MGT CAPITAL INVESTMENTS, INC. - Quarter Report: 2017 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10–Q

For the quarterly period ended June 30, 2017

For the transition period from ______________ to ______________

Commission file number: 001–32698

MGT CAPITAL INVESTMENTS, INC.

(Exact name of Registrant as specified in its charter)

512 S. Magnum 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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.

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 August 7, 2017, there were 39,906,189 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 JUNE 30, 2017

TABLE OF CONTENTS

PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

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

(Unaudited)

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

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,” “the Company,” “we,” “us”) is a Delaware corporation, incorporated in 2000. The Company was originally incorporated in Utah in 1977. MGT is comprised of the parent company, wholly–owned subsidiaries MGT Cybersecurity, Inc. (“MGT Cybersecurity”), Medicsight, Inc. (“Medicsight”), MGT Sports, Inc. (“MGT Sports”), MGT Studios, Inc. (“MGT Studios”), MGT Interactive, LLC (“MGT Interactive”), MGT Gaming, Inc. (“MGT Gaming”) and MGT Mining One, Inc. (“Mining Sub”). MGT Studios also owns a controlling minority interest in the subsidiary M2P Americas, Inc. Our corporate office is located in Durham, North Carolina. Mining Sub was formed in April 2017 for the purpose of facilitating the issuance of the Iliad Note.

The Company is in the process of acquiring and developing a diverse portfolio of cybersecurity technologies.

Also, as part of its corporate efforts in secure technologies, MGT is growing its capacity in mining Bitcoin.

On September 8, 2016, MGT stockholders voted to change the corporate name of MGT to “John McAfee Global Technologies, Inc.” Following a dispute over ownership and permitted usage of the name McAfee, the Company and Intel agreed to a mediation process to avoid unnecessary legal costs. On June 30, 2017 the Company entered into a settlement agreement with Intel (See Note 13).

Cybersecurity

On May 9, 2016, the Company, through its wholly owned subsidiary, MGT Cybersecurity, Inc., entered into an asset purchase agreement (APA) to acquire certain assets owned by D–Vasive, Inc. (the “D-Vasive APA”), a Wyoming corporation in the business of developing and marketing certain privacy and anti–spy applications. Pursuant to the terms of the D–Vasive APA, the Company had agreed to purchase assets including, but not limited to, applications for use on mobile devices, intellectual property, customer lists, databases, sales pipelines, proposals and project files, licenses and permits. The proposed purchase price for D–Vasive was $300 in cash and 23.8 million shares of MGT common stock. On October 5, 2016, the Company paid a $70 refundable advance as part of a modification of terms. The advance will be refundable if the APA is not closed within twelve months of the modification.

On May 26, 2016, the Company entered into an asset purchase agreement with Demonsaw LLC (the “Demonsaw APA”), a Delaware company, for the purchase of certain technology and assets. Demonsaw is in the business of developing and marketing secure and anonymous information sharing applications. Pursuant to the terms of the Demonsaw APA, the Company agreed to purchase assets including the source code for the Demonsaw solution, intellectual property, customer lists, databases, sales pipelines, proposals and project files, licenses and permits. The proposed purchase price for Demonsaw was 20.0 million shares of MGT common stock.

On July 7, 2016, and prior to the closing of either of the above transactions, the Company and Demonsaw terminated the Demonsaw APA. Simultaneously, D–Vasive entered an agreement with the holders of Demonsaw outstanding membership interests, whereby D–Vasive would purchase all such membership interests. The closing of that transaction was contingent on the closing of the transaction contemplated under the D–Vasive APA. Accordingly, the proposed purchase price for D–Vasive (inclusive of the Demonsaw assets) was increased to 43.8 million shares of MGT common stock (the “Amended APA”).

On August 8, 2016, the Company filed a Definitive Proxy Statement to solicit, among other things, shareholder approval of the D–Vasive acquisition, at the upcoming Annual Meeting of Stockholders. On September 8, 2016, shareholder approval was obtained. However, on September 19, 2016, the New York Stock Exchange informed the Company that it would not approve the listing on the Exchange of the 43.8 million shares required to be issued to complete the closing of the D–Vasive acquisition. Not reaching this critical closing condition resulted in the termination of the Amended APA.

