, 2018, the Company filed an amendment to its Certificate of Incorporation with the state
of Delaware to reflect this change. On February 27, 2019, the Company’s stockholders approved an increase in the Company’s
authorized commons shares from 125,000,000 to 2,500,000,000. On February 27, 2019, the Company filed an amendment to its Certificate
of Incorporation with the state of Delaware to reflect this change.
On
March 23, 2018, the Company’s stockholders approved a 1-for-2 reverse split of the Company’s common stock, to be effected
only if needed for the Company’s application to uplist its common stock to a national exchange. As of April 15, 2019,
the Company had not amended its Certificate of Incorporation to reflect this reverse split and such adjustments are not reflected
within these consolidated financial statements.
On
June 13, 2018, the Company filed a universal shelf registration statement covering up to $150 million of various MGT securities,
including common stock, preferred stock, debt securities, rights, warrants, and units, that the Company may sell from time to
time. On August 10, 2018, this registration statement on Form S-3 was declared effective by the Securities and Exchange Commission.
Through April 15, 2019, the Company has sold $6,036 million of securities under this registration statement.
Cryptocurrency
mining
In
September 2016, MGT commenced its Bitcoin mining operations in the Wenatchee Valley area of central Washington. Throughout 2017,
the Company expanded its mining capacity with the purchase of additional Bitcoin mining machines and by entering into hosting
and power agreements with Washington facilities owners. The Company also entered into management agreements with third party investors
whereby the investors purchased the mining hardware, and the Company receives both a fee to manage the mining operations plus
one-half of the net operating profit.
Towards
the end of 2017, the Company determined that there was inadequate electric power in Washington to support the Company’s
growth, and the Company moved swiftly to find a new facility to conduct its mining operations. By the end of 2017, the Company
made the decision to move its principal mining operations to northern Sweden, a geographic location with historically low ambient
temperatures and available inexpensive electricity. The Company entered into a hosting agreement (the “Hosting Agreement”)
with Beacon Leasing LLC (“Beacon”), pursuant to which Beacon agreed to deliver a turn-key solution in northern Sweden
with up to 15 megawatts of electricity capacity, which included a facility with power, cooling, and hosting services for a fixed
price of $810 per month. The facility in Sweden is owned by the city of Älvsbyn and leased by a subsidiary of Beacon. Beacon
committed to provide a fully functional facility by the end of March 2018. The Hosting Agreement required the Company to pay $1,620
to Beacon, representing the first and last month of service. During the first quarter of 2018, the Company took delivery of an
additional 2,000 Bitcoin mining machines in Sweden and moved 4,300 machines (including 2,100 investor-owned machines) from Washington
to Sweden.
Beacon
failed to deliver the fully built out facility and necessary power supply levels required by MGT by the end of March 2018. Through
the first quarter of 2018 and into the second quarter, MGT personnel made visits to Sweden and assisted Beacon with efforts to
get the facility up and running. The Company also advanced additional funds to Beacon to maximize operational capacity as quickly
as possible. During April 2018, the Company became involved in the design and setup of the Sweden facility due to concern that
Beacon may have overstated their construction abilities and financial capacity.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
1. Organization and Basis of Presentation, continued
Cryptocurrency
mining, continued
On
May 16, 2018, the Company was informed that none of the amounts due from Beacon to the electric utility serving the Älvsbyn
facility were paid and that the utility would begin shutting down the electricity to the Älvsbyn facility. On the same day,
the Company notified Beacon that it was in breach of the Hosting Agreement. In order to avoid a shutdown of the facility and a
suspension of mining operations, the Company paid $368 directly to the electric utility, as a good faith deposit. During the three
months ended September 30, 2018, the Company paid an additional aggregate of $947 to the utility provider for power consumed.
Subsequent
to May 16, 2018, the Company intensified its efforts to determine the extent of Beacon’s non-performance under the Hosting
Agreement. Management made several more trips to Sweden to supervise the completion of the facility as well as investigate Beacon’s
accounting records. The Company determined that Beacon also was faced with unpaid invoices from various material and service providers
to the facility.
Beginning
in late May 2018, the Company took steps to become the direct operator of the Swedish facility to gain control of the situation,
protect its assets, and maximize operational capacity as quickly as possible. These actions included paying the outstanding amounts
owed by Beacon in order to maintain the vendor relationships needed to complete the facility and forming MGT Sweden AB in anticipation
of assuming the building lease and the power agreements.
During
the three months ended June 30, 2018, the Company recorded restructuring expense of $2,499, which included the write-off of the
unamortized balance of the initial deposit paid to Beacon in the amount of $1,350 and $1,149, for additional costs paid by the
Company to service providers and vendors engaged to complete the facility. These costs consisted of unpaid obligations for services
provided prior to the second quarter of 2018, including:
Costs to bring electricity provider current and set up additional transformers
|
|
$
|
893
|
|
Satisfaction of payables for materials, repairs and supplies
|
|
|
206
|
|
Satisfaction of payables for payroll and consulting fees
|
|
|
50
|
|
TOTAL
|
|
$
|
1,149
|
|
The
cost of services provided after the Company took over full direct operational control of the facility are included in cost of
revenue and general and administrative expenses in the Company’s consolidated statements of operations and comprehensive
loss.
Continuing
issues arising from poor engineering and demands from the electric utility forced the Company to devote a significant amount of
time and effort to the operations in Sweden. Further, the Company determined that the financial investment to fully assume the
position of Beacon was excessive. Simultaneously, based on an analysis of available facilities in the United States, the Company
concluded that the United States provided hosting opportunities for the Company. On September 24, 2018, the combination of these
factors led to the Company deciding to forgo any further monetary investment in Sweden. The Company has relocated all of the miners
in Sweden to facilities in Colorado and Ohio.
As
of December 31, 2018, MGT owned and operated approximately 500 miners located in a leased facility in Quincy, Washington. Prior
to the mining assets’ relocation to the United States, the Company conducted a physical observation concluding that there
are approximately 5,750 operating machines in Sweden. In connection with the relocation to the U.S., approximately 3,000 were
shipped to Colorado and 2,750 were shipped to Ohio. Of the 5,750 machines shipped, 3,800 of these machines are owned by the Company,
while the remaining machines are investor owned. All miners owned or managed by MGT are S9 Antminers sold by Bitmain Technologies
LTD. In addition to the S9 Antminers, the Company owns 50 custom designed GPU-based Ethereum mining rigs. During the year ended
December 31, 2018, the Company mined 245 Bitcoin for total revenue of $2,010. In addition, the miners the Company operate pursuant
to the management agreements mined 184 Bitcoin during the same period.
Because
the price of Bitcoin has steadily decreased during 2018 and throughout the first quarter of 2019, the Company decided it is not
economically responsible to commence mining operations in Colorado or Ohio. Until the price of Bitcoin rises, the Company does
not plan to commence mining with these machines.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
1. Organization and Basis of Presentation, continued
Legacy
business – cybersecurity
On
January 26, 2018, the Company announced the end of its business relationship with cybersecurity pioneer John McAfee. Since August
2017, Mr. McAfee had served as Chief Cybersecurity Visionary of the Company, guiding the development of the Company’s cybersecurity
business, including Sentinel, an enterprise class network intrusion detector, released in October 2017. The Company also owned
the intellectual property associated with developing and marketing a mobile phone with extensive privacy and anti-hacking features.
On
March 19, 2018, the Company announced it had ended its cybersecurity operations by selling the Sentinel product line to a new
entity formed by the unit’s management team and stopping development of the privacy phone. The Sentinel assets were sold
for consideration of $60 in cash and a $1,000 promissory note, convertible into a 20% equity interest of the buyer.
Basis
of presentation
The
accompanying consolidated financial statements for the years ended December 31, 2018 and 2017 have been prepared in accordance
with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and applicable rules and
regulations of the United States Securities and Exchange Commission (“SEC”).
Note
2. Going Concern and Management’s Plans
The
accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. As of December 31, 2018, the Company had incurred
significant operating losses since inception and continues to generate losses from operations. As of December 31, 2018, the Company
had an accumulated deficit of $405,285. As of December 31, 2018, MGT’s cash and cash equivalents were $96.
Management’s
plans include overseeing the operation of approximately 5,750 cryptocurrency mining machines in Colorado and Ohio and continue
to execute on an expansion model to secure low cost power and grow its cryptocurrency assets. As discussed in Note 1, the Company
experienced additional delays and costs due to the non-performance of a key vendor. The Company has moved all of its miners from
Sweden to facilities in Colorado and Ohio. Because the machines were being moved in the latter months of 2018, the Company’s
revenue will be significantly less than historical results. Based on current budget assumptions, the Company believes that it
will be able to meet its operating expenses and obligations for one year from the date these consolidated financial statements
are issued. The Company will need to raise additional funding to grow its operations and to pay current maturities of debt. There
can be no assurance however that the Company will be able to raise additional capital when needed, or at terms deemed acceptable,
if at all. Such factors raise substantial doubt about the Company’s ability to sustain operations for at least one year
from the issuance of these consolidated financial statements. Management’s plans, including the operation of its existing
cryptocurrency mining machines, the raising of additional capital and potentially curtailing its operations alleviate such substantial
doubt. The accompanying consolidated financial statements do not include any adjustments related to the recoverability and classification
of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going
concern.
Note
3. Summary of Significant Accounting Policies
Principles
of consolidation
The
consolidated financial statements include the accounts of MGT and its wholly owned subsidiaries. All intercompany transactions
and balances have been eliminated. Non-controlling interest represents the non-controlling 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. During the first quarter of 2019, the Company dissolved all of its wholly owned subsidiaries excluding MGT Sweden AB.
