Note
2. Going Concern and Management’s Plans
The
accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates
the realization of assets and the satisfaction of liabilities in the normal course of business. As of June 30, 2019, the Company
had incurred significant operating losses since inception and continues to generate losses from operations. As of June 30, 2019,
the Company had an accumulated deficit of $411,003.
Management’s
plans include the consolidation of its activities in Company-owned and managed facilities, executing on its expansion model to
secure low cost power and grow its cryptocurrency assets. 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 unaudited condensed 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 unaudited condensed consolidated financial statements. Management’s plans,
including the consolidation of its activities in Company-owned and managed facilities, the raising of additional capital and potentially
curtailing its operations alleviate such substantial doubt. The accompanying unaudited condensed consolidated financial statements
do not include any adjustments related to the recoverability and classification of asset amounts or the classification of liabilities
that might be necessary should the Company be unable to continue as a going concern.
Note
3. Summary of Significant Accounting Policies
Principles
of consolidation
The
unaudited condensed consolidated financial statements include the accounts of MGT and MGT Sweden AB. All intercompany transactions
and balances have been eliminated.
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 long-lived assets, the fair value of warrants
issued, the fair value of conversion features, the recognition of revenue, the valuation allowance for deferred tax assets and
other legal claims and contingencies. The results of any changes in accounting estimates are reflected in the financial statements
in the period in which the changes become evident. Estimates and assumptions are reviewed periodically, and the effects of revisions
are reflected in the period that they are determined to be necessary.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar
amounts in thousands, except per–share amounts)
Note
3. Summary of Significant Accounting Policies, continued
Prior
Period Financial Statement Correction of an Immaterial Misstatement
During
the first quarter of 2019, the Company identified certain adjustments required to correct balances within notes payable, accretion
of debt discount, and the gain on extinguishment of debt relating to the modification to the June 2018 Note (as defined in Note
5) that had occurred on December 10, 2018. The Company had incorrectly calculated the fair value of the June 2018 Note as the
date of its modification, which in turn, led the Company to calculate an incorrect gain on extinguishment and an incorrect accretion
of debt discount. The errors discovered resulted in an overstatement of the Company’s notes payable balance of $566 as of
December 31, 2018, and an overstatement of the accretion of debt discount of $14 and understatement on the gain on extinguishment
of $580 for the year ended December 31, 2018.
Based
on an analysis of Accounting Standards Codification (“ASC”) 250 – “Accounting Changes and Error Corrections”
(“ASC 250”), Staff Accounting Bulletin 99 – “Materiality” (“SAB 99”) and Staff Accounting
Bulletin 108 – “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements” (“SAB 108”), the Company determined that these errors were immaterial to the previously-issued
consolidated financial statements, and as such no restatement was necessary. Correcting prior year financial statements for immaterial
errors would not require previously filed reports to be amended. Such correction may be made the next time the registrant files
the prior year financial statements. Accordingly, the misstatements were corrected during the period ended March 31, 2019 in the
accompanying consolidated balance sheet as of December 31, 2018.
The
effect on these revisions on the Company’s consolidated balance sheet as of December 31, 2018 is as follows:
|
|
|
As previously reported at December 31, 2018
|
|
|
Adjustment
|
|
|
As revised at December 31, 2018
|
|
|
Notes payable, net of discount
|
|
$
|
1,851
|
|
|
$
|
(566
|
)
|
|
$
|
1,285
|
|
|
Total current liabilities
|
|
|
2,398
|
|
|
|
(566
|
)
|
|
|
1,832
|
|
|
Total liabilities
|
|
|
2,398
|
|
|
|
(566
|
)
|
|
|
1,832
|
|
|
Accumulated deficit
|
|
|
(405,285
|
)
|
|
|
566
|
|
|
|
(404,719
|
)
|
|
Total stockholders’ deficit
|
|
|
(1,875
|
)
|
|
|
566
|
|
|
|
(1,309
|
)
|
Revenue
recognition
The
Company’s primary revenue stream is related to the mining of digital currencies. The Company derives its revenue by solving
“blocks” to be added to the blockchain and providing transaction verification services within the digital currency
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 an intangible digital asset
valued at the lower of cost or net realizable value. Net realizable value adjustments, to adjust the value of the Coins to their
market value, is included in cost of revenue on the Company’s consolidated statements of operation. Any gain or loss on
sale would be recorded to cost of revenues. Costs of revenues includes equipment depreciation, rent, net realizable value adjustments,
and electricity costs.
The
Company also recognizes revenue from its management agreements. 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.
Additionally,
the Company has machines located in a facility in Ohio and Colorado. The Company receives an allocation of profits from this facility,
as further described in Note 9. The Company records the net amount of the bitcoin received as revenue on its statement of operations.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar
amounts in thousands, except per–share amounts)
Note
3. Summary of Significant Accounting Policies, continued
Income
taxes
The
Company accounts for income taxes in accordance with ASC 740, “Income Taxes”. ASC 740 requires an asset and liability
approach for financial accounting and reporting for income taxes and established for all the entities a minimum threshold for
financial statement recognition of the benefit of tax positions and requires certain expanded disclosures. The provision for income
taxes is based upon income or loss after adjustment for those permanent items that are not considered in the determination of
taxable income. Deferred income taxes represent the tax effects of differences between the financial reporting and tax basis of
the Company’s assets and liabilities at the enacted tax rates in effect for the years in which the differences are expected
to reverse. The Company evaluates the recoverability of deferred tax assets and establishes a valuation allowance when it is more
likely than not that some portion or all the deferred tax assets will not be realized. Management makes judgments as to the interpretation
of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In management’s
opinion, adequate provisions for income taxes have been made. If actual taxable income by tax jurisdiction varies from estimates,
additional allowances or reversals of reserves may be necessary.
Loss
per share
Basic
loss per share is calculated by dividing net loss applicable to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted loss per share is calculated by dividing the net loss attributable to common shareholders
by the sum of the weighted average number of common shares outstanding plus potential dilutive common shares outstanding during
the period. Potential dilutive securities, comprised of unvested restricted shares, convertible debt stock warrants and stock
options, are not reflected in diluted net loss per share because such potential shares are anti–dilutive due to the Company’s
net loss.
