UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10–Q

 

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018

 

[  ]	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.)

 

512 S. Mangum Street, Suite 408

Durham, NC 27701

(Address of principal executive offices)

 

(914) 630–7430

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [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 the registrant is a large accelerated filer, an accelerated filer, a non–accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b–2 of the Exchange Act.

 

Large accelerated filer [  ]	Accelerated filer [  ]
Non–accelerated filer [  ]	Smaller reporting company [X]
	Emerging growth company [  ]

 

 If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Exchange Act).

Yes [  ] No [X]

 

As of November 19, 2018, there were 100,576,627 shares of the registrant’s Common stock, $0.001 par value per share, issued and outstanding.

 

 

 

MGT CAPITAL INVESTMENTS, INC.

 

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2018

 

TABLE OF CONTENTS

 

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial statements	3
Condensed Consolidated Balance Sheets as of September 30, 2018 (Unaudited) and December 31, 2017	3
Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) for the three and nine months ended September 30, 2018 and 2017	4
Condensed Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the nine months ended September 30, 2018	5
Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2018 and 2017	6
Notes to the Unaudited Condensed Consolidated Financial Statements	8
Item 2. Management’s discussion and analysis of financial condition and results of operations	25
Item 3. Quantitative and qualitative disclosures about market risk	30
Item 4. Controls and procedures	30
PART II. OTHER INFORMATION	32
Item 1. Legal proceedings	32
Item 1A. Risk factors	32
Item 2. Unregistered sales of equity securities and use of proceeds	32
Item 3. Defaults upon senior securities	32
Item 4. Mine safety disclosures	32
Item 5. Other information	32
Item 6. Exhibits	33
Signatures	34

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial statements

 

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

 

		September 30, 2018				December 31, 2017
		(Unaudited)
Assets
Current assets
Cash and cash equivalents		$	275			$	9,519
Prepaid expenses and other current assets			177				894
Digital assets			17				48
Total current assets			469				10,461
Non-current assets
Property and equipment, net			3,350				3,116
Deferred offering costs			141				-
Total assets		$	3,960			$	13,577
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable		$	339			$	287
Accrued expenses			198				707
Other payables			-				710
Notes payable, net of discount			3,309				-
Total current liabilities			3,846				1,704
Commitments and Contingencies
Stockholders’ Equity
Undesignated preferred stock, $0.001 par value, 8,500,000 shares authorized at September 30, 2018 and December 31, 2017. No shares issued or outstanding at September 30, 2018 and December 31, 2017			-				-
Common stock, $0.001 par value; 125,000,000 shares authorized; 81,748,127 and 58,963,009 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively.			81				59
Additional paid-in capital			400,296				390,736
Accumulated deficit			(400,241	)			(378,900	)
Total equity attributable to MGT stockholders			136				11,895
Non-controlling interest			(22	)			(22	)
Total equity			114				11,873
Total liabilities, stockholders’ equity, and non-controlling interest		$	3,960			$	13,577

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

 

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except share and per-share amounts)

(Unaudited)

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2018				2017				2018				2017
Revenue		$	589			$	515			$	1,954			$	1,215
Operating expenses
Cost of revenue			1,470				365				3,366				754
General and administrative			2,885				9,614				10,377				16,621
Restructuring charge			-				-				2,499				-
Impairment of property and equipment			3,668				-				3,668				-
Sales and marketing			-				29				55				212
Research and development			-				83				47				269
Total operating expenses			8,023				10,091				20,012				17,856
Operating loss			(7,434	)			(9,576	)			(18,058	)			(16,641	)
Other non-operating expenses
Interest expense			(339	)			(1,133	)			(456	)			(1,371	)
Warrant modification expense			-				-				(139	)			-
Loss on sale of cybersecurity assets			-				-				(127	)			-
Gain (loss) on sale of property and equipment			-				9				(47	)			57
Inducement expense			-				(5,764	)			-				(5,764	)
Impairment/loss on sale of investments			-				-				-				(2,871	)
Total other non-operating expenses			(339	)			(6,888	)			(769	)			(9,949	)
Net loss			(7,773	)			(16,464	)			(18,827	)			(26,590	)
Deemed dividend			-				-				(2,514	)			-
Net loss attributable to common stockholders		$	(7,773	)		$	(16,464	)		$	(21,341	)		$	(26,590	)
Other comprehensive loss
Realized loss on sale of investments			-				-				-				66
Comprehensive loss		$	(7,773	)		$	(16,464	)		$	(21,341	)		$	(26,524	)
Per-share data
Basic and diluted loss per share		$	(0.11	)		$	(0.43	)		$	(0.32	)		$	(0.77	)
Weighted average number of common shares outstanding			72,013,925				38,628,092				65,804,987				34,434,638

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements 

 

 

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018

(in thousands, except share and per-share amounts)

(Unaudited)

 

										Additional								Total Equity								Total
		Common Stock								Paid-In				Accumulated				Attributable to				Non-controlling				Stockholders’
		Shares				Amount				Capital				Deficit				MGT 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				2				3,446				-				3,448				-				3,448
Forfeiture of restricted stock			(550,000	)			(1	)			(232	)			-				(233	)			-				(233	)
Stock issued for services			1,539,051				1				2,035				-				2,036				-				2,036
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			3,950,000				6				565				-				571				-				571
Issuance of common stock for prior year sale			2,000,000				1				(1	)			-				-				-				-
Exercise of warrants			9,344,251				10				897				-				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
Net loss			-				-				-				(18,827	)			(18,827	)			-				(18,827	)
Balance at September 30, 2018 (unaudited)			81,748,127			$	81			$	400,296			$	(400,241	)		$	136			$	(22	)		$	114

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

 

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, except share and per-share amounts)

(Unaudited)

 

		For the Nine Months Ended September 30,
		2018				2017
Cash Flows From Operating Activities
Net loss		$	(18,827	)		$	(26,590	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation			2,618				385
Impairment of property and equipment			3,668				-
Amortization of intangible assets			-				124
Stock-based compensation expense			5,417				11,856
Stock issued for amendment of notes payable			-				118
Warrant modification expense			139				-
Loss on sale of investments - short term			-				84
Impairment of long-term investments			-				2,787
Amortization of debt discount			455				1,071
Loss (gain) on sale of property and equipment			47				(58	)
Loss on sale of cybersecurity assets			127				-
Inducement expense			-				5,764
Change in operating assets and liabilities
Prepaid expenses and other current assets			530				(681	)
Digital currencies			31				(7	)
Accounts payable			12				1,797
Accrued expenses			(1,385	)			258
Net cash used in operating activities			(7,168	)			(3,092	)
Cash Flows From Investing Activities
Proceeds from sale of cybersecurity assets			60				-
Proceeds from sale of investments			-				26
Purchase of property and equipment			(6,994	)			(3,897	)
Proceeds from sale of property and equipment			427				440
Net cash used in investing activities			(6,507	)			(3,431	)
Cash Flows From Financing Activities
Proceeds from issuance of convertible notes payable and warrants			-				4,971
Proceeds from private placements of common stock			80				1,150
Proceeds from sale of common stock warrants			-				100
Proceeds from sale of stock under equity purchase agreement			365				-
Payment of deferred offering costs			(141	)			-
Proceeds from the issuance of notes payable, net of original issue discount			4,700				-
Repayment of notes payable			(1,480	)			-
Proceeds from exercise of warrants			907				-
Net cash provided by financing activities			4,431				6,221
Net change in cash and cash equivalents			(9,244	)			(302	)
Cash and cash equivalents, beginning of period			9,519				345
Cash and cash equivalents, end of period		$	275			$	43

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

 

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, except share and per-share amounts)

(Unaudited)

 

		For the Nine Months Ended September 30,
		2018				2017
Supplemental disclosure of cash flow information
Cash paid for interest		$	-			$	48
Cash paid for income tax		$	-			$	-
Non-cash investing and financing activities
Conversion of convertible debt and accrued interest		$	-			$	3,935
Issuance of L2 commitment note		$	-			$	160
Deemed dividend on trigger of down round provision		$	2,514			$	-
Reclassification adjustment upon sale of available for sale investment in net loss		$	-			$	66
Stock issued for services not yet rendered		$	2			$	-
Beneficial conversion feature on convertible debt and warrants issued concurrent with debt		$	-			$	4,593
Repayment of notes payable using proceeds from equity purchase agreement		$	366			$	-
Shares issued in settlement of accounts payable		$	-			$	401
Shares issued for prepaid services		$	-			$	343
Reclassification of deferred offering costs		$	160			$	-

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

 

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per–share amounts)

 

Note 1. Organization and Basis of Presentation

 

Organization

 

MGT Capital Investments, Inc. (“MGT Capital”) is a Delaware corporation, incorporated in 2000. MGT Capital was originally incorporated in Utah in 1977. “MGT” or the “Company” is comprised of the parent company, wholly–owned subsidiaries MGT Cybersecurity, Inc., Medicsight, Inc., MGT Sports, Inc., MGT Studios, Inc. (“MGT Studios”), MGT Interactive, LLC, MGT Gaming, Inc., MGT Mining One, Inc., MGT Mining Two, Inc., and MGT Sweden AB. MGT Studios also owns a controlling minority interest in the subsidiary M2P Americas, Inc. MGT’s corporate office is located in Durham, North Carolina.