In addition, the non-controlling equity interest in M2P Americas, Inc., including the minority investors’ share of the net
operating results and other components of equity relating to the non-controlling interest was also dissolved.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
3. Summary of Significant Accounting Policies, continued
Reclassification
Certain
amounts in prior periods have been reclassified to conform to current period presentation. These reclassifications had no effect
on the previously reported net loss.
Use
of estimates and assumptions and critical accounting estimates and assumptions
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial
statements, and also affect the amounts of revenues and expenses reported for each period. Actual results could differ from those
which result from using such estimates. Management utilizes various other estimates, including but not limited to determining
the estimated lives of long-lived assets, determining the potential impairment of intangibles and other long-lived assets, the
fair value of warrants issued, the fair value of stock options, the fair value of conversion features, the fair value of the deemed
dividend, the recognition of revenue, the valuation allowance for deferred tax assets and other legal claims and contingencies.
The results of any changes in accounting estimates are reflected in the financial statements in the period in which the changes
become evident. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the period
that they are determined to be necessary.
Beneficial
conversion feature of convertible notes payable
The
Company accounts for convertible notes payable in accordance with guidelines established by the Financial Accounting Standards
Board (“FASB”) 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 accretion of debt discount
on the Company’s consolidated statement of operations and comprehensive loss.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
3. Summary of Significant Accounting Policies, continued
Revenue
recognition
In
May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic
606) which was subsequently amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12, and ASU 2017-13. These ASUs outline
a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes
most current revenue recognition guidance, including industry-specific guidance. The guidance includes a five-step framework that
requires an entity to: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract,
(iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and
(v) recognize revenue when the entity satisfies a performance obligation. In July 2015, the FASB deferred the effective date of
ASU 2014-09 to annual reporting periods beginning after December 15, 2017. A full retrospective or modified retrospective approach
was required upon adoption. The Company has adopted ASU No. 2014-09 effective January 1, 2018.
The
Company has elected to apply the modified retrospective method and the impact was determined to be immaterial on the consolidated
financial statements. Accordingly, the new revenue standard has been applied prospectively in its consolidated financial statements
from January 1, 2018 forward and reported financial information for historical comparable periods will not be revised and will
continue to be reported under the accounting standards in effect during those historical periods.
The
Company has performed an analysis and identified its revenues and costs that are within the scope of the new guidance. The Company
determined that its methods of recognizing revenues have not been significantly impacted by the new guidance.
The
Company’s primary revenue stream is related to the mining of intangible digital assets. The Company derives its revenue
by solving “blocks” to be added to the blockchain and providing transaction verification services within the digital
currency networks of cryptocurrencies, such as Bitcoin and Ethereum, commonly termed “cryptocurrency mining.” In consideration
for these services, the Company receives digital currency (“Coins”). The Coins are recorded as revenue, using the
average spot price of Bitcoin on the date of receipt. The Coins are recorded on the balance sheet as inventory at the lower of
cost or net realizable value. Any gain or loss on sale would be recorded to cost of revenues. Costs of revenues includes
equipment depreciation, rent, and electricity costs. Net realizable value adjustments, to reduce the value of the Coins to their
market value, is included in cost of revenue on the Company’s consolidated statements of operations.
Due
to a lack of authoritative and non-authoritative guidance, the Company had previously recorded the Coins as a security, where
the Company would record revaluation gains and losses to cost of revenue. As of September 30, 2018, the Company reviewed certain
non-authoritative guidance and changed its accounting policy to reflect that its Coins should be inventory. The Company determined
that this change in accounting policy had no effect on its previously filed financial statements.
The
Company also recognizes revenue from its Management Agreements (as defined in Note 12). The Company receives a fee from
each Management Agreement based on the amount of Bitcoin mined and is reimbursed for any electricity costs incurred to run the
Bitcoin mining machines it manages in its facility.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
3. Summary of Significant Accounting Policies, continued
Income
taxes
The
Company accounts for income taxes in accordance with Accounting Standards Codification (“ASC”) 740, “Income
Taxes”. ASC 740 requires an asset and liability approach for financial accounting and reporting for income taxes and established
for all the entities a minimum threshold for financial statement recognition of the benefit of tax positions, and requires certain
expanded disclosures. The provision for income taxes is based upon income or loss after adjustment for those permanent items that
are not considered in the determination of taxable income. Deferred income taxes represent the tax effects of differences between
the financial reporting and tax basis of the Company’s assets and liabilities at the enacted tax rates in effect for the
years in which the differences are expected to reverse. The Company evaluates the recoverability of deferred tax assets and establishes
a valuation allowance when it is more likely than not that some portion or all the deferred tax assets will not be realized. Management
makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous
estimates of tax liability. In management’s opinion, adequate provisions for income taxes have been made. If actual taxable
income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.
The
Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017. The Tax Act reduces the U.S. federal corporate
tax rate from 35% to 21%. In accordance with the SEC Staff Accounting Bulletin No. 118, the Company has finalized its accounting
for the effects of the Tax Act and it has not had a material effect on the Company’s results of operations. Future adjustments
made to the provisional effects will be reported as a component of income tax expense in the reporting period in which any such
adjustments are determined. Based on the new tax law that lowers corporate tax rates, the Company revalued its deferred tax assets.
Future tax benefits are expected to be lower, with the corresponding one-time charge being recorded as a component of income tax
expense, if applicable.
The
Company was previously delinquent in the filing of its 2015 and 2016 US Federal and state tax returns. On August 10, 2018, the
Company filed its delinquent returns and is now in good standing in all income tax jurisdictions.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE 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 potential shares are anti–dilutive due to the Company’s
net loss.
Accordingly,
the computation of diluted loss per share for the year ended December 31, 2018 excludes 3,455,000 unvested restricted shares,
6,000,000 shares issuable under stock options, 67,252,747 shares issuable upon the conversion of convertible debt, and
5,477,975 shares issuable under warrants. The computation of diluted loss per share for the year ended December 31, 2017
excludes 2,000,000 shares issuable to the investors of the December 2017 private placement, 3,381,816 shares issuable to UAHC
Ventures, LLC a Nevada limited liability company (“UAHC”) due to the conversion of the UAHC note payable, 3,850,000
unvested restricted shares, 6,000,000 shares issuable under stock options, and 13,720,742 shares issuable under warrants.
Stock–based
compensation
The
Company recognizes compensation expenses for all equity–based payments in accordance with ASC 718 “Compensation –
Stock Compensation”. Under fair value recognition provisions, the Company recognizes equity–based compensation net
of an estimated forfeiture rate and recognizes compensation cost only for those shares expected to vest over the requisite service
period of the award.
Restricted
stock awards are granted at the discretion of the compensation committee of the board of directors of the Company. These awards
are restricted as to the transfer of ownership and generally vest over the requisite service periods, typically over a 12 to 24-month
period (vesting on a straight–line basis). The fair value of a stock award is equal to the fair market value of a share
of the Company’s common stock on the grant date.
The
fair value of an option award is estimated on the date of grant using the Black–Scholes option valuation model. The Black–Scholes
option valuation model requires the development of assumptions that are inputs into the model. These assumptions are the expected
stock volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock
and the expected forfeiture rate. Expected volatility is calculated based on the historical volatility of the Company’s
common stock over the expected term of the option. Risk–free interest rates are calculated based on continuously compounded
risk–free rates for the appropriate term.
Determining
the appropriate fair value model and calculating the fair value of equity–based payment awards requires the input of the
subjective assumptions described above. The assumptions used in calculating the fair value of equity–based payment awards
represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment.
The Company is required to estimate the expected forfeiture rate and recognize expense only for those shares expected to vest.
The
Company accounts for share–based payments granted to non–employees in accordance with ASC 505–50, “Equity
Based Payments to Non–Employees.” The Company determines the fair value of the stock–based payment as either
the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more readily determinable.
If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions
as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments
is reached, or (2) the date at which the counterparty’s performance is complete. 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.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
3. Summary of Significant Accounting Policies, continued
Cash
and cash equivalents
The
Company considers all highly liquid instruments with an original maturity of three months or less when acquired to be cash equivalents.
The Company maintains its cash and cash equivalents at financial institutions whereby the combined account balances exceed Federal
Deposit Insurance Corporation (“FDIC”) insurance coverage by approximately $9,263 as of December 31, 2017. The Company
has $96 as the combined account balance as of December 31, 2018. Therefore, since the FDIC’s insurance coverage is
for combined account balances that exceed $250, there is no concentration of credit risk as of December 31, 2018.
Property
and equipment
Property
and equipment are stated at cost less accumulated depreciation and impairment charges. Depreciation is calculated using the straight–line
method on the various asset classes over their estimated useful lives, which range from two to five years. The cost of repairs
and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed
of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income
in the year of disposition. Depreciation expense relating to the Company’s cryptocurrency mining machines is included in
cost of revenue.
Equity-linked
instruments
The
Company accounts for equity-linked instruments with certain anti-dilution provisions in accordance with ASC 815 and ASC 260. Under
this guidance, the Company excludes instruments with certain down round features when determining whether a financial instrument
(or embedded conversion feature) is considered indexed to the Company’s own stock. As a result, financial instruments (or
embedded conversion features) with down round features are not required to be classified as derivative liabilities. The Company
recognizes the value of a down round feature only when it is triggered and the exercise or conversion price has been adjusted
downward. For equity-classified freestanding financial instruments, such as warrants, the Company treats the value of the effect
of the down round, when triggered, as a deemed dividend and a reduction of income available to common stockholders in computing
basic earnings per share. For convertible instruments with embedded conversion features containing down round provisions, the
Company recognizes the value of the down round as a beneficial conversion discount to be amortized to earnings.
