UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
Form
10–K
(Mark
One)
|
[X] |
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
For
the fiscal year ended: December 31, 2019
OR
|
[ ] |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934. |
For
the transition period from to
Commission
File Number 001-32698
MGT
CAPITAL INVESTMENTS, INC.
(Exact
name of registrant as specified in its charter)
|
Delaware |
|
13–4148725 |
(State
or other jurisdiction
of incorporation or organization) |
|
(I.R.S.
Employer
Identification No.) |
|
150
Fayetteville Street, Suite 1110
Raleigh,
NC
|
|
27601 |
|
(Address
of principal executive offices) |
|
(Zip
Code) |
(914)
630–7430
(Registrant’s
telephone number, including area code)
Securities
registered under section 12(b) of the Act:
Not
applicable
Securities
registered under section 12(g) of the Act:
common
stock, par value $.001 per share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No
[X]
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act. Yes
[ ] No [X]
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of
1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirement for the past 90 days. Yes
[X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit such files). Yes [X] No
[ ]
Indicate
by check mark whether registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer”, “accelerated
filer”, “smaller reporting company”, and “emerging growth company”
in Rule 12b-2 of the Exchange Act:
|
Large
accelerated filer [ ] |
Accelerated
filer [ ] |
| Non-accelerated
filer [ ] |
Smaller
reporting company [X] |
| Emerging
growth company [ ] |
|
If an
emerging growth company, indicate by checkmark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to section 13(a) of the Exchange Act.
[ ]
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No
[X]
As of
June 30, 2019, the last day of the registrant’s most recently
completed second fiscal quarter; the aggregate market value of the
registrant’s common stock held by non–affiliates of the registrant
was approximately $20,550,962.
As of
March 30, 2020, the registrant had outstanding 446,448,445 shares
of common stock, $0.001 par value.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
INDEX
($
in thousands, except share and per–share amounts)
NOTE
REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K and other written and oral statements
made from time to time by us may contain forward-looking
statements. Forward-looking statements can be identified by the use
of words such as “expects,” “plans,” “will,” “forecasts,”
“projects,” “intends,” “estimates,” and other words of similar
meaning. One can identify them by the fact that they do not relate
strictly to historical or current facts. These statements are
likely to address our growth strategy, financial results and
product and development programs. One must carefully consider any
such statement and should understand that many factors could cause
actual results to differ from our forward-looking statements. These
factors may include inaccurate assumptions and a broad variety of
other risks and uncertainties, including some that are known and
some that are not. No forward-looking statement can be guaranteed
and actual future results may vary materially.
These
statements are only predictions and involve known and unknown
risks, uncertainties and other factors, including the risks in the
section entitled “Risk Factors” and the risks set out below, any of
which may cause our or our industry’s actual results, levels of
activity, performance or achievements to be materially different
from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking
statements. These risks include, by way of example and not in
limitation:
|
|
● |
The
uncertainty of profitability based upon our history of
losses; |
| |
|
|
| |
● |
Risks
related to failure to obtain adequate financing on a timely basis
and on acceptable terms to continue as going concern;
and |
| |
|
|
| |
● |
Other
risks and uncertainties related to our business plan and business
strategy. |
This
list is not an exhaustive list of the factors that may affect any
of our forward-looking statements. These and other factors should
be considered carefully and readers should not place undue reliance
on our forward-looking statements. Forward looking statements are
made based on management’s beliefs, estimates and opinions on the
date the statements are made and we undertake no obligation to
update forward-looking statements if these beliefs, estimates and
opinions or other circumstances should change. Although we believe
that the expectations reflected in the forward-looking statements
are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Except as required by
applicable law, including the securities laws of the United States
we do not intend to update any of the forward-looking statements to
conform these statements to actual results.
Information
regarding market and industry statistics contained in this Annual
Report on Form 10-K is included based on information available to
us that we believe is accurate. It is generally based on industry
and other publications that are not produced for purposes of
securities offerings or economic analysis. We have not reviewed or
included data from all sources. Forecasts and other forward-looking
information obtained from these sources are subject to the same
qualifications and the additional uncertainties accompanying any
estimates of future market size, revenue and market acceptance of
products and services. As a result, investors should not place
undue reliance on these forward-looking statements.
As
used in this annual report, the terms “we”, “us”, “our”, “MGT” and
the “Company” mean MGT Capital Investments, Inc. and its
subsidiaries, unless otherwise indicated.
All
dollar amounts set forth in this Annual Report as of and for the
year ended December 31, 2019 on this Form 10–K are in thousands,
except per–share amounts.
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 in Raleigh, 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 Interactive, LLC, MGT
Gaming, Inc., MGT Mining One, Inc. and MGT Mining Two, Inc., and
MGT Sweden AB. MGT Studios, Inc. 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 processing power used to
solve these mathematical problems is measured by Hash Rate or
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 calculations and adding transaction 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
Cryptocurrency mining
Current
Operations
Following
a review of its Bitcoin mining operations in early 2019, we
determined to consolidate our activities in Company-owned and
managed facilities. Central to this strategy was the purchase of
land in LaFayette, GA and the entry into a favorable contract for
electricity in the second quarter of 2019. Located adjacent to a
utility substation, the several acre property has access to over 20
megawatts (MW) of low-cost power.
We
began Bitcoin mining at our LaFayette facility in late September
2019 on a trial basis, and on January 31, 2020, we announced we are
operating 1,500 new generation Bitcoin miners collectively rated at
approximately 80 Ph/s at the facility. All miners were purchased
from Bitmain. The total electrical load at this production level is
estimated at slightly under 4.0 MW.
Our
miners are housed in five modified shipping containers including
two manufactured by Bit5ive LLC of Miami, Florida (“Pod5ive
Containers”). As an early investor and design consultant, we
receive a modest royalty participation in all sales of Pod5ive
Containers. Phase I of the LaFayette site is structurally complete
and awaiting final grading and landscaping. The entire facility,
including the land, five 2500 KVA 3-phase transformers, the mining
containers and the miners, are owned by MGT. As we are presently
using only one-third of the available electrical load, we are
exploring ways to grow our current operations.
Former
Operations
Prior
to establishing our Company-owned and managed facility, we
conducted our Bitcoin mining operations through third-party hosting
arrangements. We also entered into management agreements with third
party investors whereby the investors purchased the mining
hardware, and we received both a fee to manage the mining
operations plus one-half of the net operating profit.
Towards
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, which included a
facility with power, cooling, and hosting services for a fixed
price of $810 per month. The facility in Sweden was 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 MGT by the end of March 2018. During the
first and second quarters of 2018, MGT personnel traveled to Sweden
to assist Beacon with getting the facility up and running, advanced
additional funding, and became involved in the design and setup of
the Sweden facility due to concern that Beacon may have overstated
its construction abilities and financial capacity.
Beginning
in late May 2018, we took steps to gain direct operating control of
the Swedish facility to protect our assets and maximize capacity as
quickly as possible. Through June 2018, we recorded restructuring
expenses 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 additional costs consisted of $893 in costs to bring the
electricity provider current and set up more transformers, and $256
in additional operating costs. The cost of services provided after
MGT took over full direct operational control of the facility are
included in cost of revenue and general and administrative expenses
in the Company’s 2018 consolidated statements of
operations.
In
September 2018, we decided to forgo any further monetary investment
in Sweden and relocated all miners located in Sweden to third-party
hosting facilities in Colorado and Ohio. Because the price of
Bitcoin steadily decreased during 2018 and throughout the first
quarter of 2019, we decided it was not economically responsible to
continue mining operations until Bitcoin economics improved, which
occurred in May 2019.
On
March 22, 2019, we entered into a settlement agreement to terminate
our initial hosting agreement in Washington and conveyed ownership
of its onsite mining assets for full satisfaction of $77 in
outstanding hosting service fees. In August and September 2019, we
terminated our management agreements with third party investors and
in December 2019, terminated our hosting arrangements in Colorado
and Ohio.
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 Blockchain transaction ledger 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 peer to peer end-user-to-end-user
transactions.
Bitcoins
are “stored” or reflected on the Blockchain 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 it. 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, being decentralized, 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 peer to peer
transactions), as well as the number of merchants that accept it.
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 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, miners
must continually invest in expensive mining hardware to achieve
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
supply of Bitcoin is finite. Once 21 million Bitcoin are generated,
the network will stop producing more. Currently, there are
approximately 18 million Bitcoin in circulation, or 85% of the
total supply of Bitcoin. Within the Bitcoin protocol is an event
referred to as Bitcoin halving (“Halving”) where the Bitcoin
provided upon mining a block is reduced by 50%. Halvings are
scheduled to occur once every 210,000 blocks, or roughly every four
years, until the maximum supply of 21 million Bitcoin is reached.
The next Halving is expected to occur in May 2020, with a revised
reward payout of 6.25 Bitcoin per block.
Given
a stable hash rate, a Halving reduces the number of new Bitcoin
being generated by the network. While the effect is to limit the
supply of new coins, it has no impact on the quantity of total
Bitcoin outstanding. As a result, the price of Bitcoin could rise
or fall based on overall investor and consumer demand. Should the
price of Bitcoin remain unchanged after the next Halving, the
Company’s revenue would be reduced by 50%, with a much larger
negative impact to profit.
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
In
January 2018, we ended our business relationship with cybersecurity
pioneer John McAfee. Since August 2017, Mr. McAfee had served as
our Chief Cybersecurity Visionary, guiding the development of our
cybersecurity business, including Sentinel, an enterprise class
network intrusion detector, released in October 2017. We also owned
the intellectual property associated with developing and marketing
a mobile phone with extensive privacy and anti-hacking
features.
In
March 2018, we sold our 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,
we believed the collection of the promissory note was doubtful and
therefore determined the fair value to be zero. We recorded a loss
on sale of $127, comprised of $60 in cash proceeds, less $27 in
assets sold, $40 in separation payments to former management, and
$120 in common stock issued to former management.
Strategy
MGT’s
strategy is to oversee the operation of approximately 1,500 Bitcoin
miners in La Fayette, Georgia. The Company’s immediate focus is to
grow free cash flow, with a longer-term objective to expand its
mining operation.
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 subsidiary have 3 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 several 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, 2019, MGT’s cash
and cash equivalents were approximately $216.
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, 2019, the Company had incurred
significant operating losses since inception, and continues to
generate losses from operations, and has an accumulated deficit of
$414,502. 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:
|
|
● |
continued
worldwide growth in the adoption and use of Bitcoin and other
digital currencies; |
| |
● |
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.
The supply of Bitcoin is limited, and production of Bitcoin will be
negatively impacted upon the next Bitcoin halving protocol expected
in May 2020.
The
supply of Bitcoin is finite. Once 21 million Bitcoin are generated,
the network will stop producing more. Currently, there are
approximately 18 million Bitcoin in circulation, or 85% of the
total supply of Bitcoin. Within the Bitcoin protocol is an event
referred to as Halving where the Bitcoin reward provided upon
mining a block is reduced by 50%. Halvings are scheduled to occur
once every 210,000 blocks, or roughly every four years, until the
maximum supply of 21 million Bitcoin is reached. The next Halving
is expected to occur in May 2020, with a revised payout of 6.25
Bitcoin per block.
Given
a stable hash rate, a Halving reduces the number of new Bitcoin
being generated by the network. While the effect is to limit the
supply of new coins, it has no impact on the quantity of total
Bitcoin outstanding. As a result, the price of Bitcoin could rise
or fall based on overall investor and consumer demand. Should the
price of Bitcoin remain unchanged after the next Halving, the
Company’s revenue would be reduced by 50%, with a much larger
impact to profit.
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 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.
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.
Further,
the Peoples Bank of China has instituted restrictions on certain
exchange trading in cryptocurrencies and ICOs. Further governmental
regulation in that country or others could negatively impact
pricing for Bitcoin. In addition, the Company’s sole source of
mining computers is a Chinese company, and we are exposed to
existing tariffs for certain equipment used in our operations. If
outright restrictions or even more punitive tariffs are placed on
the export of such computers, it 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 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.
The real estate assets we own subject to the risks associated with
real property.
Real
estate assets are subject to various risks, including:
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declines
in the value of real estate; |
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acts
of nature, including earthquakes, floods and other natural
disasters, which may result in uninsured losses; |
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adverse
changes in national and local economic and market
conditions; |
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changes
in governmental laws and regulations, fiscal policies and zoning
ordinances and the related costs of compliance with laws and
regulations, fiscal policies and ordinances; |
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costs
of remediation and liabilities associated with environmental
conditions such as indoor mold; and |
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the
potential for uninsured or under-insured property
losses. |
The
occurrence of any of the foregoing or similar events may reduce the
value of our property, impair our ability to conduct our mining
operations and, consequently, materially adversely affect our
business, financial condition and results of operations.
We face possible risks associated with the physical effects of
climate change.
The
physical effects of climate change could have a material adverse
effect on our properties, operations, and business. However, the
impacts of climate change on our operations are highly uncertain
and their significance will vary depending on the type and
geographic location of any physical impact. The impacts of climate
change could include changing temperatures, flooding, water
shortages, changes in weather and rainfall patterns, and changing
storm patterns and intensities. To the extent that climate change
impacts changes in weather patterns, some of our properties could
experience increases in storm intensity, loss of power, and rising
sea levels. Climate change may also have indirect effects on our
business by increasing the cost of, or availability of, property
insurance on terms we find acceptable or increasing the cost of
energy. There can be no assurance that climate change will not have
a material adverse effect on our properties, operations, or
business.
Our business is subject to risks arising from epidemic diseases,
such as the recent outbreak of the COVID-19
illness.
The
recent outbreak of COVID-19, which has been declared by the World
Health Organization to be a pandemic, has spread across the globe
and is impacting worldwide economic activity. A pandemic, including
COVID-19, or other public health epidemic poses the risk that we or
our employees, suppliers, and other partners may be prevented from
conducting business activities at full capacity for an indefinite
period of time, including due to spread of the disease within these
groups or due to shutdowns that may be requested or mandated by
governmental authorities. While it is not possible at this time to
estimate the impact that COVID-19 could have on our business, the
continued spread of COVID-19 and the measures taken by the
governments of countries affected and in which we operate could
disrupt the operation of our business. The COVID-19 outbreak and
mitigation measures may also have an adverse impact on global
economic conditions, which could have an adverse effect on our
business and financial condition, including on our potential to
conduct financings on terms acceptable to us, if at all. In
addition, we may take temporary precautionary measures intended to
help minimize the risk of the virus to our employees, including
temporarily requiring all employees to work remotely, and
discouraging employee attendance at in-person work-related
meetings, which could negatively affect our business. The extent to
which the COVID-19 outbreak impacts our results will depend on
future developments that are highly uncertain and cannot be
predicted, including new information that may emerge concerning the
severity of the virus and the actions to contain its
impact.
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 several 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. These
operations 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 Bitcoin may create 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 of mined Bitcoin 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 would 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 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 Bitcoin and other cryptocurrencies either globally or
locally. Large-scale sales of Bitcoin or other cryptocurrencies
would result in a reduction in their value and would 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 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. 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.
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.
The SEC has filed an action against the Company’s Chief Executive
Officer alleging violations of federal securities laws which could
result in liabilities for the Company.
On
September 7, 2018, the SEC commenced a legal action, SEC v.
Barry C. Honig et al. (the “SEC Action”), in the United States
District Court for the Southern District of New York naming as
defendant Mr. Ladd, among others. An amended complaint in the SEC
Action was filed on March 8, 2019. The SEC filed a second amended
complaint in the SEC Action on March 16, 2020 asserting additional
civil charges against Robert Ladd. On May 24, 2019, the SEC issued
a subpoena in the SEC Action to the Company and on October 31,
2019, the SEC issued subpoenas in the SEC Action to our Chairman
and our Independent Director. The SEC Action asserts civil charges
against multiple individuals and entities, including former
shareholders of the Company, 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. We cannot predict the impact that this action may
have on the Company, or whether it might result in future actions,
penalties or other liabilities against the Company. Moreover, we
expect to incur costs in responding to related requests for
information and subpoenas, and if instituted, in defending against
any resulting governmental proceedings that may be instituted
against the Company.
The Company and its directors and officer have received subpoenas
from the SEC, whose response is imposing costs on the Company and
create a perception of wrongdoing.
At
various times since September 15, 2016, and most recently on
October 31, 2019, the Company and its directors and officers have
received subpoenas from the SEC. In addition, in December 2017, the
President and Chief Executive Officer also received a subpoena from
the SEC. These subpoenas have requested the recipients to provide
the SEC with certain information, including but not limited to,
with respect to risk factors contained in certain of the Company’s
filings with the SEC, any investigations by any government agency
into Robert B. Ladd, a director of the Company and its Chief
Executive Officer, and certain other matters related to the
Company’s securities. The Company has publicly announced receipt of
the subpoenas and has been fully complying with the SEC’s request
for information. Response to the subpoenas has entailed, and may
continue to entail, legal costs and the diversion of management’s
attention, and the issuance of the subpoenas may create a
perception of wrongdoing that could be harmful to our business. The
Company has no information concerning the SEC’s purposes in serving
these subpoenas, and although the Company has no indication that
any enforcement proceedings are contemplated against the Company,
the Company cannot predict whether the subpoenas will lead to any
such proceedings.
A number of shareholder class actions and shareholder derivative
actions have been filed against the Company and its CEO alleging
violations of federal securities laws.
Certain
shareholders of the Company filed two putative class action
lawsuits (the “Class Actions”) against the Company, and Mr. Ladd,
alleging violations of federal securities laws and seeking damages.