 

On March 23, 2018, the Company’s stockholders approved an increase in the Company’s authorized common stock from 75,000,000 shares to 125,000,000 shares. On March 23, 2018, the Company filed an amendment to its Certificate of Incorporation with the state of Delaware to reflect this change.

 

On March 23, 2018, the Company’s stockholders approved a 1-for-2 reverse split of the Company’s common stock, to be effected only if needed for the Company’s application to uplist its common stock to a national exchange. As of November 19, 2018, the Company had not amended its Certificate of Incorporation to reflect this reverse split and such adjustments are not reflected within these unaudited condensed consolidated financial statements.

 

On June 13, 2018, the Company filed a universal shelf registration statement covering up to $150 million of various MGT securities, including common stock, preferred stock, debt securities, rights, warrants, and units, that the Company may sell from time to time. On August 10, 2018, this registration statement on Form S-3 was declared effective by the Securities and Exchange Commission.

 

Cryptocurrency mining

 

In September 2016, MGT commenced its Bitcoin mining operations in the Wenatchee Valley area of central Washington. Throughout 2017, the Company expanded its mining capacity with the purchase of additional Bitcoin mining machines and by entering into hosting and power agreements with Washington facilities owners. The Company also entered into management agreements with third party investors whereby the investors purchased the mining hardware, and the Company receives both a fee to manage the mining operations plus one-half of the net operating profit.

 

Towards the end of 2017, the Company determined that there was inadequate electric power in Washington to support the Company’s growth, and the Company moved swiftly to find a new facility to conduct its mining operations. By the end of 2017, the Company made the decision to move its principal mining operations to northern Sweden, a geographic location with historically low ambient temperatures and available inexpensive electricity. The Company entered into a hosting agreement (the “Hosting Agreement”) with Beacon Leasing LLC (“Beacon”), pursuant to which Beacon agreed to deliver a turn-key solution in northern Sweden with up to 15 megawatts of electricity capacity, which included a facility with power, cooling, and hosting services for a fixed price of $810 per month. The facility in Sweden is owned by the city of Älvsbyn and leased by a subsidiary of Beacon. Beacon committed to provide a fully functional facility by the end of March 2018. The Hosting Agreement required the Company to pay $1,620 to Beacon, representing the first and last month of service. During the first quarter of 2018, the Company took delivery of an additional 2,000 Bitcoin mining machines in Sweden and moved 4,300 machines (including 2,100 investor-owned machines) from Washington to Sweden.

 

Beacon failed to deliver the fully built out facility and necessary power supply levels required by MGT by the end of March 2018. Through the first quarter of 2018 and into the second quarter, MGT personnel made visits to Sweden and assisted Beacon with efforts to get the facility up and running. The Company also advanced additional funds to Beacon to maximize operational capacity as quickly as possible. During April 2018, the Company became involved in the design and setup of the Sweden facility due to concern that Beacon may have overstated their construction abilities and financial capacity.

 

 

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per–share amounts)

 

Note 1. Organization and Basis of Presentation, continued

 

Cryptocurrency mining, continued

 

On May 16, 2018, the Company was informed that none of the amounts due from Beacon to the electric utility serving the Älvsbyn facility were paid and that the utility would begin shutting down the electricity to the Älvsbyn facility. On the same day, the Company notified Beacon that it was in breach of the Hosting Agreement. In order to avoid a shutdown of the facility and a suspension of mining operations, the Company paid $368 directly to the electric utility, as a good faith deposit. During the three months ended September 30, 2018, the Company paid an additional aggregate of $947 to the utility provider for power consumed.

 

Subsequent to May 16, 2018, the Company intensified its efforts to determine the extent of Beacon’s non-performance under the Hosting Agreement. Management made several more trips to Sweden to supervise the completion of the facility as well as investigate Beacon’s accounting records. The Company determined that Beacon also was faced with unpaid invoices from various material and service providers to the facility.

 

Beginning in late May 2018, the Company took steps to become the direct operator of the Swedish facility to gain control of the situation, protect its assets, and maximize operational capacity as quickly as possible. These actions included paying the outstanding amounts owed by Beacon in order to maintain the vendor relationships needed to complete the facility and forming MGT Sweden AB in anticipation of assuming the building lease and the power agreements.

 

During the three months ended June 30, 2018, the Company recorded restructuring expense of $2,499, which included the write-off of the unamortized balance of the initial deposit paid to Beacon in the amount of $1,350 and $1,149, for additional costs paid by the Company to service providers and vendors engaged to complete the facility. These costs consisted of unpaid obligations for services provided prior to the second quarter of 2018, including:

 

Costs to bring electricity provider current and set up additional transformers		$	893
Satisfaction of payables for materials, repairs and supplies			206
Satisfaction of payables for payroll and consulting fees			50
TOTAL		$	1,149

 

The cost of services provided after the Company took over full direct operational control of the facility are included in cost of revenue and general and administrative expenses in the Company’s unaudited condensed consolidated statements of operations and comprehensive loss.

 

Continuing issues arising from poor engineering and demands from the electric utility forced the Company to devote a significant amount of time and effort to the operations in Sweden. Further, the Company determined that the financial investment to fully assume the position of Beacon was excessive. Simultaneously, based on an analysis of available facilities in the United States, the Company concluded that the United States provided hosting opportunities for the Company. On September 24, 2018, the combination of these factors led to the Company deciding to forgo any further monetary investment in Sweden, and the Company is in the process of relocating all of the miners in Sweden to a facility in Colorado.

 

As of September 30, 2018, MGT owned and operated approximately 500 miners located in a leased facility in Quincy, Washington. The Company also owns 4,200 miners which are in the process of being moved to a leased facility in Colorado. In addition, the Company operates about 2,100 miners pursuant to management agreements, which are also in the process of being moved to the leased facility in Colorado. All miners owned or managed by MGT are S9 Antminers sold by Bitmain Technologies LTD. In addition to the S9 Antminers, the Company owns 50 custom designed GPU-based Ethereum mining rigs. During the nine months ended September 30, 2018, the Company mined 230.7 Bitcoin for total revenue of $1,934. In addition, the miners the Company operates pursuant to the management agreements mined 183.6 Bitcoin during the same period.

 

 

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per–share amounts)

 

Note 1. Organization and Basis of Presentation, continued

 

Legacy business – cybersecurity

 

On January 26, 2018, the Company announced the end of its business relationship with cybersecurity pioneer John McAfee. Since August 2017, Mr. McAfee had served as Chief Cybersecurity Visionary of the Company, guiding the development of the Company’s cybersecurity business, including Sentinel, an enterprise class network intrusion detector, released in October 2017. The Company also owned the intellectual property associated with developing and marketing a mobile phone with extensive privacy and anti-hacking features.

 

On March 19, 2018, the Company announced it had ended its cybersecurity operations by selling the Sentinel product line to a new entity formed by the unit’s management team and stopping development of the privacy phone. The Sentinel assets were sold for consideration of $60 in cash and a $1,000 promissory note, convertible into a 20% equity interest of the buyer.

 

Basis of presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10–Q and Rule 10 of Regulation S–X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America. However, in the opinion of the management of the Company, all adjustments necessary for a fair presentation of the financial position and operating results have been included in these statements. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10–K for the fiscal year ended December 31, 2017, as filed with the SEC on April 2, 2018. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for any subsequent quarters or for the year ending December 31, 2018.

 

Note 2. Going Concern and Management’s Plans

 

The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of September 30, 2018, the Company had incurred significant operating losses since inception and continues to generate losses from operations. As of September 30, 2018, the Company had an accumulated deficit of $400,241. As of September 30, 2018, MGT’s cash and cash equivalents were $275. As of November 19, 2018, MGT’s cash and cash equivalents were $155.

 

Management’s plans include maximizing the utilization of its cryptocurrency mining machines, which were delivered during early 2018. As discussed in Note 1, the Company experienced additional delays and costs due to the non-performance of a key vendor. The Company is currently in the process of moving the majority of its miners from Sweden to a facility in Colorado. Until that process is complete, the Company’s revenue will be significantly less than historical results. Based on current budget assumptions, the Company believes that it will be able to meet its operating expenses and obligations for one year from the date these consolidated financial statements are issued. The Company will need to raise additional funding to grow its operations and to pay current maturities of debt. There can be no assurance however that the Company will be able to raise additional capital when needed, or at terms deemed acceptable, if at all. Such factors raise substantial doubt about the Company’s ability to sustain operations for at least one year from the issuance of these unaudited condensed consolidated financial statements. Management’s plans, including the operation of its existing cryptocurrency mining machines, the raising of additional capital and potentially curtailing its operations alleviate such substantial doubt. The accompanying unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

 

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per–share amounts)

 

Note 3. Summary of Significant Accounting Policies

 

Principles of consolidation

 

The unaudited condensed consolidated financial statements include the accounts of MGT and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated. Non-controlling interest represents the non-controlling equity investment in MGT subsidiaries, plus the minority investors’ share of the net operating results and other components of equity relating to the non-controlling interest.