Accordingly,
the computation of diluted loss per share for the three and six months ended June 30, 2019 excludes 1,100,001 unvested restricted
shares, 6,000,000 shares issuable under stock options, 74,776,203 shares issuable upon the conversion of convertible debt,
1,450,000 shares issuable under warrants, and 48,780,488 shares under preferred stock. The computation of diluted loss per share
for the three and six months ended June 30, 2018 excludes 1,250,000 shares issuable to the investors of the December 2017 private
placement, 3,600,000 unvested restricted shares, 6,000,000 shares issuable under stock options, and 9,440,796 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.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar
amounts in thousands, except per–share amounts)
Note
3. Summary of Significant Accounting Policies, continued
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.
Gain
(Loss) on Modification/Extinguishment of Debt
In
accordance with ASC 470, a modification or an exchange of debt instruments that adds a 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
and accounted for as extinguishment of the original instrument along with the recognition of a gain/loss. Additionally, under
ASC 470, a substantive modification of a debt instrument is deemed to have been accomplished with debt instruments that are substantially
different if the present value of the cash flows under the terms of the new debt instrument is at least 10 percent different from
the present value of the remaining cash flows under the terms of the original instrument. A substantive modification is accounted
for as an extinguishment of the original instrument along with the recognition of a gain/loss.
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 unaudited condensed consolidated financial statements, other than those disclosed below.
In
June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 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. On January 1, 2019, the Company adopted ASU 2018-07, which has not had a material effect on the Company’s
financial statements.
In
February 2016, the FASB issued ASU 2016-02 Leases 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. In July 2018, the FASB issued ASU 2018-10 Leases,
Codification Improvements and ASU 2018-11 Leases, Targeted Improvements, to provide additional guidance for the adoption of ASU
2016-02. ASU 2018-10 clarifies certain provisions and corrects 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 ASU 2016-02. ASU 2016-02, ASU 2018-10, ASU 2018-11, (collectively,
“Topic 842”) are effective for fiscal years beginning after December 15, 2018, with early adoption permitted.
On
January 1, 2019, the Company adopted Topic 842 and made the following elections:
|
|
●
|
The
Company did not elect the hindsight practical expedient, for all leases.
|
|
|
|
|
|
|
●
|
The
Company elected the package of practical expedients to not reassess prior conclusions related to contracts containing leases,
lease classification and initial direct costs for all leases.
|
|
|
|
|
|
|
●
|
In
March 2018, the FASB approved an optional transition method that allows companies to use the effective date as the date of
initial application on transition. The Company elected this transition method, and as a result, will not adjust its comparative
period financial information or make the newly required lease disclosures for periods before the effective date.
|
|
|
|
|
|
|
●
|
The
Company elected to not separate lease and non-lease components, for all leases.
|
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar
amounts in thousands, except per–share amounts)
Note
3. Summary of Significant Accounting Policies, continued
On
January 1, 2019, the Company recorded a Right of Use Asset of $87, a corresponding Lease Liability of $84 and a corresponding
cumulative adjustment to accumulated deficit of $3 in accordance with Topic 842.
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement, Disclosure Framework—Changes to the Disclosure Requirements
for Fair Value Measurement (“ASU 2018-13”), which 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 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 11 – Subsequent Events, the Company did not identify any recognized
or non-recognized subsequent events that would have required adjustment or disclosure in the unaudited condensed consolidated
financial statements.
Note
4. Property, Plant, and Equipment
In
connection with the Company’s strategy to consolidate its activities in Company-owned and managed facilities, the Company
acquired 6 acres of land in LaFayette, Georgia in May 2019 for a total cost of $57 and other equipment for $15 in June 2019.
The
Company recorded depreciation expense of $0 and $708 for the three months ended June 30, 2019 and 2018, respectively. The Company
recorded depreciation expense of $0 and $1,189 for the six months ended June 30, 2019 and 2018, respectively. Depreciable assets
acquired during the three months ended June 30, 2019 were not placed in service and therefore depreciation has not yet commenced.
Note
5. Notes Payable
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 was to be made in nine equal monthly installments beginning July 23, 2018. The May 2018 Notes were
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.
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 was to be made in nine equal monthly installments beginning August 1, 2018. The June 2018 Note was
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.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar
amounts in thousands, except per–share amounts)
Note
5. Notes Payable, continued
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 was permitted to prepay all or any portion of the outstanding balance at any time without pre-payment penalty.
On
January 7, 2019, and again on March 28, 2019 the Company entered into amendments to one of the May 2018 Notes. Pursuant to the
amendments, the borrower has agreed to extend the maturity date of the note to July 15, 2019 and does not require the Company
to make its monthly installment payments due from December 2018, through March 2019, provided that the Company makes all installment
payments for the months thereafter beginning April 15, 2019. Installment payments shall be paid in cash unless the Company elects
to make payments in shares of the Company’s common stock, in which case the number of shares to be issued will be based
on the lowest VWAP of the Company’s common stock during the preceding twenty trading days multiplied by 70%, or any lower
price made available to any other holder of the Company’s securities. In consideration of these amendments, the Company
incurred extension fees payable to the borrower of $121.
On
January 28, 2019, the Company entered into an amendment to the June 2018 Note. Pursuant to the amendment, the borrower has agreed
to extend the maturity date to October 1, 2019 and not require the Company to make its installment payment due under the Note
Purchase Agreement during January, February, and March 2019. The Company and the borrower have agreed that the Company is to pay
all installment payments in cash unless both the Company and the borrower agree to make payments in shares of the Company’s
common stock, in which case the number of shares to be issued will be based on the lowest intra-day trade price of the Company’s
common stock during the preceding twenty trading days multiplied by 70%. In consideration of this amendment, the Company incurred
an extension fee payable to the borrower of $527.
Because
the January 2019 and March 2019 amendments were considered a substantive change, the Company has treated the modification as an
extinguishment of debt and determined 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 $1,275.