The Class Actions followed and referenced allegations made against
Mr. Ladd and others in a complaint filed by the SEC in the SEC
Action. The first Class Action was filed on September 28, 2018, in
the United States District Court for the District of New Jersey,
and alleges generally that defendants were engaged in a
pump-and-dump scheme to artificially inflate MGT’s stock price and
that, as a result, defendants’ statements about MGT’s business and
prospects were materially false and misleading and/or lacked a
reasonable basis at all relevant times. The second 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 Class Actions entered into a
binding settlement term sheet, and on September 24, 2019, the
parties entered into a stipulation of settlement. On August 7,
2019, the lead plaintiff in the first Class Action filed a notice
and order of voluntary dismissal with prejudice, and on October 11,
2019, the lead plaintiff in the second Class Action filed an
unopposed motion for preliminary approval of the proposed class
action settlement. There can be no assurance that the court will
approve the settlement, that particular shareholders will not opt
out of the settlement or that other shareholders will not bring
other shareholder class actions alleging different violations of
law.
Certain
shareholders of the Company have filed derivative actions against
the Company and certain of our directors, officers and
shareholders, including Mr. Ladd (the “Derivative Actions”). The
allegations in the Derivative Actions largely repeat the
allegations in the Class Actions. While the Company intends to
defend against the Derivative Actions and believes that they are
without merit, the outcome of these actions cannot be predicted.
Moreover, regardless of their outcome, these actions may entail a
significant amount of defense costs, may divert the attention of
management and could create a public perception of
wrongdoing.
The SEC and shareholder actions against the Company’s CEO could
result in the loss of his services or otherwise divert his
attention from the management of the Company.
Mr.
Ladd is a director of the Company and has served as the Chief
Executive Officer of the Company since January 2012 (except for the
periods from November 2016 through August 2017 and September 10,
2018 through April 30, 2019). During this time, he has been largely
responsible for the Company’s strategic direction and has been
influential in all major policy decisions of the Company. As
described above, the SEC has filed a lawsuit against Mr. Ladd,
alleging violations of securities laws. In addition to injunctive
relief and monetary penalties, the complaint seeks an officer and
director bar with respect to Mr. Ladd, which if obtained by the SEC
would prevent him from continuing to serve in such capacities with
the Company. Also as described above, Mr. Ladd has also been named
as a defendant in shareholder actions against the Company. While
the Company has no reason to believe that Mr. Ladd has failed to
comply with applicable securities law in respect of the Company,
the outcome of these litigations is uncertain. In the event Mr.
Ladd is prevented from serving as an executive officer and/or
director of the Company, the Company’s business, operations and
strategic direction may be adversely impacted. Also, the SEC and
shareholder actions may divert Mr. Ladd’s attention from the
management of the Company and could result in an increase in our
director and officer insurance costs.
Risks Related to Our Stock
Penny stock regulations may impose certain restrictions on
marketability of our securities.
The
SEC has adopted regulations which generally define a “penny stock”
to be any equity security that has a market price of less than
$5.00 per share or an exercise price of less than $5.00 per share,
subject to certain exceptions. A security listed on a national
securities exchange is exempt from the definition of a penny stock.
Our common stock is not currently listed on a national security
exchange. Our common stock is therefore subject to rules that
impose additional sales practice requirements on broker-dealers who
sell such securities to persons other than established customers
and accredited investors (generally those with assets in excess of
$1,000 or annual income exceeding $200, or $300 together with their
spouse). For transactions covered by such rules, the broker-dealer
must make a special suitability determination for the purchase of
such securities and have received the purchaser’s written consent
to the transaction prior to the purchase.
Additionally,
for any transaction involving a penny stock, unless exempt, the
rules require the delivery, prior to the transaction, of a risk
disclosure document mandated by the SEC relating to the penny stock
market. The broker-dealer must also disclose the commission payable
to both the broker-dealer and the registered representative,
current quotations for the securities and, if the broker-dealer is
the sole market maker, the broker dealer must disclose this fact
and the broker-dealer’s presumed control over the market. Finally,
monthly statements must be sent disclosing recent price information
for the penny stock held in the account and information on the
limited market in penny stocks. Broker-dealers must wait two
business days after providing buyers with disclosure materials
regarding a security before effecting a transaction in such
security. Consequently, the “penny stock” rules restrict the
ability of broker-dealers to sell our securities and affect the
ability of investors to sell our securities in the secondary market
and the price at which such purchasers can sell any such
securities, thereby affecting the liquidity of the market for our
common stock.
Stockholders
should also be aware that, according to the SEC, the market for
penny stocks has suffered in recent years from patterns of fraud
and abuse. Such patterns include:
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control
of the market for the security by one or more broker-dealers that
are often related to the promoter or issuer; |
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manipulation
of prices through prearranged matching of purchases and sales and
false and misleading press releases; |
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“boiler
room” practices involving high pressure sales tactics and
unrealistic price projections by inexperienced
salespersons; |
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excessive
and undisclosed bid-ask differentials and markups by selling
broker-dealers; and |
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the
wholesale dumping of the same securities by promoters and
broker-dealers after prices have been manipulated to a desired
level, along with the inevitable collapse of those prices with
consequent investor losses. |
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.
Future sales and issuances of our equity securities or rights to
purchase our equity securities, including pursuant to equity
incentive plans, would result in additional dilution of the
percentage ownership of our stockholders and could cause our stock
price to fall.
To
the extent we raise additional capital by issuing equity securities
through an agreement with Oasis Capital, LLC (the “Oasis Equity
Line”) or otherwise, our stockholders may experience substantial
dilution. We may, as we have in the past, sell common stock,
rights, warrants, options or convertible securities or other equity
securities in one or more transactions at prices and in a manner we
determine from time to time. If we sell common stock, rights,
warrants, options or convertible securities or other equity
securities in more than one transaction, investors may be further
diluted by subsequent sales. Such sales may also result in material
dilution to our existing stockholders, and new investors could gain
rights superior to existing stockholders. Because we are quoted on
the OTCQB instead of a national securities exchange or quotation
system, our investors may experience significant volatility in the
market price of our stock and have difficulty selling their
shares.
Our
common stock is currently quoted on the OTC Market Group’s OTCQB
market quotation system under the ticker symbol “MGTI.” The OTCQB
is a regulated quotation services that displays real-time quotes
and last sale prices in over-the-counter securities. Trading in
shares quoted on the OTCQB is often thin and characterized by
volatility in trading prices. This volatility may be caused by a
variety of factors, including the lack of readily available price
quotations, the absence of consistent administrative supervision of
bid and ask quotations, lower trading volume and market conditions.
As a result, there may be wide fluctuations in the market price of
the shares of our common stock for reasons unrelated to operating
performance, and this volatility, when it occurs, may have a
negative effect on the market price for our securities. Moreover,
the OTCQB is not a stock exchange, and trading of securities on
this platform is more sporadic than the trading of securities
listed on a national quotation system or stock exchange.
Accordingly, our stockholders may not be able to realize a fair
price from their shares when they determine to sell them or may
have to hold them for a substantial period of time until the market
for our common stock improves.
A significant number of additional shares of our common stock may
be issued at a later date, and their sale could depress the market
price of our common stock.
As of
December 31, 2019, we had options exercisable for 6,000,000 shares
of our common stock. In addition, we have 78,050,084 shares
issuable upon conversion of outstanding notes and 115 shares of
Series C Preferred Stock which are convertible into 96,638,655
shares of our common stock at any time at the option of the holder
in an amount determined by dividing the Stated Value ($10) by the
conversion price. The conversion price of the Series C Preferred
Stock will be equal to the lower of (i) $0.05 per share (subject to
adjustment for stock splits, stock dividends, and similar
transactions) or (ii) 70% of the lowest trading price of the common
stock for the 10 days prior to the conversion date. The holder of
both the convertible debt and the Series C Preferred Stock share
common ownership and are subject to a combined ownership limitation
of 9.99% of our common stock. The possibility of the issuance of
all or some of the shares upon the exercise or conversion of the
outstanding warrants, options or Series C Preferred Stock, as well
as the sale of shares pursuant to the Oasis Equity Line, could
substantially reduce the market price for our common
stock.
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 our common stock has fluctuated considerably and is
likely to remain volatile, in part due to the limited market for
our common stock, and you could lose all or part of your
investment.
There
is a limited public market for our common stock, and we cannot
provide assurances that a more active trading market will develop
or continue. As a result of low trading volume in our common stock,
the purchase or sale of a relatively small number of shares could
result in significant share price fluctuations. Additionally, the
market price of our common stock may continue to fluctuate
significantly in response to a number of factors, some of which are
beyond our control.
For
these reasons and others, an investment in our securities is risky
and you should invest only if you can withstand a significant loss
and wide fluctuations in the value of your investment.
Item 1B. Unresolved Staff
Comments
Not
applicable.
Item 2. Properties
Our
principal corporate office is located at 150 Fayetteville Street,
Suite 1110 Raleigh, NC 27601, occupied under a lease that expires
January 2023. Monthly rent is $3 until expiration of the lease. A
security deposit of $3 was required upon execution of the lease. We
believe our office is in good condition and is sufficient to
conduct our operations.
We
have constructed our own Bitcoin mining facility on 6 acres in
LaFayette, GA which we acquired in May 2019. We believe our mining
facility is in good condition and is sufficient to conduct our
operations.
Item 3. Legal
Proceedings
On
September 15, 2016, the Company received a subpoena from the SEC
and in December 2017, the Company’s Chief Executive Officer and
President received a subpoena from the SEC, requesting information,
including but not limited to, with respect to the company’s
communications with certain individuals and entities, the issuance
of Company stock, and Company press releases. The time period
covered by the subpoenas was January 1, 2013 through the date of
issuance of the subpoenas. The Company responded to the subpoenas
and cooperated with the SEC and its staff in a timely
manner.
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.
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 (defined below) 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 (defined below), the Ojha
Derivative Action, and the Thomas Derivative Action (defined
below), 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.
On
February 14, 2020, the parties to the Ojha Derivative Action and
the Thomas Derivative Action entered into a binding settlement term
sheet setting forth the essential terms of a settlement agreement.
The terms provide for certain corporate governance reforms to be
implemented by the Company, a cash payment to the Company by or on
behalf of various individual defendants, and a payment of
attorneys’ fees to counsel for plaintiffs, together with dismissal
of the actions and the exchange of releases. The settlement is
subject to the parties’ agreement to final settlement documentation
which all parties have agreed to cooperate to prepare and execute,
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 companies that are not
identified by name in the SEC Action. 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 stockholders in the Company, among others. The SEC filed an
amended complaint in the SEC Action on March 8, 2019. The SEC filed
a second amended complaint in the SEC Action on March 16, 2020
asserting additional civil charges against Robert Ladd. The
Company, through its counsel, is monitoring the progress of the SEC
Action and has responded to a third-party document subpoena served
on it by the SEC in the matter.
In
September 2018 and October 2018, various shareholders of the
Company filed putative class action lawsuits against the Company,
its Chief Executive Officer and certain of its individual officers
and shareholders, alleging violations of federal securities laws
and seeking damages (the “2018 Securities Class Actions”). The 2018
Securities Class Action followed and referenced the allegations
made against the Company’s Chief Executive Officer and others in
the SEC Action. The first putative class action lawsuit was filed
on September 28, 2018, in the United States District Court for the
District of New Jersey, and alleges that the named defendants
engaged in a pump-and-dump scheme to artificially inflate the price
of the Company’s stock and that, as a result, defendants’
statements about the Company’s business and prospects were
materially false and misleading and/or lacked a reasonable basis at
relevant times. The second putative class action was filed on
October 9, 2018, in the United States District Court for the
Southern District of New York and makes similar
allegations.
On
May 28, 2019, the parties to the 2018 Securities Class Actions
entered into a binding settlement term sheet, and on September 24,
2019, the parties entered into a stipulation of settlement. On
August 7, 2019, the lead plaintiff in the first class action filed
a notice and order of voluntary dismissal with prejudice, and on
October 11, 2019, the lead plaintiff in the second class action
filed in the federal court in New York an unopposed motion for
preliminary approval of the proposed class action settlement. On
December 17, 2019, the court issued an order granting preliminary
approval of the settlement. A hearing on final approval of the
settlement has been scheduled for May 27, 2020.
On
August 28, 2019, a shareholder derivative action was filed by
shareholder Tyler Tomczak against the Company and certain of its
directors, officers and shareholders in the United States District
Court for the Southern District of New York, alleging breach of
fiduciary duties, waste and unjust enrichment and seeking
declaratory relief and damages (the “Tomczak Derivative Action”).
The underlying allegations in the Tomczak Derivative Action largely
repeat the allegations of wrongdoing in the 2018 Securities Class
Actions.
On
September 11, 2019, a shareholder derivative action was filed by
shareholder Arthur Aviles against the Company and certain of its
directors, officers and shareholders in the United States District
Court for the District of Delaware, alleging breach of fiduciary
duties, waste and unjust enrichment and seeking declaratory relief
and damages (the “Aviles Derivative Action”). The underlying
allegations in the Aviles Derivative Action largely repeat the
allegations of wrongdoing in the 2018 Securities Class
Actions.
On
February 12, 2020, the parties to the Tomczak Derivative Action and
the Aviles Derivative Action entered into a binding settlement term
sheet setting forth the essential terms of a settlement agreement.
The terms provide for a certain corporate governance reform to be
implemented by the Company (in addition to the reforms agreed to in
the settlement of the Ojha Derivative Action and the Thomas
Derivative Action) a cash payment to plaintiffs, and a payment of
attorneys’ fees to counsel for plaintiffs, together with dismissal
of the actions and the exchange of releases. The settlement is
subject to the parties’ agreement to final settlement documentation
which all parties have agreed to cooperate to prepare and execute,
and to court approval.
On
October 31, 2019, the Company, and its current officers and
directors, received subpoenas from the SEC requesting information,
including but not limited to, with respect to risk factors
contained in certain of the Company’s filings with the SEC, any
investigations by any government agency into Robert B. Ladd and
certain other matters related to the Company’s securities. The time
period covered by the subpoenas is January 1, 2019 through the date
of issuance of the subpoenas. The Company and its officers and
directors cooperated with the SEC’s request. The Company is unable
to predict, what action, if any, might be taken in the future by
the SEC or any other governmental authority as a result of the
subpoenas.
Item 4. Mine Safety
Disclosures
None.
PART II
Item 5. Market For Registrant’s Common
Equity, Related Stockholder Matters And Issuer’s Purchases Of
Equity Securities
Market Information
Our
common stock is traded on the OTC QB tier of OTC Markets LLC under
the symbol “MGTI.”
Holders
On
March 30, 2020, the Company’s common stock closed on the OTC QB
tier of OTC Markets LLC at $0.02 per share and there were 363
stockholders of record.
Dividends
The
Company has never declared or paid cash dividends on its common
stock and has no intention to do so in the foreseeable
future.
Unregistered sales of equity securities
On
February 12, 2020 and March 16, 2020, the Company issued 15,037,594
and 17,709,563 shares of common stock to Iliad Research and
Trading, L.P. in connection with the conversion of $200 and $150 of
outstanding principal.
Item 6. Selected Financial
Data
Not
applicable.
Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of
Operations
Overview
Current
Operations
Following
a review of its Bitcoin mining operations in early 2019, we
determined to consolidate our activities in Company-owned and
managed facilities. Central to this strategy was the purchase of
land in LaFayette, GA and the entry into a favorable contract for
electricity in the second quarter of 2019. Located adjacent to a
utility substation, the several acre property has access to over 20
megawatts (MW) of low-cost power.
We
began Bitcoin mining at our LaFayette facility in late September
2019 on a trial basis, and on January 31, 2020, we announced we are
operating 1,500 new generation Bitcoin miners collectively rated at
approximately 80 Ph/s at the facility. All miners were purchased
from Bitmain. The total electrical load at this production level is
estimated at slightly under 4.0 MW.
Our
miners are housed in five modified shipping containers including
two manufactured by Bit5ive LLC of Miami, Florida. As an early
investor and design consultant, we receive a modest royalty
participation in all sales of Pod5ive Containers. Phase I of the
LaFayette site is structurally complete and awaiting final grading
and landscaping. The entire facility, including the land, five 2500
KVA 3-phase transformers, the mining containers and the miners, are
owned by us. As we are presently using only one-third of the
available electrical load, we are exploring ways to grow our
current operations.
Former
Operations
Prior
to establishing our Company-owned and managed facility, we
conducted our Bitcoin mining operations through third-party hosting
arrangements. We also entered into management agreements with third
party investors whereby the investors purchased the mining
hardware, and we received both a fee to manage the mining
operations plus one-half of the net operating profit.
Towards
the end of 2017, we made the decision to move its 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, which included a
facility with power, cooling, and hosting services for a fixed
price of $810 per month. The facility in Sweden was 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 MGT by the end of March 2018. During the
first and second quarters of 2018, MGT personnel traveled to Sweden
to assist Beacon with getting the facility up and running, advanced
additional funding, and became involved in the design and setup of
the Sweden facility due to concern that Beacon may have overstated
its construction abilities and financial capacity.
Beginning
in late May 2018, we took steps to gain direct operating control of
the Swedish facility to protect our assets and maximize capacity as
quickly as possible. Through June 2018, we 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 us to service
providers and vendors engaged to complete the facility. These
additional costs consisted of $893 in costs to bring the
electricity provider current and set up more transformers, and $256
in additional operating costs. The cost of services provided after
we took over full direct operational control of the facility are
included in cost of revenue and general and administrative expenses
in our consolidated statements of operations.