Any
incentive-based compensation received by the Optionee from the Company hereunder or otherwise shall be subject to recovery by
the Company in the circumstances and manner provided in any Incentive-based Compensation Recovery that may be adopted or implemented
by the Company and in effect from time to time on or after the date hereof, and Optionee shall effectuate any such recovery at
such time and in such manner as the Company may specify.
Research
and development
Research
and development expenses are charged to operations as incurred. During the years ended December 31, 2018 and 2017, respectively,
the Company expensed $47 and $346 in research and development costs.
Gain
(Loss) on Modification/Extinguishment of Debt
In
accordance with ASC 470, a modification or an exchange of debt instruments that adds a substantive conversion option or eliminates
a conversion option that was substantive at the date of the modification or exchange is considered a substantive change and must
be measured by determining the extinguishment of the debt. The Company recognized a gain on the extinguishment of debt
of approximately $1,295 in conjunction with amending a note purchase agreement on December 10, 2018. In addition to the changes
in the payment terms of the note, the debt holder agreed to change the convertibility terms of the Note from a non-convertible
note to a convertible note. The debt holder can elect to be paid in cash (within three trading days of notification) or shares
of the Company’s common stock.
Impairment
of long-lived assets
Long-lived
assets are reviewed for impairment whenever facts or circumstances either internally or externally may suggest that the carrying
value of an asset may not be recoverable, Should there be an indication of impairment, we test for recoverability by comparing
the estimated undiscounted future cash flows expected to result from the use of the asset to the carrying amount of the asset
or asset group. Any excess of the carrying value of the asset or asset group over its estimated fair value is recognized as an
impairment loss. The Company fully impaired the mining assets by expensing $6,345 as of December 31, 2018.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
3. Summary of Significant Accounting Policies, continued
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.
In
June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services
from nonemployees. The guidance is effective for public entities, certain not-for-profit entities, and certain employee benefit
plans for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other entities,
ASU 2018-07 is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning
after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company
is evaluating the impact of adopting this pronouncement.
In
July 2018, the FASB issued ASU 2018-10 Leases (Topic 842), Codification Improvements and ASU 2018-11 Leases (Topic 842), Targeted
Improvements, to provide additional guidance for the adoption of Topic 842. ASU 2018-10 clarifies certain provisions and correct
unintended applications of the guidance such as the application of implicit rate, lessee reassessment of lease classification,
and certain transition adjustments that should be recognized to earnings rather than to stockholders’ (deficit) equity.
ASU 2018-11 provides an alternative transition method and practical expedient for separating contract components for the adoption
of Topic 842. In February 2016, the FASB issued ASU 2016-02 Leases (Topic 842) which requires an entity to recognize assets and
liabilities arising from a lease for both financing and operating leases with terms greater than 12 months. ASU 2018-11, ASU 2018-10,
and ASU 2016-02 (collectively, “the new lease standards”) are effective for fiscal years beginning after December
15, 2018, with early adoption permitted. The Company is currently evaluating the effect the new lease standards will have on its
Consolidated Financial Statements; however, the Company anticipates recognizing assets and liabilities arising from any leases
that meet the requirements under the new lease standards on the adoption date and including qualitative and quantitative disclosures
in the Company’s Notes to the Consolidated Financial Statements.
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (“ASC 820”) , Disclosure Framework—Changes
to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 is intended to improve the
effectiveness of fair value measurement disclosures. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019,
and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of
adopting this pronouncement.
In
August 2018, the FASB issued ASU 2018-15, Intangible – Goodwill and Other – Internal-Use Software (“ASU 2018-15”),
which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract
with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is
effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal
years. Early adoption is permitted. The Company is currently evaluating the impact of adopting this pronouncement.
Management’s
evaluation of subsequent events
The
Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based
upon the review, other than what is described in Note 15 – Subsequent Events, the Company did not identify any recognized
or non-recognized subsequent events that would have required adjustment or disclosure in the consolidated financial statements.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
4. Prepaid Expenses and Other Current Assets
Prepaid
expenses and other current assets consisted of the following:
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Prepaid expenses
|
|
$
|
193
|
|
|
$
|
734
|
|
Deferred offering costs
|
|
|
-
|
|
|
|
160
|
|
Total prepaid expenses and other current assets
|
|
$
|
193
|
|
|
$
|
894
|
|
Note
5. Sale of Cybersecurity Assets
On
March 16, 2018, the Company sold its Sentinel product line to a new entity formed by the unit’s management team for consideration
of $60 and a $1,000 promissory note, convertible into a 20% equity interest of the buyer. Due to the early stage nature of the
buyer’s business, the Company believes the collection of the promissory note is doubtful and therefore has determined the
fair value to be zero. The Company recorded a loss on sale as follows:
Cash proceeds
|
|
$
|
60
|
|
|
|
|
|
|
Less:
|
|
|
|
|
Assets sold
|
|
|
(27
|
)
|
Separation payments to former management
|
|
|
(40
|
)
|
Common stock issued to former management, at fair value
|
|
|
(120
|
)
|
|
|
|
|
|
Loss on sale of cybersecurity assets
|
|
$
|
(127
|
)
|
Note
6. Property and Equipment
Property
and equipment consisted of the following:
|
|
As of
|
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Computer hardware and software
|
|
$
|
17
|
|
|
$
|
10
|
|
Crypto-currency mining machines
|
|
|
-
|
|
|
|
3,685
|
|
Property and equipment, gross
|
|
|
17
|
|
|
|
3,695
|
|
Less: Accumulated depreciation
|
|
|
(17
|
)
|
|
|
(579
|
)
|
Property and equipment, net
|
|
$
|
-
|
|
|
$
|
3,116
|
|
The
Company recorded depreciation expense of $3,291 and $946 for the years ended December 31, 2018 and 2017, respectively.
On
February 9, 2018, the Company sold Bitcoin machines with an aggregate book value of $474 for gross proceeds of $427 and recorded
a loss on the sale of $47.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
6. Property and Equipment, continued
Under
the guidance of ASC 360, a long-lived asset (or asset group) should be tested for recoverability whenever events or changes in
circumstances indicate that its carrying amount may not be recoverable. Based on the significant decline in the price of Bitcoin
during the nine months ended September 30, 2018, the Company performed a recoverability test, in which it measured the undiscounted
cash flows of its cryptocurrency mining assets. This recoverability test indicated that its cryptocurrency mining assets might
be impaired. The Company then performed the second step of the analysis, whereby it measured the fair value of the cryptocurrency
mining assets. The Company used a weighted approach where it measured both the discounted cash flows expected from the cryptocurrency
mining assets as well as determining the market value of the assets. The Company determined that as of September 30, 2018, that
it should record an impairment charge of $3,668 to its cryptocurrency mining assets. Based on the continual decline in Bitcoin
during the fourth quarter of 2018, coupled with the unpredictable volatility of Bitcoin’s price, the Company believes that
there are indications that the decrease in Bitcoin’s price is other than temporary.
Based
on the aforementioned reasons, the Company determined to fully impair the remaining carrying value of its cryptocurrency mining
assets as of December 31, 2018 with a fourth quarter impairment charge of $2,677. The total impairment charge recognized during
the year ended December 31, 2018 was $6,345.
Note
7. Notes Payable
10%
convertible promissory notes
During
February and March 2017, the Company issued two $50, 10% convertible promissory notes to accredited investors. Both notes would
have matured one year from the date of issuance. Both notes were convertible at a fixed rate of $0.25 per share. Management recorded
a beneficial conversion feature on both notes in the aggregate of $100 and recorded that amount to additional paid in capital.
The debt discounts were accreted using the effective interest method over the term of the notes.
On
August 14 and September 6, 2017, the holder of the notes converted the aggregate principal balance $100 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 year ended December 31, 2017.
During
the year ended December 31, 2017, the Company incurred $100 as accretion of debt discount on these
notes.
Iliad
Note
On
May 18, 2017, the Company issued 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, bearing interest at 10% per annum,
with an original issuance discount of $225, reimbursed legal and accounting expenses of $5, and a warrant to purchase 1,231,819
shares of common stock of the Company at an exercise price of $1.05 per share. These warrants expire five years from the date
of issuance.
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 Iliad Note in the amounts of $230, $202 and $923, respectively. The debt discounts
were accreted using the effective interest method over the term of the Iliad Note, provided that at any time on or after the occurrence
of an event of default, the interest rate shall be adjusted to 22% per annum. Subject to the terms and conditions set forth in
the Iliad Note, the Company may prepay the outstanding balance of the Iliad Note in part or in full in cash of an amount equal
to 125% multiplied by the outstanding balance of the Iliad Note.
At
any time beginning on the date that is six months from the issuance date until the outstanding balance of the Iliad Note has been
paid in full, Iliad may, at its option, convert all or any portion of the outstanding balance into shares of common stock of the
Company on a cashless basis at a price of $1.05 per share, which will be adjusted for any future issuances of equity that contain
a lower per-share exercise price. In addition, beginning three months after the issuance date, Iliad has the right to redeem a
portion of the outstanding balance of the Iliad Note in any amount that is less than $90 per calendar month. The Company has the
right to fund each redemption using cash or shares of the Company’s common stock at a price that is the lower of $1.05 per
share and the price that is 65% of the Company’s market price.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
7. Notes Payable, continued
Iliad
Note, continued
On
December 7, 2017, the Company entered into a settlement agreement with Iliad (the “Iliad Settlement Agreement”). Under
the Iliad Settlement Agreement, the Company induced Iliad to accept 547,660 additional shares of the Company’s common stock
in connection with the conversion of the full balance of the Iliad Note outstanding. As part of the Iliad Settlement Agreement,
the Company also increased the shares issuable to Iliad under its warrant. Accordingly, on December 7, 2017, Iliad converted the
Iliad Note and related accrued interest of $75 into a total of 1,909,863 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 $1,348 as accretion of debt discount,
and (b) recorded the fair value of the additional shares issued to Iliad and the additional value of the warrants in the amount
of $7,517 as inducement expense.