On March 3, 2017, MGT purchased 46% of the outstanding membership interests in Demonsaw LLC for 2.0 million MGT common shares from Future Tense Secure Systems, Inc. (“FTS”). The Company recorded the purchase using the fair value of the common shares provided and immediately impaired the equity method investment during the three months ended March 31, 2017.

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

Cybersecurity, continued

Janice Dyson, wife of John McAfee, the Company’s Executive Chairman of the Board of Directors and Chief Executive Officer, is the sole director of FTS and owns 33% of the currently outstanding shares of common stock of such company.

On April 3, 2017 the Company terminated the APA dated May 9, 2016, as amended on July 7, 2016, entered into by and among MGT, D–Vasive, the shareholders of D–Vasive and MGT Cybersecurity. The termination of the APA was premised on Section 3.4(b) of the APA which states that the APA may be terminated by either party thereto if the Closing contemplated thereunder did not occur on or before a specified date and the same is not otherwise extended by the parties, in writing or otherwise. Pursuant to the APA, as amended, MGT would have acquired certain technology and assets of D–Vasive if the Closing had occurred on the terms of the APA, as amended.

Bitcoin mining

On September 13, 2016, the Company announced launch of its 5.0 PH/s Bitcoin mining operation, based in central Washington. The facility is currently being expanded with the addition of 13 PH/s in computing power.

Legacy businesses

Prior to second quarter ending June 30, 2016, the Company and its subsidiaries were principally engaged in the business of acquiring, developing, and monetizing assets in the online and mobile gaming space as well as the social casino industry.

Note 2. Going concern and management plans

The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of June 30, 2017, the Company had incurred significant operating losses since inception and continues to generate losses from operations and as of June 30, 2017, has an accumulated deficit of $338,593. At June 30, 2017, MGT’s cash and cash equivalents were $323. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Commercial results have been limited and the Company has not generated significant revenues. The Company’s primary source of operating funds since inception has been debt and equity financings. The Company intends to raise additional capital, through debt and equity financings. Management believes that it can be successful in obtaining additional capital; however, no assurance can be provided that the Company will be able to do so. There is no assurance that any funds raised will be sufficient to enable the Company to attain profitable operations or continue as a going concern. To the extent that the Company is unsuccessful, the Company may need to curtail or cease its operations and implement a plan to extend payables or reduce overhead until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful.

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Note 3. Summary of significant accounting policies

Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10–Q and Rule 10 of Regulation S–X. Accordingly, they do not include all of the information and notes required by U.S. GAAP. However, in the opinion of the management of the Company, all adjustments necessary for a fair presentation of the financial position and operating results have been included in these statements. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10–K for the fiscal year ended December 31, 2016, as filed with the SEC on April 20, 2017. Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for any subsequent quarters or for the year ending December 31, 2017.

Use of estimates and assumptions and critical accounting estimates and assumptions

The preparation of financial statements, in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date(s) of the financial statements and the reported amounts of revenues and expenses during the reporting period(s).

Critical accounting estimates are estimates for which (a) the nature of the estimate is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact of the estimate on financial condition or operating performance is material. The Company’s critical accounting estimates and assumptions affecting the financial statements were:

(1) Fair value of long–lived assets: Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. If long–lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long–lived assets are depreciated over the newly determined remaining estimated useful lives. The Company considers the following to be some examples of important indicators that may trigger an impairment review: (i) significant under–performance or losses of assets relative to expected historical or projected future operating results; (ii) significant changes in the manner or use of assets or in the Company’s overall strategy with respect to the manner or use of the acquired assets or changes in the Company’s overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a significant decline in the Company’s stock price for a sustained period of time; and (vi) regulatory changes. The Company evaluates acquired assets for potential impairment indicators at least annually and more frequently upon the occurrence of such events.

(2) Valuation allowance for deferred tax assets: Management assumes that the realization of the Company’s net deferred tax assets, resulting from its net operating loss (“NOL”) carry–forwards for Federal income tax purposes that may be offset against future taxable income, was not considered more likely than not and accordingly, the potential tax benefits of the net loss carry–forwards are offset by a full valuation allowance. Management made this assumption based on (a) the Company has incurred recurring losses, (b) general economic conditions, and (c) its ability to raise additional funds to support its daily operations by way of a public or private offering, among other factors.