In
September 2018, we deciding to forgo any further monetary
investment in Sweden and relocated all miners located in Sweden to
third-party hosting facilities in Colorado and Ohio. Because the
price of Bitcoin steadily decreased during 2018 and throughout the
first quarter of 2019, we decided it was not economically
responsible to continue mining operations until Bitcoin economics
improved, which occurred in May 2019.
On
March 22, 2019, we entered into a settlement agreement to terminate
our initial hosting agreement in Washington and conveyed ownership
of our onsite mining assets for full satisfaction of $77 in
outstanding hosting service fees. In August and September 2019, we
terminated our management agreements with third party investors and
in December 2019, terminated its hosting arrangements in Colorado
and Ohio.
Critical accounting policies and estimates
Our
discussion and analysis of financial condition and results of
operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”).
The notes to the consolidated financial statements contained in
this Annual Report describe our significant accounting policies
used in the preparation of the consolidated financial statements.
The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates. We
continually evaluate our critical accounting policies and
estimates.
We
believe the critical accounting policies listed below reflect
significant judgments, estimates and assumptions used in the
preparation of our consolidated financial statements.
Revenue recognition
Our
primary revenue stream is related to the mining of digital
currencies. We derive our revenue by solving “blocks” to be added
to the blockchain and providing transaction verification services
within the digital currency network of Bitcoin, commonly termed
“cryptocurrency mining.” In consideration for these services, we
receive digital currency (“Coins”). The Coins are recorded as
revenue, using the average spot price of Bitcoin on the date of
receipt. The Coins are recorded on the balance sheet as an
intangible digital asset valued at the lower of cost or net
realizable value. Net realizable value adjustments, to adjust the
value of Coins to market value, is included in cost of revenue on
our consolidated statement of operations. Further, any gain or loss
on the sale of Coins would be recorded to costs of revenue. Costs
of revenue include hosting fees, equipment and infrastructure
depreciation, net realizable value adjustments, and electricity
costs.
We
also recognized revenue from our management agreements through
their termination in August and September 2019. We received a fee
from each management agreement based on the amount of Bitcoin
mined, half of profits and were reimbursed for any electricity
costs incurred to run the Bitcoin mining machines they managed in
their facilities. Additionally, we had machines located in hosted
facilities in Ohio and Colorado. We received an allocation of
profits from these facilities. We terminated both hosting
arrangements in December 2019.
We
also recognize a royalty participation upon the sale of modified
shipping containers manufactured by Bit5ive LLC of Miami, Florida
under the terms of a collaboration agreement entered in August
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 one to ten years when
placed in service. The cost of repairs and maintenance is expensed
as incurred; major replacements and improvements are capitalized.
When assets are retired or disposed of, the cost and accumulated
depreciation are removed from the accounts, and any resulting gains
or losses are included in income in the year of
disposition.
In
connection with our plans to consolidate our activities in
Company-owned and managed facilities, we entered into agreements to
acquire Bitcoin mining machines and containers to house the mining
machines requiring upfront deposits. Deposits on such purchases are
classified as Other Assets. Upon delivery, installation and full
payment, the assets are then classified as property and equipment
on the consolidated balance sheet.
Stock–based compensation
We
recognize 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 (the “Board”).
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. We are required to
estimate the expected forfeiture rate and recognize expense only
for those shares expected to vest.
We
account for share–based payments granted to non–employees in
accordance with ASC 505–50, “Equity Based Payments to
Non–Employees”. We determine 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.
Impairment
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.
Recent accounting pronouncements
Note
3 to our audited consolidated financial statements appearing
elsewhere in this report includes Recent Accounting
Pronouncements.
Results of operations
Years ended December 31, 2019 and 2018
Revenues
Our revenues for the year ended December 31, 2019 decreased by
$1,580, or 78%, to $450 as compared to $2,030 for the year ended
December 31, 2018. Our revenue is primarily derived from
cryptocurrency mining which totaled $406 during 2019. All revenue
in 2018 was derived from cryptocurrency mining. The decrease in
revenues is a result of our decision to not operate most of our
miners for the first five months of 2019 due to the unfavorable
economics of mining Bitcoin, the negative factors related to the
lower price of Bitcoin and the increased difficulty rate. The
decrease in revenues is also a result of the Company’s initiative
to consolidate its activities in Company-owned and managed
facilities, requiring a reduction in operations at our third-party
hosting facilities in Colorado Springs, CO and Coshocton,
Ohio.
Both of these hosting arrangements were terminated in December
2019.
The
Company is also entitled to a royalty from the sale of POD5 mining
containers manufactured and sold by Bit5ive, LLC. During 2019, the
Company recognized $44 in royalties under this agreement. No
royalties were recognized in 2018.
Operating Expenses
Operating expenses for the year ended December 31, 2019 decreased
by $18,002, or 69%, to $7,951 as compared to $25,953 for the year
ended December 31, 2018. The decrease in operating expenses was
primarily due to lower general and administrative expenses of
$5,439, a decrease of $3,681 in cost of sales from the reduction in
cryptocurrency mining operations, and the absence in 2019 of the
Sweden restructuring charge of $2,499 in 2018 and a decrease in
fixed asset impairment charges of $6,281.
The decrease in general and administrative expenses of $5,439 or
42% to $7,377 as compared to $12,816 for the year ended December
31, 2018, was primarily due to lower stock-based compensation in
the amount of $4,101, a decrease in payroll and related expenses of
$623, a $2,042 decrease in administrative and travel costs related
to the Company’s exit from Sweden, and lower consulting expenses of
$170. The lower general and administrative costs in 2019 were
offset by higher legal and professional fees of $295, an increase
in costs related to build-out of the Company’s facility in Georgia
of $655, and expenses related to the termination of the management
and hosting agreements of $596.
Other
Income and Expense
For
the year ended December 31, 2019, non–operating income and expense
consisted of accretion of debt discount of $5,605, partially offset
by a gain on extinguishment of debt of $3,540, interest income of
$10, a gain on sale of property and equipment of $599, and a change
in the fair value of the liability associated with the termination
of the management agreements of $176.
During
the comparable period ended December 31, 2018, non–operating income
and expenses consisted of a gain on extinguishment of debt of
$1,875, offset by interest expense of $3, accretion of debt
discount of $919, a warrant modification expense of $139, and a
loss on disposal of investments and assets of $174.
Liquidity and capital resources
Sources
of Liquidity
We
have historically financed our business through the sale of debt
and equity interests. We have incurred significant operating losses
since inception and continue to generate losses from operations and
as of December 31, 2019 have an accumulated deficit of $414,502. At
December 31, 2019, our cash and cash equivalents were $216, and our
working capital deficit was $649. As of December 31, 2019, we had
one note payable outstanding with a principal amount of $929.
During February and March of 2020, we converted $200 and $150 of
debt principal into 15,037,594 and 17,709,563 shares of common
stock, reducing the outstanding principal to $579.
In January 2020, management completed the initial phase of its plan
to consolidate its activities in Company-owned and managed
facilities, executing on its expansion model to secure low cost
power and grow its cryptocurrency assets. In connection with this
plan, the Company terminated its management agreements and its
third-party hosting arrangements in 2019. The Company will need to
raise additional funding to grow its operations and to pay current
maturities of debt. There can be no assurance however that the
Company will be able to raise additional capital when needed, or at
terms deemed acceptable, if at all. The Company’s ability to raise
additional capital will also be impacted by the volatility of
Bitcoin and the recent outbreak of COVID-19, both which are highly
uncertain, cannot be predicted and could have an adverse effect on
the Company’s business and financial condition. 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. 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.
The price of Bitcoin is volatile, and fluctuations are expected.
Declines in the price of Bitcoin have had a negative impact in our
operating results and liquidity and could harm the price of our
Common Stock. Movements may be influenced by various factors,
including, but not limited to, government regulation, security
breaches experienced by service providers, as well as political and
economic uncertainties around the world. Since we record revenue
based on the price of earned Bitcoin and we may retain such Bitcoin
as an asset or as payment for future expenses, the relative value
of such revenues may fluctuate, as will the value of any Bitcoin we
retain. The low and high exchange price per Bitcoin for the year
ending December 31, 2019, as reported by Blockchain.info, were
approximately $3 and $14 respectively. During the period January 1,
2020 through March 24, 2020, the price of Bitcoin remained
volatile, with a high and low and high exchange price per Bitcoin
of approximately $5 and $10, respectively.
The
supply of Bitcoin is finite. Once 21 million Bitcoin are generated,
the network will stop producing more. Currently, there are
approximately 18 million Bitcoin in circulation, or 85% of the
total supply of Bitcoin. Within the Bitcoin protocol is an event
referred to as Halving where the Bitcoin reward provided upon
mining a block is reduced by 50%. Halvings are scheduled to occur
once every 210,000 blocks, or roughly every four years, until the
maximum supply of 21 million Bitcoin is reached. The next Halving
is expected to occur in May 2020, with a revised reward payout of
6.25 Bitcoin per block.
Given
a stable hash rate, a Halving reduces the number of new Bitcoin
being generated by the network. While the effect is to limit the
supply of new coins, it has no impact on the quantity of total
Bitcoin outstanding. As a result, the price of Bitcoin could rise
or fall based on overall investor and consumer demand. Should the
price of Bitcoin remain unchanged after the next Halving, the
Company’s revenue would be reduced by 50%, with a much larger
negative impact to profit.
The
recent outbreak of COVID-19, which has been declared by the World
Health Organization to be a pandemic, has spread across the globe
and is impacting worldwide economic activity. A pandemic, including
COVID-19, or other public health epidemic poses the risk that we or
our employees and our business partners may be prevented from
conducting business activities at full capacity for an indefinite
period of time, including due to spread of the disease within these
groups or due to shutdowns that may be requested or mandated by
governmental authorities. While it is not possible at this time to
estimate the impact that COVID-19 could have on our business, the
continued spread of COVID-19 and the measures taken by the
governments of countries affected which we conduct business with
could disrupt our business. The COVID-19 outbreak and mitigation
measures may also have an adverse impact on global economic
conditions, which could have an adverse effect on our business and
financial condition, including on our potential to conduct
financings on terms acceptable to us, if at all. In addition, we
may take temporary precautionary measures intended to help minimize
the risk of the virus to our employees, including temporarily
requiring all employees to work remotely and suspending all
non-essential travel for our employees, which could negatively
affect our business. The extent to which the COVID-19 outbreak
impacts our results will depend on future developments that are
highly uncertain and cannot be predicted, including new information
that may emerge concerning the severity of the virus and the
actions to contain its impact.
Our
primary source of operating funds has been through debt and equity
financing.
Equity Purchase Agreements
In
August 2018, as amended in December 2018, we and Oasis Capital, LLC
(“Oasis”) entered into an equity purchase agreement pursuant to
which we issued and sold to Oasis from time to time 100,650,000
shares of our common stock for gross proceeds of $6,491, registered
with the SEC under a Form S–3. On April 16, 2019, our registration
statement on Form S–3 lost its effectiveness as the aggregate
market value of our common stock held by non-affiliates was below
the regulatory threshold of $75,000.
In
June 2019, we entered into a new equity purchase agreement pursuant
to which we may issue and sell to Oasis from time to time up to
76,558,643 shares of our common stock that are registered with the
SEC under a Form S-1 that went effective on June 25, 2019. Through
October 2019, 52,000,000 shares were issued and sold under this
registration statement for net proceeds of $1,654. However,
following the Company’s announcement on October 31, 2019 that our
current officers and directors, received subpoenas from the SEC,
Oasis has been unwilling to sell shares under the S-1. The
subpoenas demand information with respect to risk factors contained
in certain of our filings with the SEC, any investigations by any
government agency into our Chief Executive Officer and certain
other matters related to our securities. The time period covered by
the subpoenas is January 1, 2019 through the date of issuance of
the subpoenas.
Sale of Preferred Stock
On
April 12, 2019, our 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
voting rights or to 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
we may redeem the Preferred Shares at 1.2 times the Stated
Value.
Each
Preferred Share is convertible into shares of our 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 our common stock, defined
as the lowest trading price of our 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 our common stock. The common shares issued upon conversion
have been registered under our registration statement on Form S-3.
On April 12, 2019 and July 15, 2019, we sold 190 Preferred Shares
for $1,890 and 10 Preferred Shares for $100,
respectively.
Sale of Common Stock
On
April 12, 2019, we entered into a purchase agreement with an
accredited investor whereby we sold 17,500,000 shares of our common
stock for $525 pursuant to our registration statement on Form S-3.
The holder of these shares is also the holder of an unsecured
promissory note in the amount of $3,600 (the “June 2018 Note”) and
an affiliate of the acquirer of 160 shares of the Preferred Shares
of which 115 are issued and outstanding as of December 31,
2019.
Property & Equipment Acquisitions and
Commitments
In
connection with our plans to consolidate our activities in a
Company-owned and managed facility in LaFayette, Georgia, we
acquired the following assets during 2019 and through January
2020:
|
|
● |
6
acres of land in Lafayette, Georgia for $57 |
|
|
● |
1,500
Bitcoin miners valued at $2,313 |
|
|
● |
Infrastructure
costs totaling $771, including transformers and related equipment,
land preparation, fencing, electrical contracting, permits, design
and architectural fees |
|
|
● |
5
modified Bitcoin mining containers for $761 |
Phase
I of the LaFayette site is structurally complete and awaiting final
grading and landscaping. The entire facility, including the land,
five 2500 KVA 3-phase transformers, the mining containers and the
miners, are owned by MGT. As we are presently using only one-third
of the available electrical load, we are exploring ways to grow our
current operations.
| |
|
Years ended
December 31, |
|
| |
|
2019 |
|
|
2018 |
|
| Cash (used in) / provided by |
|
|
|
|
|
|
|
|
| Operating activities |
|
$ |
(3,960 |
) |
|
$ |
(8,763 |
) |
| Investing activities |
|
|
(3,314 |
) |
|
|
(6,507 |
) |
| Financing
activities |
|
|
7,394 |
|
|
|
5,847 |
|
| Net increase
(decrease) in cash and cash equivalents |
|
$ |
120 |
|
|
$ |
(9,423 |
) |
| |
|
|
|
|
|
|
|
|
Cash
Flows
Operating activities
Net cash used in operating activities was $3,960 for the year ended
December 31, 2019 as compared to $8,763 for the year ended December
31, 2018. The amount in 2019 primarily consisted of a net loss of
$8,781 offset by non-cash charges of $8,676 (including: stock-based
compensation of $2,301, an impairment charge to the Company’s
intangible cryptocurrency mining assets of $64, depreciation
expense of $170, amortization of debt discount of $5,605, and costs
associated with terminating management agreements and third-party
hosting agreements of $536), and reduced by other non-cash items,
including the gain from debt extinguishment of $3,540 and the
change in the fair value of the liability associated with the
termination of the management agreements of $176 , plus, gain from
sale of property and equipment sales of $599, and a change in
working capital excluding cash of $460.
Net
cash used in operating activities was $8,763 for the year ended
December 31, 2018. Cash used in operating activities for the year
ended December 31, 2018 primarily consisted of a net loss of
$23,283 offset by non-cash charges of $16,690 consisting of:
stock-based compensation of $6,402, an impairment charge of $6,345
to the Company’s intangible cryptocurrency mining assets,
depreciation expense of $3,291, amortization of debt discount of
$919, loss on disposal of assets of $174, and a non-cash warrant
modification expense of $139 partially offset by a gain on
extinguishment of debt of $1,875, plus a change in working capital
excluding cash of $875.
Investing activities
Net
cash used in investing activities was $3,314 for the year ended
December 31, 2019 as compared to net cash used in investing
activities of $6,507 for the year ended December 31, 2018. The
amount in 2019 consisted of purchases of property and equipment of
$3,849 offset by proceeds from the sale of property and equipment
of $535. For 2018, the Company used $6,994 to purchase property and
equipment, offset by $427 in net proceeds from sale of property and
equipment, and $60 from the sale of our cybersecurity
assets.
Financing activities
During
the year ended December 31, 2019, cash provided by financing
activities totaled $7,394 which includes $4,983 in net proceeds
from the sale of common stock under our equity purchase agreement,
$525 in net proceeds from private placements of our common stock,
$1,990 in net proceeds from private placements of our preferred
stock, and $106 from the exercise and buyback of stock purchase
warrants, partially offset by $210 from the repayments of notes
payable.
During
the year ended December 31, 2018, cash provided by financing
activities totaled $5,847, which includes $5,200 from the net
proceeds of notes payable, $1,309 from the sale of Common Stock
under our equity purchase agreement, $80 from private placements of
our Common Stock and $907 from the exercise of stock purchase
warrants offset by $1,649 from the repayments of notes
payable.
Off–balance sheet arrangements
As of
December 31, 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.
Item 7A. Quantitative and Qualitative
Disclosure About Market Risk
The
Company is not exposed to market risk related to interest rates on
foreign currencies.
Item 8. Financial Statements and
Supplementary Data
See
Financial Statements and Schedules attached hereto.
Item 9. Changes in and Disagreements
with Accountants on Accounting and Financial
Disclosure
None.
Item 9A. Controls and
Procedures
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures designed to ensure that
the information we are required to disclose in reports that we file
or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified under the rules and
forms of the SEC. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that
such information is accumulated and communicated to our management,
including our Chief Executive Officer and our Chief Financial
Officer, as appropriate to allow timely decisions regarding
required disclosures. As required by paragraph (b) of Rules 13a-15
and 15d-15 under the Exchange Act, our Chief Executive Officer (our
principal executive) and Chief Financial Officer (our principal
financial officer and principal accounting officer) carried out an
evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures as of December 31, 2019. Based
on this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures (as
defined in paragraph (e) of Rules 13a-15 and 15d-15 under the
Exchange Act) were effective as December 31, 2019.