 

Reclassification

 

Certain amounts in prior periods have been reclassified to conform to current period presentation. These reclassifications had no effect on the previously reported net loss.

 

Use of estimates and assumptions and critical accounting estimates and assumptions

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and also affect the amounts of revenues and expenses reported for each period. Actual results could differ from those which result from using such estimates. Management utilizes various other estimates, including but not limited to determining the estimated lives of long-lived assets, determining the potential impairment of intangibles and other long-lived assets, the fair value of warrants issued, the fair value of stock options, the fair value of conversion features, the fair value of the deemed dividend, the recognition of revenue, the valuation allowance for deferred tax assets and other legal claims and contingencies. The results of any changes in accounting estimates are reflected in the financial statements in the period in which the changes become evident. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period that they are determined to be necessary.

 

Revenue recognition

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) which was subsequently amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12, and ASU 2017-13. These ASUs outline a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The guidance includes a five-step framework that requires an entity to: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when the entity satisfies a performance obligation. In July 2015, the FASB deferred the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017. A full retrospective or modified retrospective approach was required upon adoption. The Company has adopted ASU No. 2014-09 effective January 1, 2018.

 

The Company has elected to apply the modified retrospective method and the impact was determined to be immaterial on the condensed consolidated financial statements. Accordingly, the new revenue standard has been applied prospectively in its condensed consolidated financial statements from January 1, 2018 forward and reported financial information for historical comparable periods will not be revised and will continue to be reported under the accounting standards in effect during those historical periods.

 

The Company has performed an analysis and identified its revenues and costs that are within the scope of the new guidance. The Company determined that its methods of recognizing revenues have not been significantly impacted by the new guidance.

 

The Company’s primary revenue stream is related to the mining of digital currencies. The Company derives its revenue by solving “blocks” to be added to the blockchain and providing transaction verification services within the digital currency networks of cryptocurrencies, such as Bitcoin and Ethereum, commonly termed “cryptocurrency mining.” In consideration for these services, the Company receives digital currency (“Coins”). The Coins are recorded as revenue, using the average spot price of Bitcoin on the date of receipt. The Coins are recorded on the balance sheet as inventory at the lower of cost or net realizable value. Any adjustments to net realizable value would be recorded to cost of revenues. Any gain or loss on sale would be recorded to other income/expense. Cost of revenues includes equipment depreciation, rent, net realizable value adjustments, and electricity costs.

 

Due to a lack of authoritative and non-authoritative guidance, the Company had previously recorded the Coins as a security, where the Company would record revaluation gains and losses to cost of revenue. As of September 30, 2018, the Company reviewed certain recently released non-authoritative guidance on the accounting for held crypto-currency assets, in which the Company should record its Coins as inventory. The Company determined that this change in accounting policy had no material effect on its previously filed financial statements.

 

 

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per–share amounts)

 

Note 3. Summary of Significant Accounting Policies, continued

 

Revenue recognition, continued

 

The Company also recognizes revenue from its Management Agreements (as defined in Note 9). The Company receives a fee from each Management Agreement based on the amount of Bitcoin mined and is reimbursed for any electricity costs incurred to run the bitcoin mining machines it manages in its facility.

 

Income taxes

 

The Company accounts for income taxes in accordance with Accounting Standards Codification (“ASC”) 740, “Income Taxes”. ASC 740 requires an asset and liability approach for financial accounting and reporting for income taxes and established for all the entities a minimum threshold for financial statement recognition of the benefit of tax positions, and requires certain expanded disclosures. The provision for income taxes is based upon income or loss after adjustment for those permanent items that are not considered in the determination of taxable income. Deferred income taxes represent the tax effects of differences between the financial reporting and tax basis of the Company’s assets and liabilities at the enacted tax rates in effect for the years in which the differences are expected to reverse. The Company evaluates the recoverability of deferred tax assets and establishes a valuation allowance when it is more likely than not that some portion or all the deferred tax assets will not be realized. Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In management’s opinion, adequate provisions for income taxes have been made. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.

 

The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017. The Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%. As of the completion of these unaudited condensed consolidated financial statements and related disclosures, we have made a reasonable estimate of the effects of the Tax Act. This estimate incorporates assumptions made based upon the Company’s current interpretation of the Tax Act, and may change as the Company may receive additional clarification and implementation guidance and as the interpretation of the Tax Act evolves. In accordance with the Securities and Exchange Commission (the “SEC”) Staff Accounting Bulletin No. 118, the Company will finalize the accounting for the effects of the Tax Act no later than the fourth quarter of 2018. Future adjustments made to the provisional effects will be reported as a component of income tax expense in the reporting period in which any such adjustments are determined. Based on the new tax law that lowers corporate tax rates, the Company revalued its deferred tax assets. Future tax benefits are expected to be lower, with the corresponding one time charge being recorded as a component of income tax expense.

 

The Company was previously delinquent in the filing of its 2015 and 2016 US Federal and state tax returns. On August 10, 2018, the Company filed its delinquent returns and is now in good standing in all income tax jurisdictions.

 

Loss per share

 

Basic loss per share is calculated by dividing net loss applicable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted loss per share is calculated by dividing the net loss attributable to common shareholders by the sum of the weighted average number of common shares outstanding plus potential dilutive common shares outstanding during the period. Potential dilutive securities, comprised of unvested restricted shares, convertible debt stock warrants and stock options, are not reflected in diluted net loss per share because such potential shares are anti–dilutive due to the Company’s net loss.

 

Accordingly, the computation of diluted loss per share for the three and nine months ended September 30, 2018 excludes 3,555,000 unvested restricted shares, 6,000,000 shares issuable under stock options, and 6,227,975 shares issuable under warrants, as they are anti-dilutive due to the Company’s net loss. The computation of diluted loss per share for the three and nine months ended September 30, 2017 excludes 4,100,000 unvested restricted shares, 4,357,143 shares issuable from the conversion of notes payable, 6,000,000 shares issuable under options and 13,196,699 shares issuable under warrants, as they are anti–dilutive due to the Company’s net loss.

 

 

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per–share amounts)

 

Note 3. Summary of Significant Accounting Policies, continued

 

Stock–based compensation

 

The Company recognizes compensation expenses for all equity–based payments in accordance with ASC 718 “Compensation – Stock Compensation”. Under fair value recognition provisions, the Company recognizes equity–based compensation net of an estimated forfeiture rate and recognizes compensation cost only for those shares expected to vest over the requisite service period of the award.

 

Restricted stock awards are granted at the discretion of the compensation committee of the board of directors of the Company. These awards are restricted as to the transfer of ownership and generally vest over the requisite service periods, typically over a 12 to 24-month period (vesting on a straight–line basis). The fair value of a stock award is equal to the fair market value of a share of the Company’s common stock on the grant date.

 

The fair value of an option award is estimated on the date of grant using the Black–Scholes option valuation model. The Black–Scholes option valuation model requires the development of assumptions that are inputs into the model. These assumptions are the expected stock volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock and the expected forfeiture rate. Expected volatility is calculated based on the historical volatility of the Company’s common stock over the expected term of the option. Risk–free interest rates are calculated based on continuously compounded risk–free rates for the appropriate term.

 

Determining the appropriate fair value model and calculating the fair value of equity–based payment awards requires the input of the subjective assumptions described above. The assumptions used in calculating the fair value of equity–based payment awards represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment. The Company is required to estimate the expected forfeiture rate and recognize expense only for those shares expected to vest.

 

The Company accounts for share–based payments granted to non–employees in accordance with ASC 505–50, “Equity Based Payments to Non–Employees.” The Company determines the fair value of the stock–based payment as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more readily determinable. If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete. The fair value of unvested equity instruments is re-measured each reporting period and such re-measured value is amortized over the requisite remaining service period.

 

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.

 

 

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per–share amounts)

 

Note 3. Summary of Significant Accounting Policies, continued

 

Recent accounting pronouncements

 

Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying unaudited condensed consolidated financial statements, other than those disclosed below and in the Company’s Annual Report on Form 10-K, filed with the SEC on April 2, 2018.

 

In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The guidance is effective for public entities, certain not-for-profit entities, and certain employee benefit plans for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other entities, ASU 2018-07 is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company is evaluating the impact of adopting this pronouncement.

 

In July 2018, the FASB issued ASU 2018-10 Leases (Topic 842), Codification Improvements and ASU 2018-11 Leases (Topic 842), Targeted Improvements, to provide additional guidance for the adoption of Topic 842. ASU 2018-10 clarifies certain provisions and correct unintended applications of the guidance such as the application of implicit rate, lessee reassessment of lease classification, and certain transition adjustments that should be recognized to earnings rather than to stockholders’ equity. ASU 2018-11 provides an alternative transition method and practical expedient for separating contract components for the adoption of Topic 842. In February 2016, the FASB issued ASU 2016-02 Leases (Topic 842) which requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases with terms greater than 12 months. ASU 2018-11, ASU 2018-10, and ASU 2016-02 (collectively, “the new lease standards”) are effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect the new lease standards will have on its Condensed Consolidated Financial Statements; however, the Company anticipates recognizing assets and liabilities arising from any leases that meet the requirements under the new lease standards on the adoption date and including qualitative and quantitative disclosures in the Company’s Notes to the Condensed Consolidated Financial Statements.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (“ASC 820”) , Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 is intended to improve the effectiveness of fair value measurement disclosures. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of adopting this pronouncement.