(3) Estimates and assumptions used in valuation of equity instruments and debt instruments: Management estimates the expected term of embedded conversion features, share options and similar instruments, expected volatility of the Company’s common shares and the method used to estimate it, expected annual rate of quarterly dividends, and risk free rate(s) to value derivative financial instruments, share options and similar instruments.

These significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to these estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.

Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates.

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Note 3. Summary of significant accounting policies, continued

Principles of consolidation

All intercompany transactions and balances have been eliminated. Non–controlling interest represents the minority equity investment in MGT subsidiaries, plus the minority investors’ share of the net operating results and other components of equity relating to the non–controlling interest.

Fair value of financial instruments

The Company follows ASC 820–10 of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification to measure the fair value of its financial instruments and disclosures about fair value of its financial instruments. ASC 820–10 establishes a framework for measuring fair value and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, ASC 820–10 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The three (3) levels of fair value hierarchy defined by ASC 820–10 are described below:

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.

The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

The carrying amounts of the Company’s financial assets and liabilities, such as cash, prepaid expenses and other current assets, accounts payable and accrued expenses approximate their fair values because of the short maturity of these instruments.

The Company had no Level 3 financial assets or liabilities as of June 30, 2017 and December 31, 2016.

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Note 3. Summary of significant accounting policies, continued

Fair value of financial assets and liabilities measured on a recurring basis

The Company uses Level 1 of the fair value hierarchy to measure the fair value of digital currencies and revalues its digital currencies at every reporting period and recognizes gains or losses in the consolidated statements of operations that are attributable to the change in the fair value of the digital currency.

Financial assets and liabilities measured at fair value on a recurring basis are summarized below and disclosed on the balance sheets as follows:

The following table provides the investments carried at fair value measured on a recurring basis as of June 30, 2017:

The following table provides the investments carried at fair value measured on a recurring basis as of December 31, 2016:

Beneficial conversion feature of convertible notes payable

The Company accounts for convertible notes payable in accordance with the guidelines established by the FASB Accounting Standards Update (“ASU”) Topic 470-20, Debt with Conversion and Other Options, Emerging Issues Task Force (“EITF”) 98-5, Accounting for Convertible Securities with beneficial conversion features or Contingently Adjustable Conversion Ratios, and EITF 00-27, Application of Issue No 98-5 To Certain Convertible Instruments. The beneficial conversion feature of a convertible note is normally characterized as the convertible portion or feature of certain notes payable that provide a rate of conversion that is below market value or in-the-money when issued. The Company records a beneficial conversion feature related to the issuance of a convertible note when issued and also records the estimated fair value of any warrants issued with those convertible notes. The beneficial conversion features that are contingent upon the occurrence of a future event are recorded when the contingency is resolved.

The beneficial conversion feature of a convertible note is measured by first allocating a portion of the note’s proceeds to any warrants, if applicable, as a discount on the carrying amount of the convertible on a relative fair value basis. The discounted face value is then used to measure the effective conversion price of the note. The effective conversion price and the market price of the Company’s common stock are used to calculate the intrinsic value of the conversion feature. The intrinsic value is recorded in the financial statements as a debt discount from the face amount of the note and such discount is amortized over the expected term of the convertible note (or to the conversion date of the note, if sooner) and is charged to interest expense.

Revenue recognition

The Company recognizes revenue when it is realized or realizable and earned. We consider revenue realized or realizable and earned when there is persuasive evidence of an arrangement and that the product has been shipped or the services have been provided to the customer, the sales price is fixed or determinable and collectability is probable. Our material revenue stream is related to the mining of digital currency. The Company derives its revenue by providing transaction verification services within the digital currency network of Bitcoin, commonly termed “Bitcoin mining.” In consideration for these services, the Company receives digital currency, Bitcoins (“BTC,” “coins”). The coins are recorded as revenue, using the average spot price of Bitcoin on the date of receipt. The coins are recorded on the balance sheet at their fair value and re–measured at each reporting date. Revaluation gains or losses, as well gains or losses on sale of BTC are recorded in the statement of operations. Expenses associated with running the Bitcoin mining business, such as equipment deprecation, rent and electricity cost are recorded as cost of revenues.