Limitations
on Internal Control over Financial Reporting
An
internal control system over financial reporting has inherent
limitations and may not prevent or detect misstatements. Therefore,
even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may
deteriorate. However, these inherent limitations are known features
of the financial reporting process. Therefore, it is possible to
design into the process safeguards to reduce, though not eliminate,
this risk.
Management’s
Annual Report on Internal Control over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting, as defined in Exchange
Act Rule 13a-15(f) and 15d-15(f). Internal control over financial
reporting is a process used to provide reasonable assurance
regarding the reliability of our financial reporting and the
preparation of our financial statements for external purposes in
accordance with generally accepted accounting principles in the
United States. Internal control over financial reporting includes
policies and procedures that pertain to the maintenance of records
that in reasonable detail accurately and fairly reflect the
transactions and dispositions of our assets; provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of our financial statements in accordance with
generally accepted accounting principles in the United States, and
that our receipts and expenditures are being made only in
accordance with the authorization of our board of directors and
management; and provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on our financial
statements.
Under
the supervision and with the participation of our management,
including our Chief Executive Officer (our principal executive) and
Chief Financial Officer (our principal financial officer and
principal accounting officer), we performed a complete
documentation of the Company’s significant processes and key
controls, and conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework in
Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission in 2013. Based
on this evaluation, management concluded that our internal control
over financial reporting was effective as of December 31,
2019.
This Annual Report on Form 10-K does not include an attestation
report of the Company’s independent registered public accounting
firm regarding internal control over financial reporting since the
Company is a smaller reporting company under the rules of the
SEC.
Changes
in Internal Control over Financial Reporting
During
the quarter ended December 31, 2019, documentation of significant
processes and key controls supporting the Company’s internal
control over financial reporting was completed, along with the
related testing of controls. Material weaknesses previously
reported by the Company were also remediated in the quarter ended
December 31, 2019.
Item 9B. Other
Information
None.
PART III
Item 10. Directors, Executive Officers
and Corporate Governance
|
Name |
|
Age |
|
Position |
|
Robert
B. Ladd |
|
61 |
|
President,
Chief Executive Officer and Director |
|
|
|
|
|
|
|
H.
Robert Holmes |
|
75 |
|
Chairman
of the Board, Chairman of the Compensation and of the
Nominating/Corporate Governance Committee, Audit Committee Member,
Director
|
|
Michael
Onghai |
|
49 |
|
Chairman
of the Audit Committee, Compensation Committee and
Nominating/Corporate Governance Committee Member, Independent
Director
|
|
Robert
S. Lowrey |
|
59 |
|
Chief
Financial Officer, Treasurer and Secretary |
Directors
are elected based on experience, qualifications and in accordance
with the Company’s by–laws to serve until the next annual
stockholders meeting and until their successors are elected in
their stead. Officers are appointed by the Board and hold office
until their successors are chosen and qualified, until their death
or until they resign or have been removed from office. All
corporate officers serve at the discretion of the Board. There are
no family relationships between any director or executive officer
and any other director or executive officer of the
Company.
Robert
B. Ladd joined the Company in December 2010 as a Director. He
was named Interim President and CEO in February 2011, and appointed
President and CEO in January 2012, positions held continuously with
the exception of November 2016 through August 2017, a period during
which Mr. Ladd was President. He also served as our Interim CFO
from November 2015 through February 2018. On September 10, 2018,
Mr. Ladd took a leave of absence from his positions as President
and Chief Executive Office and was reappointed as President and
Chief Executive Officer on May 1, 2019. Mr. Ladd is also the
Managing Member of Laddcap Value Advisors, LLC, which serves as the
investment manager for various private partnerships, including
Laddcap Value Partners LP. Prior to forming his investment
partnership in 2003, Mr. Ladd was a Managing Director at Neuberger
Berman Group. Mr. Ladd is a former Director of InFocus Systems,
Inc. (NASDAQ – INFS, 2007 to 2009), and served on the boards of
Delcath Systems, Inc. (NASDAQ – DCTH, 2006–2012) and Pyxis Tankers
(NASDAQ – PXS, 2016 – 2017). Mr. Ladd has earned his designation as
a Chartered Financial Analyst (1986). Based on Mr. Ladd’s
familiarity with the Company in serving as our Chief Executive
Officer since 2011 and his overall background and experience as an
executive in the financial industry, the Nominating and Corporate
Governance Committee of the Board concluded that Mr. Ladd has the
requisite experience, qualifications, attributes and skill
necessary to serve as a member of the Board.
H.
Robert Holmes was elected as a director in May 2012 and served
as Interim President and Chief Executive Officer from September 10,
2018 to May 1, 2019. From 2008 to 2012, Mr. Holmes has served on
the board of Dejour Energies Inc. (NYSE–MKT: DEJ, 2008–2013). Mr.
Holmes was the founder and general partner of Gilford Partners
Hedge Fund. From 1980 to 1992, Mr. Holmes was the Co–Founder, and
President of Gilford Securities, Inc. Previously, Mr. Holmes served
in various positions with Paine Webber and Merrill Lynch. Mr.
Holmes has served on the Board of Trustees North Central College in
Naperville, II; Board of Trustees of Sacred Heart Schools, Chairman
of Development Committee, in Chicago, IL; Board of Trustees of
Crested Butte Academy where he was Chairman of Development
Committee; and the Board of Trustees Mary Wood Country Day School,
Rancho Mirage, CA. The Board believes that Mr. Holmes has the
experience, qualifications, attributes and skills necessary to
serve as a director because of his years of business experience and
service as a director for many companies over his
career.
Michael
Onghai was appointed a director in May 2012. Mr. Onghai has
been the CEO of LookSmart (OTC: LKST), since February 2013. He has
been the founder and Chairman of AppAddictive, an advertising and
social commerce platform since July 2011. Mr. Onghai is the
President of Snowy August Management LLC, a special situations fund
concentrating on the Asian market, spin–offs and event–driven
situations. Mr. Onghai is the founder of Stock Sheet, Inc., and
Daily Stocks, Inc. – the web’s early providers of financial
information and search engine related content for financial
information. Mr. Onghai has founded several other internet
technology companies for the last two decades. Mr. Onghai is an
advisor to several internet incubators and is a panelist who
advises FundersClub on which companies to accept for its pioneering
venture capital platform. Mr. Onghai has earned his designation as
a Chartered Financial Analyst (2006) and holds a B.S. in Electrical
Engineering and Computer Science from the University of California,
Los Angeles and graduated from the Executive Management Certificate
Program in Value Investing (The Heilbrunn Center for Graham &
Dodd Investing) Graduate School of Business at Columbia Business
School. The Board believes that Mr. Onghai has the experience,
qualifications, attributes and skills necessary to serve as a
director and chairman of the Audit Committee because of his years
of business experience and financial expertise.
Robert
S. Lowrey was appointed as Chief Financial Officer, Treasurer
and Secretary on March 1, 2018. Mr. Lowrey most recently served as
a Director of Finance for Bioventus LLC, a privately held medical
device company, from January 2013 through September 2017. Prior to
Bioventus, Mr. Lowrey served as the Controller and Principal
Accounting Officer for BioCryst Pharmaceutics, Inc., a NASDAQ
listed company, from January 2011 through January 2013. Mr. Lowrey
has previously served in various financial roles at Dex One, a NYSE
listed company, and was employed by Ernst & Young, LLP for 11
years, where he served both public and private companies. Mr.
Lowrey holds a B.A. degree in Business Administration from Grove
City College and is a licensed CPA in North Carolina as well as a
Charted Global Management Accountant. Mr. Lowrey is also a member
of the America Institute of Certified Public Accountants and the
North Carolina Association of CPAs.
Family Relationships
There
are no family relationships among any of the Company’s directors
and executive officers.
Board Role in Risk Oversight
The
Board’s primary function is one of oversight. The Board as a whole
works with the Company’s management team to promote and cultivate a
corporate environment that incorporates enterprise-wide risk
management into strategy and operations. Management periodically
reports to the Board about the identification, assessment and
management of critical risks and management’s risk mitigation
strategies. Each committee of the Board is responsible for the
evaluation of elements of risk management based on the committee’s
expertise and applicable regulatory requirements. In evaluating
risk, the Board and its committees consider whether the Company’s
programs adequately identify material risks in a timely manner and
implement appropriately responsive risk management strategies
throughout the organization. The audit committee focuses on
assessing and mitigating financial risk, including risk related to
internal controls, and receives at least quarterly reports from
management on identified risk areas. In setting compensation, the
compensation committee strives to create incentives that encourage
behavior consistent with the Company’s business strategy, without
encouraging undue risk-taking. The nominating committee considers
areas of potential risk within corporate governance and compliance,
such as management succession. Each of the committees reports
regularly to the Board as a whole as to their findings with respect
to the risks they are charged with assessing.
Code of Business Conduct and Ethics
On
July 11, 2018, the Board revised the Code of Business Conduct and
Ethics which applies to all directors and employees including the
Company’s principal executive officer, principal financial officer
and principal accounting officer or persons performing similar
functions. Prior to July 11, 2018, the Company’s employees and
directors were subject to the previous Code of Ethics adopted by
the Board on June 25, 2012.
Copies
of the Code of Business Conduct and Ethics can be obtained, without
charge by writing to the Corporate Secretary at MGT Capital
Investments, Inc., 150 Fayetteville Street, Suite 1110, Raleigh, NC
27601, or through our corporate website at
mgtci.com.
Audit Committee and Audit Committee Financial
Expert
On
November 25, 2004, the Board established an Audit Committee to
carry out its audit functions. At December 31, 2018, the membership
of the Audit Committee was Michael Onghai and H. Robert
Holmes.
The
Board has determined that Michael Onghai, an independent director,
is the Audit Committee financial expert, as defined in Regulation
S–K promulgated under the Exchange Act, serving on its Audit
Committee.
Item 11. Executive
Compensation
Summary Compensation Table
The
following table summarizes Fiscal Years 2019 and 2018 compensation
for services in all capacities of the Company’s named executive
officers and other individuals:
|
Name |
|
Principal Position |
|
Year |
|
|
Salary |
|
|
Bonus |
|
|
Stock
awards (1) |
|
|
All other
compensation |
|
|
Total
compensation |
|
| Robert B. Ladd |
|
President
and Chief Executive Officer (2) |
|
|
2019 |
|
|
$ |
360 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
360 |
|
| |
|
|
|
|
2018 |
|
|
$ |
350 |
|
|
$ |
- |
|
|
$ |
1,116 |
|
|
$ |
- |
|
|
$ |
1,466 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| H. Robert Holmes |
|
Interim
President and Chief Executive Officer (3) |
|
|
2019 |
|
|
$ |
125 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
125 |
|
| |
|
|
|
|
2018 |
|
|
$ |
112 |
|
|
$ |
- |
|
|
$ |
248 |
|
|
$ |
- |
|
|
$ |
360 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Robert S. Lowrey |
|
Chief
Financial Officer (4) |
|
|
2019 |
|
|
$ |
240 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
240 |
|
| |
|
|
|
|
2018 |
|
|
$ |
200 |
|
|
$ |
10 |
|
|
$ |
1,655 |
|
|
$ |
- |
|
|
$ |
1,875 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Stephen Schaeffer |
|
Chief
Operating Officer (5) |
|
|
2019 |
|
|
$ |
183 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
183 |
|
| |
|
|
|
|
2018 |
|
|
$ |
250 |
|
|
$ |
100 |
|
|
$ |
73 |
|
|
$ |
- |
|
|
$ |
423 |
|
|
(1) |
This
column discloses the dollar amount of the aggregate grant date fair
value of restricted stock granted in the year. The grant date fair
value will vest and be expensed over a 24–month term. |
| |
|
| (2) |
Mr.
Ladd was appointed Interim Chief Financial Officer on December 8,
2015, serving in such capacity until February 2018, and reappointed
Chief Executive Officer on August 16, 2017. Mr. Ladd took a leave
of absence as President and Chief Executive Officer on September
10, 2018 and was reappointed as President and Chief Executive
Officer on May 1, 2019. |
| |
|
| (3) |
Mr.
Holmes was appointed Interim Chief President and Chief Executive
Officer from September 10, 2018 to May 1, 2019. Compensation for
Mr. Holmes in 2019 included $75 in Director fees and $50 in salary.
Compensation for Mr. Holmes in 2018 included $75 in Director fees
and $37 in salary.
|
| (4) |
Mr.
Lowrey was appointed Chief Financial Officer on March 1,
2018. |
| |
|
| (5) |
Mr.
Schaeffer was appointed Chief Operating Officer on July 11, 2018.
Mr. Schaeffer resigned his position on May 10, 2019 and received a
payment of $100, net of appropriate payroll and withholding
deductions. |
Employment Agreements
Robert
B. Ladd
On
July 7, 2016, the Company entered into an employment agreement with
Robert B. Ladd, to act as its President and Chief Executive
Officer. The terms of his agreement were reviewed and approved by
the Company’s Nominations and Compensation Committee and ratified
by stockholders on September 8, 2016. Under the terms of the
agreement, Mr. Ladd served as President and Chief Executive Officer
with a salary of $240 per year and was eligible for a cash and/or
equity bonus as determined by the Nomination and Compensation
Committee. Further, Mr. Ladd received 2,000,000 shares of the
Company’s Common Stock, 1/3 of which vested within 12 months from
the execution of the agreement, another 1/3 at 18 months, and the
remaining 1/3 at 24 months from the execution of the agreement.
Lastly, the agreement also provides for certain rights granted to
Mr. Ladd in the event of his death, permanent incapacity, voluntary
termination or discharge for cause.
From
November 18, 2016 through August 15, 2017, Mr. Ladd relinquished
his duties as Chief Executive Officer, while remaining
President.
On
April 1, 2018, the Company entered into an Amended and Restated
Executive Employment Agreement (the “Employment Agreement”) with
Mr. Ladd, which was executed on April 6, 2018. The Employment
Agreement provides that Mr. Ladd has been reappointed as President
and Chief Executive Officer of the Company 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
through May 1, 2019, Mr. Ladd took a leave of absence as an
executive and officer of the Company in order to focus on
allegations levied against him in an SEC complaint filed on
September 7, 2018.
Robert
S. Lowrey
On
March 8, 2018, the Company entered into an employment agreement
with Mr. 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 $240,000. Mr. Lowrey also received a one-time signing
bonus of $10,000. 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, one-third of which vested on March 8, 2019,
one-third of which shall vest on September 8, 2019, and one-third
of which shall vest on March 8, 2020. On August 1, 2018, the
Company issued Mr. Lowrey 250,000 shares of the Company’s Common
Stock, pursuant to the Company’s 2016 Stock Option Plan, one-third
of which vested on January 31, 2019, one-third of which vested on
July 31, 2019, and one-third of which vested on January 1, 2020.
This employment agreement expired on February 28, 2020. Mr. Lowrey
remains an at will employee with the same title, responsibilities,
compensation and benefits. In addition, Mr. Lowrey received a bonus
of $20,000 in January 2020 and shall be entitled to receive an
additional $20,000 bonus in connection with the filing of the
Company’s Form 10-Q for the quarter ended March 31,
2020.
Outstanding Equity Awards at December 31, 2019
Outstanding Stock Awards at Fiscal Year-End for
2019
|
Name |
|
Number of shares or units of stock that have not vested
(#) |
|
|
Market value of shares or units of stock that have not vested
($) |
|
|
Equity incentive plan awards: number of unearned shares, units or
other rights that have not vested
(#) |
|
|
Equity
incentive plan awards: market or payout value of unearned shares,
units or other rights that have not vested
($) |
|
| Robert B. Ladd |
|
|
200,000 |
|
|
$ |
4 |
|
|
|
- |
|
|
|
- |
|
| Robert Lowrey |
|
|
333,333 |
|
|
|
6 |
|
|
|
- |
|
|
|
- |
|
Director Compensation
The
following table sets forth the compensation of persons who served
as a member of our Board of Directors during all or part of 2019,
other than Robert B. Ladd, who is not compensated separately for
Board service, and H. Robert Holmes whose compensation is discussed
under “Executive Compensation”.
|
Name |
|
Fees Earned Or
Paid in Cash |
|
|
Stock
Awards |
|
|
All Other
Compensation |
|
|
Total |
|
| Michael Onghai |
|
$ |
50 |
|
|
$ |
- |
|
|
$ |
– |
|
|
$ |
50 |
|
Directors
are reimbursed for their out–of–pocket expenses incurred in
connection with the performance of Board duties.
Independent Director Compensation
In
2018, the Company changed its cash compensation policy for
independent directors. Each independent director will receive
annual compensation of $50. The Chairman of the Board will receive
an additional $25.
Item 12. Security Ownership of Certain
Beneficial Owners and Management And Related Stockholder
Matters
Security Owner of Certain Beneficial Owners
The
following table sets forth certain information regarding beneficial
ownership and voting power of the Common Stock as of March 30,
2020, of:
|
|
● |
each
person serving as a director, a nominee for director, or executive
officer of the Company; |
| |
|
|
| |
● |
all
executive officers and directors of the Company as a group;
and |
| |
|
|
| |
● |
all
persons who, to our knowledge, beneficially own more than five
percent of the Common Stock. |
“Beneficial
ownership” here means direct or indirect voting or investment power
over outstanding stock and stock which a person has the right to
acquire now or within 60 days after March 30, 2020. See the
accompanying footnotes to the tables below for more detailed
explanations of the holdings. Except as noted, to our knowledge,
the persons named in the tables beneficially own and have sole
voting and investment power over all shares listed.