 

In August 2018, the FASB issued ASU 2018-15, Intangible – Goodwill and Other – Internal-Use Software (“ASU 2018-15”) , which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of adopting this pronouncement.

 

Management’s evaluation of subsequent events

 

The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the review, other than what is described in Note 12 – Subsequent Events, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the unaudited condensed consolidated financial statements.

 

 

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per–share amounts)

 

Note 4. Sale of Cybersecurity Assets

 

On March 16, 2018, the Company sold its Sentinel product line to a new entity formed by the unit’s management team for consideration of $60 and a $1,000 promissory note, convertible into a 20% equity interest of the buyer. Due to the early stage nature of the buyer’s business, the Company believes the collection of the promissory note is doubtful and therefore has determined the fair value to be zero. The Company recorded a loss on sale as follows:

 

Cash proceeds		$	60
Less:
Assets sold			(27	)
Separation payments to former management			(40	)
Common stock issued to former management, at fair value			(120	)
Loss on sale of cybersecurity assets		$	(127	)

 

Note 5. Property and Equipment

 

Property and equipment consisted of the following:

 

		As of
		September 30, 2018				December 31, 2017
Computer hardware and software		$	17			$	10
Crypto-currency mining machines			3,344				3,685
Property and equipment, gross			3,361				3,695
Less: Accumulated depreciation			(11	)			(579	)
Property and equipment, net		$	3,350			$	3,116

 

The Company recorded depreciation expense of $1,429 and $189 for the three months ended September 30, 2018 and 2017, respectively. The Company recorded depreciation expense of $2,618 and $385 for the nine months ended September 30, 2018 and 2017, respectively.

 

On February 9, 2018, the Company sold Bitcoin machines with an aggregate book value of $474 for gross proceeds of $427 and recorded a loss on the sale of $47.

 

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. 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.

 

 

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per–share amounts)

 

Note 6. Notes Payable

 

On May 23, 2018, the Company entered into a securities purchase agreement with two accredited investors, pursuant to which the Company issued $840 in unsecured promissory notes for aggregate consideration of $700 (the “May 2018 Notes”). The outstanding balance of the May 2018 Notes is to be made in nine equal monthly installments beginning July 23, 2018. The May 2018 Notes mature on March 23, 2019. Subject to the terms and conditions set forth in the May 2018 Notes, the Company may prepay all or any portion of the outstanding balance at any time without pre-payment penalty. Upon the occurrence of an event of default, the outstanding balance of the May 2018 Notes shall immediately increase to 120% of the outstanding balance immediately prior to the event of default and become immediately due and payable.

 

On June 1, 2018, the Company entered into a note purchase agreement with an accredited investor, pursuant to which the Company issued an unsecured promissory note in the amount of $3,600 (the “June 2018 Note”) for consideration of $3,000. The outstanding balance of the June 2018 Note is to be made in nine equal monthly installments beginning August 1, 2018. The June 2018 Note matures on April 1, 2019. Subject to the terms and conditions set forth in the June 2018 Note, the Company may prepay all or any portion of the outstanding balance at any time without pre-payment penalty. Upon the occurrence of an event of default, the outstanding balance of the June 2018 Note shall immediately increase to 120% of the outstanding balance immediately prior to the event of default and become immediately due and payable.

 

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 is due in full on February 28, 2019. The August 2018 Note bears interest at a rate of 8% per annum. Subject to the terms and conditions set forth in the August 2018 Note, the Company may prepay all or any portion of the outstanding balance at any time without pre-payment penalty. Upon the occurrence of an event of default, the interest rate on the August 2018 Note shall immediately increase to 24% per annum.

 

Notes payable consisted of the following:

 

		As of September 30, 2018
		Principal				Discount				Net
May 2018 Notes		$	560			$	(53	)		$	507
June 2018 Note			2,400				(246	)			2,154
August 2018 Note			697				(49	)			648
Total notes payable		$	3,657			$	(348	)		$	3,309

 

As of December 31, 2017, the Company had no notes payable outstanding.

 

During the three months ended September 30, 2018 and 2017, the Company recorded amortization of debt discount of $338 and $1,023, respectively.

 

During the nine months ended September 30, 2018 and 2017, the Company recorded amortization of debt discount of $455 and $1,071, respectively.

 

 

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per–share amounts)

 

Note 7. Common Stock and Warrant Issuances

 

Issuance of common stock

 

On January 17, 2018, the Company received $281 from the exercise of warrants to purchase 375,000 shares of common stock.

 

On March 15, 2018, the Company received $80 from the issuance of 200,000 shares of common stock to an investor.

 

On April 30, 2018, the Company received $313 from the exercise of warrants to purchase 625,000 shares of common stock.

 

On May 2, 2018, the Company received $313 from the exercise of warrants to purchase 625,000 shares of common stock.

 

During the nine months ended September 30, 2018, the Company issued an aggregate of 7,719,251 shares of common stock in exchange for the cashless exercise of warrants to purchase 3,938,630 shares of common stock.

 

During the nine months ended September 30, 2018, the Company issued 1,539,051 shares of its common stock to consultants in exchange for services. These services were valued using the value of the shares issued of $2,036. During the nine months ended September 30, 2017, the Company issued 1,855,000 shares of its common stock to consultants in exchange for services. These services were valued using the value of the shares issued of $2,681.

 

On December 7, 2017, a holder of one of the Company’s convertible notes payable converted their note but requested that the Company not issue the shares due to ownership limitation provisions. On February 6, 2018 and March 26, 2018, the ownership limitations were satisfied and the Company issued 3,381,816 shares of its common stock to this former noteholder.

 

On December 15, 2017, the Company sold 2,000,000 shares of its common stock in a private placement, but the owners of the shares requested that these shares not be issued due to ownership limitations. On June 20, 2018, the Company issued 750,000 of these shares. On July 13, 2018 and July 20, 2018, the Company issued the remaining shares not issued under the December private placement.

 

Equity Purchase Agreement

 

On August 30, 2018, the Company and L2 Capital, LLC (“L2 Capital”), a Kansas limited liability company, entered into an equity purchase agreement (the “Equity Purchase Agreement”), pursuant to which the Company may issue and sell to L2 Capital from time to time up to $35,000 of the Company’s common stock that is registered with the SEC under a registration statement on a Form S–3. Pursuant to the Equity Purchase Agreement, the Company may require L2 Capital to purchase shares of common stock that is equal to the lesser of $500 and 200% of the average trading volume of the common stock in the ten prior trading days, upon the Company’s delivery of a put notice to L2 Capital. L2 Capital shall purchase such number of shares of common stock at a per share price that equals to the lowest volume weighted average trading price of the common stock during the five prior trading days multiplied by 93.5%.

 

During the three and nine months ended September 30, 2018, the Company issued 3,950,000 shares of its common stock in exchange for $731. Of that amount, $366 was applied directly as payment against the August 2018 Note.

 

During the nine months ended September 30, 2018, the Company charged $160 against the Equity Purchase Agreement related to deferred financing costs from its previous equity purchase agreement, which was terminated concurrent to the entrance into the Equity Purchase Agreement.

 

 

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per–share amounts)

 

Note 7. Common Stock and Warrant Issuances, continued

 

Warrants

 

The following table summarizes information about shares issuable under warrants outstanding at September 30, 2018:

 

		Warrant shares outstanding				Weighted average exercise price				Weighted average remaining life				Intrinsic value
Outstanding at January 1, 2018			13,720,742			$	1.49
Issued			-
Additional warrants issued for trigger of anti-dilution protection			1,000,000			$	0.40
Exercised			(5,563,630	)		$	0.91
Expired or cancelled			(2,929,137	)		$	0.60
Outstanding at September 30, 2018			6,227,975			$	0.94				1.94			$	-
Exercisable at September 30, 2018			6,227,975			$	0.94				1.94			$	-

 

During the nine months ended September 30, 2018, the Company changed the exercise terms of certain of its warrants to allow for and induce a cashless exercise. During the nine months ended September 30, 2018, the Company recorded $139 in warrant modification expense due to the modifications.

 

Deemed dividend

 

On March 15, 2018, an anti-dilution protection feature in certain of the Company’s warrants was triggered, causing a decrease in the exercise price of those warrants from $4.50 to $0.40. In accordance with ASC 260-10-25, the Company has recorded a deemed dividend equal to the change in fair value of the warrants due to the decrease in exercise price in the amount of $2,514.

 

 

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per–share amounts)

 

Note 8. Stock–Based Compensation

 

Issuance of restricted common stock – directors, officers and employees

 

On January 15, 2018, the Company granted 10,000 shares of restricted common stock to an employee of the Company. The Company valued the award on its grant date and is expensing the grant date fair value over the 12 month vesting period.