On
April 9, 2019, the Company entered an amendment to one of its May 2018 Notes to (a) forego the installment payments due on February
23, 2019 and March 23, 2019, (b) extend the maturity date of the note to August 15, 2019, and (c) include a substantial conversion
feature allowing the debt holder, in its sole discretion, to have the right to convert the April 15, 2019 monthly payment, and
each payment thereafter, into shares of the Company’s common stock. The number of shares to be issued will be based on the
lower of: i) 70% of the lowest intra-day price of the Company’s common stock during the
preceding
twenty (20) trading days, or ii) any lower price that is made available to any other holder of the Company’s securities,
whether by sale or conversion, on the date of a conversion notice. In exchange for the amendment, the Company compensated the
holder of the note by increasing the outstanding principal due by $50. The Company accounted for this amendment as an extinguishment
of debt and recorded a gain of $127.
On
May 10, 2019, the original holders of the Company’s May 2018 Notes assigned and sold all notes to Oasis Capital, LLC (“Oasis
Capital”). On the same date, the Company and Oasis Capital executed a letter agreement to amend the terms of the May 2018
Notes allowing Oasis Capital to convert the total outstanding principal amount of $421 into shares of the Company’s common
stock, at a price equal to 70% of the lowest trading price during the 20 days preceding the conversion dates, or any lower price
made available to any other holder of the Company’s securities. This amendment also eliminated the Company’s mandatory
monthly amortization payments and extended the maturity of the May 2018 Notes until August 15, 2019. After such date, and within
10 business days, any outstanding balance shall be satisfied, at the Company’s election, either with cash, common
stock conversion or any combination thereof. On May 15, 2019, the Company issued 10,568,087 shares of its common stock pursuant
to the full conversion of the May 2018 Notes.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar
amounts in thousands, except per–share amounts)
Note
5. Notes Payable, continued
On
May 10, 2019, the Company executed a letter agreement with the holder of the June 2018 Note to amend the terms of the June 2018
Note allowing the holder to covert the total outstanding principal amount of $3,159 into shares of the Company’s common
stock, at a price equal to 70% of the lowest trading price during the 20 day period preceding the conversion dates, or
any lower price made available to any other holder of the Company’s securities. This amendment also eliminates the Company’s
mandatory monthly amortization payments and extends the maturity of the June 2018 Note until December 15, 2019. After such
date, and within 10 business days, any outstanding balance shall be satisfied, at the Company’s election, either with: cash,
common stock conversion, or any combination thereof. The Company accounted for this amendment as an extinguishment of debt and
recorded a gain of $1,004. During the three months ended June 30, 2019, the Company issued 46,656,156 shares of its common stock
upon the conversion of $1,275 in outstanding principal by the holder, and reducing the outstanding principle to
$1,884 as of June 30, 2019. The holder of the June 2018 Note also acquired 17,500,000 shares of the Company’s common stock
on April 12, 2019 and is an affiliate of the acquirer of 150 shares of the Preferred Shares acquired on April 12, 2019, see Note
7 below, and are collectively subject to a maximum beneficial ownership of 9.99%
Notes
payable consisted of the following:
|
|
|
As of June 30, 2019
|
|
|
|
|
Principal
|
|
|
Discount
|
|
|
Net
|
|
|
June 2018 Note
|
|
$
|
1,884
|
|
|
$
|
(1,441
|
)
|
|
$
|
443
|
|
|
Total notes payable
|
|
$
|
1,884
|
|
|
$
|
(1,441
|
)
|
|
$
|
443
|
|
|
|
|
As of December 31, 2018
|
|
|
|
|
Principal
|
|
|
Discount
|
|
|
Net
|
|
|
May 2018 Notes
|
|
$
|
400
|
|
|
$
|
(25
|
)
|
|
$
|
375
|
|
|
June 2018 Note
|
|
|
2,448
|
|
|
|
(1,803
|
)
|
|
|
645
|
|
|
December 2018 Note
|
|
|
351
|
|
|
|
(86
|
)
|
|
|
265
|
|
|
Total notes payable
|
|
$
|
3,199
|
|
|
$
|
(1,914
|
)
|
|
$
|
1,285
|
|
During
the three months ended June 30, 2019 and 2018, the Company recorded amortization of debt discount of $2,731 and $117, respectively.
During
the six months ended June 30, 2019 and 2018, the Company recorded amortization of debt discount of $3,822 and $117, respectively.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar
amounts in thousands, except per–share amounts)
Note
6. 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.
Lease
rental expense totaled $40 and $36 during the six months ended June 30, 2019 and 2018, respectively, and $20 and $20 during the
three months ended June 30, 2019 and 2018, respectively.
Total
future minimum payments required under the sublease agreement are as follows:
|
Years ended December 31,
|
|
Amount
|
|
|
2019 (remaining nine months)
|
|
$
|
42
|
|
|
2020
|
|
|
7
|
|
|
Total undiscounted minimum future lease payments
|
|
$
|
49
|
|
|
Less imputed interest
|
|
|
(2
|
)
|
|
Present value of operating lease liabilities
|
|
$
|
47
|
|
At
June 30, 2019, the weighted average remaining lease term and discount rate for operating leases was 0.58 years and 10.8%, respectively.
The Company’s lease agreement does not contain any material residual value guarantees or material restrictive covenants.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar
amounts in thousands, except per–share amounts)
Note
6. Leases, continued
Right
of use asset
The
Company has recognized a right of use asset of $51 in the unaudited condensed consolidated Balance Sheet as of June 30, 2019.
Note
7. Common Stock, Preferred Stock and Warrants
Common
stock
Equity
Purchase Agreement under Form S-3
From
January 1, 2019 through April 16, 2019, the Company sold shares of its common stock pursuant to an equity purchase agreement with
Oasis Capital. The equity purchase agreement was entered on August 30, 2018 and was amended on November 30, 2018, whereby the
Company could issue and sell to Oasis Capital from time to time up to $50,000 of the Company’s common stock that was registered
with the SEC under a registration statement on Form S–3. Subject to the terms of the equity purchase agreement, the Company
provided notice (a “Put Notice”) requiring Oasis Capital to purchase a number of shares (the “Put Shares”)
of the common stock equal to the lesser of $500 and 200% of the average trading volume of the common stock in the ten trading
days immediately preceding the date of such Put Notice. The terms also provided the purchase price for such Put Shares to be the
lowest traded price on a principal market for any trading day during the five trading days either following or beginning on the
date on which Oasis Capital receives delivery of the Put Shares, multiplied by 95.0%.