During
the year ended December 31, 2017, the Company incurred $1,355 (accretion of $7 and $1,348 in connection with the conversion
of the Iliad Note) as accretion of debt discount on this note.
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 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%.
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 also issued to the holders of the First Notes warrants to purchase an aggregate of 400,000 shares
of the Company’s common stock at an exercise price of $0.96 per share. These warrants expire seven years from the date of
issuance.
The
Company recorded the Commitment Note as a deferred offering cost as the Company had not received equity proceeds from the
Equity Purchase Agreement during 2017. 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 April 15, 2017, no derivative liability was recognized.
Upon receipt of proceeds
from the Equity Purchase Agreement during 2018, the Company has reclassified $160 from deferred offering costs to additional paid-in
capital.
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.
The
Company recorded an initial debt discount of $287, representing (a) an original issue discount of $108 and (b) relative fair value
of warrants issued to the note holders of $179. The debt discounts were amortized using the effective interest method.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
7. Notes Payable, continued
March
2017 securities purchase agreement
On
March 10, 2017, the Company and L2 Capital entered into a securities purchase agreement, which was subsequently amended on March
15, 2017 pursuant to which the Company issued two 10% 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 was due
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.
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 an 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 would 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 was 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 is equal to 65% multiplied
by the market price. Pursuant to the L2 Collateralized Note, L2 Capital promised to pay the Company the principal amount of $500
(consisting of $393 in cash, legal fees of $7 and an original issue 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 instrument’s 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 would 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 Common Stock
Purchase Warrant on a cashless basis unless the underlying shares of common stock have been registered with the SEC prior to the
exercise.
The
Company recorded an initial debt discount related to L2 Collateralized Note of $287, representing (a) an original issue discount
of $108 and (b) relative fair value of warrants issued to the note holders of $179. The debt discounts were amortized using the
effective interest method.
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 related to the Second Note of $500, representing (a) an original issue discount of $108
and (b) a beneficial conversion feature of $392. The debt discounts were amortized using the effective interest method.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
7. Notes Payable, continued
March
2017 securities purchase agreement, continued
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 Commitment Note, First Note,
and Second Note outstanding. Accordingly, on September 8, 2017, L2 Capital converted all principal under the Commitment Note,
First Note, and Second Note 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 2,157,407 shares issued to L2 Capital in the amount of $5,739 as inducement
expense.
During
the year ended December 31, 2017, the Company recorded accretion of debt discount of $165 (accretion of $78 and $709
in connection with the conversion of the Note) on the Notes.
May
2017 Notes
On
May 1, 2017, the Company issued notes payable to two accredited investors in the aggregate amount of $330 (the “May 2017
Notes”) bearing interest at 10% per annum. The Company also issued to the holders of the May 2017 Notes warrants to purchase
an aggregate of 360,000 shares of the Company’s common stock at an exercise price of $0.50 per share. These warrants expire
five years from the date of issuance.
The
May 2017 Notes were 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.
At
any time the May 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 variable conversion price as defined in the agreement.
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 was 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 year ended December 31, 2017, the Company recorded accretion of debt discount of $165 (accretion of $55 and $110
in connection with the conversion of the May 2017 Note) on the May 2017 Notes.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
7. Notes Payable, continued
August
2017 Notes
On
August 9, 2017, the Company issued notes payable to two accredited investors in the aggregate amount of $330 (the “August
2017 Notes”), bearing interest at 10% per annum, with an aggregate original issuance discount of $35. The Company also issued
to the holders of the August 2017 Notes warrants to purchase an aggregate of 360,000 shares of the Company’s common stock
at an exercise price of $1.05 per share. These warrants expire five years from the date of issuance.
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.
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. The Company recorded the intrinsic value of the beneficial conversion feature as the effective conversion price
of the August 2017 Notes were less than the fair value of the Company’s common stock on the date of issuance. The debt discounts
were accreted using the effective interest method over the term of the August 2017 Notes.
On
December 8, 2017, the Company induced the holders of the August 2017 Notes to accept 7,600 additional shares of the Company’s
common stock in connection with the conversion of the full balance of the August 2017 Notes.
Accordingly,
on December 8, 2017, the August 2017 Notes and related accrued interest of $11 were converted into a total of 462,000 shares of
the Company’s common stock. On the date of conversion, the Company (a) recorded the remaining discount on the notes in the
amount of $285 as accretion of debt discount, and (b) recorded the fair value of the additional shares issued to the holders of
the August 2017 Notes in the amount of $21 as inducement expense.
During
the year ended December 31, 2017, the Company recorded amortization of debt discount of $330 (accretion of $45 and $285
in connection with the conversion of the August 2017 Note) on the August 2017 Notes.
UAHC
Note
On
August 18, 2017, the Company issued to UAHC Ventures, LLC, a Nevada limited liability company (“UAHC”), a secured
convertible note (the “UAHC Note”) in the original principal amount of $2,410, bearing interest at 10% per annum,
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 at an exercise price of $1.05 per share. These warrants expire five years from the date
of issuance.
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 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 Company
recorded the intrinsic value of the beneficial conversion feature as the effective conversion price of the UAHC Note was less
than the fair value of the Company’s common stock on the date of issuance. The debt discounts were accreted using the effective
interest method over the term of the UAHC Note.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
7. Notes Payable, continued
UAHC
Note, continued
On
December 7, 2017, the Company and UAHC entered into a Settlement Agreement (the “UAHC Settlement Agreement”). In accordance
with the UAHC Settlement Agreement, the Company induced UAHC to accept 1,016,806 additional shares of the Company’s common
stock in connection with the conversion of the full balance of the UAHC Note outstanding. On December 29, 2017, the Company and
UAHC entered into a clarification and amendment agreement to clarify that, upon the reservation of the conversion shares with
the Company’s transfer agent, the UAHC Note would be deemed converted in full. As part of the UAHC Settlement Agreement,
the Company also increased the shares issuable to UAHC under its warrant.
Accordingly,
on December 7, 2017, UAHC converted the UAHC Note and accrued interest of $73 into a total of 3,381,816 shares of the Company’s
common stock. On the date of conversion, the Company (a) recorded the remaining discount on the note of $2,408 as accretion of
debt discount, and (b) recorded the fair value of the additional shares issued to UAHC and the additional value of the warrant
in the amount of $6,989 as inducement expense. At the date of the inducement, UAHC requested that the shares not yet be issued
due to ownership limitations. The conversion meets all of the requirements to be classified as an equity instrument. Accordingly,
the conversion was recorded as additional paid-in capital. The shares were issued to UAHC during the three months
ended March 31, 2018.
During
the year ended December 31, 2017, the Company recorded amortization of debt discount of $2,410 (accretion of $2 and
$2,408 in connection with the conversion of the UAHC Note) on the UAHC Note.
September
2017 Note
On
September 12, 2017, the Company issued a note payable to an accredited investor in the amount of $480 (the “September 2017
Note”), bearing interest at 10% per annum, with an original issue discount of $80, and a warrant to purchase 1,000,000 shares
of the Company’s common stock at an exercise price of $2 per share. The warrant expires three years from the date of issuance.
The principal and all accrued and unpaid interest on the outstanding balance would have been due on September 12, 2019.
Under
the initial terms, 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 would be adjusted for any future issuances of equity that contain a lower per-share exercise price.
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
Company recorded the intrinsic value of the beneficial conversion feature as the effective conversion price of the September 2017
Note was less than the fair value of the Company’s common stock on the date of issuance. The debt discount was accreted
using the effective interest method over the term of the September 2017 Note.
On
December 8, 2017, the Company induced the holder of the September 2017 Note to accept 16,864 additional shares of the Company’s
common stock in connection with the conversion of the full balance of the September 2017 Note. Accordingly, on December 8, 2017,
the September 2017 Note and related accrued interest of $11 were converted into a total of 672,000 shares of the Company’s
common stock. On the date of the conversion, the Company (a) recorded the remaining discount on the note of $478 as accretion
of debt discount, and (b) recorded the fair value of the additional shares issued to the holder of September 2017 Note in the
amount of $46 as inducement expense.
During
the year ended December 31, 2017, the Company recorded amortization of debt discount of $480 (accretion of $2 and $478
in connection with the conversion of the September 2017 Note) on the September 2017 Note.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
7. Notes Payable, continued
May
2018 Notes
On
May 23, 2018, the Company entered into a securities purchase agreement with two accredited investors, pursuant to which the Company
issued $840 in unsecured promissory notes for aggregate consideration of $700 (the “May 2018 Notes”). The outstanding
balance of the May 2018 Notes is to be made in nine equal monthly installments beginning July 23, 2018. The May 2018 Notes were
originally scheduled to mature on March 23, 2019. Subject to the terms and conditions set forth in the May 2018 Notes, the Company
may prepay all or any portion of the outstanding balance at any time without pre-payment penalty. Upon the occurrence of an event
of default, the outstanding balance of the May 2018 Notes shall immediately increase to 120% of the outstanding balance immediately
prior to the event of default and become immediately due and payable. The Company did not make their monthly installment payment
in December 2018. However, the Company entered into an amendment with one of the accredited investors to the May 2018 Notes on
January 7, 2019 where the Lender has allowed the Company to forego their December 2018 payment and begin making payments on February
23, 2019. As a result, the Company is not in default as of December 31, 2018. On March 1, 2019, the other accredited investor
waived the cross default provision that is in conjunction with the first accredited investor, which allowed the Company to not
default as of December 31, 2018.