 

On March 1, 2018, the Company granted 750,000 shares of restricted common stock to Mr. Robert Lowrey in connection with his employment agreement to serve as the Company’s Chief Financial Officer. The Company valued the award on its grant date and is expensing the grant date fair value over the 24 month vesting period.

 

On April 6, 2018, the Company granted 900,000 shares of restricted common stock to certain of its officers and directors in connection with the commencement of operations in Sweden. The Company valued the awards on their grant date and is expensing the grant date fair value over the 12 month vesting period.

 

On April 6, 2018, the Company granted 600,000 shares of restricted common stock to Mr. Robert Ladd in connection with his employment agreement to serve as the Company’s Chief Executive Officer. The Company valued the award on its grant date and is expensing the grant date fair value over the 24 month vesting period.

 

On July 10, 2018, the Company granted 100,000 shares of restricted common stock to Mr. Stephen Schaeffer in connection with incentive compensation from his original employment agreement as President of Cryptocurrency Operations. A deployment benchmark was met, making Mr. Schaeffer eligible for the shares issuance. The Company valued the award on its grant date and is expensing the grant date fair value immediately as there is no vesting period.

 

On August 1, 2018, the Company granted 250,000 shares of restricted common stock to Mr. Robert Lowrey in connection with his employment as Chief Financial Officer. The Company valued the award on its grant date and is expensing the grant date fair value over the 17 month vesting period.

 

On September 17, 2018, the Company granted 100,000 shares of restricted common stock to a former employee in connection with the termination of their position and separation agreement. The Company valued the award on its grant date and is expensing the grant date fair value immediately as there is no vesting period.

 

On September 30, 2018, the Company granted 50,000 shares of restricted common stock to an employee of the Company. The Company valued the award on its grant date and is expensing the grant date fair value over the 18 month vesting period.

 

 

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per–share amounts)

 

Note 8. Stock–Based Compensation, continued

 

Issuance of restricted common stock – directors, officers and employees, continued

 

The Company’s activity in restricted common stock was as follows for the nine months ended September 30, 2018:

 

		Number of shares				Weighted average grant date fair value
Non–vested at January 1, 2018			3,850,000			$	1.42
Granted			2,760,000			$	1.33
Vested			(2,655,000	)		$	1.40
Forfeited			(550,000	)		$	1.06
Non–vested at September 30, 2018			3,405,000			$	1.44

 

For the three months ended September 30, 2018 and 2017, the Company has recorded $1,114 and $1,248, respectively, in employee and director stock-based compensation, which is a component of general and administrative expenses in the unaudited condensed consolidated statements of operations and comprehensive loss.

 

For the nine months ended September 30, 2018 and 2017, the Company has recorded $3,448 and $2,253, in employee and director stock–based compensation expense, which is a component of general and administrative expenses in the unaudited condensed consolidated statement of operations and comprehensive loss.

 

As of September 30, 2018, unamortized stock-based compensation costs related to restricted share arrangements was $3,374, and will be recognized over a weighted average period of 0.96 years.

 

 

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per–share amounts)

 

Note 8. Stock–Based Compensation, continued

 

Stock options

 

The following is a summary of the Company’s stock option activity for the nine months ended September 30, 2018:

 

		Options				Weighted average exercise price				Weighted average Grant date fair value				Weighted average remaining life				Intrinsic value
Outstanding – January 1, 2018			6,000,000			$	0.71			$	1.29
Granted			–
Exercised			–
Forfeited/Cancelled			–
Outstanding – September 30, 2018			6,000,000			$	0.71			$	1.29				1.34			$	–
Exercisable – September 30, 2018			6,000,000			$	0.71			$	1.29				1.34			$	–

 

For the three months ended September 30, 2018 and 2017, the Company has recorded $0 and $5,169, respectively, in stock option related stock-based compensation expense, which is a component of general and administrative expenses in the unaudited condensed consolidated statement of operations and comprehensive loss.

 

For the nine months ended September 30, 2018 and 2017, the Company has recorded $0 and $7,094, respectively, in stock option related stock-based compensation expense, which is a component of general and administrative expenses in the unaudited condensed consolidated statement of operations and comprehensive loss.

 

As of September 30, 2018, there were no unrecognized compensation costs, as all outstanding stock options are fully vested.

 

Note 9. Commitments and Contingencies

 

Operating commitments

 

On December 7, 2017 and January 9, 2018, the Company entered into agreements with Beacon whereby Beacon agreed to provide hosting services to the Company for purposes of its mining operations and provide 15 megawatts of uninterrupted power in Sweden. The agreement is for a term of 24 months for a fee of $810 per month. The Company prepaid the first and last month of service in the amount of $1,620.

 

As described in Note 1, Beacon did not meet its obligations under the agreement with the Company. On May 16, 2018, the Company notified Beacon that it was in breach of the agreement, demanding reimbursement of the Company’s prepayment and notifying Beacon that it would not be paying the monthly fee due under the agreement. Beacon has not responded to the Company’s notification and the Company is currently exploring its potential remedies against Beacon.

 

On June 30, 2018, the Company wrote off the un-recognized portion of its prepayment in the amount of $1,350 to restructuring charge on the Company’s unaudited condensed consolidated statements of operations and consolidated loss.

 

On October 23, 2018, the Company entered into a hosting agreement with a hosting facility in Colorado where it is in the process of moving its machines from Sweden. (See Note 12 – Subsequent Events). The Company is currently in the process of shipping its mining machines to that location.

 

 

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per–share amounts)

 

Note 9. Commitments and Contingencies, continued

 

Management agreements

 

On October 12, 2017, MGT entered into two management agreements with two accredited investors, Deep South Mining LLC and BDLM, LLC. On November 21, 2017, the Company entered into a third management agreement with another accredited investor, Buckhead Crypto, LLC (“Buckhead Crypto”) (all three accredited investors together are “Users”, each agreement a “Management Agreement”, and all three agreements together are “Management Agreements”). Each of the Users agreed on substantially similar terms to purchase an aggregate of 2,376 Bitmain Antminer S9 mining computers (the “Bitcoin Hardware”) for a total of $3,650 to mine Bitcoin with the Company acting as the exclusive manager for each of the Users. In addition, the Users have agreed to pay to the Company, in advance, the first three months of expected electricity costs of the Bitcoin mining operations in the sum of $691, which is included in Other Payables on the Company’s consolidated balance sheet as of December 31, 2017. Initial electricity cost for the first three months following delivery of the Bitcoin Hardware shall be reimbursed to the Users within the first three months of operation. Each Management Agreement is in effect for 24 months from the date that the Bitcoin Hardware begins mining operations, and may be terminated by mutual written agreement.

 

Pursuant to the Management Agreements, the Company shall provide for installation, hosting, maintenance and repair and provide ancillary services necessary to operate the Bitcoin Hardware. In accordance with each of the Management Agreements, each of the Users will gain a portion of the Bitcoin mined called the user distribution portion (“User Distribution Portion”). The User Distribution Portion is 50% of the amount of Bitcoin mined net of the operating fee (10% of the total Bitcoin mined) and the electricity cost.

 

Furthermore, upon execution of the Management Agreements, as an incentive to the Users, the Company issued to the Users an aggregate of 436,100 shares of the Company’s common stock and a Series F warrant to purchase 436,100 shares of the Company’s common stock at an initial exercise price of $2.00 per share exercisable for a period of three years to the Users. The Company issued the shares of common stock and issued all three Series F warrants for the benefits of the three Users on the respective dates of the execution of the Management Agreements.

 

On February 28, 2018, the Company and Buckhead Crypto terminated their Management Agreement. The Company purchased the Bitcoin mining machines for $767 and refunded prepaid electricity paid by Buckhead Crypto of $133.

 

On February 13, 2018, the Company entered into a new management agreement with a third party with terms similar to the other Management Agreements. The third party agreed to purchase 200 Bitmain Antminer S9 mining computers for a total of $428 to mine Bitcoin with the Company acting as the exclusive manager. This management agreement is in effect for 24 months from the date that the Bitcoin Hardware begins mining operations, and may be terminated by mutual written agreement.

 

As of September 30, 2018 and December 31, 2017, the Company owed $0 and $0, respectively, to the Users as the User Distribution Portion under the Management Agreements.

 

Collaborative Ventures

 

On August 14, 2018, the Company entered into a collaborative venture with a third party cryptocurrency miner to develop a fully contained crypto currency mining pod (the “POD5 Agreement”). Pursuant to the POD5 Agreement, the Company will assist with the design and development of the pods. The Company will retain naming rights to the pods and receive royalty payments from the third party in exchange for providing capital as well as engineering and design expertise. As an inducement to enter into the POD5 Agreement, the Company paid $25 to the third party and issued the third party 200,000 shares of the Company’s common stock, the value of which is included in general and administrative expenses.

 

 

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per–share amounts)

 

Note 9. Commitments and Contingencies, continued

 

Legal

 

On September 7, 2018, the SEC commenced a legal action naming as a defendant Robert Ladd, the Company’s then Chief Executive Officer and President, among others. The SEC filed civil charges against multiple individuals and entities who are alleged to have violated the securities laws in connection with certain microcap stocks.