During
the three and six months ended June 30, 2019, the Company issued 23,900,000 and 67,000,000 shares of its common stock in exchange
for $1,575 and $3,731, respectively. Of the proceeds received during the three months ended March 31, 2019, $354 was applied directly
as payment against the December 2018 Note.
On
April 16, 2019, the Company became ineligible to issue shares under its registration statement on Form S-3 as the aggregate market
value of the Company’s common stock held by non-affiliates was below the regulatory threshold of $75,000. In connection
with this ineligibility, the equity purchase agreement was terminated.
Equity
Purchase Agreement under Form S-1
On
June 3, 2019, the Company entered into an equity purchase agreement with Oasis Capital, whereby the Company shall have the right,
but not the obligation, to direct Oasis Capital to purchase shares of the Company’s common stock (the “New Put Shares”)
in an amount in each instance up to the lesser of $1,000 or 250% of the average daily trading volume by delivering a notice to
Oasis Capital (the “New Put Notice”). The purchase price (the “Purchase Price”) for the New Put Shares
shall equal 95% of the one lowest daily volume weighted average price on a principal market during the five trading days immediately
following the date Oasis receives the New Put Shares via DWAC associated with the applicable New Put Notice (the “Valuation
Period”). The closing of a New Put Notice shall occur within one trading day following the end of the respective Valuation
Period, whereby (i) Oasis shall deliver the Investment Amount (as defined below) to the Company by wire transfer of immediately
available funds and (ii) Oasis shall return surplus New Put Shares if the value of the New Put Shares delivered to Oasis causes
the Company to exceed the maximum commitment amount. The Company shall not deliver another New Put Notice to Oasis within ten
trading days of a prior New Put Notice. The “Investment Amount” means the aggregate Purchase Price for the New Put
Shares purchased by Oasis, minus clearing costs payable to Oasis’s broker or to the Company’s transfer agent for the
issuance of the New Put Shares. The shares issuable under the equity purchase agreement are registered with the SEC under a registration
statement on Form S-1 that was declared effective on June 25, 2019 and are subject to a maximum beneficial ownership by Oasis
Capital of 9.99%.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar
amounts in thousands, except per–share amounts)
Note
7. Common Stock, Preferred Stock and Warrants, continued
Other
Common Stock Sales and Issuances
On
April 12, 2019, the Company entered into a purchase agreement with an accredited investor whereby it sold 17,500,000 shares of
its common stock for $525 pursuant to the Company’s then-effective registration statement on Form S-3. The holder of these
shares is also the holder of the June 2018 Note and an affiliate of the acquirer of 150 shares of the Preferred Shares acquired
on April 12, 2019 described below.
During
the six months ended June 30, 2019, the Company issued 160,500 shares of its common stock to consultants in exchange for services.
These services were valued based upon the value of the shares issued of $60. During the six months ended June 30, 2018, the Company
issued 1,178,551 shares of its common stock to consultants in exchange for services. These services were valued based upon the
value of the shares issued of $1,714.
Preferred
Stock
On
January 11, 2019, the Company’s Board of Directors approved the authorization of 10,000 shares of Series B Preferred Stock
with a par value of $ 0.001 (“Series B Preferred Shares”). The holders of the Series B Preferred Shares shall be entitled
to receive, when, as and if declared by the Board of Directors of the Company, out of funds legally available for such purpose,
dividends in cash at a rate of 12% of the stated value per annum on each Series B Preferred Share. Such dividends shall be cumulative
and shall accrue without interest from the date of issuance of the respective share of the Series B Preferred Shares. Each holder shall also be entitled to vote on all matters submitted to stockholders of the Company and shall
be entitled to 55,000 votes for each Series B Preferred Share owned at the record date for the determination of stockholders entitled
to vote on such matter or, if no such record date is established, at the date such vote is taken or any written consent of stockholders
is taken. In the event of a liquidation event, any holders of the Series B Preferred Shares
shall be entitled to receive, for each Series B Preferred Shares, the stated value in cash out of the assets of the Company,
whether from capital or from earnings available for distribution to its stockholders. The Series B Preferred Shares are not convertible
into shares of the Company’s common stock.
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 have no voting rights, receive no dividends, and are entitled to a liquidation preference equal to the stated
value. 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 held, together with
holdings of its affiliates, following a conversion exceeds 9.99% of the Company’s common stock. The Company has accounted
for the beneficial conversion feature of the Preferred Shares, convertible at 0.7 times the market price of the Company’s
common stock, as a deemed dividend of $859, measured as the difference between the conversion price of the Preferred Shares and
the fair value of the underlying common stock.
The
common shares issued upon conversion have been registered under the Company’s then-effective registration statement on Form
S-3. On April 12, 2019, the Company sold 190 Preferred Shares for $1,890, net of issuance costs. During April, May and June 2019,
holders of the preferred shares converted 50 of their Preferred Shares into 14,077,092 shares of common stock. Given the
right of redemption is solely at the option of the Company, the Preferred Shares are not considered mandatorily redeemable, and
as such are classified in shareholders’ equity on the Company’s condensed consolidated balance sheet.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar
amounts in thousands, except per–share amounts)
Note
7. Common Stock, Preferred Stock and Warrants, continued
Warrants
The
following table summarizes information about shares issuable under warrants outstanding during the six months ended June 30, 2019:
|
|
|
Warrant
shares
outstanding
|
|
|
Weighted
average
exercise price
|
|
|
Weighted average remaining life
|
|
|
Intrinsic value
|
|
|
Outstanding at January 1, 2019
|
|
|
5,477,975
|
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(4,000,000
|
)
|
|
$
|
1.12
|
|
|
|
|
|
|
|
|
|
|
Expired or cancelled
|
|
|
(27,975
|
)
|
|
$
|
0.79
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2019
|
|
|
1,450,000
|
|
|
$
|
0.72
|
|
|
|
0.82
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2019
|
|
|
1,450,000
|
|
|
$
|
0.72
|
|
|
|
0.82
|
|
|
$
|
-
|
|
On
June 5, 2019, the Company entered into an agreement with a holder of a warrant for 10,000 shares of common stock, whereby the
holder agreed to sell the warrant back to the Company for a nominal amount. The Company subsequently cancelled the warrant.