June
2018 Note
On
June 1, 2018, the Company entered into a note purchase agreement with an accredited investor, pursuant to which the Company issued
an unsecured promissory note in the amount of $3,600 (the “June 2018 Note”) for consideration of $3,000. The outstanding
balance of the June 2018 Note is to be made in nine equal monthly installments beginning August 1, 2018. The June 2018 Note was
originally scheduled to mature on April 1, 2019. Subject to the terms and conditions set forth in the June 2018 Note, the Company
may prepay all or any portion of the outstanding balance at any time without pre-payment penalty. Upon the occurrence of an event
of default, the outstanding balance of the June 2018 Note shall immediately increase to 120% of the outstanding balance immediately
prior to the event of default and become immediately due and payable.
August
2018 Note
On
August 31, 2018, the Company entered into a note purchase agreement with an accredited investor, pursuant to which the Company
issued an unsecured promissory note in the amount of $1,062 (the “August 2018 Note”) for consideration of $1,000.
The outstanding balance of the August 2018 Note had a maturity date of February 28, 2019 and was paid in full in December 2018.
The August 2018 Note bore interest at a rate of 8% per annum and subject to the terms and conditions set forth in the August 2018
Note. The Company was able to prepay all or any portion of the outstanding balance at any time without pre-payment penalty.
December
2018 Note
On
December 6, 2018, the Company entered into a note purchase agreement with an accredited investor, pursuant to which the Company
issued an unsecured promissory note in the amount of $598 (the “December 2018 Note”) for consideration of $500. The
outstanding balance of the December 2018 Note had a maturity date of May 6, 2019 and was paid in full in March 2019. The December
2018 Note bore interest at a rate of 8% per annum and subject to the terms and conditions set forth in the December 2018 Note,
the Company may prepay all or any portion of the outstanding balance at any time without pre-payment penalty.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
7. Notes Payable, continued
Notes
Payable Summary
Notes
payable consisted of the following:
|
|
As of December 31, 2018
|
|
|
|
Principal
|
|
|
Discount
|
|
|
Net
|
|
May 2018 Notes
|
|
$
|
400
|
|
|
$
|
(25
|
)
|
|
$
|
375
|
|
June 2018 Note
|
|
|
2,448
|
|
|
|
(1,237
|
)
|
|
|
1,211
|
|
December 2018 Note
|
|
|
351
|
|
|
|
(86
|
)
|
|
|
265
|
|
Total notes payable
|
|
$
|
3,199
|
|
|
$
|
(1,348
|
)
|
|
$
|
1,851
|
|
As
of December 31, 2017, the Company had no notes payable outstanding.
During
the years ended December 31, 2018 and 2017, the Company recorded amortization of debt discount of $905 and $5,627,
respectively.
Modification
of Notes Payable
On
October 24, 2018, the Company entered into an amendment to its June 2018 Note to (a) forego the installment payment due on November
1, 2018; (b) extend the maturity date of the note to May 1, 2019; and (c) increase the principal amount on the note by $48.
On
November 9, 2018, the Company entered into an amendment of one of its May 2018 Notes to (a) forego the installment payments due
on November 23, 2018, December 23, 2018, and January 23, 2019; and (b) extend the maturity date of the note to June 23, 2019.
In exchange for the amendment, the Company paid the holder of the note $11.
On
December 10, 2018, the Company entered into an amendment to its June 2018 Note to (a) forego the installment payment due on December
1, 2018; (b) extend the maturity date of the note to July 1, 2019; and (c) increase the principal amount on the note by $245.
In
addition to the changes in the payment terms of the June 2018 Note described above, the holder has agreed to change the convertibility
terms of the June 2018 Note from a non-convertible note to a convertible note. The holder may elect to be paid in cash (within
three trading days of notification) or shares of the Company’s common stock. If the holder elects to be paid in shares,
the Company may choose to pay such redemption amount in either cash or shares at its election. Because the December 2018 amendment
was considered a substantive change, the Company must treat the modification as an extinguishment of debt and determine the gain
or loss on the exchange of instruments. Based on the analysis performed, the Company determined that there was a gain on extinguishment
of debt of $1,295.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
8. Common Stock and Warrant Issuances
Issuance
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 total 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 a purchase price of $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 for one share of common stock, for a period of three years at a price of $1.00 per share.
On
May 18, 2017, the Company issued 200,000 shares of its common stock in connection with an amendment to the Iliad Note valued at
$118.
During
August and September, 2017, the Company issued 220,000 shares of its common stock in satisfaction of accounts payable of $401.
On
October 12, 2017 and November 30, 2017, the Company issued 347,400 shares and 88,700 shares, respectively, of its common stock
in connection with the Management Agreements, as discussed in Note 12.
During
the year ended December 31, 2017, the Company received $395 from the exercise of warrants to purchase 665,000 shares of common
stock.
During
the year ended December 31, 2017, the Company issued 7,028,588 shares of its common stock from the cashless exercise of warrants
to purchase 3,012,186 shares of common stock. Due to provisions in one of the Company’s warrants that were exercised, it
was possible for a cashless exercise to yield more shares than under a standard cash exercise.
On
January 17, 2018, the Company received $281 from the exercise of warrants to purchase 375,000 shares of common stock.
On
March 15, 2018, the Company received $80 from the issuance of 200,000 shares of common stock to an investor.
On
April 30, 2018, the Company received $313 from the exercise of warrants to purchase 625,000 shares of common stock.
On
May 2, 2018, the Company received $313 from the exercise of warrants to purchase 625,000 shares of common stock.
During
the year ended December 31, 2018, the Company issued an aggregate of 8,469,251 shares of common stock in exchange for the cashless
exercise of warrants to purchase 3,954,530 shares of common stock.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
8. Common Stock and Warrant Issuances, continued
Issuance
of common stock, continued
During
the year ended December 31, 2018, the Company issued 2,387,273 shares of its common stock to consultants in exchange for services.
These services were valued using the value of the shares issued of $2,272. During the year ended December 31, 2017, the Company
issued 2,574,000 shares of its common stock to consultants in exchange for services. These services were valued using the value
of the shares issued of $4,629.
On
December 7, 2017, a holder of one of the Company’s convertible notes payable converted their note but requested that the
Company not issue the shares due to ownership limitation provisions. On February 6, 2018 and March 26, 2018, the ownership limitations
were satisfied and the Company issued 3,381,816 shares of its common stock to this former noteholder.
On
December 15, 2017, the Company sold 2,000,000 shares of its common stock in a private placement, but the owners of the shares
requested that these shares not be issued due to ownership limitations. On June 20, 2018, the Company issued 750,000 of these
shares. On July 13, 2018 and July 20, 2018, the Company issued the remaining shares not issued under the December private placement.
Equity
Purchase Agreement
On
August 30, 2018, the Company and L2 Capital, LLC (“L2 Capital”), a Kansas limited liability company, entered into
an equity purchase agreement (the “August Equity Purchase Agreement”), pursuant to which the Company may issue and
sell to L2 Capital from time to time up to $35,000 of the Company’s common stock that is registered with the SEC under a
registration statement on a Form S–3. Pursuant to the August Equity Purchase Agreement, the Company may require L2 Capital
to purchase shares of common stock that is equal to the lesser of $500 and 200% of the average trading volume of the common stock
in the ten prior trading days, 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 volume weighted average trading price of the common
stock during the five prior trading days multiplied by 93.5%.
On
November 30, 2018, the Company and L2 Capital entered into an amendment (the “EPA Amendment”) to the August
Equity Purchase Agreement. Under the August Equity Purchase Agreement, the Company has the right, but no obligation, to sell
from time to time at its sole discretion to L2 Capital shares of the Company’s common up to $35,000. The EPA Amendment
amends the aggregate value of the Common Stock that can be sold to L2 from $35,000 to $50,000. Subject to the terms of the
EPA and Amendment, the Company may by notice (a “Put Notice”) delivered to L2 Capital require L2 Capital to
purchase a number of shares (the “Put Shares”) of the Common Stock that is equal to the lesser of $500 and 200%
of the average trading volume of the Common Stock in the ten trading days immediately preceding the date of such Put Notice.
The Amendment and EPA provide that the Purchase Price for such Put Shares will be the lowest traded price on the Principal
Market for any Trading Day during the five trading days either following or beginning on the date on which L2 Capital
receives delivery of the Put Shares into its brokerage account, which period is referred to as the Valuation Period,
multiplied by 95.0%.
During
the year ended December 31, 2018, the Company issued 33,650,000 shares of its common stock in exchange for $2,760. Of that amount,
$1,312 was applied directly as payment against the August 2018 Note and the December 2018 Note.
During
the year ended December 31, 2018, the Company charged $301 against the Equity Purchase Agreement related to deferred financing
costs from its previous equity purchase agreement, which was terminated concurrent with the commencement of the Equity Purchase
Agreement.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
8. Common Stock and Warrant Issuances, continued
Warrants
During
February and March, 2017, the Company issued warrants to purchase 4,875,000 shares of the Company’s common stock in connection
with private placements. One third of the warrants have an exercise price of $0.50 per share, one third of the warrants have an
exercise price of $0.75 per share and one third of the warrants have an exercise price of $1.00 per share. All of the warrants
expire three years from the date of issuance.