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Note 3. Summary of significant accounting policies, continued

Loss per share

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

The computation of diluted loss per share for the three and six months ended June 30, 2017, excludes 2,500,000 unvested restricted shares, 6,000,000 shares issuable under options and 11,716,819 shares issuable under warrants. The computation of diluted loss per share for the three and six months ended June 30, 2016, excluded 1,000,000 unvested restricted shares and 100,000 shares issuable under warrants, as they were anti–dilutive due to the Company’s net loss.

Segment reporting

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision–making group in deciding how to allocate resources and in assessing performance. Our chief operating decision–making group is composed of the chief executive officer and chief financial officer. We currently operate in the cybersecurity and bitcoin mining segments. Certain corporate expenses are not allocated to segments.

Stock–based compensation

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

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

The fair value of option award is estimated on the date of grant using the Black–Scholes option valuation model. The Black–Scholes option valuation model requires the development of assumptions that are input into the model. These assumptions are the expected stock volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock and the expected forfeiture rate. Expected volatility is calculated based on the historical volatility of our common stock over the expected option life and other appropriate factors. Risk–free interest rates are calculated based on continuously compounded risk–free rates for the appropriate term. The dividend yield is assumed to be zero as the Company has never paid or declared any cash dividends on our common stock and does not intend to pay dividends on our common stock in the foreseeable future. The expected forfeiture rate is estimated based on historical experience.

Determining the appropriate fair value model and calculating the fair value of equity–based payment awards requires the input of the subjective assumptions described above. The assumptions used in calculating the fair value of equity–based payment awards represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and the Company uses different assumptions, our equity–based compensation could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate and recognize expense only for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the equity–based compensation could be significantly different from what the Company has recorded in the current period.

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Note 3. Summary of significant accounting policies, continued

Stock–based compensation, continued

The Company accounts for share–based payments granted to non–employees in accordance with ASC 505–40, “Equity Based Payments to Non–Employees”. The Company determines the fair value of the stock–based payment as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete. The fair value of the equity instruments is re–measured each reporting period over the requisite service period.

Reclassification

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

Recent accounting pronouncements

Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying consolidated financial statements, other than those disclosed below and in the Annual Report on Form 10–K.

In July 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-11, “Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception”. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. ASU 2017-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company has adopted the ASU beginning with these condensed consolidated financial statements. As a result, the conversion features of certain of its convertible notes payable and equity instruments that contain “down round” provisions will not be bifurcated and will not be recorded as a derivative liability.

Note 4. Prepaid expenses and other current assets

Prepaid expenses and other current assets consisted of the following:

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Note 5. Investments

Equity security investments available for sale, at market value, reflect unrealized appreciation and depreciation, as a result of temporary changes in market value during the period, in shareholders’ equity, net of income taxes in “accumulated other comprehensive loss” in the condensed consolidated balance sheets. For publicly traded securities, market value is based on quoted market prices or valuation models that use observable market inputs.

Investments available for sale

For non–public, non–controlled investments in equity securities, the Company uses the cost–method of accounting.

Investments at cost

During the three and six months ended June 30, 2017, the Company recognized an impairment charge of $0 and $287, respectively, related to its investment in DDGG.

Note 6. Intangible assets

The Company’s intangible assets consisted of the following:

For the three months ended June 30, 2017 and 2016, the Company recorded amortization expense of $41 and $57, respectively. For the six months ended June 30, 2017 and 2016, the Company recorded amortization expense of $83 and $57, respectively.

The following table outlines estimated future annual amortization expense for the next three years:

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Note 7. Property and equipment

Property and equipment consisted of the following:

The Company recorded depreciation expense of $97 and $5 for the three months ended June 30, 2017, and 2016, respectively. The Company recorded depreciation expense of $196 and $11 for the six months ended June 30, 2017, and 2016, respectively.

During the second quarter of 2017, the Company sold bitcoin machines with a book value of $262 for gross proceeds of $310 and recorded a gain on sale of $48.

Note 8. Accrued expenses

Accrued expenses consisted of the following:

Note 9. Notes payable

As of June 30, 2017, the Company’s notes payable consisted of the following:

As of December 31, 2016, the Company’s notes payable consisted of the following:

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Note 9. Notes payable

August 2016 Notes

On August 2, 2016, the Company sold $2,300 in unsecured promissory notes in a private placement, which were subsequently exchanged for new notes in the same principal amount (the “August 2016 Notes”). The August 2016 Notes are convertible, at the option of the holder thereof, into shares of the Company’s common stock at a conversion price of $1.00 per share, which was to be adjusted for any future issuances of equity. During the first quarter of 2017, the conversion price of the August 2016 Notes was adjusted down to $0.75 per share.