On
May 9, 2019, the Company entered into a modification agreement with the holder of six separate warrants. Under the terms of the
initial warrant agreements, the holder was entitled to purchase 4,000,000 shares of the Company’s common stock at prices
of between $0.50 per share and $2.00 per share at various times through September 2022. Under the terms of the modification agreement,
the holder was permitted to exercise all 4,000,000 warrants at a price of $0.03 per share, or $120. The Company accounted for
this modification as a down-round feature under the guidance of ASC 260-10-30, whereby the change in fair value of the warrants
before and after the down-round was triggered was recorded as a deemed dividend in the amount of $101.
Note
8. Stock–Based Compensation
Issuance
of restricted common stock – directors, officers and employees
The
Company’s activity in restricted common stock was as follows for the six months ended June 30, 2019:
|
|
|
Number of shares
|
|
|
Weighted average
grant date fair
value
|
|
|
Non–vested at January 1, 2019
|
|
|
3,355,000
|
|
|
$
|
1.46
|
|
|
Vested
|
|
|
(2,254,999
|
)
|
|
$
|
1.39
|
|
|
Non–vested at June 30, 2019
|
|
|
1,100,001
|
|
|
$
|
1.59
|
|
For
the three months ended June 30, 2019 and 2018, the Company has recorded $730 and $1,247, in employee and director stock–based
compensation expense, which is a component of general and administrative expenses in the consolidated statement of operations.
For
the six months ended June 30, 2019 and 2018, the Company has recorded $1,624 and $2,334 in employee and director stock–based
compensation expense, which is a component of general and administrative expenses in the consolidated statement of operations.
As
of June 30, 2019, unamortized stock-based compensation costs related to restricted share arrangements was $843 and will be recognized
over a weighted average period of 0.68 years.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar
amounts in thousands, except per–share amounts)
Note
8. Stock–Based Compensation, continued
Stock
options
The
following is a summary of the Company’s stock option activity for the six months ended June 30, 2019:
|
|
|
Options
|
|
|
Weighted
average
exercise price
|
|
|
Weighted average Grant date fair value
|
|
|
Weighted average remaining life
|
|
|
Intrinsic value
|
|
|
Outstanding – January 1, 2019
|
|
|
6,000,000
|
|
|
$
|
0.71
|
|
|
$
|
1.29
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding – June 30, 2019
|
|
|
6,000,000
|
|
|
$
|
0.71
|
|
|
$
|
1.29
|
|
|
|
0.59
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable – June 30, 2019
|
|
|
6,000,000
|
|
|
$
|
0.71
|
|
|
$
|
1.29
|
|
|
|
0.59
|
|
|
$
|
–
|
|
As
of June 30, 2019, there were no unrecognized compensation costs, as all outstanding stock options are fully vested.
Note
9. Commitments and Contingencies
Bitcoin
Mining Agreements
On
May 20, 2019, the Company entered into an agreement with a third-party consultant whereby the consultant would advise and consult
with the Company on certain business and financial matters relating to crypto-currency mining. The Company engaged the consultant
to: (1) assist in locating at least 5 acres of real property in Georgia within close proximity to a fully operational electric
substation with a minimum of 15 MW of available capacity, subject to approval by the power company, (2) negotiate a power rate
between the Company and a power company, (3) assist in the identification, purchase, and delivery of transformers required to
serve the containerized mining systems, (4) successfully install the aforementioned transformers, and (5) obtain an electrical
permit and successfully inspect of all electrical infrastructure between the container and substation. The consulting agreement
was valued at $400, payable upon successful achievement of defined milestones. As of June 30, 2019, $200 in milestone achievement
was earned and has been recorded as a component of general and administrative expenses in the unaudited condensed consolidated
statement of operations. The remaining $200 of unearned milestones is recorded as a prepaid expense in the unaudited condensed
consolidated balance sheet and is being held in escrow until achievement of such milestones.
On
October 23, 2018, the Company entered into a hosting agreement (“Colorado Hosting Agreement”) with a hosting facility
in Colorado, whereby the service provider will provide a facility to host Bitcoin computing servers. The Colorado Hosting Agreement
has been amended several times and currently provides for the hosting of 1,260 miners, a reduction of a security deposit from
$204 to $85 and a termination date of December 3, 2020. Because the price of Bitcoin steadily decreased in 2018 and throughout
the first quarter 2019, the Company decided it was not economically responsible to commence mining under this hosting arrangement
until May 2019 when Bitcoin mining economics started to improve. During the three months ended June 30, 2019, the Company recognized
revenue of $47 under this agreement.
On
May 10, 2019, the Company, entered into a hosting agreement (“Ohio Hosting Agreement”) relating to the generation
of Bitcoin mining revenues at a facility located in Coshocton, Ohio (the “Facility”) for a term that is the earlier
of (i) two years, or (ii) when the parties determine that the Bitcoin mining business at the Facility is uneconomical.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar
amounts in thousands, except per–share amounts)
Note
9. Commitments and Contingencies, continued
Under
the terms of the Ohio Hosting Agreement, the Company agreed to provide the necessary hardware to conduct Bitcoin mining at the
Facility. In addition, the Company is required to deliver a security deposit in the amount of $240 to the service provider of
the facility (the “Security Deposit”). The service provider agreed, among other things, to provide necessary hosting
capacity, equipment, infrastructure and electricity to operate the mining hardware at the Facility. A third-party operator agreed,
among other things, to and maintain the Facility in accordance with prudent industry standards and to maintain the hardware.