On
March 10, 2017, the Company issued a warrant to purchase 400,000 shares of the Company’s common stock to L2 Capital in connection
with the March 2017 Equity Purchase Agreement. These warrants have an exercise price of $0.957 per share and expire on March 10,
2024.
On
May 1, 2017, the Company issued warrants to purchase 360,000 shares of the Company’s common stock to the holders of the
May 2017 Notes. These warrants have an exercise price of $0.50 per share and expire on May 31, 2022.
On
May 18, 2017, the Company issued warrants to purchase 1,231,819 shares of the Company’s common stock to Iliad, in connection
with the issuance of the Iliad Note. These warrants have an exercise price of $1.05 per share and expire on May 31, 2022. On December
8, 2017, in connection with the Iliad Settlement Agreement (see Note 9), the Company increased the number of shares issuable under
this warrant to 1,724,547 shares and decreased the exercise price to $0.75 per share. The Company and Iliad also capped the number
of shares issuable under a cashless exercise to 5,173,640 shares. On December 14, 2017, Iliad exercised 1,348,186 warrants on
a cashless basis and received 5,173,640 shares of common stock. Iliad subsequently forfeited the remaining 376,361 warrant shares
as the remaining warrants were no longer able to be exercised.
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 $0.50 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.
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
December 7, 2017, the exercise price of these warrants was decreased to $0.75 per share due to down round provisions in the warrant
and accordingly the Company issued additional 144,000 warrants.
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 warrants have an exercise price of $1.05 per share and expire five years from the date of issuance. On December
7, 2017, in connection with the UAHC Settlement Agreement (see Note 7), the Company increased the number of shares issuable
under this warrant to 1,206,667 shares and decreased the exercise price to $0.75 per share. The Company and UAHC also capped the
number of shares issuable under a cashless exercise to 3,620,001 shares.
On
September 1, 2017, in accordance with the terms of the warrant (see Note 7) 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.
As described in Note 7, the fair value of the additional warrant shares were recorded as a discount on the Second Note.
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 of the Company’s common stock.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
8. Common Stock and Warrant Issuances, continued
Warrants
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.
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.
On
January 17, 2018, the Company received $281 from the exercise of warrants to purchase 375,000 shares of common stock.
On
April 30, 2018, the Company received $313 from the exercise of warrants to purchase 625,000 shares of common stock.
On
May 2, 2018, the Company received $313 from the exercise of warrants to purchase 625,000 shares of common stock.
During
the year ended December 31, 2018, the Company issued an aggregate of 8,469,251 shares of common stock in exchange for the cashless
exercise of warrants to purchase 3,954,530 shares of common stock.
The
following table summarizes information about shares issuable under warrants outstanding during the year ended December
31, 2018:
|
|
Warrant
shares
outstanding
|
|
|
Weighted
average
exercise price
|
|
|
Weighted average remaining life
|
|
|
Intrinsic value
|
|
Outstanding at January 1, 2018
|
|
|
13,720,742
|
|
|
$
|
1.49
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional warrants issued for trigger of anti-dilution protection
|
|
|
1,000,000
|
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(5,579,530
|
)
|
|
$
|
0.91
|
|
|
|
|
|
|
|
|
|
Expired or cancelled
|
|
|
(3,663,237
|
)
|
|
$
|
0.56
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
5,477,975
|
|
|
$
|
1.01
|
|
|
|
1.37
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2018
|
|
|
5,477,975
|
|
|
$
|
1.01
|
|
|
|
1.37
|
|
|
$
|
-
|
|
During
the year ended December 31, 2018, the Company changed the exercise terms of certain of its warrants to allow for and induce a
cashless exercise. During the year ended December 31, 2018, the Company recorded $139 in warrant modification expense due to the
modifications.
Deemed
dividend
On
March 15, 2018, an anti-dilution protection feature in certain of the Company’s warrants was triggered, causing a decrease
in the exercise price of those warrants from $4.50 to $0.40. In accordance with ASC 260-10-25, the Company has recorded a deemed
dividend equal to the change in fair value of the warrants due to the decrease in exercise price in the amount of $2,514.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
9. Stock–Based Compensation
Issuance
of restricted common stock – directors, officers and employees
During the year ended
December 31, 2017, the Company issued an aggregate of 4,150,000 shares of restricted common stock to certain employees and directors.
The Company valued each award on its grant date and is expensing the grant date fair value of the 16-24 month vesting period.
On
January 15, 2018, the Company granted 10,000 shares of restricted common stock to an employee of the Company. The Company valued
the award on its grant date and is expensing the grant date fair value over the 12 month vesting period.
On
March 1, 2018, the Company granted 750,000 shares of restricted common stock to Robert Lowrey in connection with his employment
agreement to serve as the Company’s Chief Financial Officer. The Company valued the award on its grant date and is expensing
the grant date fair value over the 24 month vesting period.
On
April 6, 2018, the Company granted 900,000 shares of restricted common stock to certain of its officers and directors in connection
with the commencement of operations in Sweden. The Company valued the awards on their grant date and is expensing the grant date
fair value over the 12 month vesting period.
On
April 6, 2018, the Company granted 600,000 shares of restricted common stock to Robert Ladd in connection with his employment
agreement to serve as the Company’s Chief Executive Officer. The Company valued the award on its grant date and is expensing
the grant date fair value over the 24 month vesting period.
On
May 31, 2018, Nolan Bushnell resigned as a Director of the Company. In connection with his resignation, Mr. Bushnell forfeited
550,000 shares of restricted common stock.
On
July 10, 2018, the Company granted 100,000 shares of restricted common stock to Stephen Schaeffer in connection with incentive
compensation from his original employment agreement as President of Cryptocurrency Operations. A deployment benchmark was met,
making Mr. Schaeffer eligible for the shares issuance. The Company valued the award on its grant date and is expensing the grant
date fair value immediately as there is no vesting period.
On
August 1, 2018, the Company granted 250,000 shares of restricted common stock to Robert Lowrey in connection with his employment
as Chief Financial Officer. The Company valued the award on its grant date and is expensing the grant date fair value over the
17 month vesting period.
On
September 17, 2018, the Company granted 100,000 shares of restricted common stock to a former employee in connection with the
termination of their position and separation agreement. The Company valued the award on its grant date and is expensing the grant
date fair value immediately as there is no vesting period.
On
September 30, 2018, the Company granted 50,000 shares of restricted common stock to an employee of the Company. The Company valued
the award on its grant date and is expensing the grant date fair value over the 18 month vesting period.
On
December 31, 2018, the Company determined that certain of its executives and directors had not met their performance goals and
required them to forfeit their restricted shares. The Company received and canceled 1,966,666 restricted shares.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
9. Stock–Based Compensation, continued
Issuance
of restricted common stock – directors, officers and employees, continued
The
Company’s activity in restricted common stock was as follows for the year ended December 31, 2018:
|
|
Number of shares
|
|
|
Weighted average
grant date fair
value
|
|
Non–vested at January 1, 2018
|
|
|
3,850,000
|
|
|
$
|
1.42
|
|
Granted
|
|
|
2,760,000
|
|
|
$
|
1.33
|
|
Vested
|
|
|
(2,705,000
|
)
|
|
$
|
1.41
|
|
Forfeited
|
|
|
(550,000
|
)
|
|
$
|
1.06
|
|
Non–vested at December 31, 2018
|
|
|
3,355,000
|
|
|
$
|
1.43
|
|
For
the years ended December 31, 2018 and 2017, the Company has recorded $4,357 and $3,280, in employee and director stock–based
compensation expense, which is a component of general and administrative expenses in the consolidated statement of operations
and comprehensive loss.
As
of December 31, 2018, unamortized stock-based compensation costs related to restricted share arrangements was $2,466, and
will be recognized over a weighted average period of 0.80 years.
Stock
options
The
following is a summary of the Company’s stock option activity for the year ended December 31, 2018:
|
|
Options
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted average Grant date fair value
|
|
|
Weighted average remaining life
|
|
|
Intrinsic value
|
|
Outstanding – January 1, 2018
|
|
|
6,000,000
|
|
|
$
|
0.71
|
|
|
$
|
1.29
|
|
|
|
4.62
|
|
|
|
|
|
Granted
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding – December 31, 2018
|
|
|
6,000,000
|
|
|
$
|
0.71
|
|
|
$
|
1.29
|
|
|
|
3.62
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable – December 31, 2018
|
|
|
6,000,000
|
|
|
$
|
0.71
|
|
|
$
|
1.29
|
|
|
|
3.62
|
|
|
$
|
–
|
|
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 year ended December 31, 2018 and 2017, the Company has recorded $0 and $7,094, respectively, in stock option related stock-based
compensation expense, which is a component of general and administrative expenses in the consolidated statement of operations
and comprehensive loss.