During February and March 2017, holders of the Company’s August 2016 Notes converted a total of $1,800 principal value into a total of 1,900,000 shares of the Company’s common stock.

On June 27, 2017, holders of the Company’s August 2016 Notes converted a total of $75 principal value into a total of 100,000 shares of the Company’s common stock.

10% convertible promissory notes

During February and March 2017, the Company issued two $50, 10% convertible promissory notes. Both notes mature one year from the date of issuance. Both notes are convertible at a fixed rate of $0.25 per share. Management recorded a beneficial conversion feature on both of the notes in aggregate of $100 and recorded to additional paid in capital. The beneficial conversion features are being accreted to interest expense over the 1 year life of the notes.

During the three and six months ended June 30, 2017, the Company charged to operations $3 and $4, respectively as amortization of debt discount on this note.

Iliad note

On May 18, 2017, the Company sold to Iliad Research and Trading, L.P., (“Iliad”), a Utah limited partnership, a secured convertible note (the “Iliad Note”) in the original principal amount of $1,355, with an original issuance discount of $225 and reimbursed legal and accounting expenses of $5, and a warrant to purchase 1,231,819 shares of common stock of the Company.

The principal and all accrued and unpaid interest on the outstanding balance on the date that is twenty-four (24) months from the issuance date. The Iliad Note is secured with the Company’s ownership of Mining Sub and all assets of Mining Sub. The Note bears an interest rate of 10% per annum, provided that at any time on or after the occurrence of an Event of Default, the interest rate shall be adjusted to 22% per annum. Subject to the terms and conditions set forth in the Iliad Note, the Company may prepay the outstanding balance of the Iliad Note in part or in full in cash of an amount equal to 125% multiplied by the outstanding balance of the Iliad Note.

At any time beginning on the date that is six months from the issuance date until the outstanding balance of the Iliad Note has been paid in full, Iliad may, at its option, convert all or any portion of the outstanding balance into shares of common stock of the Company on a cashless basis at a price of $1.05 per share, which will be adjusted for any future issuances of equity that contain a lower per-share exercise price. In addition, beginning three months after the issuance date, Iliad has the right to redeem a portion of the outstanding balance of the Iliad Note in any amount that is less than $90 per calendar month. The Company has the right to fund each redemption using cash or shares of the Company’s common stock at a price that is the lower of $1.05 per share and the price that is 65% of the Company’s market price.

Management recorded a debt discount for (a) the relative fair value of the warrants issued and (b) the intrinsic value of the beneficial conversion feature on the Iliad Note in the amounts of $202 and $923, respectively. The debt discounts will be accreted using the effective interest method over the term of the Iliad Note. During the three months ended June 30, 2017 and 2016, the Company recorded accretion of the debt discount on the Iliad Note of $1 and $0, respectively. During the six months ended June 30, 2017 and 2016 the Company recorded accretion of the debt discount on the Iliad Note of $1 and $0, respectively.

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Note 9. Notes payable, continued

March 2017 equity purchase agreement

On March 10, 2017, the Company and L2 Capital, LLC (“L2 Capital”), a Kansas limited liability company, entered into an equity purchase agreement (the “Equity Purchase Agreement”), pursuant to which the Company may issue and sell to L2 Capital from time to time up to $5,000 of the Company’s common stock that will be registered with the Securities and Exchange Commission (the “SEC”) under a registration statement on a form S–1. Pursuant to the Equity Purchase Agreement, the Company may require L2 Capital to purchase shares of common stock in a minimum amount of $25 and maximum of the lesser of (a) $1,000 or (b) 150% of the Average Daily Trading Value, upon the Company’s delivery of a Put Notice to L2 Capital. L2 Capital shall purchase such number of shares of common stock at a per share price that equals to the lowest closing bid price of the common stock during the Pricing Period multiplied by 90%. Before the expiration of the term of the Equity Purchase Agreement, the said Agreement shall terminate, subject to certain exceptions set forth therein, at any time by a written notice from the Company to L2 Capital.