The
service provider is required to disburse on a monthly basis: (i) the total electricity costs to the utility provider; (ii) 10%
of Gross Profits (as defined in the Ohio Hosting Agreement) to the operator; (iii) the Net Profits (as defined in the Ohio Hosting
Agreement) such that 10% of all Gross Profits (as defined in the Ohio Hosting Agreement) shall be paid to the Company,
40% of all Gross Profits shall be paid to service provider, and 40% of all Gross Profits will be paid into the Security Deposit
account until such time as the Security Deposit is paid in full; and (iv) subsequent to the satisfaction of the Security Deposit,
Net Profits equally between the Company and the service provider.
During
the three and six months ended June 30, 2019, the Company recognized $23 under this agreement, of which $18 was applied
to the Security Deposit.
Employment
Agreements
On
May 1, 2019, the Company’s board of directors reappointed Mr. Robert Ladd as Chief Executive Officer of the Company. Mr.
Ladd’s existing employment agreement with the Company remains in effect.
The
Company’s Chief Operating Officer, Stephen Schaeffer resigned effective May 10, 2019. In connection with his resignation,
Mr. Schaeffer and the Company entered into a resignation and release agreement providing for a lump sum payment of $100, net of
appropriate payroll withholding deductions, the immediate vesting of 350,000 shares of common stock previously granted to Mr.
Schaeffer, and providing health insurance benefits as available under the Company’s COBRA health insurance program.
Management
Agreements
On
May 2, 2019, the Company entered into amended management agreements with two accredited investors, Deep South Mining LLC and BDLM,
LLC (the “Users”). The Users’ miners were reconnected and mining Bitcoin was resumed upon execution of these
agreements. Due to wear and tear, the parties acknowledge the Users’ Bitcoin Hardware consist of 1,800 Bitmain Antminer
S9 mining computers, collectively.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar
amounts in thousands, except per–share amounts)
Note
9. Commitments and Contingencies, continued
Legal
In
September 2018 and October 2018, various shareholders of the Company filed putative class action lawsuits against the Company,
its Chief Executive Officer and certain of its individual officers and shareholders, alleging violations of federal securities
laws and seeking damages (the “2018 Securities Class Actions”). The 2018 Securities Class Actions followed and referenced
the allegations made against the Company’s Chief Executive Officer and others in the SEC Action. The first putative class
action lawsuit was filed on September 28, 2018, in the United States District Court for the District of New Jersey, and alleges
that the named defendants engaged in a pump-and-dump scheme to artificially inflate the price of the Company’s stock, and
that, as a result, defendants’ statements about the Company’s business and prospects were materially false and misleading
and/or lacked a reasonable basis at relevant times. The second putative class action was filed on October 9, 2018, in the United
States District Court for the Southern District of New York and makes similar allegations. On May 28, 2019, the parties to the
2018 Securities Class Actions entered into a Binding Settlement Term Sheet setting forth the essential terms of a settlement agreement
of these actions. The terms provide for the payment of a cash sum to the plaintiff class and an agreement to assign certain potential
cash recoveries to the class, together with dismissal of the action with prejudice and the exchange of releases. The settlement
is subject to all parties’ agreement to final settlement documentation which all parties have agreed to negotiate in good
faith, and to court approval.
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 Chief Executive Officer and President, as well as certain individuals alleged to have participated in
the schemes while they were shareholders of 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.
On
May 29, 2019, the SEC served a third-party subpoena on the Company seeking the production of documents in the SEC Action, to which
the Company is responding in due course.
Note
10. Employee Benefit Plans
The
Company maintains defined contribution benefit plans under Section 401(k) of the Internal Revenue Code covering substantially
all qualified employees of the Company (the “401(k) Plan”). Under the 401(k) Plan, the Company may make discretionary
contributions of up to 100% of employee contributions. During the six months ended June 30, 2019 and 2018, the Company made contributions
to the 401(k) Plan of $9 and $18, respectively.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar
amounts in thousands, except per–share amounts)
Note
11. Subsequent Events
The
Company has evaluated the impacts of subsequent events through August 14, 2019, and has determined that no such events
occurred that were required to be reflected in the unaudited condensed consolidated financial statements, except as described
within the above notes and described below.
Subsequent
to June 30, 2019, through August 14, 2019, the Company issued 30,500,000 shares of its common stock under the equity
purchase agreement for gross proceeds of $1,291.
In
July and August 2019,
the holder of the June 2018 Note converted
$325 of debt principle into 11,537,510 shares of common stock, reducing the outstanding principal to $1,759.
On
July 15, 2019, the Company announced it entered into a purchase agreement with Bitmaintech Pte. Ltd, a Singapore private limited
company, to purchase 1,100 Antminer-S-17 Bitcoin miners for an aggregate purchase price of approximately $2,770, subject
to adjustments, with delivery expected in October 2019 to the Company’s facility in Lafayette, GA.
On
July 12, 2019, the acquirer of 150 shares of Preferred Shares
on April 12, 2019, converted 25 shares of Preferred Shares
into 6,725,854 shares of common stock. The same entity acquired 10 shares of the Preferred Shares for $100 on July 15, 2019.
Item
2. Management’s discussion and analysis of financial condition and results of operations
This
Quarterly Report on Form 10–Q contains forward–looking statements that involve risks and uncertainties, as well as
assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed
or implied by such forward–looking statements. The statements contained herein that are not purely historical are forward–looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). Forward–looking statements are often identified by the use of
words such as, but not limited to, “anticipate,” “estimates,” “should,” “expect,”
“guidance,” “project,” “intend,” “plan,” “believe” and similar expressions
or variations intended to identify forward–looking statements. These statements are based on the beliefs and assumptions
of our management based on information currently available to management. Such forward–looking statements are subject to
risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially
from future results expressed or implied by such forward–looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors”
included in our Annual Report on Form 10–K for the fiscal year ended December 31, 2019 as filed with the Securities and
Exchange Commission (“SEC”) on April 16, 2019, in addition to other public reports we filed with the SEC. The forward–looking
statements set forth herein speak only as of the date of this report. Except as required by law, we undertake no obligation to
update any forward–looking statements to reflect events or circumstances after the date of such statements.