Percentage
beneficially owned is based upon 446,448,445 shares of Common Stock
issued and outstanding as of March 30, 2020.
|
Name and Address of Beneficial Owner (1) |
|
Amount and Nature of Beneficial Ownership |
|
|
[Percentage of Beneficial Ownership] |
|
| Current Directors
and Officers: |
|
|
|
|
|
|
|
|
| Robert
B. Ladd (2) |
|
|
1,773,334 |
|
|
|
0.40 |
% |
| Robert S.
Lowrey |
|
|
1,000,000 |
|
|
|
0.22 |
% |
| H. Robert
Holmes |
|
|
702,819 |
|
|
|
0.16 |
% |
| Michael
Onghai |
|
|
586,000 |
|
|
|
0.13 |
% |
| All directors and
executive officers (4 persons) |
|
|
4,502,153 |
|
|
|
0.91 |
% |
| 5%
Stockholders |
|
|
|
|
|
|
|
|
| Iliad Research
& Trading, L.P. (3) |
|
|
44,588,910 |
|
|
|
9.99 |
% |
|
|
(1) |
Unless
otherwise noted, the addresses for the above persons are in care of
the Company at 105 Fayetteville Street, Suite 1110, Raleigh, NC
27601. |
| |
|
|
| |
(2) |
Includes
200,000 shares of restricted stock of which vest on April 1, 2020,
subject to the terms of Mr. Ladd’s employment agreement, as
amended. |
| |
|
|
| |
(3) |
Includes
39,488,910 common shares owned by Iliad Management, LLC, Fife
Trading, Inc. and John M. Fife (collectively, the “Iliad
Stockholders”) on March 15, 2020. The address of each of the Iliad
Stockholders is 303 East Wacker Drive, Suite 1040, Chicago, IL
60601. Also includes 5,100,000 common shares issuable pursuant to:
(a) a convertible note held by Iliad Research & Trading, L.P.
and/or (b) shares of Series C convertible preferred stock owned by
Chicago Venture Partners, L.P., an affiliate of the Iliad
Stockholders (collectively, the “Convertible Securities”).
Additional shares of common stock are issuable pursuant to the
Convertible Securities, however based on the underlying terms of
the Convertible Securities, the Iliad Stockholders are limited to
owning 9.99% of the Company’s outstanding common
shares. |
Securities Authorized for Issuance Under Equity Compensation
Plans
The
table below provides information on our equity compensation plans
as of December 31, 2019:
| |
|
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights |
|
|
Weighted–average
exercise price of
outstanding options,
warrants and rights |
|
|
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column
(a)) |
|
| Plan category |
|
(a) |
|
|
(b) |
|
|
(c) |
|
| Equity compensation plans
approved by security holders (1) (2) |
|
|
6,000,000 |
|
|
$ |
0.71 |
|
|
|
5,102,586 |
|
| Equity
compensation plans not approved by security holders |
|
|
– |
|
|
|
– |
|
|
|
– |
|
| Total |
|
|
6,000,000 |
|
|
$ |
0.71 |
|
|
|
5,102,586 |
|
|
|
(1) |
On
December 31, 2015, the Company’s stockholders approved an increase
of the number of shares of Common Stock issuable under the
Company’s 2012 Stock Incentive Plan to 3,000,000 shares. As of
December 31, 2018, the Company’s 2012 Stock Incentive Plan
expired. |
| |
|
|
| |
(2) |
On
September 8, 2016, the Company’s stockholders approved the MGT
Capital Investments, Inc. 2016 Equity Incentive Plan. The Company
received approval to issue 6,000,000 options and 2,000,000
restricted stock under the Plan to certain officers of the Company.
The maximum number of shares of Common Stock that may be issued
under the 2016 Plan shall initially be 18,000,000. As of December
31, 2019, the Company has issued 6,000,000 options and 4,250,000
shares under this plan. The 6,000,000 options expired in their
entirety on January 31, 2020. |
Item 13. Certain Relationships and
Related Transactions and Director Independence
The
Company was a party to a consulting agreement with Future Tense
Secure Systems (“FTS”), pursuant to which FTS provided advice,
consultation, information and services to the Company including
assistance with executive management, business and product
development and potential acquisitions or related transactions.
Janice Dyson, wife of John McAfee, the Company’s former Chief
Cybersecurity Visionary, was the sole director of FTS and owned 33%
of the outstanding common shares of FTS through the termination of
our agreement with FTS on January 26, 2018. During the year ended
December 31, 2018, the Company recorded consulting fees of $137 to
FTS for such services. As of December 31, 2018, the Company owed $0
to FTS.
Director Independence
Michael
Onghai is considered independent under Section 803A of NYSE MKT
rules.
Item 14. Principal Accountant Fees and
Services
Effective
January 5, 2017, RBSM LLP became our current independent auditor.
The following is a summary of the fees billed by our independent
auditors for professional services rendered for the fiscal years
ended December 31, 2019 and 2018.
| |
|
Year Ended December 31, |
|
| |
|
2019 |
|
|
2018 |
|
| Audit fees |
|
$ |
262 |
|
|
$ |
269 |
|
| Tax fees |
|
|
– |
|
|
|
– |
|
| Audit-related fees |
|
|
18 |
|
|
|
15 |
|
| Other fees |
|
|
– |
|
|
|
– |
|
| |
|
$ |
280 |
|
|
$ |
284 |
|
Audit
fees consist of fees billed for services rendered for the audit of
our financial statements and review of our financial statements
included in our quarterly reports on Form 10–Q.
Tax
fees consist of fees billed for professional services related to
the preparation of our U.S. federal and state income tax returns
and tax advice.
Audit–related
fees consists of fees reasonably related to the performance of the
audit or review of the Company’s financial statements that are not
reported as “Audit Fees.”
All
other fees consist of fees for other miscellaneous
items.
All
services provided by the Company’s independent auditor were
approved by the Company’s audit committee.
Pre–Approval Policy of Services Performed by Independent Registered
Public Accounting Firm
The
Audit Committee’s policy is to pre–approve all audit and non–audit
related services, tax services and other services. Pre–approval is
generally provided for up to one year, and any pre–approval is
detailed as to the particular service or category of services and
is generally subject to a specific budget. The Audit Committee has
delegated the pre–approval authority to its chairperson when
expedition of services is necessary. The independent registered
public accounting firm and management are required to periodically
report to the full Audit Committee regarding the extent of services
provided by the independent registered public accounting firm in
accordance with this pre–approval and the fees for the services
performed to date.
PART IV
Item 15. Exhibits and Financial
Statement Schedules.
Financial Statements
The
consolidated financial statements of the Company for the fiscal
years covered by this Annual Report are located on pages F-1 to
F-37 of this Annual Report.
|
Exhibit
No. |
|
Description |
|
|
|
|
|
3.1 |
|
Restated
Certificate of Incorporation of MGT Capital Investments, Inc., as
amended (incorporated by reference to Exhibit 3.1 to the Annual
Report on Form 10-K filed with the SEC on April 16,
2019). |
|
|
|
|
|
3.2 |
|
Amended
and Restated Bylaws of MGT Capital Investments, Inc. (incorporated
by reference to Exhibit 3.1 to the Current Report on Form 8-K filed
with the SEC on January 30, 2014). |
|
|
|
|
|
4.1 |
|
Certificate
of Designation of 12% Series B Preferred Stock of MGT Capital
Investments, Inc., filed with the Delaware Secretary of State on
January 11, 2019 (incorporated by reference to Exhibit 4.1 to the
Current Report on Form 8-K filed with the SEC on January 14,
2019). |
|
|
|
|
|
4.2 |
|
Certificate
of Designation of Series C Convertible Preferred Stock
(incorporated by reference to Exhibit 4.1 to the Current Report on
Form 8-K filed with the SEC on April 18, 2019). |
|
|
|
|
|
4.3 |
|
Description
of MGT Capital Investment, Inc.’s Securities.* |
|
|
|
|
|
10.11 |
|
Securities
Purchase Agreement (incorporated by reference to Exhibit 10.1 to
the Current Report on Form 8-K filed with the SEC on May 24,
2017). |
|
|
|
|
|
10.12 |
|
Form
of Secured Convertible Promissory Note (incorporated by reference
to Exhibit 10.2 to the Current Report on Form 8-K filed with the
SEC on May 24, 2017). |
|
|
|
|
|
10.13 |
|
Form
of Warrant to Purchase Common Stock (incorporated by reference to
Exhibit 10.3 to the Current Report on Form 8-K filed with the SEC
on May 24, 2017). |
|
|
|
|
|
10.14 |
|
Security
Agreement, dated as of May 18, 2017, by MGT Mining One, Inc., in
favor of Iliad Research and Trading, L.P. (incorporated by
reference to Exhibit 10.4 to the Current Report on Form 8-K filed
with the SEC on May 24, 2017). |
|
|
|
|
|
10.15 |
|
Securities
Purchase Agreement, dated as of August 18, 2017, by and among MGT
Capital Investments, Inc., MGT Mining Two, Inc., and UAHC Ventures
LLC (incorporated by reference to Exhibit 10.1 to the Current
Report on Form 8-K filed with the SEC on August 28,
2017). |
|
|
|
|
|
10.16 |
|
Form
of the Secured Convertible Promissory Note (incorporated by
reference to Exhibit 10.2 to the Current Report on Form 8-K filed
with the SEC on August 28, 2017). |
|
|
|
|
|
10.17 |
|
Form
of the Warrant to Purchase Common Stock (incorporated by reference
to Exhibit 10.3 to the Current Report on Form 8-K filed with the
SEC on August 28, 2017). |
|
|
|
|
|
|
|
|
|
10.18 |
|
Form
of Warrant to Purchase Common Stock (incorporated by reference to
Exhibit 10.3 to the Current Report on Form 8-K filed with the SEC
on October 16, 2017). |
|
|
|
|
|
10.19 |
|
Form
of Securities Purchase Agreement (incorporated by reference to
Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC
on December 21, 2017). |
|
|
|
|
|
10.20 |
|
Form
of Warrant to Purchase Shares of Common Stock (incorporated by
reference to Exhibit 10.2 to the Current Report on Form 8-K filed
with the SEC on December 21, 2017). |
|
|
|
|
|
10.21 |
|
Executive
Employment Agreement, by and between MGT Capital Investments, Inc.
and Robert S. Lowrey, effective as of March 8, 2018 (incorporated
by reference to Exhibit 10.1 to the Current Report on Form 8-K
filed with the SEC on March 9, 2018). |
|
|
|
|
|
10.22 |
|
Employment
Agreement, by and between MGT Capital Investments, Inc. and Robert
Ladd, dated as of April 1, 2018 (incorporated by reference to
Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC
on April 12, 2018). |
|
|
|
|
|
10.23 |
|
Securities
Purchase Agreement, dated as of May 23, 2018, by and among MGT
Capital Investments, Inc. and Gemini Special Opportunities Fund, LP
and Black Mountain Equities, Inc. (incorporated by reference to
Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC
on May 25, 2018). |
|
|
|
|
|
10.24 |
|
Promissory
Note in favor of Gemini Special Opportunities Fund, LP dated May
23, 2018 (incorporated by reference to Exhibit 10.2 to the Current
Report on Form 8-K filed with the SEC on May 25,
2018). |
|
|
|
|
|
10.25 |
|
Promissory
Note in favor of Black Mountain Equities, Inc. dated May 23, 2018
(incorporated by reference to Exhibit 10.3 to the Current Report on
Form 8-K filed with the SEC on May 25, 2018). |
|
|
|
|
|
10.26 |
|
Note
Purchase Agreement, dated as of June 1, 2018, by and between MGT
Capital Investments, Inc. and Iliad Research and Trading, L.P.
(incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K filed with the SEC on June 7, 2018). |
|
|
|
|
|
10.27 |
|
Promissory
Note, dated as of June 1, 2018 by MGT Capital Investments, Inc., in
favor of Iliad Research and Trading, L.P. (incorporated by
reference to Exhibit 10.2 to the Current Report on Form 8-K filed
with the SEC on June 7, 2018). |
|
|
|
|
|
10.28 |
|
Second
Amendment to the Promissory Note, dated as of December 10, 2018, by
and between MGT Capital Investments, Inc. and Iliad Research and
Trading, L.P. (incorporated by reference to Exhibit 10.35 to the
Annual Report on Form 10-K filed with the SEC on April 16,
2019). |
|
|
|
|
|
10.29 |
|
Equity
Purchase Agreement dated as of August 30, 2018, by and between MGT
Capital Investments, Inc. and L2 Capital, LLC (incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K filed
with the SEC on August 30, 2018). |
|
|
|
|
|
10.30 |
|
Amendment
to the Equity Purchase Agreement, dated as of November 30, 2018, by
and between MGT Capital Investments, Inc. and L2 Capital, LLC
(incorporated by reference to Exhibit 10.37 to the Annual Report on
Form 10-K filed with the SEC on April 16, 2019). |
|
|
|
|
|
10.31 |
|
Registration
Rights Agreement by and between MGT Capital Investments, Inc. and
L2 Capital, LLC (incorporated by reference to Exhibit 10.2 to the
Current Report on Form 8-K filed with the SEC on August 30,
2018). |
|
|
|
|
|
10.32 |
|
Data
Mining Facility Leasing Agreement, dated as of October 23, 2018, by
and between MGT Capital Investments, Inc. and 3G Venture LLC
(incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K filed with the SEC on October 29, 2018). |
|
|
|
|
|
10.33 |
|
Form
of Securities Purchase Agreement, dated as of January 11, 2019
(incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K filed with the SEC on January 14, 2019). |
|
|
|
|
|
10.34 |
|
Form
of Promissory Note, dated January 11, 2019 (incorporated by
reference to Exhibit 10.2 to the Current Report on Form 8-K filed
with the SEC on January 14, 2019). |
|
|
|
|
|
10.35 |
|
Form
of Rescission and Cancellation Agreement, dated January 22, 2019
(incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K filed with the SEC on January 24, 2019). |
|
|
|
|
|
10.36 |
|
Common
Stock Purchase Agreement dated April 12, 2019, between Iliad
Research and Trading, L.P. and MGT Capital Investments, Inc.
(incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K filed with the SEC on April 18, 2019). |
|
|
|
|
|
10.37 |
|
Preferred
Stock Purchase Agreement dated April 12, 2019, between Iliad
Research and Trading, L.P. and MGT Capital Investments, Inc.
(incorporated by reference to Exhibit 10.2 to the Current Report on
Form 8-K filed with the SEC on April 18, 2019). |
|
|
|
|
|
10.38 |
|
Agreement,
effective as of May 1, 2019, by and among MGT Capital Investments,
Inc., N 4th Street LLC, and Bit5ive LLC (incorporated by reference
to Exhibit 10.1 to the Current Report on Form 8-K filed with the
SEC on May 15, 2019). |
|
|
|
|
|
10.39 |
|
Resignation
and Release Agreement, dated May 13, 2019, by and between Stephen
Schaeffer and MGT Capital Investments, Inc. (incorporated by
reference to Exhibit 10.2 to the Current Report on Form 8-K filed
with the SEC on May 15, 2019). |
|
|
|
|
|
10.40 |
|
Equity
Purchase Agreement, dated June 3, 2019, between MGT Capital
Investments, Inc. and Oasis Capital, LLC (incorporated by reference
to Exhibit 10.1 to the Current Report on Form 8-K filed with the
SEC on June 4, 2019). |
|
|
|
|
|
10.41 |
|
Registration
Rights Agreement, dated June 3, 2019, between MGT Capital
Investments, Inc. and Oasis Capital, LLC (incorporated by reference
to Exhibit 10.2 to the Current Report on Form 8-K filed with the
SEC on June 4, 2019). |
|
|
|
|
|
10.42 |
|
Purchase
Agreement, dated July 15, 2019, by and between MGT Capital
Investments, Inc. and Bitmaintech Pte. Ltd. (incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K filed
with the SEC on July 18, 2019). |
|
|
|
|
|
10.43 |
|
Settlement
Agreement, dated August 31, 2019, between MGT Capital Investments,
Inc. and BDLM, LLC (incorporated by reference to Exhibit 10.1 to
the Quarterly Report on Form 10-Q filed with the SEC on November
14, 2019). |
|
|
|
|
|
10.44 |
|
Settlement
Agreement, dated August 31, 2019, between MGT Capital Investments,
Inc. and Deep South Mining, LLC (incorporated by reference to
Exhibit 10.2 to the Quarterly Report on Form 10-Q filed with the
SEC on November 14, 2019). |
|
|
|
|
|
10.45 |
|
Fifth
Amendment to the Promissory Note dated June 1, 2018, between MGT
Capital Investments, Inc. and Iliad Research and Trading,
L.P.* |
|
|
|
|
|
21.1
|
|
Subsidiaries*
|
|
23.1 |
|
Consent
of independent registered public accountant.* |
|
|
|
|
|
31.1 |
|
Certification
pursuant to Section 302 of the Sarbanes–Oxley Act of 2002 of
Principal Executive Officer* |
|
|
|
|
|
31.2 |
|
Certification
pursuant to Section 302 of the Sarbanes–Oxley Act of 2002 of
Principal Financial and Accounting Officer* |
|
|
|
|
|
32 |
|
Certification
pursuant to Section 906 of the Sarbanes–Oxley Act of 2002 of
Principal Executive Officer, Principal Financial and Accounting
Officer* |
|
|
|
|
|
101.INS |
|
XBRL
Instance Document* |
|
|
|
|
|
101.SCH |
|
XBRL
Taxonomy Extension Schema* |
|
|
|
|
|
101.CAL |
|
XBRL
Taxonomy Extension Calculation Linkbase Document* |
|
|
|
|
|
101.DEF |
|
XBRL
Taxonomy Extension Definition Linkbase Document* |
|
|
|
|
|
101.LAB |
|
XBRL
Taxonomy Extension Labels Linkbase Document* |
|
|
|
|
|
101.PRE |
|
XBRL
Taxonomy Extension Presentation Linkbase Document* |
Item 16. Form 10–K
Summary.