 

In September 2018 and October 2018, various shareholders of the Company filed two putative class action lawsuits against the Company, its former CEO and certain of its individual officers and shareholders, alleging violations of federal securities laws and seeking damages. The lawsuits followed, and referenced allegations made against the Company’s former CEO and others in a complaint filed by the SEC on September 7, 2018. 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 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 action was filed on October 9, 2018, in the United States District Court for the Southern District of New York and makes similar allegations. The Company intends to defend against the actions vigorously.

 

Employment agreements

 

On March 8, 2018, the Company entered into an employment with Mr. Robert Lowrey, effective March 1, 2018. Mr. Lowrey’s employment agreement provides that he has been appointed for an initial term of two years. Mr. Lowrey is entitled to receive an annualized base salary of $240. Mr. Lowrey will also receive a one-time signing bonus of $10. Mr. Lowrey is also eligible for a cash and/or equity bonus as the Compensation Committee may determine, from time to time, based on meeting performance objectives and bonus criteria to be mutually identified by Mr. Lowrey and the Compensation Committee. In connection with the execution of his employment agreement, the Company issued to Mr. Lowrey 750,000 shares of the Company’s restricted common stock, pursuant to the Company’s 2016 Stock Option Plan vesting over a two year period.

 

On April 1, 2018, the Company entered into an Amended and Restated Executive Employment Agreement (the “Employment Agreement”) with Mr. Robert Ladd, which was executed on April 6, 2018. The Employment Agreement provides that Mr. Ladd has been reappointed for an initial term of two years. Mr. Ladd is entitled to receive an annualized base salary of $360 and is also eligible for a cash and/or equity bonus as the Compensation Committee may determine, from time to time, based on meeting performance objectives and bonus criteria to be mutually identified by Mr. Ladd and the Compensation Committee. In connection with the execution of the Employment Agreement, the Company issued to Mr. Ladd 600,000 shares of the Company’s restricted common stock, pursuant to the Company’s 2016 Stock Option Plan, vesting over a two year period. On September 10, 2018, Mr. Ladd took an indefinite leave of absence from the Company in order to focus on allegations levied against him in an SEC complaint filed on September 7, 2018.

 

On July 11, 2018, the Company entered into an Amended and Restated Executive Employment Agreement with Mr. Stephen Schaeffer. The Agreement provides that Mr. Schaeffer has been appointed Chief Operating Officer of the Company. Mr. Schaeffer will continue to serve as President of Cryptocurrency Operations, the position for which he was originally hired for a term of two years in an Executive Employment Agreement dated August 15, 2017. Mr. Schaeffer is entitled to receive an annualized base salary of $250 and is also eligible for a cash and/or equity bonus as the Compensation Committee may determine, from time to time, based on meeting performance objectives and bonus criteria to be mutually identified by Mr. Schaeffer and the Compensation Committee.

 

 

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per–share amounts)

 

Note 10. Related Party Transactions

 

Janice Dyson, wife of John McAfee, the Company’s former Chief Cybersecurity Visionary, is the sole director of Future Tense Secure Systems, Inc. (“FTS”) and owns 33% of the outstanding common shares of FTS.

 

On May 9, 2016, the Company entered a consulting agreement with FTS, pursuant to which FTS would provide advice, consultation, information and services to the Company including assistance with executive management, business and product development and potential acquisitions or related transactions. On January 26, 2018, the Company terminated its agreement with FTS. During the nine months ended September 30, 2018 and 2017, the Company recorded consulting fees of $137 and $135, respectively, to FTS for such services. As of September 30, 2018, the Company owed $0 to FTS.

 

Note 11. Employee Benefit Plans

 

The Company maintains defined contribution benefit plans under Section 401(k) of the Internal Revenue Code covering substantially all qualified employees of the Company (the “401(k) Plan”). Under the 401(k) Plan, the Company may make discretionary contributions of up to 100% of employee contributions. During the nine months ended September 30, 2018 and 2017, the Company made contributions to the 401(k) Plan of $18 and $8, respectively.

 

Note 12. Subsequent Events

 

The Company has evaluated the impacts of subsequent events through November 19, 2018, and has determined that no such events occurred that were required to be reflected in the unaudited condensed consolidated financial statements, except as described within the above notes and described below.

 

Modification of Notes Payable

 

On October 24, 2018, the Company entered into an amendment to its June 2018 Note to (a) forego the installment payment due on November 1, 2018; (b) extend the maturity date of the note to May 1, 2019; and (c) to increase the principal amount on the note by $48.

 

On November 9, 2018, the Company entered into an amendment of one of its May 2018 Notes to (a) forego the installment payments due on November 23, 2018, December 23, 2018, and January 23, 2019; and (b) extend the maturity date of the note to June 23, 2018. In exchange for the amendment, the Company paid the holder of the note $11.

 

Operating Agreement

 

On October 23, 2018, the Company entered into a hosting agreement with a hosting facility in Colorado where it is in the process of moving its machines from Sweden. The agreement will be in effect from November 1, 2018 through October 31, 2020, for an approximate fee of $408 per month. In connection with this agreement, the Company paid $408 as a security deposit.

 

Shares issued to consultants

 

Subsequent to September 30, 2018 through November 19, 2018, the Company issued 78,500 shares of its common stock to consultants in exchange for services.

 

Equity Purchase Agreement

 

Subsequent to September 30, 2018 through November 19, 2018, the Company issued 18,000,000 shares of its common stock under the Equity Purchase Agreement in exchange for $608.

 

Warrant Exercises

 

Subsequent to September 30, 2018 through November 19, 2018, the Company issued 750,000 shares of its common stock under cashless exercises of a warrant to purchase 15,900 shares of the Company’s common stock.

 

 

Item 2. Management’s discussion and analysis of financial condition and results of operations

 

This Quarterly Report on Form 10–Q contains forward–looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward–looking statements. The statements contained herein that are not purely historical are forward–looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward–looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “estimates,” “should,” “expect,” “guidance,” “project,” “intend,” “plan,” “believe” and similar expressions or variations intended to identify forward–looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward–looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward–looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in our Annual Report on Form 10–K filed with the Securities and Exchange Commission (“SEC”) on April 2, 2018, in addition to other public reports we filed with the SEC. The forward–looking statements set forth herein speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward–looking statements to reflect events or circumstances after the date of such statements.

 

Executive summary

 

MGT Capital Investments, Inc. (“MGT”, “the Company”, “we”, or “us”) is a Delaware corporation, incorporated in 2000. The Company was originally incorporated in Utah in 1977. MGT is comprised of the parent company, wholly–owned subsidiaries MGT Cybersecurity, Inc. Medicsight, Inc., MGT Sports, Inc., MGT Studios, Inc. (“MGT Studios”), MGT Interactive, LLC, MGT Gaming, Inc., MGT Mining One, Inc., MGT Mining Two, Inc., and MGT Sweden AB. MGT Studios also owns a controlling minority interest in the subsidiary M2P Americas, Inc. Our corporate office is located in Durham, North Carolina.

 

All figures set forth in this Quarterly Report on this Form 10-Q are in thousands, except share and per-share amounts.

 

In September 2016, we commenced our Bitcoin mining operations in the Wenatchee Valley area of central Washington. Throughout 2017, we expanded our mining capacity with the purchase of additional Bitcoin mining machines and by entering into hosting and power agreements with Washington facilities owners. We have also entered into management agreements with third party investors whereby the investors purchased the mining hardware, and we receive both a fee to manage the mining operations plus one-half of the net operating profit.

 

Towards the end of 2017, we determined that there was inadequate electric power in Washington to support our growth, and we moved swiftly to find a new facility to conduct our mining operations. By the end of 2017, we made the decision to move our principal mining operations to northern Sweden, a geographic location with historically low ambient temperatures and available inexpensive electricity. We entered into a hosting agreement (the “Hosting Agreement”) with Beacon Leasing LLC (“Beacon”), pursuant to which Beacon agreed to deliver a turn-key solution in northern Sweden with up to 15 megawatts of electricity capacity, including a facility with power, cooling, and hosting services for a fixed price of $810 per month. The facility in Sweden is owned by the city of Älvsbyn and leased by a subsidiary of Beacon. Beacon committed to provide a fully functional facility by the end of March 2018. The Hosting Agreement required us to pay $1,620 to Beacon, representing the first and last month of service. During the first quarter of 2018, we took delivery of an additional 2,000 Bitcoin mining machines in Sweden and moved 4,300 machines (including 2,100 investor-owned machines) from Washington to Sweden.

 

Beacon failed to deliver the fully built out facility and necessary power supply levels required by us by the end of March 2018. Through the first quarter of 2018 and into the second quarter, our personnel made visits to Sweden and assisted Beacon with efforts to get the facility up and running. We also advanced additional funds to Beacon to maximize operational capacity as quickly as possible. During April 2018, we became involved in the design and setup of the Sweden facility due to concern that Beacon may have overstated their construction abilities and financial capacity.