In connection with the Equity Purchase Agreement, the Company has issued to L2 Capital an 8% convertible promissory note (the “Commitment Note”) in the principal amount of $160 in consideration of L2 Capital’s contractual commitment to the Equity Purchase Agreement. The Commitment Note matures six months after the Issue Date. All or part of the Commitment Note is convertible into the common stock of the Company upon the occurrence of any of the Events of Default at a Variable Conversion Price that equals to 75% of the lowest Trading Price for the common stock during a thirty–day Trading Day period immediately prior to the Conversion Date.

The Company recorded the Commitment Note as a deferred offering costs as the Company is yet to receive equity proceeds from the Equity Purchase Agreement. The Company is yet to file a registration statement on the offering. Management analyzed the contingent variable conversion price and concluded that the contingent conversion features should be bifurcated and accounted for as a derivative liability only upon the triggering of a default event. Because all default events were cured prior to the release of the financial statements, no derivative liability was recognized.

On May 18, 2017, the Company amended the Equity Purchase Agreement to (a) facilitate the issuance of the Iliad Note and (b) to increase the capacity of the Equity Purchase Agreement to $6,500.

March 2017 securities purchase agreement

In addition, on March 10, 2017, the Company and L2 Capital entered into a securities purchase agreement (the “Securities Purchase Agreement”), which was subsequently amended on March 15, 2017 pursuant to which the Company issued two 10% convertible notes (the “Convertible Notes”) in an aggregate principal amount of $1 million with a 20% original issue discount, of which the first convertible note was funded on March 14, 2017. The Company received gross proceeds of $393 (which represents the deduction of the 20% original discount and $7 for L2 Capital’s legal fees) in exchange for issuance of the first Convertible Note (the “First Note”) in the Principal Amount of $500. The First Note matures six months from the Issue Date and the accrued and unpaid interest at a rate of 10% per annum is due on such date. At any time on or after the occurrence of an Event of Default, the Holder of the First Note shall have the right to convert all or part of the unpaid and outstanding Principal Amount and the accrued and unpaid interest to shares of common stock at a conversion price that equals 65% multiplied by the lowest Trading Price for the common stock during a thirty–day Trading Day period immediately prior to the Conversion Date (the “Market Price”).

Management analyzed the contingent variable conversion price and concluded that the contingent conversion features should be bifurcated and accounted for as a derivative liability only upon the triggering of a default event. A default event occurred on May 15, 2017. However, on May 18, 2017, the Company and L2 Capital amended the note in order to waive all rights resulting from default events under the note. Therefore, no derivative liability was recognized.

The Company received a L2 Capital Back End Note (“L2 Collateralized Note”) secured with the First Note for its issuance of the Second Note to L2 Capital. In accordance with the Second Note, the Company shall pay to the order of L2 Capital a Principal Amount of $500 and the accrued and unpaid interest at a rate of 10% per annum on the Maturity Date, which is eight months from the Issue Date. At any time on or after the occurrence of an Event of Default, the Holder of the Second Note shall have the right to convert all or part of the unpaid and outstanding Principal Amount and the accrued and unpaid interest into shares of common stock at a conversion price that equals to 65% multiplied by the Market Price. Pursuant to the L2 Collateralized Note, L2 Capital promises to pay the Company the Principal Amount of $500 (consisting $393 in cash, legal fees of $7 and an original issuance discount of $100) no later than November 10, 2017.

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Note 9. Notes payable, continued

March 2017 securities purchase agreement, continued

Under ASC 210–20–45–1, management offset the L2 Collateralized Note by the receivable due from the investor on November 10, 2017. Currently the $500 L2 Collateralized Note is shown net of the $500 receivable from the investor.

In connection with the issuance of the First Note, the Company also issued to L2 Capital Warrants to purchase up to 400,000 shares of common stock (the “Warrant Shares”) pursuant to the common stock purchase warrant (the “Common Stock Purchase Warrant”) executed by the Company. The Warrant shall be exercisable at a price of 110% multiplied by the closing bid price of the common stock on the issuance date (the “Exercise Price”), subject to adjustments and exercisable from the Issue Date until the seven–year anniversary. At the time that the Second Note is funded by the Holder thereof in cash, then on such funding date, the Warrant Shares shall immediately and automatically be increased by the quotient (the “Second Warrant Shares”) of $375 divided by the lesser of (i) the Exercise Price and (ii) 110% multiplied by the closing bid price of the common stock on the funding date of the Second Note. With respect to the Second Warrant Shares, the Exercise Price hereunder shall be redefined to equal the lesser of (i) the Exercise Price and (ii) 110% multiplied by the closing bid price of the common stock on the funding date of the Second Note. L2 Capital may exercise the Warrant cashless unless the underlying shares of common stock have been registered with the SEC prior to the exercise.