As
of December 31, 2018, there were no unrecognized compensation costs, as all outstanding stock options are fully vested.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
10. Non–Controlling Interest
At
December 31, 2018, the Company’s non–controlling interest was as follows:
January 1, 2017
|
|
$
|
(22
|
)
|
Non-controlling share of net loss
|
|
|
-
|
|
January 1, 2018
|
|
$
|
(22
|
)
|
Reclassification of non-controlling interest to accumulated deficit
|
|
|
22
|
|
December 31, 2018
|
|
$
|
-
|
|
Note
11. Income Taxes
Significant
components of deferred tax assets were as follows:
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
U.S. federal tax loss carry–forward
|
|
$
|
12,705
|
|
|
$
|
10,174
|
|
U.S. State tax loss carry–forward
|
|
|
1,052
|
|
|
|
766
|
|
U.S. federal capital loss carry–forward
|
|
|
-
|
|
|
|
-
|
|
Equity based compensation
|
|
|
7,764
|
|
|
|
3,117
|
|
Fixed assets, intangible assets and goodwill
|
|
|
2,224
|
|
|
|
496
|
|
Long-term investments
|
|
|
969
|
|
|
|
870
|
|
Total deferred tax assets
|
|
|
24,714
|
|
|
|
15,423
|
|
Less: valuation allowance
|
|
|
(24,714
|
)
|
|
|
(15,423
|
)
|
Net deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
As
of December 31, 2018, the Company had the following tax attributes:
|
|
Amount
|
|
|
Begins to
expire
|
U.S. federal net operating loss carry–forwards
|
|
$
|
60,502
|
|
|
Fiscal 2023
|
U.S. State net operating loss carry–forwards
|
|
|
44,382
|
|
|
Fiscal 2031
|
As
it is not more likely than not that the resulting deferred tax benefits will be realized, a full valuation allowance has been
recognized for such deferred tax assets. For the year ended December 31, 2018, the valuation allowance increased by $9,291.
Federal and state laws impose substantial restrictions on the utilization of tax attributes in the event of an “ownership
change,” as defined in Section 382 of the Internal Revenue Code. As of December 31, 2018, the
Company performed a high level review of its changes in ownership and determined that a change of control event likely occurred
under Section 382 of the Internal Revenue Code and the Company’s net operating loss carryforwards are likely to be limited.
The
Company has recorded the necessary provisional adjustments in its consolidated financial statements in accordance with its current
understanding of the Tax Act and guidance currently available as of this filing and recorded a provisional reduction of
$10,743 to its gross deferred tax assets in the fourth quarter of 2017, the period in which the legislation was
enacted. The provisional reduction was fully offset by an equal reduction in the Company’s valuation allowance given the
Company’s historical net losses, resulting in no net income tax expense being recorded.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
11. Income Taxes, continued
The
provision for/ (benefit from) income tax differs from the amount computed by applying the statutory federal income tax rate to
income before the provision for/(benefit from) income taxes. The sources and tax effects of the differences are as follows:
|
|
For the Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Expected Federal Tax
|
|
|
(21.0
|
)%
|
|
|
(34.0
|
)%
|
State Tax (Net of Federal Benefit)
|
|
|
(2.4
|
)
|
|
|
(5.5
|
)
|
Accretion of notes payable discount
|
|
|
0.9
|
|
|
|
4.4
|
|
Inducement expense
|
|
|
-
|
|
|
|
15.9
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
10.5
|
|
Other permanent differences
|
|
|
-
|
|
|
|
0.2
|
|
True up of prior year deferred tax assets
|
|
|
(3.2
|
)
|
|
|
1.3
|
|
Change in federal and state tax rates
|
|
|
-
|
|
|
|
18.4
|
|
Note Extinguishment
|
|
|
(1.3
|
)
|
|
|
-
|
|
Change in valuation allowance
|
|
|
27.0
|
|
|
|
(11.2
|
)
|
Effective rate of income tax
|
|
|
-
|
%
|
|
|
-
|
%
|
The
Company files income tax returns in the U.S. federal jurisdiction, New York State, North Carolina and New Jersey jurisdictions.
With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non–U.S. income tax examinations
by tax authorities for years before 2013.
The
Company was previously delinquent in the filing of its U.S. federal and state income tax returns for the years ended December
31, 2016 and 2015. The Company filed these returns on August 10, 2018.
Note
12. Commitments and Contingencies
Operating
commitments
On
October 23, 2018, the Company entered into a hosting agreement with a hosting facility in Colorado through November 1,
2010. The Company is also negotiation a formal management agreement with a mining operation in Ohio. The Company has
shipped its mining machines to those locations.
Operating
leases
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 was $6 for the first 12 -month period and $7 each month thereafter
until expiration of the lease. A security deposit of $13 was required upon execution of the sublease. Prior to the sublease, the
Company paid $4 per month of office rent.
Lease
rental expense totaled $77 and $110 during the years ended December 31, 2018 and 2017, respectively.
Total
future minimum payments required under the sublease agreement are as follows:
Years ended December 31,
|
|
Amount
|
|
2019
|
|
$
|
85
|
|
2020
|
|
|
7
|
|
Total
|
|
$
|
92
|
|
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
12. Commitments and Contingencies, continued
Management
agreements
On
October 12, 2017, MGT entered into two management agreements with two accredited investors, Deep South Mining LLC and BDLM, LLC.
On November 21, 2017, the Company entered into a third management agreement with another accredited investor, Buckhead Crypto,
LLC (“Buckhead Crypto”) (all three accredited investors together are “Users”, each agreement a “Management
Agreement”, and all three agreements together are “Management Agreements”). Each of the Users agreed on substantially
similar terms to purchase an aggregate of 2,376 Bitmain Antminer S9 mining computers (the “Bitcoin Hardware”) for
a total of $3,650 to mine Bitcoin with the Company acting as the exclusive manager for each of the Users. In addition, the Users
have agreed to pay to the Company, in advance, the first three months of expected electricity costs of the Bitcoin mining operations
in the sum of $691, which is included in Other Payables on the Company’s consolidated balance sheet as of December 31, 2017.
Initial electricity cost for the first three months following delivery of the Bitcoin Hardware shall be reimbursed to the Users
within the first three months of operation. Each Management Agreement is in effect for 24 months from the date that the Bitcoin
Hardware begins mining operations, and may be terminated by mutual written agreement.
Pursuant
to the Management Agreements, the Company shall provide for installation, hosting, maintenance and repair and provide ancillary
services necessary to operate the Bitcoin Hardware. In accordance with each of the Management Agreements, each of the Users will
gain a portion of the Bitcoin mined called the user distribution portion (“User Distribution Portion”). The User Distribution
Portion is 50% of the amount of Bitcoin mined net of the operating fee (10% of the total Bitcoin mined) and the electricity cost.
Furthermore,
upon execution of the Management Agreements, as an incentive to the Users, the Company issued to the Users an aggregate of 436,100
shares of the Company’s common stock and a Series F warrant to purchase 436,100 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 Users. The Company issued the shares
of common stock and issued all three Series F warrants for the benefits of the three Users on the respective dates of the execution
of the Management Agreements.
On
February 28, 2018, the Company and Buckhead Crypto terminated their Management Agreement. The Company purchased the Bitcoin mining
machines for $767 and refunded prepaid electricity paid by Buckhead Crypto of $133.
On
February 13, 2018, the Company entered into a new management agreement with a third party with terms similar to the other Management
Agreements. The third party agreed to purchase 200 Bitmain Antminer S9 mining computers for a total of $428 to mine Bitcoin with
the Company acting as the exclusive manager. This management agreement is in effect for 24 months from the date that the Bitcoin
Hardware begins mining operations, and may be terminated by mutual written agreement.
As
of December 31, 2018 and December 31, 2017, the Company owed $0 and $0, respectively, to the Users as the User Distribution Portion
under the Management Agreements.
Collaborative
Ventures
On
August 14, 2018, the Company entered into a collaborative venture with a third party cryptocurrency miner to develop a fully contained
crypto currency mining pod (the “POD5 Agreement”). Pursuant to the POD5 Agreement, the Company will assist with the
design and development of the pods. The Company will retain naming rights to the pods and receive royalty payments from the third
party in exchange for providing capital as well as engineering and design expertise. As an inducement to enter into the POD5 Agreement,
the Company paid $25 to the third party and issued the third party 200,000 shares of the Company’s common stock, the value
of which is included in general and administrative expenses. As of April 16, 2019, no further development has occurred under
this agreement.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
12. Commitments and Contingencies, continued
Legal
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 “2016 Securities Class 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 amended complaint, which the plaintiffs opposed. The Court heard oral argument
on the motion to dismiss on February 7, 2018. On February 27, 2018, the Court issued a Memorandum and Order dismissing the 2016
Securities Class Action in its entirety, with prejudice. The time for plaintiffs to file a notice of appeal expired on March 30,
2018.
Separately,
on September 15, 2016, the Company received a subpoena from the SEC and in December 2017, the Company’s former Chief Executive
Officer and President received a subpoena from the SEC. The Company has cooperated fully with the SEC 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.
On
January 24, 2017, the Company was served with a summons and complaint filed by plaintiff shareholder Atul Ojha in New York state
court against certain officers and directors of the Company, and naming the Company as a nominal defendant. The lawsuit is styled
as a derivative action (the “Ojha Derivative Action”) and was originally filed (but not served on any defendant) on
October 15, 2016. The Ojha Derivative Action substantively alleges that the defendants, collectively or individually, inadequately
managed the business and assets of the Company resulting in the deterioration of the Company’s financial condition. The
Ojha Derivative Action asserts claims including, but not limited to, breach of fiduciary duties, unjust enrichment and waste of
corporate assets. On February 27, 2017, the parties to the Ojha Derivative Action executed a stipulated stay of proceedings pending
resolution of the 2016 Securities Class Action. Shortly after issuance of the February 27, 2018, ruling dismissing the 2016 Securities
Class Action, the parties to the Ojha Derivative Action agreed to extend the stay indefinitely, with the plaintiff having the
option to vacate the stay on thirty days’ notice. Should the plaintiff seek to vacate the stay, the Company will address
and defend the Ojha Derivative Action.
On
September 7, 2018, the SEC commenced a legal action in the United States District Court for the Southern District of New York
(the “SEC Action”) which asserts civil charges against multiple individuals and entities who are alleged to have violated
the securities laws by engaging in pump-and-dump schemes in connection with certain microcap stocks and three unidentified companies.