 

On May 16, 2018, we were informed that none of the amounts due from Beacon to the electric utility serving the Älvsbyn facility had been paid and that the utility would begin shutting down the electricity to the Älvsbyn facility. On the same day, we notified Beacon that it was in material breach of the Hosting Agreement. In order to avoid a shutdown of the facility and a suspension of mining operations, we paid the utility provider $368, as a good faith deposit. During the three months ended September 30, 2018, we paid an additional aggregate of $947 to the utility provider for power consumed.

 

Subsequent to May 16, 2018, we intensified its efforts to determine the extent of Beacon’s non-performance under the Hosting Agreement. Management made several more trips to Sweden to supervise the completion of the facility as well as investigate Beacon’s accounting records. We determined that Beacon also was faced with unpaid invoices from various material and service providers to the facility.

 

 

Beginning in late May 2018, we took steps to become the direct operator of the Swedish facility to gain control of the situation, protect our assets, and maximize operational capacity as quickly as possible. These actions included paying same of the outstanding amounts owed by Beacon in order to maintain key vendor relationships needed to complete the facility. We also formed MGT Sweden AB in anticipation of assuming the building lease and the power agreements.

 

During the three months ended June 30, 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 costs consisted of unpaid obligations for services provided prior to the second quarter of 2018, including:

 

Costs to bring electricity provider current and set up additional transformers		$	893
Satisfaction of payables for materials, repairs and supplies			206
Satisfaction of payables for payroll and consulting fees			50
TOTAL		$	1,149

 

Continuing issues arising from poor engineering and demands from the electric utility forced us to devote a significant amount of time and effort to the operations in Sweden. Further, we determined that the financial investment to fully assume the position of Beacon was excessive. Simultaneously, based on an analysis of available facilities in the United States, we concluded that the United States provided hosting opportunities for us. On September 24, 2018, the combination of these factors led us to decide to forgo any further monetary investment in Sweden, and is currently in the process of relocating all of the miners in Sweden to a facility in Colorado.

  

As of September 30, 2018, MGT owned and operated approximately 500 miners located in a leased facility in Quincy, Washington. We also own 4,200 miners which are in the process of being moved to a leased facility in Colorado. In addition, we operate about 2,100 miners pursuant to management agreements, which are also in the process of being moved to the leased facility in Colorado. All miners owned or managed by us are S9 Antminers sold by Bitmain Technologies LTD. In addition to the S9 Antminers, we own 50 custom designed GPU-based Ethereum mining rigs. During the nine months ended September 30, 2018, we mined 230.7 Bitcoin for total revenue of $1,934. In addition, the miners we operate pursuant to the management agreements mined 183.6 Bitcoin during the same period.

 

Critical accounting policies and estimates

 

Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The notes to the unaudited condensed consolidated financial statements contained in this Quarterly Report describe our significant accounting policies used in the preparation of the unaudited condensed consolidated financial statements. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. We continually evaluate our critical accounting policies and estimates.

 

We believe the critical accounting policies listed below reflect significant judgments, estimates and assumptions used in the preparation of our unaudited condensed consolidated financial statements.

 

Revenue recognition

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) which was subsequently amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12, and ASU 2017-13. These ASUs outline a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The guidance includes a five-step framework that requires an entity to: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when the entity satisfies a performance obligation. In July 2015, the FASB deferred the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017. A full retrospective or modified retrospective approach was required upon adoption. The Company has adopted ASU No. 2014-09 effective January 1, 2018.

 

The Company has elected to apply the modified retrospective method and the impact was determined to be immaterial on the condensed consolidated financial statements. Accordingly, the new revenue standard has been applied prospectively in our condensed consolidated financial statements from January 1, 2018 forward and reported financial information for historical comparable periods will not be revised and will continue to be reported under the accounting standards in effect during those historical periods.

 

 

The Company has performed an analysis and identified its revenues and costs that are within the scope of the new guidance. The Company determined that its methods of recognizing revenues have not been significantly impacted by the new guidance.

 

The Company’s primary revenue stream is related to the mining of digital currencies. The Company derives its revenue by solving “blocks” to be added to the blockchain and providing transaction verification services within the digital currency networks of cryptocurrencies, such as Bitcoin and Ethereum, commonly termed “cryptocurrency mining.” In consideration for these services, the Company receives digital currency (“Coins”). The Coins are recorded as revenue, using the average spot price of Bitcoin on the date of receipt. The Coins are recorded on the balance sheet as inventory at the lower of cost or net realizable value. Any net realizable value adjustments would be recorded to cost of revenues. Any gain or loss on sale would be recorded to other income or expense. Cost of revenues includes equipment depreciation, rent, net realizable adjustments, and electricity costs.

 

Due to a lack of authoritative and non-authoritative guidance, the Company had previously recorded the Coins as a security, where the Company would record revaluation gains and losses to cost of revenue. As of September 30, 2018, the Company reviewed certain recently released non-authoritative guidance on the accounting for held crypto-currency assets, in which the Company should record its Coins as inventory. The Company determined that this change in accounting policy had no material effect on its previously filed financial statements.

 

The Company also recognizes revenue from its management agreements. The Company receives a fee from each management agreement based on the amount of Bitcoin mined and is reimbursed for any electricity costs incurred to run the bitcoin mining machines it manages in its facility.

 

Stock–based compensation

 

The Company recognizes compensation expense for all equity–based payments in accordance with Accounting Standards Codification (“ASC”) 718 “Compensation – Stock Compensation”. Under fair value recognition provisions, the Company recognizes equity–based compensation net of an estimated forfeiture rate and recognizes compensation cost only for those shares expected to vest over the requisite service period of the award.

 

Restricted stock awards are granted at the discretion of the compensation committee of the board of directors of the Company. These awards are restricted as to the transfer of ownership and generally vest over the requisite service periods, typically over a 12 to 24 month period (vesting on a straight–line basis). The fair value of a stock award is equal to the fair market value of a share of the Company’s common stock on the grant date.

 

The fair value of an option award is estimated on the date of grant using the Black–Scholes option valuation model. The Black–Scholes option valuation model requires the development of assumptions that are inputs into the model. These assumptions are the expected stock volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock and the expected forfeiture rate. Expected volatility is calculated based on the historical volatility of the Company’s common stock over the expected term of the option. Risk–free interest rates are calculated based on continuously compounded risk–free rates for the appropriate term.

 

Determining the appropriate fair value model and calculating the fair value of equity–based payment awards requires the input of the subjective assumptions described above. The assumptions used in calculating the fair value of equity–based payment awards represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment. The Company is required to estimate the expected forfeiture rate and recognize expense only for those shares expected to vest.

 

The Company accounts for share–based payments granted to non–employees in accordance with ASC 505–50, “Equity Based Payments to Non–Employees”. The Company determines the fair value of the stock–based payment as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more readily determinable. If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete. The fair value of unvested equity instruments is re–measured each reporting period and such re-measured value is amortized over the requisite remaining service period.

 

 

Impairment

 

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. 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.

 

Results of operations

 

Three months ended September 30, 2018 and 2017

 

Revenues

 

Our revenues for the three months ended September 30, 2018 increased by $74, or 14%, to $589 as compared to $515 for the three months ended September 30, 2017. Our revenue is derived from cryptocurrency mining. The increase in revenues is a result of our increased mining capacity through the acquisition of additional machines during the year ended December 31, 2017 and during the first quarter of 2018.

 

Operating Expenses

 

Operating expenses for the three months ended September 30, 2018 decreased by $2,068, or 20%, to $8,023 as compared to $10,091 for the three months ended September 30, 2017. The decrease in operating expenses was primarily due to a decrease in general and administrative expenses, as well as no costs associated with marketing or research and development, offset by an increase of $1,105 in cost of sales from cryptocurrency mining operations and an impairment charge of $3,668.

 

The decrease in general and administrative expenses of $6,729, or 70%, was primarily due to a decrease in stock-based compensation of $6,451 and a decrease in legal and professional fees of $589, offset by an increase in payroll and related expenses of $21 and administrative costs to operate our Sweden facility of $287.

 

Other Income and Expense

 

For the three months ended September 30, 2018, non–operating expenses consisted of interest expense of $339. During the comparable period ended September 30, 2017, non–operating expenses consisted of interest expense of $1,133 and inducement expense of $5,764, offset by a gain on sale of property and equipment of $9.

 

Nine months ended September 30, 2018 and 2017

 

Revenues

 

Our revenues for the nine months ended September 30, 2018 increased by $739, or 61%, to $1,954 as compared to $1,215 for the nine months ended September 30, 2017. Our revenue is derived from cryptocurrency mining. The significant increase in revenues is a result of our increased mining capacity through the acquisition of additional machines during the year ended December 31, 2017 and during the first quarter of 2018.

 

Operating Expenses

 

Operating expenses for the nine months ended September 30, 2018 increased by $2,156, or 12%, to $20,012 as compared to $17,856 for the nine months ended September 30, 2017. The increase in operating expenses was primarily due to an increase in cost of sales of $2,612 from cryptocurrency mining operations, an impairment charge of $3,668 and a charge of $2,499 for the Sweden restructuring, offset by a decrease in general and administrative expenses of $6,244, and reductions in marketing of $157 and research and development of $222.