Not
applicable.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly
authorized.
| |
MGT
CAPITAL INVESTMENTS, INC |
|
March
30, 2020 |
|
|
| |
|
|
| |
By: |
/s/
Robert B. Ladd |
| |
|
Robert
B. Ladd |
| |
|
President
(Principal Executive Officer) |
Pursuant
to the requirements of the Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates
indicated.
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
|
/s/
Robert B. Ladd |
|
President,
Chief Executive Officer and Director |
|
March
30, 2020 |
|
Robert
B. Ladd |
|
(Principal
Executive Officer) |
|
|
|
|
|
|
|
|
|
/s/
H. Robert Holmes |
|
Director |
|
March
30, 2020 |
|
H.
Robert Holmes |
|
|
|
|
|
|
|
|
|
|
|
/s/
Michael Onghai |
|
Director |
|
March
30, 2020 |
|
Michael
Onghai |
|
|
|
|
|
|
|
|
|
|
|
/s/
Robert S. Lowrey |
|
Chief
Financial Officer |
|
March
30, 2020 |
|
Robert
S. Lowrey |
|
(Principal
Financial and Accounting Officer) |
|
|
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
The
Stockholders and the Board of Directors of
MGT
Capital Investments, Inc. and Subsidiaries
Opinion
on the Financial Statements
We
have audited the accompanying consolidated balance sheets of MGT
Capital Investments, Inc. and Subsidiaries (collectively, the
“Company”) as of December 31, 2019 and 2018, and the related
consolidated statements of operations, changes in stockholders’
(deficit) equity and cash flows for each of the years in the two
year period ended December 31, 2019, and the related notes
(collectively referred to as the “consolidated financial
statements”). In our opinion, the
consolidated financial statements present fairly, in
all material respects, the financial position of the Company at
December 31, 2019 and 2018, and the results of its operations and
its cash flows for each of the years in the two year period ended
December 31, 2019, in conformity with U.S. generally accepted
accounting principles.
Change
in Accounting Principles
As
discussed in Note 3 and 6 to the consolidated financial statements,
the Company changed its method of accounting for leases in 2019 due
to the adoption of ASU No. 2016-02, Leases (Topic 842), as amended,
effective January 1, 2019, using the modified retrospective
approach.
The
Company's Ability to Continue as a Going Concern
The
accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 2 to the financial statements, the Company has
suffered recurring losses from operations and will require
additional capital to fund its current operating plan. This raises
substantial doubt about the Company’s ability to continue as a
going concern. Management’s plans regarding these matters are also
described in Note 2. The consolidated financial statements do not
include any adjustments to reflect the possible future effects on
the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of
this uncertainty.
Basis
for Opinion
These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on the Company’s financial statements based on our audits. We are a
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required
to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the
PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose
of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express
no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/
RBSM LLP
We
have served as the Company’s auditor since 2017.
New
York, NY
March
30, 2020
PART
I - FINANCIAL INFORMATION
Item
1. Financial Statements
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(Dollars
in thousands, except per-share amounts)
| |
|
As of
December 31, |
|
| |
|
2019 |
|
|
2018 |
|
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
| Assets |
|
|
|
|
|
|
|
|
| Current assets |
|
|
|
|
|
|
|
|
| Cash
and cash equivalents |
|
$ |
216 |
|
|
$ |
96 |
|
| Prepaid expenses
and other current assets |
|
|
125 |
|
|
|
193 |
|
|
Intangible digital assets |
|
|
18 |
|
|
|
30 |
|
| Total current
assets |
|
|
359 |
|
|
|
319 |
|
| |
|
|
|
|
|
|
|
|
| Non-current assets |
|
|
|
|
|
|
|
|
| Property and
equipment, at cost, net |
|
|
3,536 |
|
|
|
- |
|
| Right of use
asset, operating lease, net of accumulated amortization |
|
|
78 |
|
|
|
- |
|
| Other
assets |
|
|
321 |
|
|
|
204 |
|
| Total
assets |
|
$ |
4,294 |
|
|
$ |
523 |
|
| |
|
|
|
|
|
|
|
|
| Liabilities and
Stockholders’ Equity (Deficit) |
|
|
|
|
|
|
|
|
| Current liabilities |
|
|
|
|
|
|
|
|
| Accounts
payable |
|
$ |
795 |
|
|
$ |
537 |
|
| Accrued expenses
and other payables |
|
|
26 |
|
|
|
10 |
|
| Notes payable, net
of discount |
|
|
52 |
|
|
|
1,285 |
|
| Management
agreement termination liability |
|
|
116 |
|
|
|
- |
|
|
Operating lease liability |
|
|
19 |
|
|
|
- |
|
| Total current
liabilities |
|
|
1,008 |
|
|
|
1,832 |
|
| |
|
|
|
|
|
|
|
|
| Non-current liabilities |
|
|
|
|
|
|
|
|
|
Operating lease liability |
|
|
59 |
|
|
|
- |
|
| Total
liabilities |
|
$ |
1,067 |
|
|
$ |
1,832 |
|
| |
|
|
|
|
|
|
|
|
| Commitments and
Contingencies (Note 9) |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| Stockholders’
Equity (Deficit) |
|
|
|
|
|
|
|
|
| Undesignated
preferred stock, $0.001 par value, 8,489,800 and 8,500,000 shares
authorized at December 31, 2019 and 2018, respectively. No shares
issued and outstanding at December 31, 2019 and 2018 |
|
|
- |
|
|
|
- |
|
| Series B preferred
stock, $0.001 par value, 10,000 and 0 shares authorized at December
31, 2019 and 2018, respectively. No shares issued or outstanding at
December 31, 2019 and 2018. |
|
|
- |
|
|
|
- |
|
| Series C
convertible preferred stock, $0.001 par value, 200 and 0 shares
authorized at December 31, 2019 and 2018, respectively. 115 and 0
shares issued and outstanding at December 31, 2019 and 2018,
respectively |
|
|
- |
|
|
|
- |
|
| Common stock,
$0.001 par value; 2,500,000,000 shares authorized; 413,701,289 and
111,079,683 shares issued and outstanding at December 31, 2019 and
2018, respectively. |
|
|
414 |
|
|
|
111 |
|
| Additional paid-in
capital |
|
|
417,315 |
|
|
|
403,299 |
|
|
Accumulated deficit |
|
|
(414,502 |
) |
|
|
(404,719 |
) |
| Total
stockholders’ equity (deficit) |
|
|
3,227 |
|
|
|
(1,309 |
) |
| |
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity (Deficit) |
|
$ |
4,294 |
|
|
$ |
523 |
|
The accompanying notes are an integral part of these consolidated
financial statements
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Dollars
in thousands, except per-share amounts)
| |
|
For the
Years Ended December 31, |
|
| |
|
2019 |
|
|
2018 |
|
| |
|
|
|
|
|
|
| Revenue |
|
$ |
450 |
|
|
$ |
2,030 |
|
| |
|
|
|
|
|
|
|
|
| Operating
expenses |
|
|
|
|
|
|
|
|
| Cost of revenue |
|
|
510 |
|
|
|
4,191 |
|
| General and
administrative |
|
|
7,377 |
|
|
|
12,816 |
|
| Restructuring
charge |
|
|
- |
|
|
|
2,499 |
|
| Impairment of
property and equipment |
|
|
64 |
|
|
|
6,345 |
|
| Sales and
marketing |
|
|
- |
|
|
|
55 |
|
|
Research and development |
|
|
- |
|
|
|
47 |
|
| Total
operating expenses |
|
|
7,951 |
|
|
|
25,953 |
|
| |
|
|
|
|
|
|
|
|
| Operating loss |
|
|
(7,501 |
) |
|
|
(23,923 |
) |
| |
|
|
|
|
|
|
|
|
| Other non-operating
income (expense) |
|
|
|
|
|
|
|
|
| Interest income
(expense) |
|
|
10 |
|
|
|
(3 |
) |
| Change in fair
value of liability |
|
|
176 |
|
|
|
- |
|
| Accretion of debt
discount |
|
|
(5,605 |
) |
|
|
(919 |
) |
| Warrant
modification expense |
|
|
- |
|
|
|
(139 |
) |
| Loss on sale of
cybersecurity assets |
|
|
- |
|
|
|
(127 |
) |
| Gain (loss) on
sale of property and equipment |
|
|
599 |
|
|
|
(47 |
) |
| Gain
on extinguishment of debt |
|
|
3,540 |
|
|
|
1,875 |
|
| Total
other non-operating expense |
|
|
(1,280 |
) |
|
|
640 |
|
| |
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(8,781 |
) |
|
|
(23,283 |
) |
| |
|
|
|
|
|
|
|
|
|
Deemed dividend |
|
|
(1,005 |
) |
|
|
(2,514 |
) |
| |
|
|
|
|
|
|
|
|
| Net
loss attributable to common stockholders |
|
$ |
(9,786 |
) |
|
$ |
(25,797 |
) |
| |
|
|
|
|
|
|
|
|
|
Per-share data |
|
|
|
|
|
|
|
|
| Basic
and diluted loss per share |
|
$ |
(0.04 |
) |
|
$ |
(0.35 |
) |
| |
|
|
|
|
|
|
|
|
| Weighted
average number of common shares outstanding |
|
|
257,122,569 |
|
|
|
73,056,223 |
|
The accompanying notes are an integral part of these consolidated
financial statements
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(DEFICIT)
FOR
THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(Dollars
in thousands, except per-share amounts)
| |
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
Total (Deficit) Equity
Attributable |
|
|
Non- |
|
|
Total
Stockholders’ |
|
| |
|
Preferred Stock
|
|
|
Common
Stock |
|
|
Paid- |
|
|
Accumulated |
|
|
to MGT |
|
|
controlling |
|
|
(Deficit) |
|
| |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
In
Capital |
|
|
Deficit |
|
|
Stockholders |
|
|
interest |
|
|
Equity |
|
| Balance
at January 1, 2018 |
|
|
- |
|
|
$ |
- |
|
|
|
58,963,009 |
|
|
$ |
59 |
|
|
$ |
390,736 |
|
|
$ |
(378,900 |
) |
|
$ |
11,895 |
|
|
$ |
(22 |
) |
|
$ |
11,873 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Stock
based compensation |
|
|
- |
|
|
|
|
|
|
|
2,860,000 |
|
|
|
3 |
|
|
|
4,354 |
|
|
|
- |
|
|
|
4,357 |
|
|
|
|
|
|
|
4,357 |
|
| Forfeiture
of unvested restricted stock |
|
|
- |
|
|
|
|
|
|
|
(550,000 |
) |
|
|
(1 |
) |
|
|
(232 |
) |
|
|
- |
|
|
|
(233 |
) |
|
|
|
|
|
|
(233 |
) |
| Forfeiture
of vested restricted stock |
|
|
- |
|
|
|
|
|
|
|
(1,966,666 |
) |
|
|
(2 |
) |
|
|
2 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
| Stock
issued for services |
|
|
- |
|
|
|
|
|
|
|
2,387,273 |
|
|
|
2 |
|
|
|
2,270 |
|
|
|
- |
|
|
|
2,272 |
|
|
|
|
|
|
|
2,272 |
|
| Stock
issued for prior year notes payable conversion |
|
|
- |
|
|
|
|
|
|
|
3,381,816 |
|
|
|
3 |
|
|
|
(3 |
) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
| Sale
of stock in connection with private placement |
|
|
- |
|
|
|
|
|
|
|
200,000 |
|
|
|
- |
|
|
|
80 |
|
|
|
- |
|
|
|
80 |
|
|
|
|
|
|
|
80 |
|
| Sale
of stock in connection with equity purchase agreement |
|
|
- |
|
|
|
|
|
|
|
33,650,000 |
|
|
|
34 |
|
|
|
2,425 |
|
|
|
- |
|
|
|
2,459 |
|
|
|
|
|
|
|
2,459 |
|
| Issuance
of common stock for prior year sale |
|
|
- |
|
|
|
|
|
|
|
2,000,000 |
|
|
|
2 |
|
|
|
(2 |
) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
| Exercise
of warrants |
|
|
- |
|
|
|
|
|
|
|
10,094,251 |
|
|
|
11 |
|
|
|
896 |
|
|
|
- |
|
|
|
907 |
|
|
|
|
|
|
|
907 |
|
| Stock
issued in disposition of cybersecurity assets |
|
|
- |
|
|
|
|
|
|
|
60,000 |
|
|
|
- |
|
|
|
120 |
|
|
|
- |
|
|
|
120 |
|
|
|
|
|
|
|
120 |
|
| Deemed
dividend |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
2,514 |
|
|
|
(2,514 |
) |
|
|
- |
|
|
|
|
|
|
|
- |
|
| Warrant
modification expense |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
139 |
|
|
|
- |
|
|
|
139 |
|
|
|
|
|
|
|
139 |
|
| Reclassification
of non-controlling interest to accumulated deficit |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(22 |
) |
|
|
(22 |
) |
|
|
22 |
|
|
|
- |
|
| Net
loss |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(23,283 |
) |
|
|
(23,283 |
) |
|
|
|
|
|
|
(23,283 |
) |
| Balance
at December 31, 2018 |
|
|
- |
|
|
$ |
- |
|
|
|
111,079,683 |
|
|
$ |
111 |
|
|
$ |
403,299 |
|
|
$ |
(404,719 |
) |
|
$ |
(1,309 |
) |
|
$ |
- |
|
|
$ |
(1,309 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Stock
issued for services |
|
|
- |
|
|
|
- |
|
|
|
160,500 |
|
|
|
- |
|
|
|
60 |
|
|
|
- |
|
|
|
60 |
|
|
|
- |
|
|
|
60 |
|
| Stock
based compensation - employee restricted stock |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,249 |
|
|
|
- |
|
|
|
2,249 |
|
|
|
- |
|
|
|
2,249 |
|
| Sale
of stock under equity purchase agreement |
|
|
- |
|
|
|
- |
|
|
|
119,000,000 |
|
|
|
119 |
|
|
|
5,216 |
|
|
|
- |
|
|
|
5,335 |
|
|
|
- |
|
|
|
5,335 |
|
| Stock
sold in connection with registered direct placements |
|
|
- |
|
|
|
- |
|
|
|
17,500,000 |
|
|
|
18 |
|
|
|
507 |
|
|
|
- |
|
|
|
525 |
|
|
|
- |
|
|
|
525 |
|
| Sale
of preferred stock |
|
|
200 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,990 |
|
|
|
- |
|
|
|
1,990 |
|
|
|
- |
|
|
|
1,990 |
|
| Common
stock issued on conversion of notes payable |
|
|
- |
|
|
|
- |
|
|
|
124,089,191 |
|
|
|
124 |
|
|
|
2,614 |
|
|
|
- |
|
|
|
2,738 |
|
|
|
- |
|
|
|
2,738 |
|
| Conversion
of preferred stock |
|
|
(85 |
) |
|
|
- |
|
|
|
27,605,667 |
|
|
|
28 |
|
|
|
(28 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
| Issuance
of common stock for mining assets |
|
|
- |
|
|
|
- |
|
|
|
10,250,000 |
|
|
|
10 |
|
|
|
301 |
|
|
|
- |
|
|
|
311 |
|
|
|
- |
|
|
|
311 |
|
| Exercise
of warrants |
|
|
- |
|
|
|
- |
|
|
|
4,000,000 |
|
|
|
4 |
|
|
|
116 |
|
|
|
- |
|
|
|
120 |
|
|
|
- |
|
|
|
120 |
|
| Warrant
buy-back and cancellation |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(14 |
) |
|
|
- |
|
|
|
(14 |
) |
|
|
- |
|
|
|
(14 |
) |
| Cancellation
of shares received from transfer agent |
|
|
- |
|
|
|
- |
|
|
|
(83,752 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
| Deemed
dividend |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,005 |
|
|
|
(1,005 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
| Cumulative
effect adjustment related to ASU adoption |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3 |
|
|
|
3 |
|
|
|
- |
|
|
|
3 |
|
| Issuance
of stock based compensation - employee restricted stock |
|
|
- |
|
|
|
- |
|
|
|
100,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
| Net
loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(8,781 |
) |
|
|
(8,781 |
) |
|
|
- |
|
|
|
(8,781 |
) |
| Balance
at December 31, 2019 |
|
|
115 |
|
|
$ |
- |
|
|
|
413,701,289 |
|
|
$ |
414 |
|
|
$ |
417,315 |
|
|
$ |
(414,502 |
) |
|
$ |
3,227 |
|
|
$ |
- |
|
|
$ |
3,227 |
|
The accompanying notes are an integral part of these consolidated
financial statements
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Dollars
in thousands, except per-share amounts)
| |
|
For the
Years Ended December 31, |
|
| |
|
2019 |
|
|
2018 |
|
| Cash Flows From
Operating Activities |
|
|
|
|
|
|
|
|
| Net loss |
|
$ |
(8,781 |
) |
|
$ |
(23,283 |
) |
|
Adjustments to reconcile net loss to net cash used in operating
activities |
|
|
|
|
|
|
|
|
| Depreciation |
|
|
170 |
|
|
|
3,291 |
|
| (Gain) loss on
sale of property and equipment |
|
|
(599 |
) |
|
|
47 |
|
| Termination of
management agreements |
|
|
536 |
|
|
|
- |
|
| Change in fair
value of liability |
|
|
(176 |
) |
|
|
- |
|
| Impairment of
property and equipment |
|
|
64 |
|
|
|
6,345 |
|
| Stock-based
compensation expense |
|
|
2,301 |
|
|
|
6,402 |
|
| Warrant
modification expense |
|
|
- |
|
|
|
139 |
|
| Extinguishment of
note payable |
|
|
(3,540 |
) |
|
|
(1,875 |
) |
| Loss on sale of
business unit |
|
|
- |
|
|
|
127 |
|
| Amortization of
note discount |
|
|
5,605 |
|
|
|
919 |
|
| Change in
operating assets and liabilities |
|
|
|
|
|
|
|
|
| Prepaid expenses
and other current assets |
|
|
80 |
|
|
|
514 |
|
| Intangible digital
assets |
|
|
12 |
|
|
|
18 |
|
| Management
agreement termination liability |
|
|
(45 |
) |
|
|
- |
|
| Right of use
asset |
|
|
9 |
|
|
|
- |
|
| Operating lease
liability |
|
|
(6 |
) |
|
|
- |
|
| Other assets |
|
|
66 |
|
|
|
(204 |
) |
| Accounts
payable |
|
|
352 |
|
|
|
210 |
|
|
Accrued expenses |
|
|
(8 |
) |
|
|
(1,413 |
) |
| Net cash used
in operating activities |
|
|
(3,960 |
) |
|
|
(8,763 |
) |
| |
|
|
|
|
|
|
|
|
| Cash Flows From
Investing Activities |
|
|
|
|
|
|
|
|
| Proceeds from sale
of cybersecurity assets |
|
|
- |
|
|
|
60 |
|
| Deposits on
property and equipment |
|
|
(203 |
) |
|
|
- |
|
| Purchase of
property and equipment |
|
|
(3,646 |
) |
|
|
(6,994 |
) |
|
Proceeds from sale of property and equipment |
|
|
535 |
|
|
|
427 |
|
| Net cash used
in investing activities |
|
|
(3,314 |
) |
|
|
(6,507 |
) |
| |
|
|
|
|
|
|
|
|
| Cash Flows From
Financing Activities |
|
|
|
|
|
|
|
|
| Proceeds from sale
of common stock |
|
|
525 |
|
|
|
80 |
|
| Payment of
deferred offering costs |
|
|
(70 |
) |
|
|
- |
|
| Proceeds from the
issuance of notes payable, net of original issue discount |
|
|
- |
|
|
|
5,200 |
|
| Proceeds from sale
of stock under equity purchase agreement, net of issuance
costs |
|
|
5,053 |
|
|
|
1,309 |
|
| Sale of preferred
stock, net of issuance costs |
|
|
1,990 |
|
|
|
- |
|
| Repayment of notes
payable |
|
|
(210 |
) |
|
|
(1,649 |
) |
| Proceeds from exercise of
warrants |
|
|
120 |
|
|
|
907 |
|
|
Warrant Buybacks |
|
|
(14 |
) |
|
|
- |
|
| Net cash
provided by financing activities |
|
|
7,394 |
|
|
|
5,847 |
|
| |
|
|
|
|
|
|
|
|
| Net change in cash and cash
equivalents |
|
|
120 |
|
|
|
(9,423 |
) |
| |
|
|
|
|
|
|
|
|
| Cash and cash
equivalents, beginning of year |
|
|
96 |
|
|
|
9,519 |
|
| |
|
|
|
|
|
|
|
|
| Cash and cash
equivalents, end of year |
|
$ |
216 |
|
|
$ |
96 |
|
The accompanying notes are an integral part of these consolidated
financial statements
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Dollars
in thousands, except per-share amounts)
| |
|
For the
years ended December 31, |
|
| |
|
2019 |
|
|
2018 |
|
| Supplemental disclosure of cash flow
information |
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
3 |
|
|
$ |
14 |
|
| |
|
|
|
|
|
|
|
|
| Cash
paid for income tax |
|
$ |
- |
|
|
$ |
- |
|
| |
|
|
|
|
|
|
|
|
| Non-cash investing
and financing activities |
|
|
|
|
|
|
|
|
| Deemed