Executive
summary
MGT
Capital Investments, Inc. (“MGT”, “the Company”, “we”, or “us”) is a Delaware
corporation, incorporated in 2000. The Company was originally incorporated in Utah in 1977. MGT is comprised of the parent company,
and its wholly–owned subsidiary MGT Sweden AB. Our corporate office is located in Durham, North Carolina.
All
dollar figures set forth in this Quarterly Report on this Form 10-Q are in thousands, except per-share amounts.
Following
a review of its Bitcoin mining operations, the Company has determined to consolidate its activities going forward in Company-owned
and managed facilities. Central to this strategy is the recent purchase of land in LaFayette, GA and the entry into a favorable
contract for electricity there. Located adjacent to a utility substation, the several acre property has access to over 20 megawatts
(MW) of low-cost power. MGT has also ordered transformers with a total load capacity of 12.5 MW to accommodate the first phase
of this project and has begun the construction and physical site development. The facility will accommodate shipping containers
racked with miners with individual capacities of up to 1 MW.
Our
agreements with third-party hosting facilities allow for reduced commitments and provide for flexibility to deploy miners at
the new Georgia location upon its readiness. MGT is now mining with 1,260 Bitmain S9 miners in Colorado Springs,
representing its entire commitment in this location. In Coshocton, Ohio, MGT is now operating approximately 1,000 S9 miners,
including miners in the first Pod5ive container delivered in late July. We are contractually committed to a total of 1,800
miners in Ohio, with full deployment dependent upon the speed of the facility buildout by our third-party partner.
On
July 15, 2019, the Company announced it entered into a purchase agreement with Bitmaintech Pte. Ltd, a Singapore private limited
company, to purchase 1,100 Antminer S17 Bitcoin miners for an aggregate purchase price of approximately $2,770, subject
to adjustments, with delivery expected in October 2019 to the Company’s facility in Lafayette, GA.
Critical
accounting policies and estimates
Our
discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”). The notes to the unaudited condensed consolidated financial statements contained in this Quarterly Report describe
our significant accounting policies used in the preparation of the unaudited condensed consolidated financial statements. The
preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods. Actual results could differ from those estimates. We continually evaluate
our critical accounting policies and estimates.
We
believe the critical accounting policies listed below reflect significant judgments, estimates and assumptions used in the preparation
of our unaudited condensed consolidated financial statements.
Revenue
recognition
The
Company’s primary revenue stream is related to the mining of digital currencies. The Company derives its revenue by solving
“blocks” to be added to the blockchain and providing transaction verification services within the digital currency
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 an intangible digital asset
valued at the lower of cost or net realizable value. Net realizable value adjustments, to adjust the value of the Coins to their
market value, is included in cost of revenue on the Company’s consolidated statements of operation. Any gain or loss on
sale would be recorded to cost of revenues. Costs of revenues includes equipment depreciation, rent, net realizable value adjustments,
and electricity costs.
The
Company also recognizes revenue from its management agreements. 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.
Stock–based
compensation
The
Company recognizes compensation expense for all equity–based payments in accordance with Accounting Standards Codification
(“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.
Results
of operations
Three
months ended June 30, 2019 and 2018
Revenues
Our
revenues for the three months ended June 30, 2019 decreased by $339, or 83%, to $70 as compared to $409 for the three months ended
June 30, 2018. Our revenue is derived from cryptocurrency mining. The decrease in revenues is a result of our decision to not
operate the majority of our miners due to the unfavorable economics of decreased price of Bitcoin and increased difficulty.
Operating
Expenses
Operating
expenses for the three months ended June 30, 2019 decreased by $4,705, or 69%, to $2,092 as compared to $6,797 for the three months
ended June 30, 2018. The decrease in operating expenses was primarily due to a decrease in general and administrative expenses
of $1,209, the absence of the Sweden restructuring charge in 2018 of $2,499, and a decrease of $997 in cost of sales from cryptocurrency
mining operations.
The
decrease in general and administrative expenses of $1,209 or 37% to $2,074 as compared to $3,283 for the three months ended June
30, 2018, was primarily due to a decrease in stock-based compensation of $951, a decrease in payroll and related expenses of $161,
a decrease in administrative and travel costs to operate the Sweden facility of $483, offset by an increase in legal and professional
fees of $268 and an increase in consulting fees of $226 primarily related to Company’s facility in Georgia.
Other
Income and Expense
For
the three months ended June 30, 2019, non–operating expenses consisted of interest income of $3, accretion of debt discount
of $2,731 and a gain on extinguishment of debt of $1,131. During the comparable period ended June 30, 2018, non–operating
expenses consisted of accretion of debt discount of $117.
Six
months ended June 30, 2019 and 2018
Revenues
Our
revenues for the six months ended June 30, 2019 decreased by $1,267, or 93%, to $98 as compared to $1,365 for the six months ended
June 30, 2018. Our revenue is derived from cryptocurrency mining. The decrease in revenues is a result of our decision to not
operate the majority of our miners due to the unfavorable economics of decreased price of Bitcoin and increased difficulty.
Operating
Expenses
Operating
expenses for the six months ended June 30, 2019 decreased by $7,897, or 66%, to $4,092 as compared to $11,989 for the six months
ended June 30, 2018. The decrease in operating expenses was primarily due to a decrease in general and administrative expenses
of $3,504, the absence of the Sweden restructuring charge in 2018 of $2,499, and a decrease of $1,792 in cost of sales from cryptocurrency
mining operations.
The
decrease in general and administrative expenses of $3,504, or 47% to $3,988 as compared to $7,492 for the six months ended June
30, 2018, was primarily due to a decrease in stock-based compensation of $2,230 and a decrease in payroll and related expenses
of $587, a decrease in administrative and travel costs to operate the Sweden facility of $753, a decrease in marketing and research
and development costs of $101, offset by an increase in legal and professional fees of $324.