Management recorded the warrants at relative fair value to additional paid in capital. The corresponding debt discount is being amortized over the life of the note using the effective interest method. During the three and six months ended June 30, 2017, the Company charged to operations $25 and $29, respectively, as accretion of debt discount on this note and warrants issued concurrent with this note.

May 2017 Notes

On May 1, 2017, the Company issued notes payable to two investors in the aggregate amount of $330,000 (the “May 2017 Notes”). The May 2017 Notes mature on October 1, 2018, with mandatory repayments beginning on October 1, 2017 in the amount of $25 and continuing monthly thereafter. The May 2017 Notes accrue interest at a rate of 10% per annum.

The May 2017 Notes are convertible into the Company’s common stock only after an event of default. Events of default include failure to pay payments due under the May 2017 Notes, entrance into any bankruptcy or insolvency proceedings, failure to meet the obligations of any other notes payable in an amount exceeding $100, the Company’s stock being suspending for trading or delisted, losing the Company’s ability to deliver shares, or becoming more than 15 days delinquent on any filings required with the SEC.

The May 2017 Notes feature a “most favored nation” clause, in which, if the Company were to issue convertible notes with more favorable terms to another investor, the holders of the May 2017 Notes can elect to replace their notes with new notes with the same terms as the more favorable notes. As of the date of the issuance of this report, the Company has not replaced the May 2017 Notes under this clause.

The Company recorded an initial debt discount of $165, representing $65 related to an original issue discount and $100 representing the relative fair value of warrants issued to the note holders. The debt discount will be amortized using the effective interest method.

During the three and six months ended June 30, 2017, the Company recorded amortization of debt discount of $14 and $14, respectively, on the May 2017 Notes.

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Note 10. Common stock issuances

Sale of common stock

During February and March 2017, the Company sold 1,625,000 shares of its common stock to accredited investors at a purchase price of $0.40 per Share for aggregate proceeds received of $650. In addition, for every Share purchased, the Investors received detachable warrants, as follows: (i) one Series A Warrant; (ii) one Series B Warrant; and (iii) one Series C Warrant.

During May 2017, the Company sold 1,250,000 shares of its common stock at $0.40 per share for total proceeds of $500. In addition, for every Share purchased, the Investors received detachable warrants, as follows: (i) one Series A Warrant; (ii) one Series B Warrant; and (iii) one Series C Warrant.

Each Series A Warrant is exercisable for one share of common stock, for a period of three years at a price of $0.50 per share. Each Series B Warrant is exercisable for one share of common stock, for a period of three years at a price of $0.75 per share, and each Series C Warrant is exercisable is exercisable for one share of common stock, for a period of three years at a price of $1.00 per share.

Management evaluated the terms of the warrants and determined that each were considered “fixed for fixed” and that they were properly classified as equity instruments.

During the three months ended June 30, 2017, the Company issued 1,010,000 shares of its common stock to consultants in exchange for services. The Company charged $969 to stock based compensation, which is a component of selling, general and administrative expenses in the Company’s Statements of Operations and Comprehensive Loss.

Note 11. Stock–based compensation

Issuance of restricted shares – directors, officers and employees

During the six months ended June 30, 2017, the Company issued 2,150,000 shares of restricted common stock to certain employees. The Company valued each award on its grant date and is expensing the grant date fair value over the 16-24 month vesting period.

The Company’s activity in restricted shares was as follows for the six months ended June 30, 2017:

For the three and six months ended June 30, 2017 the Company has recorded $666 and $1,005, in employee and director stock–based compensation expense, which is a component of selling, general and administrative expense in the condensed consolidated statement of operations and comprehensive loss.

During the three and six months ended June 30, 2017, the Company did not allocate any stock–based compensation expense to non–controlling interest.

As of June 30, 2017, unamortized stock-based compensation costs related to restricted share arrangements was $2,613, and will be recognized over a weighted average period of 1.45 years.