dividend on warrant modification and beneficial conversion feature
of preferred stock |
|
$ |
1,005 |
|
|
$ |
- |
|
|
Deemed dividend on trigger of down round provision |
|
$ |
- |
|
|
$ |
2,514 |
|
|
Cumulative effect adjustment related to ASU adoption |
|
$ |
3 |
|
|
$ |
- |
|
|
Conversion of notes payable into common stock |
|
$ |
2,738 |
|
|
$ |
- |
|
|
Repayment of note payable and interest through the issuance of
shares under the equity purchase agreement |
|
$ |
354 |
|
|
$ |
1,310 |
|
|
Acquisition of miners through common stock |
|
$ |
311 |
|
|
$ |
- |
|
|
Reclassification of NCI to accumulated deficit |
|
$ |
- |
|
|
$ |
22 |
|
|
Reclassification of deferred offering costs |
|
$ |
70 |
|
|
$ |
160 |
|
|
Conversion of Series C convertible preferred stock into common
stock |
|
$ |
28 |
|
|
$ |
- |
|
The accompanying notes are an integral part of these consolidated
financial statements
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except share and per–share amounts)
Note
1. Organization and Basis of Presentation
Organization
MGT
Capital Investments, Inc. (“MGT” or the “Company”) is a Delaware
corporation, incorporated in 2000. MGT was originally incorporated
in Utah in 1977. 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
Interactive, LLC, MGT Gaming, Inc., MGT Mining One, Inc., MGT
Mining Two, Inc., and MGT Sweden AB. MGT Studios, Inc. 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 in Raleigh, North
Carolina.
On
February 27, 2019, the Company’s stockholders approved an increase
in the Company’s authorized common shares from 125,000,000 to
2,500,000,000 and the Company filed an amendment to its Certificate
of Incorporation with the state of Delaware to reflect this
change.
On
June 4, 2019, the Company filed a registration statement on Form
S-1 covering up to 76,558,643 shares of common stock the Company
may sell from time to time. On June 25, 2019, this registration
statement was declared effective by the Securities and Exchange
Commission (“SEC”). Through December 31, 2019, the Company sold
52,000,000 shares of its common stock under this registration
statement for gross proceeds of $1,754.
Cryptocurrency mining
Current
Operations
Following
a review of its Bitcoin mining operations in early 2019, the
Company determined to consolidate its activities in Company-owned
and managed facilities. Central to this strategy was the purchase
of land in LaFayette, GA and the entry into a favorable contract
for electricity in the second quarter of 2019. Located adjacent to
a utility substation, the several acre property has access to over
20 megawatts (MW) of low-cost power.
The
Company began Bitcoin mining at its LaFayette facility in late
September 2019 on a trial basis, and on January 31, 2020, the
Company announced it is operating 1,500 new generation Bitcoin
miners collectively rated at approximately 80 Ph/s at the facility.
All miners were purchased from Bitmaintech Pte. Ltd., a Singapore
limited company (“Bitmain”). The total electrical load at this
production level is estimated at slightly under 4.0 MW.
The
Company’s miners are housed in five modified shipping containers
including two manufactured by Bit5ive LLC of Miami, Florida
(“Pod5ive Containers”). As an early investor and design consultant,
the Company receives a modest royalty participation in all sales of
Pod5ive Containers. Phase I of the LaFayette site is structurally
complete and awaiting final grading and landscaping. The entire
facility, including the land, five 2500 KVA 3-phase transformers,
the mining containers and the miners, are owned by MGT. As the
Company is presently using only one-third of the available
electrical load, it is exploring ways to grow its current
operations.
Former
Operations
Prior
to establishing its Company-owned and managed facility, the Company
conducted its Bitcoin mining operations through third-party hosting
arrangements. The Company also entered into management agreements
with third party investors whereby the investors purchased the
mining hardware, and the Company received both a fee to manage the
mining operations plus one-half of the net operating
profit.
Towards
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 was 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.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except share and per–share amounts)
Note
1. Organization and Basis of Presentation, continued
Beacon
failed to deliver the fully built out facility and necessary power
levels required by MGT by the end of March 2018. During the first
and second quarters of 2018, MGT personnel traveled to Sweden to
assist Beacon with getting the facility up and running, advanced
additional funding, and became involved in the design and setup of
the Sweden facility due to concern that Beacon may have overstated
its construction abilities and financial capacity.
Beginning
in late May 2018, the Company took steps to gain direct operating
control to protect its assets and maximize capacity as quickly as
possible. Through June of 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 $893 in costs to bring the electricity
provider current and set up more transformers, and $256 in
additional operating costs. 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.
In
September 2018, the Company deciding to forgo any further monetary
investment in Sweden and relocated all miners located in Sweden to
third-party hosting facilities in Colorado and Ohio. Because the
price of Bitcoin steadily decreased during 2018 and throughout the
first quarter of 2019, the Company decided it was not economically
responsible to continue mining operations until Bitcoin economics
improved, which occurred in May 2019.
On
March 22, 2019, the Company entered into a settlement agreement to
terminate its initial hosting agreement in Washington and conveyed
ownership of its onsite mining assets for full satisfaction of $77
in outstanding hosting service fees. In August and September 2019,
the Company terminated its management agreements with third party
investors and in December 2019, terminated its hosting arrangements
in Colorado and Ohio. See Note 9 for a further description of these
termination agreements.
Legacy business – cybersecurity
In
January 2018, the Company ended 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.
In
March 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 determined the fair value to be
zero. The Company recorded a loss on sale $127, comprised of $60 in
cash proceeds, less $27 in assets sold, $40 in separation payments
to former management, and $120 in common stock issued to former
management.
Basis of presentation
The
accompanying consolidated financial statements for the years ended
December 31, 2019 and 2018 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”).
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except share and per–share amounts)
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, 2019, the Company had incurred
significant operating losses since inception and continues to
generate losses from operations. As of December 31, 2019, the
Company had an accumulated deficit of $414,502.
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.
The Company will need to raise additional funding to grow its
operations and to pay current maturities of debt. There can be no
assurance however that the Company will be able to raise additional
capital when needed, or at terms deemed acceptable, if at all. The
Company’s ability to raise additional capital will also be impacted
by the volatility of Bitcoin and the recent outbreak of COVID-19,
both which are highly uncertain, cannot be predicted and could have
an adverse effect on the Company’s business and financial
condition. 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. 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 subsidiaries. All intercompany transactions and balances have
been eliminated.
Reclassification
Certain
amounts in prior periods have been reclassified to conform to
current period presentation. These reclassifications had no effect
on the previously reported net loss.
Use of estimates and assumptions and critical accounting estimates
and assumptions
The
preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities as of the date of the
financial statements, and also affect the amounts of revenues and
expenses reported for each period. Actual results could differ from
those which result from using such estimates. Management utilizes
various other estimates, including but not limited to determining
the estimated lives of long-lived assets, stock compensation,
determining the potential impairment of long-lived assets, the fair
value of warrants issued, the fair value of conversion features,
the recognition of revenue, the valuation allowance for deferred
tax assets and other legal claims and contingencies. The results of
any changes in accounting estimates are reflected in the financial
statements in the period in which the changes become evident.
Estimates and assumptions are reviewed periodically, and the
effects of revisions are reflected in the period that they are
determined to be necessary.
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.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except share and per–share amounts)
Note
3. Summary of Significant Accounting Policies,
continued
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 |
) |
|
Gain on
extinguishment of debt |
|
|
1,295 |
|
|
|
580 |
|
|
|
1,875 |
|
|
Accretion
of debt discount |
|
|
(905 |
) |
|
|
(14 |
) |
|
|
(919 |
) |
Revenue recognition
The
Company’s primary revenue stream is related to the mining of
digital currencies. The Company derives its revenue by solving
“blocks” to be added to the blockchain and providing transaction
verification services within the digital currency network of
Bitcoin, commonly termed “cryptocurrency mining.” In consideration
for these services, the Company receives digital currency
(“Coins”). The Coins are recorded as revenue, using the average
spot price of Bitcoin on the date of receipt. The Coins are
recorded on the balance sheet as an intangible digital asset valued
at the lower of cost or net realizable value. Net realizable value
adjustments, to adjust the value of Coins to market value, are
included in cost of revenue on the Company’s consolidated statement
of operations. Further, any gain or loss on the sale of Coins would
be recorded to costs of revenue. Costs of revenue include hosting
fees, equipment and infrastructure depreciation, net realizable
value adjustments, and electricity costs.
The
Company also recognized revenue from its management agreements
through their termination in August and September 2019, as further
described in Note 9. The Company received a fee from each
management agreement based on the amount of Bitcoin mined, half of
the profits and was reimbursed for any electricity costs incurred
to run the Bitcoin mining machines it managed in its
facilities.
Additionally,
the Company had machines located in hosted facilities in Ohio and
Colorado. The Company received an allocation of profits from these
facilities, as further described in Note 9. The Company recorded
the net amount of the Bitcoin received as revenue in its statement
of operations.
The
Company also recognizes a royalty participation upon the sale of
Pod5ive Containers under the terms of a collaboration agreement
entered in August 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 one to ten years when
placed in service. The cost of repairs and maintenance is expensed
as incurred; major replacements and improvements are capitalized.
When assets are retired or disposed of, the cost and accumulated
depreciation are removed from the accounts, and any resulting gains
or losses are included in income in the year of
disposition.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except share and per–share amounts)
Note
3. Summary of Significant Accounting Policies,
continued
In
connection with the Company’s plans to consolidate its activities
in Company-owned and managed facilities, the Company has entered
into agreements to acquire Bitcoin mining machines and containers
to house the mining machines requiring upfront deposits. Deposits
on such purchases are classified as Other Assets. Upon delivery,
installation and full payment, the assets are classified as
property and equipment on the consolidated balance
sheet.
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, stock options,
convertible debt and convertible preferred stock 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, 2019 excludes 650,000 unvested restricted shares,
6,000,000 shares issuable under stock options, 78,050,084 shares
issuable upon the conversion of convertible debt, and 96,638,655
shares under convertible preferred stock. 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
conversion of convertible debt and 5,477,975 shares issuable under
warrants.
Stock–based compensation
The
Company recognizes compensation expense for all equity–based
payments in accordance with ASC 718 “Compensation – Stock
Compensation”. Under fair value recognition provisions, the Company
recognizes equity–based compensation net of an estimated forfeiture
rate and recognizes compensation cost only for those shares
expected to vest over the requisite service period of the
award.
Restricted
stock awards are granted at the discretion of the compensation
committee of the board of directors of the Company (the “Board of
Directors”). These awards are restricted as to the transfer of
ownership and generally vest over the requisite service periods,
typically over a 12 to 24-month period (vesting on a straight–line
basis). The fair value of a stock award is equal to the fair market
value of a share of the Company’s common stock on the grant
date.
The
fair value of an option award is estimated on the date of grant
using the Black–Scholes option valuation model. The Black–Scholes
option valuation model requires the development of assumptions that
are inputs into the model. These assumptions are the expected stock
volatility, the risk–free interest rate, the expected life of the
option, the dividend yield on the underlying stock and the expected
forfeiture rate. Expected volatility is calculated based on the
historical volatility of the Company’s common stock over the
expected term of the option. Risk–free interest rates are
calculated based on continuously compounded risk–free rates for the
appropriate term.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except share and per–share amounts)
Note
3. Summary of Significant Accounting Policies,
continued
Determining
the appropriate fair value model and calculating the fair value of
equity–based payment awards requires the input of the subjective
assumptions described above. The assumptions used in calculating
the fair value of equity–based payment awards represent
management’s best estimates, which involve inherent uncertainties
and the application of management’s judgment. The Company is
required to estimate the expected forfeiture rate and recognize
expense only for those shares expected to vest.
The
Company accounts for share–based payments granted to non–employees
in accordance with ASC 505–50, “Equity Based Payments to
Non–Employees.” The Company determines the fair value of the
stock–based payment as either the fair value of the consideration
received or the fair value of the equity instruments issued,
whichever is more readily determinable. If the fair value of the
equity instruments issued is used, it is measured using the stock
price and other measurement assumptions as of the earlier of either
(1) the date at which a commitment for performance by the
counterparty to earn the equity instruments is reached, or (2) the
date at which the counterparty’s performance is
complete.
Fair Value Measure and Disclosures
ASC
820 “Fair Value Measurements and Disclosures” provides the
framework for measuring fair value. That framework provides a fair
value hierarchy that prioritizes the inputs to valuation techniques
used to measure fair value. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for
identical assets or liabilities (Level 1 measurements) and the
lowest priority to unobservable inputs (Level 3
measurements).
Fair
value is defined as an exit price, representing the amount that
would be received upon the sale of an asset or payment to transfer
a liability in an orderly transaction between market participants.
Fair value is a market-based measurement that is determined based
on assumptions that market participants would use in pricing an
asset or liability. A three-tier fair value hierarchy is used to
prioritize the inputs in measuring fair value as
follows:
| |
● |
Level
1 Quoted prices in active markets for identical assets or
liabilities. |
| |
|
|
| |
● |
Level
2 Quoted prices for similar assets or liabilities in active
markets, quoted prices for identical or similar assets or
liabilities in markets that are not active, or other inputs that
are observable, either directly or indirectly. |
| |
|
|
| |
● |
Level
3 Significant unobservable inputs that cannot be corroborated by
market data. |
As of
December 31, 2019, the Company had a Level 3 financial instrument
related to the management agreement termination liability.