Other
Income and Expense
For
the six months ended June 30, 2019, non–operating expenses consisted of accretion of debt discount of $3,822, gain on sale
of property and equipment of $82 and a gain on extinguishment of debt of $2,406. During the comparable period ended June 30, 2018,
non–operating expenses consisted of accretion of debt discount of $117, warrant modification expense of $139, loss on sale
of business unit of $127, and a loss on sale of property and equipment of $47.
Liquidity
and capital resources
Sources
of Liquidity
We
have historically financed our business through the sale of debt and equity instruments. We have incurred significant operating
losses since inception with an accumulated deficit of $411,003 as of June 30, 2019, and continue to generate losses from operations.
At June 30, 2019, our cash and cash equivalents were $3,059 and our working capital was $2,569. As of June 30, 2019, we had notes
payable outstanding with a face value of $1,884.
Management’s
plans include the consolidation of its activities in Company-owned and managed facilities, executing on its expansion model to
secure low cost power and grow its cryptocurrency assets. 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 unaudited condensed 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 unaudited condensed consolidated financial statements. Management’s plans,
including the consolidation of its activities in Company-owned and managed facilities, the raising of additional capital and potentially
curtailing its operations alleviate such substantial doubt. The accompanying unaudited condensed consolidated financial statements
do not include any adjustments related to the recoverability and classification of asset amounts or the classification of liabilities
that might be necessary should the Company be unable to continue as a going concern.
The
price of Bitcoin is volatile, and fluctuations are expected. Movements may be influenced by various factors, including, but not
limited to, government regulation, security breaches experienced by service providers, as well as political and economic uncertainties
around the world. Since we record revenue based on the price of earned Bitcoin and we may retain such Bitcoin as an asset or as
payment for future expenses, the relative value of such revenues may fluctuate, as will the value of any Bitcoin we retain. The
high and low exchange rate per Bitcoin for the six months ended June 30, 2019, as reported by Blockchain.info, were approximately
$3 and $12 respectively.
The
Company’s primary source of operating funds has been through debt and equity financing.
Equity
Purchase Agreements
On
August 30, 2018, and further amended on December 3, 2018, the Company and Oasis Capital, LLC (“Oasis Capital”) entered
into an equity purchase agreement pursuant to which the Company issued and sold to Oasis Capital from time to time 100,650,000
shares of the Company’s common stock, registered with the SEC under a registration statement on a Form S–3, for gross
proceeds of $6,491. On April 16, 2019, the Company’s registration statement on Form S–3 lost its effectiveness as
the aggregate market value of the Company’s common stock held by non-affiliates was below the regulatory threshold of $75,000.
On
June 4, 2019, the Company and Oasis Capital entered into a new equity purchase agreement pursuant to which the Company may issue
and sell from time to time to Oasis Capital up 76,558,643 shares of the Company’s common stock that are registered with
the SEC under a registration statement on Form S-1 that went effective on June 25, 2019. No shares were issued or sold under this
registration statement during the three months ended June 30, 2019. Subsequent to June 30, 2019, 30,500,000 shares of the
Company’s common stock were issued and sold for gross proceeds of $1,291.
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 common 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 $1,890.
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. The holder of these shares is also
the holder of the June 2018 Note and an affiliate of the holder of 150 shares of the Preferred Shares.
Property
& Equipment Acquisitions
In
connection with management’s plans to consolidate its activities in Company-owned and managed facilities, the Company acquired
6 acres of land in Lafayette, Georgia in May 2019 for $57, acquired electrical transformers of $177 in June and July 2019,
and in July 2019 entered into an agreement to purchase 1,100 Antminer- S-17 Bitcoin miners for $2,768, of which $1,384 was paid
as a deposit and the remaining balance will be paid upon delivery expected to be in October 2019. The Company will incur additional
costs to complete its owned and managed facility and anticipates the funding for such costs to be provided from cash on hand and
proceeds from its equity purchase agreement.
|
|
|
Six Months ended June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Cash (used in) / provided by
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(2,611
|
)
|
|
$
|
(5,317
|
)
|
|
Investing activities
|
|
|
(72
|
)
|
|
|
(6,507
|
)
|
|
Financing activities
|
|
|
5,646
|
|
|
|
4,603
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
2,963
|
|
|
$
|
(7,221
|
)
|
Cash
Flows
Operating
activities
Net
cash used in operating activities was $2,611 for the six months ended June 30, 2019 as compared to $5,317 for the six months
ended June 30, 2018. Cash used in operating activities for the six months ended June 30, 2019 primarily consisted of a net loss
of $5,328, partially offset by stock-based compensation of $1,679, amortization of note discounts of $3,822 less a non-cash gain
on extinguishment of $2,406 with a decrease in working capital of $296. Cash used in operating activities for the six months
ended June 30, 2018 primarily consisted of a net loss of $11,054 partially offset by non-cash stock-based compensation of $3,908,
depreciation expense of $1,189, and an increase due to changes in working capital of $210.
Investing
activities
Net
cash used in investing activities was $72 for the six months ended June 30, 2019 as compared to net cash used in investing activities
of $6,507 for the six months ended June 30, 2018. During the six months ended June 30, 2019, the Company used $72 in the purchase
of property and equipment. During the six months ended June 30, 2018, the Company used $6,994 in the purchase of property and
equipment, and realized $60 in proceeds from sales of our cybersecurity assets and $427 from the sale of property and equipment.
Financing
activities
During
the six months ended June 30, 2019, cash provided by financing activities totaled $5,646, which includes $3,329 from the
sale of stock under our equity line of credit, sale of preferred stock of $1,890 and proceeds of $120 from the exercising of warrants
offset by $210 in repayments of notes payable and payments of deferred offering costs of $8. During the six months ended
June 30, 2018, cash provided by financing activities totaled $4,603, comprised of $3,700 from the net proceeds of notes payable,
$80 from private placements of our common stock and $906 from the exercise of stock purchase warrants offset by $83 in deferred
offering costs paid.
Off–balance
sheet arrangements
As
of June 30, 2019, we had no obligations, assets or liabilities which would be considered off–balance sheet arrangements.
We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often
referred to as variable interest entities, which would have been established for the purpose of facilitating off–balance
sheet arrangements.