The Company is one of the three unidentified companies but is not named as a defendant. However, the SEC named as defendants Robert
Ladd, the Company’s former Chief Executive Officer and President, as well as certain individuals alleged to have participated
in the schemes while they were stockholders in the Company, among others. The SEC filed an amended complaint in the SEC Action
on March 8, 2019. The Company, through its counsel, is monitoring the progress of the SEC Action.
In
September 2018 and October 2018, various shareholders of the Company filed putative class action lawsuits against the Company,
its former Chief Executive Officer and certain of its individual officers and shareholders, alleging violations of federal securities
laws and seeking damages (the “2018 Securities Class Actions”). The 2018 Securities Class Action followed and referenced
the allegations made against the Company’s former Chief Executive Officer and others in the SEC Action. The first putative
class action lawsuit was filed on September 28, 2018, in the United States District Court for the District of New Jersey, and
alleges that the named defendants engaged in a pump-and-dump scheme to artificially inflate the price of the Company’s stock
and that, as a result, defendants’ statements about the Company’s business and prospects were materially false and
misleading and/or lacked a reasonable basis at relevant times. The second putative class action was filed on October 9, 2018,
in the United States District Court for the Southern District of New York and makes similar allegations. The Company intends to
defend against the 2018 Securities Class Actions vigorously.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
12. Commitments and Contingencies, continued
Legal,
continued
In
November 2018, the Company’s board received a shareholder demand letter dated November 6, 2018, from shareholders Nicholas
Fulton and Kelsey Thacker (the “Fulton Demand”). The Fulton Demand referenced the SEC Action and the allegations therein,
and demanded that the board take action to investigate, address and remedy the allegations raised in the SEC Action. The Company’s
counsel has communicated with counsel for the shareholders, advising them concerning the existence and status of the 2018 Securities
Class Actions, the Ojha Derivative Action, and the Thomas Derivative Action (defined below). Shareholders’ counsel has indicated
a general willingness to defer further action until resolution of the 2018 Securities Class Actions, and counsel continue to communicate
concerning the details.
On
December 12, 2018, a shareholder derivative action was filed by shareholder Bob Thomas against the Company and certain of its
current and former directors, officers and shareholders in New York state court, alleging breach of fiduciary duties, unjust enrichment,
abuse of control, gross mismanagement, and waste and seeking declaratory relief and damages (the “Thomas Derivative Action”).
The underlying allegations in the Thomas Derivative Action largely repeat the allegations of wrongdoing in the 2018 Securities
Class Actions. Based on recent communications between the Company’s counsel and plaintiff’s counsel in the Thomas
Derivative Action, plaintiff intends to seek consolidation of this case with the Ojha Derivative Action, and then to stay the
consolidated derivative action pending resolution of the 2018 Securities Class Actions. The Company-related defendants’
time to respond to the Thomas Derivative Action has been extended until thirty days after the Court rules on plaintiff’s
motion.
With
respect to the Thomas Derivative action plaintiffs’ counsel have indicated that they intend to move for an order
consolidating the Thomas Derivative action with the shareholder derivative action captioned Oiha v. Ladd, et al., Index No.
65647/2016 (New York Supreme Court, Westchester County) and staying the consolidated action pending resolution of the pending
parallel class actions captioned Klinabera v. MGT Capital Investments, et al.. No. 2:18-cv-14380 (United States District
Court, District of New Jersey), and Guver v. MGT Capital Investments. Inc., et al.. No. 1:18-cv-09228 (United States District
Court, Southern District of New York). Plaintiffs’ counsel in the Thomas Derivative action have also extended the Company’s time to
respond to the complaint until 30 days after the Court rules on that motion.
The
Company believes that the claims in the actions filed against the Company are without merit and intends to vigorously defend against
these actions.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
12. Commitments and Contingencies, continued
Employment
agreements
On
March 8, 2018, the Company entered into an employment with Robert Lowrey, effective March 1, 2018. Mr. Lowrey’s employment
agreement provides that he has been appointed for an initial term of two years. Mr. Lowrey is entitled to receive an annualized
base salary of $240. Mr. Lowrey will also receive a one-time signing bonus of $10. Mr. Lowrey is also eligible for 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. Lowrey and the Compensation Committee. In connection with the execution of his employment
agreement, the Company issued to Mr. Lowrey 750,000 shares of the Company’s restricted common stock, pursuant to the Company’s
2016 Stock Option Plan vesting over a two year period.
On
April 1, 2018, the Company entered into an Amended and Restated Executive Employment Agreement (the “Employment Agreement”)
with Robert Ladd, which was executed on April 6, 2018. The Employment Agreement provides that Mr. Ladd has been reappointed for
an initial term of two years. Mr. Ladd is entitled to receive an annualized base salary of $360 and is also eligible for 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. Ladd and the Compensation Committee. In connection with the execution of the Employment
Agreement, the Company issued to Mr. Ladd 600,000 shares of the Company’s restricted common stock, pursuant to the Company’s
2016 Stock Option Plan, vesting over a two year period. On September 10, 2018, Mr. Ladd took an indefinite leave of absence from
the Company in order to focus on allegations levied against him in an SEC complaint filed on September 7, 2018.
On
July 11, 2018, the Company entered into an Amended and Restated Executive Employment Agreement with Stephen Schaeffer. The agreement
provides that Mr. Schaeffer has been appointed Chief Operating Officer of the Company. Mr. Schaeffer will continue to serve as
President of Cryptocurrency Operations, the position for which he was originally hired for a term of two years in an Executive
Employment Agreement dated August 15, 2017. Mr. Schaeffer is entitled to receive an annualized base salary of $250 and is also
eligible for 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. Schaeffer and the Compensation Committee.
Note
13. Related Party Transactions
Janice
Dyson, wife of John McAfee, the Company’s former Chief Cybersecurity Visionary, is the sole director of Future Tense Secure
Systems, Inc. (“FTS”) and owns 33% of the outstanding common shares of FTS. On March 3, 2017, the Company purchased
from FTS its 46% ownership interest Demonsaw for 2,000,000 shares of MGT common stock. The Company recorded the purchase using
the fair value of the common shares provided of $2,500 and immediately impaired the equity method investment during the three
months ended March 31, 2017.
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. On January 26, 2018, the Company terminated its agreement with FTS. During the year ended December 31,
2018 and 2017, the Company recorded consulting fees of $137 and $360, respectively, to FTS for such services. As of December 31,
2018, the Company owed $0 to FTS.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
14. Employee Benefit Plans
The
Company maintains defined contribution benefit plans under Section 401(k) of the Internal Revenue Code covering substantially
all qualified employees of the Company (the “401(k) Plan”). Under the 401(k) Plan, the Company may make discretionary
contributions of up to 100% of employee contributions. During the year ended December 31, 2018 and 2017, the Company made contributions
to the 401(k) Plan of $18 and $10, respectively.
Note
15. Subsequent Events
The
Company has evaluated the impacts of subsequent events through April 16, 2019, and has determined that no such events occurred
that were required to be reflected in the consolidated financial statements, except as described within the above notes and described
below.
Modification
of Notes Payable
On
January 7, 2019, the Company entered into an amendment to its May 2018 Notes to (a) forego the installment payments due on December
23, 2018 and January 23, 2019; (b) extend the maturity date of the note to May 23, 2019; (c) pay the Lender an extension
fee in the amount of $21 and (d) give the Company the option of paying each installment payment in shares of common stock at
a price equal to 80% of the lowest volume weighted average price for the previous 10 trading days.
On
January 28, 2019, the Company entered into an amendment to its June 2018 Note to (a) forego the installment payment due on January
1, 2019, February 1, 2019, and March 1, 2019; (b) extend the maturity date of the note to October 1, 2019; and (c) to increase
the principal amount on the note by $527.
Shares
issued to consultants
Subsequent
to December 31, 2018 through April 16, 2019, the Company issued 190,500 shares of its common stock to consultants in exchange
for services.
Equity
Purchase Agreement
Subsequent
to December 31, 2018, through April 16, 2019, the Company issued 67,000,000 shares of its common stock under the Equity
Purchase Agreement in exchange for $3,277.
Sale
of Preferred Stock
On
April 12, 2019, the Company’s Board of Directors approved the authorization of 200 shares of Series C Convertible Preferred
Stock with a par value of $0.001 and a stated value of $10,000 per share (“Preferred Shares”). The holders of the
Preferred Shares are not entitled to vote their shares or receive dividends. At any time prior to the one-year anniversary from
the issuance date, the Company may redeem the Preferred Shares at 1.4 times the Stated Value, following which the Company may
redeem the Preferred Shares at 1.2 times the Stated Value.
Each
Preferred Share is convertible into shares of the Company’s common stock in an amount equal to the greater of: (a) 200,000
shares of common stock or (b) the amount derived by dividing the Stated Value by the product of 0.7 times the market price of
the Company’s common stock, defined as the lowest trading price of the Company’s common stock during the ten day period
preceding the conversion date. The holder may not convert any Preferred Shares if the total amount of shares, together with holdings
of its affiliates, following a conversion shall exceed 9.99% of the Company’s commons stock. The common shares issued upon
conversion have been registered under the Company’s registration statement on Form S-3. On April 12, 2019, the Company sold
190 Preferred Shares for $2,000.
Sale
of Common Stock
On
April 12, 2019, the Company entered into a Purchase Agreement with an accredited investor whereby it sold 17,500,000 shares
of its common stock for $525 pursuant to the Company’s registration statement on Form S-3.
Settlement
Agreement
On
March 22, 2019, the Company entered into a settlement agreement to terminate its Data Center Hosting Agreement in Washington.
The Company conveyed its ownership of its mining assets located in the hosting facility for full satisfaction of $77k in outstanding
hosting service fees.