Observable transactions are not available to aid in determining the
fair value of the management agreement termination liability.
Therefore, the fair value was determined based on the remaining
payments which include two components that are based on market
conditions, Bitcoin price and Difficulty, thus requiring the
liability to be adjusted to fair value on a periodic basis. The
fair value of Bitcoin price and Difficulty are obtained on quoted
prices in active markets. Refer to Note 9 for additional
information.
Gain (Loss) on Modification/Extinguishment of
Debt
In
accordance with ASC 470, a modification or an exchange of debt
instruments that adds or eliminates a conversion option that was
substantive at the date of the modification or exchange is
considered a substantive change and is measured and accounted for
as extinguishment of the original instrument along with the
recognition of a gain or 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 or loss.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except share and per–share amounts)
Note
3. Summary of Significant Accounting Policies,
continued
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.
Recently adopted accounting pronouncements
In
February 2016, the Financial Accounting Standards Board (“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.
In
January 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. |
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 December 2019, the Company entered into a new
office lease and under the guidance of Topic 842, recorded a Right
of Use Asset of $79, a corresponding Lease Liability of
$79.
Cash and cash equivalents
The
Company considers all highly liquid instruments with an original
maturity of three months or less when acquired to be cash
equivalents. The Company’s combined accounts were $216 and $96 as
of December 31, 2019 and 2018, respectively. Since the FDIC’s
insurance coverage is for combined account balances that exceed
$250, there is no concentration of credit risks.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except share and per–share amounts)
Note
3. Summary of Significant Accounting Policies,
continued
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 were charged to operations as incurred.
During the year ended December 31, 2018, the Company expensed $47
in research and development costs. No research and development
costs were incurred in 2019.
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 13 – 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.
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
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.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except share and per–share amounts)
Note
4. Property, Plant, and Equipment and Other Assets
|
Property
and equipment consisted of the following: |
|
As
of |
|
|
|
|
December
31, 2019 |
|
|
December
31, 2018 |
|
|
Land |
|
$ |
57 |
|
|
$ |
- |
|
|
Computer
hardware and software |
|
|
10 |
|
|
|
17 |
|
|
Bitcoin
mining machines |
|
|
2,313 |
|
|
|
- |
|
| Infrastructure |
|
|
771 |
|
|
|
- |
|
|
Containers |
|
|
467 |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
Property
and equipment, gross |
|
|
3,618 |
|
|
|
17 |
|
|
Less:
Accumulated depreciation |
|
|
(82 |
) |
|
|
(17 |
) |
|
Property
and equipment, net |
|
$ |
3,536 |
|
|
$ |
- |
|
The
Company recorded depreciation expense of $170 and $3,291 for the
years ended December 31, 2019 and 2018, respectively.
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.
During
the year ended December 31, 2019, the Company recorded an
impairment charge of $64 in connection with the termination of its
hosting agreement in Ohio. See Note 9 for a further description of
this termination.
During
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. During 2019, the Company sold Bitcoin machines with an
aggregate net book value of $18 for gross proceeds of $535 and
received a vendor credit of $82 upon the conveyance of miners that
were fully depreciated, resulting in a net gain of $599.
|
Other
Assets consisted of the following: |
|
As
of |
|
| |
|
December
31, 2019 |
|
|
December
31, 2018 |
|
|
Deposits
on containers |
|
$ |
203 |
|
|
$ |
- |
|
|
Security
deposits |
|
|
118 |
|
|
|
204 |
|
|
Other
Assets |
|
$ |
321 |
|
|
$ |
204 |
|
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except share and per–share amounts)
Note
4. Property, Plant, and Equipment and Other Assets,
continued
During
July 2019, the Company entered into a purchase agreement with
Bitmain to purchase 1,100 Antminer-S-17 Bitcoin mining machines for
an aggregate purchase price of approximately $2,770, subject to
adjustments, with delivery in November 2019 to the Company’s
facility in LaFayette, GA.
The
Company paid a deposit of $1,385 in July 2019. Due to declining
prices and price protection included in the purchase agreement, the
Company was able to take ownership of about 1,100 S17 Pro miners
with a further payment of $71,640 upon delivery in November 2019.
The Company also acquired approximately 400 Bitcoin mining machines
from Bitmain in November 2019, for a total of approximately 1,500
Bitcoin mining machines all located in the Company’s facility in
LaFayette, GA. Once these Bitcoin mining machines were delivered
and installed, the deposit was reclassified to property and
equipment, and depreciation commenced over the 2-year estimated
useful life using the straight-line method. All Bitcoin mining
machines were placed in service during 2019, except approximately
600 which were placed in service in January 2020 upon delivery and
installation of two additional containers.
During
September 2019, the Company entered into an agreement to purchase
two containers to house the Bitcoin mining machines and paid a
deposit of $203. Full payment on these containers was made upon
delivery and installation in January 2020, at which time the cost
of containers was reclassified to property and equipment and
depreciated over its estimated useful life of 5 years using the
straight-line method.
Note
5. Notes Payable
May
2018 Notes
On
May 23, 2018, the Company entered into a securities purchase
agreement with two accredited investors, pursuant to which the
Company issued $840 in unsecured promissory notes for aggregate
consideration of $700 (the “May 2018 Notes”). 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 could have
prepaid 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
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
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 agreed to extend the maturity date of the
note to July 15, 2019 and did 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 were to be paid in cash unless the Company elected to make
payments in shares of the Company’s common stock, in which case the
number of shares to be issued would have been 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.
Because
the January 2019 and March 2019 amendments were considered a
substantive change, the Company accounted for the modifications as
an extinguishment of debt and recorded a gain of $320.
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 issuable was 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.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except share and per–share amounts)
Note
5. Notes Payable, continued
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. On May 15, 2019, the Company issued 10,568,087
shares of its common stock to Oasis Capital pursuant to the full
conversion of the May 2018 Notes.
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 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 could have
prepaid 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.
On
October 24, 2018, the Company entered into first 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
December 10, 2018, the Company entered into second 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 $1,875 during the year ended December 31,
2018.
On
January 28, 2019, the Company entered into the third amendment to
the June 2018 Note. Pursuant to the amendment, the borrower 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 agreed the Company would pay all installment payments
in cash unless both the Company and the borrower agreed to make
payments in shares of the Company’s common stock, in which case the
number of shares issuable would 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. The Company accounted for this amendment as an
extinguishment of debt and recorded a gain of $991.
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 eliminated the Company’s mandatory monthly
amortization payments and extended 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
$1,310.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except share and per–share amounts)
Note
5. Notes Payable, continued
On
December 31, 2019, the Company entered into an amendment to the
June 2018 Note to extend the maturity date to June 30, 2020. The
Company has also agreed to pay an extension fee in the amount of
$84, which has been added to outstanding balance for a total
outstanding principal balance of $929 as of December 31, 2019.
Additionally, this amendment deleted in its entirety, the
requirement for Iliad Research and Trading, L.P. to settle the
outstanding balance with: (a) cash, (b) common stock conversion
with a defined formula, or (c) any combination of (a) and (b) by no
later than December 15, 2019. The Company accounted for this
amendment as an extinguishment of debt and recorded a gain of $792.
In connection with recording the new debt, the Company recorded
debt discount of $877 including both (i) the time of value money
and (ii) the discount related to the conversion feature underlying
the debt instrument.
During
the year ended December 31, 2019, the Company issued 113,521,104
shares of its common stock upon the conversion of $2,315 in
outstanding principal by the holder of the June 2018
Note.
The
holder of the June 2018 Note also acquired 17,500,000 shares of the
Company’s common stock on April 12, 2019, and is an affiliate of
the acquirer of 160 shares of the Preferred Shares acquired during
2019, see Note 7 below, and are collectively subject to a maximum
beneficial ownership of 9.99%. Of the 160 shares of Preferred Stock
acquired by the affiliate, 115 shares are issued and outstanding as
of December 31, 2019.
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 was permitted to prepay all or any portion of the
outstanding balance at any time without pre-payment
penalty.
Notes
payable consisted of the following:
|
|
|
As of
December 31, 2019 |
|
|
|
|
Principal |
|
|
Discount |
|
|
Net |
|
|
June 2018
Note |
|
$ |
929 |
|
|
$ |
(877 |
) |
|
$ |
52 |
|
|
Total
notes payable |
|
$ |
929 |
|
|
$ |
(877 |
) |
|
$ |
52 |
|
| |
|
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 years December 31, 2019 and 2018, the Company recorded
accretion of debt discount of $5,605 and $919,
respectively.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except share and per–share amounts)
Note
6. Leases
On
August 9, 2016, the Company entered into an office sublease
agreement in Durham, North Carolina. The lease commenced on
September 1, 2016 and had an expiration date of January 31, 2020.
The Company terminated the sublease agreement in December 2019 in
connection with the relocation of its executive office to Raleigh,
North Carolina. The Company accounted for this termination by
removing the right of use asset and lease liability. There was no
impact on the statement of operations, The sublease security
deposit of $13 was recovered in full. Under the sublease agreement,
monthly rent was $6 for the first 12 -month period and $7 each
month thereafter.
The
Company accounted for its new office lease as an operating lease
under the guidance of Topic 842. Rent expense under the new lease
is $3 per month, with annual increases of 3% during the three-year
term. The Company used an incremental borrowing rate of 29.91%
based on the weighted average effective interest rate of its
outstanding debt. In December 2019, the Company recorded a Right of
Use Asset of $79 and a corresponding Lease Liability of $79. The
Right to Use Asset is accounted for as an operating lease and has a
balance, net of amortization of $78 at December 31,
2019.
Total
future minimum payments required under the lease agreement are as
follows:
|
Years
ended December 31, |
|
Amount |
|
|
2020 |
|
$ |
36 |
|
|
2021 |
|
|
37 |
|
|
2022 |
|
|
39 |
|
|
Total
undiscounted minimum future lease payments |
|
$ |
112 |
|
|
Less
Imputed interest |
|
|
(34 |
) |
|
Present
value of operating lease liabilities |
|
$ |
78 |
|
|
Disclosed
as: |
|
|
|
|
|
Current
portion |
|
$ |
19 |
|
|
Non-current
portion |
|
|
59 |
|
|
|
|
$ |
78 |
|
The
Company recorded rent expense of $64 and $77 for the years ended
December 31, 2019 and 2018, respectively.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except share and per–share amounts)
Note
7. Common Stock, Preferred Stock and Warrants
Common stock
Equity
Purchase Agreement under Form S-3
On
August 30, 2018, the Company and L2 Capital, LLC (“L2 Capital”)
entered into an equity purchase agreement, which was later amended
on November 30, 2018, whereby the Company could issue and sell to
L2 Capital from time to time up to $50,000 of the Company’s common
stock that was registered with the SEC under a registration
statement on Form S–3. Subject to the terms of the equity purchase
agreement, the Company provided notices (a “Put Notice”) requiring
L2 Capital to purchase a number of shares (the “Put Shares”) of the
common stock equal to the lesser of $500 and 200% of the average
trading volume of the common stock in the ten trading days
immediately preceding the date of such Put Notice. The terms also
provided the purchase price for such Put Shares to be the lowest
traded price on a principal market for any trading day during the
five trading days either following or beginning on the date on
which L2 Capital receives delivery of the Put Shares, multiplied by
95.0%.
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 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.
During
the year ended December 31, 2019, the Company issued 67,000,000
shares of its common stock in exchange for $3,681, net of issuance
cost of $50. Of the proceeds received during the first quarter of
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%.
During
the year ended December 31, 2019, the Company issued 52,000,000
shares of its common stock for net proceeds of $1,654, net of
deferred offering costs of $70 and transaction clearing fees of
$30.
Other
Common Stock Issuances
During
2018, the Company issued 10,094,251 shares of common stock upon the
exercise of outstanding warrants. Of these shares issued, cash
proceeds of $907 were received from the exercise of warrants to
purchase 1,625,000 shares of common stock and 8,469,251 shares of
common stock were issued in exchange for the cashless exercise of
warrants to purchase 3,954,530 shares of common stock.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except share and per–share amounts)
Note
7. Common Stock, Preferred Stock and Warrants.
continued
On
March 15, 2018, the Company issued 200,000 shares of its common
stock for $80.
On
December 7, 2018, a holder of one of the Company’s convertible
notes payable agreements converted their note and requested the
Company not issue the shares due to ownership limitations. On
February 6, 2018 and March 26, 2018, the ownership limitations were
satisfied, and the Company issued 3,381,819 shares of its common
stock.
On
December 15, 2017, the Company issued 2,000,000 shares of common
stock in a private placement, however the holder of the shares
requested the shares not be issued due to ownership limitations. On
June 20, 2018, the Company issued 750,000 of these shares and
issued the remaining shares in July 2018. On July 13, 2018 and July
20, 2018, the Company issued the remaining shares not issued under
the December 2017 private placement.
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 160 shares of the Preferred Shares acquired on during
2019 described below.
During
the years ended December 31, 2019 and 2018, the Company issued
160,500 and 2,387,273 shares of its common stock, respectively, to
consultants in exchange for services. These services were valued at
$60 and $2,272 during 2019 and 2018, respectively, based upon the
value of the shares issued.
In
connection with the termination of its management agreements, see
Note 9 below, the Company issued 10,250,000
shares
of its common stock to acquire 2,000 S9 miners from the third-party
investors. The S9 miners were valued at $311, based on the trading
value of the Company’s common stock on the date each management
agreement was terminated.
Preferred Stock
On
January 11, 2019, the Company’s Board of Directors approved the
authorization of 10,000 shares of Series B Preferred Stock with a
par value of $0.001 (“Series B Preferred Shares”). The holders of
the Series B Preferred Shares shall be entitled to receive, when,
as, and if declared by the Board of Directors of the Company, out
of funds legally available for such purpose, dividends in cash at
the rate of 12% of the stated value per annum on each Series B
Preferred Share. Such dividends shall be cumulative and shall
accrue without interest from the date of issuance of the respective
share of the Series B Preferred Shares. Each holder shall also be
entitled to vote on all matters submitted to stockholders of the
Company and shall be entitled to 55,000 votes for each Series B
Preferred Share owned at the record date for the determination of
stockholders entitled to vote on such matter or, if no such record
date is established, at the date such vote is taken or any written
consent of stockholders is solicited. In the event of a liquidation
event, any holders of the Series B Preferred Shares shall be
entitled to receive, for each Series B Preferred Shares, the stated
value in cash out of the assets of the Company, whether from
capital or from earnings available for distribution to its
stockholders. The Series B Preferred Shares are not convertible
into shares of the Company’s common stock.
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. 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 consolidated balance sheet.
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.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except share and per–share amounts)
Note
7. Common Stock, Preferred Stock and Warrants.
continued
The
common shares issued upon conversion of the Preferred Shares have
been registered under the Company’s then-effective registration
statement on Form S-3. On April 12, 2019, the Company sold 190
Preferred Shares for $1,890, net of issuance costs and on July 15,
2019 sold 10 Preferred Shares for $100. During the second and third
quarters of 2019, holders converted 50 Preferred Shares into
14,077,092 shares of common stock and 35 Preferred Shares into
13,528,575 shares of common stock, respectively. As of December 31,
2019, 115 shares of Preferred Stock are issued and
outstanding.
Upon
issuance of the Preferred Shares, the Company recorded a deemed
dividend based on the beneficial conversion feature underlying the
Preferred Shares. In connection with the April 12, 2019 and July
2019 issuances, the Company recorded deemed dividends of $859 and
$46, respectively, measured as the difference between the
conversion price of the Preferred Shares and the fair value of the
underlying common stock.
Warrants
The
following table summarizes information about shares issuable under
warrants outstanding during the year ended December 31,
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 |
|
|
(1,477,975 |
) |
|
$ |
0.72 |
|
|
|
|
|
|
|
|
|
|
Outstanding and
exercisable at December 31, 2019 |
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
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 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 $100.
During
August and September 2019, the Company entered into agreements with
three holders of warrants for 1,450,000 shares of common stock,
whereby the holders agreed to sell the warrants back to the Company
for $14. The Company subsequently cancelled these warrants, as well
as 17,975 warrants for no consideration, and there are no
outstanding warrants as of December 31, 2019.
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 year ended December 31, 2019:
|
|
|
Number of
shares |
|
|
Weighted
average
grant date fair
value |
|
|
Non–vested
at January 1, 2019 |
|
|
3,355,000 |
|
|
$ |
1.46 |
|
|
Granted |
|
|
100,000 |
|
|
$ |
0.04 |
|
|
Vested |
|
|
(2,805,000 |
) |
|
$ |
1.30 |
|
|
Non–vested
at December 31, 2019 |
|
|
650,000 |
|
|
$ |
1.24 |
|
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except share and per–share amounts)
Note
8. Stock–Based Compensation, continued
For
the years ended December 31, 2019 and 2018, the Company has
recorded $2,249 and $4,357, in employee and director stock–based
compensation expense, which is a component of general and
administrative expenses in the consolidated statement of
operations. 100,000 restricted shares granted to an employee on
July 29, 2019 were issued in November 2019. As of December 31,
2019, unamortized stock-based compensation costs related to
restricted share arrangements was $223 and will be recognized over
a weighted average period of 0.32 years.
Stock options
The
following is a summary of the Company’s stock option activity for
the year ended December 31, 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 |
|
|
|
|
|