 

The decrease in general administrative expenses of $6,244, or 38%, was primarily due to a decrease in stock-based compensation of $6,451 and a decrease of $1,423 in legal and professional fees, offset by an increase of $890 in payroll and related expenses and an increase of $683 due to administrative costs to run our Sweden facility.

 

 

Other Income and Expense

 

For the nine months ended September 30, 2018, non–operating expenses primarily consisted of interest expense of $456, warrant modification expense of $139, loss on the sale of cybersecurity assets of $127, and a loss on sale of property and equipment of $47. During the comparable period ended September 30, 2017, non–operating expenses consisted of an inducement expense of $5,764, loss on sale of investments of $2,871, and interest expense of $1,371, offset by a gain on sale of property and equipment of $57.

 

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 September 30, 2018 have an accumulated deficit of $400,241. At September 30, 2018, our cash and cash equivalents were $275 and our working capital deficit was $3,377. As of September 30, 2018, we had notes payable outstanding with a face value of $3,657. As of November 19, 2018, our cash and cash equivalents were $155.

 

Management’s plans include maximizing the utilization of its cryptocurrency mining machines, which were delivered during early 2018. As discussed in Note 1 to the unaudited condensed consolidated financial statements, the Company experienced additional delays and costs due to the non-performance of a key vendor. The Company is in the process of relocating the majority of its operations from Sweden to a facility in Colorado. Based on current budget assumptions, the Company believes that it will be able to meet its operating expenses and obligations for one year from the date these consolidated financial statements are issued. The Company will need to raise additional funding to grow its operations and to pay current maturities of debt. There can be no assurance however that the Company will be able to raise additional capital when needed, or at terms deemed acceptable, if at all. Such factors raise substantial doubt about the Company’s ability to sustain operations for at least one year from the issuance of these unaudited condensed consolidated financial statements. Management’s plans, including the operation of its existing cryptocurrency mining machines, the raising of additional capital and potentially curtailing its operations alleviate such substantial doubt. The accompanying unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

The price of Bitcoin is volatile, and fluctuations are expected. Declines in the price of Bitcoin has 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 high and low exchange rate per Bitcoin for the nine months ending September 30, 2018, as reported by Blockchain.info, were approximately $6 and $17 respectively.

 

		Nine Months ended September 30,
		2018				2017
Cash (used in) / provided by
Operating activities		$	(7,168	)		$	(3,092	)
Investing activities			(6,507	)			(3,431	)
Financing activities			4,431				6,221
Net increase (decrease) in cash and cash equivalents		$	(9,244	)		$	(302	)

 

Cash Flows

 

Operating activities

 

Net cash used in operating activities was $7,168 for the nine months ended September 30, 2018 as compared to $3,092 for the nine months ended September 30, 2017. Cash used in operating activities for the nine months ended September 30, 2018 primarily consisted of a net loss of $18,827 partially offset by non-cash stock-based compensation of $5,417, an impairment charge of $3,668, and depreciation expense of $2,618. Cash used in operating activities for the nine months ended September 30, 2017 primarily consisted of a net loss of $26,590, partially offset by stock-based compensation of $11,856 and impairment/loss on sale of long-term investments of $2,787, plus an increase due to changes in working capital of $1,367.

 

 

Investing activities

 

Net cash used in investing activities was $6,507 for the nine months ended September 30, 2018 as compared to net cash used in investing activities of $3,431 for the nine months ended September 30, 2017. Net cash used in investing activities for the nine months ended September 30, 2018 was primarily due to our purchases of property and equipment of $6,994 partially offset by proceeds from the sale of property and equipment of $427 and proceeds from the sale of our cybersecurity assets of $60. During the nine months ended September 30, 2017, the Company used $3,897 in the purchase of property and equipment, and realized $26 in net proceeds from sales of various investments in the open market and $440 from the sale of property and equipment.

 

Financing activities

 

During the nine months ended September 30, 2018, cash provided by financing activities totaled $4,431, which includes $4,700 from the net proceeds of notes payable, $365 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 $141 in deferred offering costs paid. During the nine months ended September 30, 2017, cash provided by financing activities totaled $6,221, comprised of $4,971 in net proceeds from convertible debt instruments, $100 from the proceeds of exercise of warrants, and $1,150 from the proceeds of a private placement of common stock.

 

Off–balance sheet arrangements

 

As of September 30, 2018, we had no obligations, assets or liabilities which would be considered off–balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off–balance sheet arrangements.

 

Item 3. Quantitative and qualitative disclosures about market risk

 

The Company is not exposed to market risk related to interest rates on foreign currencies.

 

Item 4. Controls and procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures designed to ensure that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified under the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. As required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer (our principal executive) and Chief Financial Officer (our principal financial officer and principal accounting officer) carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2018. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in paragraph (e) of Rules 13a-15 and 15d-15 under the Exchange Act) were not effective as September 30, 2018 due to a material weakness in our internal control over financial reporting as described below.

 

Limitations on Internal Control over Financial Reporting

 

An internal control system over financial reporting has inherent limitations and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

 

Management’s Quarterly Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f) and 15d-15(f). Internal control over financial reporting is a process used to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles in the United States. Internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of our financial statements in accordance with generally accepted accounting principles in the United States, and that our receipts and expenditures are being made only in accordance with the authorization of our board of directors and management; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

 

 

Under the supervision and with the participation of our management, including our Chief Executive Officer (our principal executive) and Chief Financial Officer (our principal financial officer and principal accounting officer), we performed a complete documentation of the Company’s significant processes and key controls, and conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on this evaluation, management concluded that our internal control over financial reporting was not effective as of September 30, 2018 due to the material weaknesses described below.

 

A material weakness is defined within the Public Company Accounting Oversight Board’s Auditing Standard No. 5 as a deficiency or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. We determined that our internal control of financial reporting had the following material weakness:

 

	●	Due to the small size of the Company, the Company does not maintain sufficient segregation of duties to ensure the processing, review and authorization of all transactions including non-routine transactions.
	●	Our processes lacked timely and complete reviews and analysis of information used to prepare our financial statements and disclosures in accordance with accounting principles generally accepted in the United States of America.
	●	The Company failed to prevent and timely discover a misappropriation of assets by a key vendor of the Company.

 

The Company is evaluating these weaknesses to determine the appropriate remedy. Because disclosure controls and procedures include those components of internal control over financial reporting that provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, management also determined that its disclosure controls and procedures were not effective as a result of the foregoing material weaknesses in its internal control over financial reporting.

 

Changes in Internal Control over Financial Reporting

 

During the quarter ended September 30, 2018, there were no changes in internal control over financial reporting.

 

 

PART II. OTHER INFORMATION

 

Item 1. Legal proceedings

 

On September 7, 2018, the SEC commenced a legal action naming as a defendant Robert Ladd, the Company’s then Chief Executive Officer and President, among others. The SEC filed civil charges against multiple individuals and entities who are alleged to have violated the securities laws in connection with certain microcap stocks.

 

In September 2018 and October 2018, various shareholders of the Company filed two putative class action lawsuits against the Company, its former CEO and certain of its individual officers and shareholders, alleging violations of federal securities laws and seeking damages. The lawsuits followed, and referenced allegations made against the Company’s former CEO and others in a complaint filed by the SEC on September 7, 2018. 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 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 action was filed on October 9, 2018, in the United States District Court for the Southern District of New York and makes similar allegations. The Company intends to defend against the actions vigorously.

 

Item 1A. Risk factors

 

There are no additional risk factors other than those discussed in our Annual Report Form 10–K filed on April 2, 2018.

 

Item 2. Unregistered sales of equity securities and use of proceeds

 

On September 6, 2018, the Company sold 500,000 shares of its common stock under its Equity Purchase Agreement for gross proceeds of $159.

 

On September 12, 2018, the Company sold 1,025,000 shares of its common stock under its Equity Purchase Agreement for gross proceeds of $257.

 

On September 19, 2018, the Company sold 1,025,000 shares of its common stock under its Equity Purchase Agreement for gross proceeds of $185.

 

On September 26, 2018, the Company sold 1,400,000 shares of its common stock under its Equity Purchase Agreement for gross proceeds of $131.

 

Item 3. Defaults upon senior securities

 

None.

 

Item 4. Mine safety disclosures

 

Not applicable.

 

Item 5. Other information

 

None.

 

 

Item 6. Exhibits

 

	10.1		Employment agreement by and between the Company and Stephen Schaeffer dated August 15, 2017*
	10.2		First amendment to the employment agreement by and between the Company and Stephen Schaeffer dated February 1, 2018*
	10.3		Second amendment to the employment agreement by and between the Company and Stephen Schaeffer dated July 11, 2018*
	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 Officer*
	32		Certification pursuant to Section 906 of the Sarbanes–Oxley Act of 2002 of Principal Executive Officer and Principal Financial 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*
	*		Filed herewith

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	MGT CAPITAL INVESTMENTS, INC
Date: November 19, 2018	By:	/s/ H. Robert Holmes
		H. Robert Holmes
		Interim President and Chief Executive Officer
		(Principal Executive Officer)