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Note 11. Stock–based compensation, continued

Stock options

The following is a summary of the Company’s stock option activity for the six months ended June 30, 2017:

For the three months ended June 30, 2017 and 2016, the Company has recorded $962 and $0, respectively, in employee and director stock–based compensation expense, which is a component of selling, general and administrative expense in the condensed consolidated statement of operations.

For the six months ended June 30, 2017 and 2016, the Company has recorded $1,925 and $0, respectively, in employee and director stock–based compensation expense, which is a component of selling, general and administrative expense in the condensed consolidated statement of operations.

As of June 30, 2017, unrecognized compensation costs related to non–vested stock options was $5,133 and will be recognized over a weighted average period of 1.42 years.

Warrants

During February and March, 2017, the Company issued warrants to purchase 4,875,000 shares of the Company’s common stock in connection with private placements. One third of the warrants have an exercise price of $0.50 per share, one third of the warrants have an exercise price of $0.75 per share and one third of the warrants have an exercise price of $1.00 per share. All of the warrants expire three years from the date of issuance.

On March 10, 2017, the Company issued a warrant to purchase 400,000 shares of the Company’s common stock to L2 Capital in connection with the March 2017 Equity Purchase Agreement. These warrants have an exercise price of $0.957 per share and expire on March 10, 2024.

On May 1, 2017, the Company issued warrants to purchase 360,000 shares of the Company’s common stock to the holders of the May 2017 Notes. These warrants have an exercise price of $0.50 per share and expire on May 31, 2022.

On May 18, 2017, the Company issued warrants to purchase 1,231,819 shares of the Company’s common stock to Iliad, in connection with the issuance of the Iliad Note. These warrants have an exercise price of $1.05 per share and expire on May 31, 2022.

On May 1, 2017, the Company issued warrants to purchase 3,750,000 shares of the Company’s common stock in connection with a private placement. One third of the warrants have an exercise price of $0.05 per share, one third of the warrants have an exercise price of $0.75 per share and one third of the warrants have an exercise price of $1.00 per share. All of the warrants expire three years from the date of issuance.

In June 2017, the Company issued warrants to purchase 1,000,000 shares of the Company’s common stock in connection with a private placement. The warrants have an exercise price of $1.25 per share. All of the warrants expire three years from the date of issuance.

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Note 11. Stock–based compensation, continued

Warrants, continued

The following table summarizes information about shares issuable under warrants outstanding at June 30, 2017:

Note 12. Non–controlling interest

At June 30, 2017, the Company’s non–controlling interest was as follows:

Note 13. Operating leases, commitments and legal

Operating leases

On October 26, 2015, the Company entered into an Office License Agreement commencing December 1, 2015. The term expired on November 30, 2016 and carried a monthly fee of $4, with one month (January) rent free. The Company paid a refundable service retainer of $6 and a non–refundable set up fee of $1.

On August 9, 2016, the Company entered into a Sublease Agreement for an office lease in Durham, North Carolina. The lease commenced on September 1, 2016 and expires on January 31, 2020. Monthly rent will be $6 for the first 12–month period, $7 for the second 12–month period, $7 for the third 12–month period and $7 per month for the remaining months until expiration of the lease. A security deposit of $13 was required upon execution of the sublease.

Total lease rental expense totaled $24 and $13 during the three months ended June 30, 2017 and 2016, respectively, and $60 and $23 for the six months ended June 30, 2017 and 2016, respectively.

Total future minimum payments required under the new operating lease are as follows.

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Note 13. Operating leases, commitments and legal, continued

Commitments

On July 7, 2016, the Company entered into an employment agreement with Robert B. Ladd, to act as its President and Chief Operating Officer. The terms of his agreement were reviewed and approved by the Company’s Nominations and Compensation Committee. Under the terms of the agreement, Mr. Ladd will serve as President and Chief Operating Officer receives a salary of $240 per year and is eligible for a cash and/or equity bonus as determined by the Nomination and Compensation Committee. Further, Mr. Ladd received 2,000,000 shares of the Company’s common stock, 1/3 of which shall vest within 12 months from the execution of the agreement, another 1/3 within 18 months, and the remaining 1/3 within 24 months from the execution of the agreement. Lastly, the agreement also provides for certain rights granted to Mr. Ladd in the event of his death, permanent incapacity, voluntary termination or discharge for cause.

On November 18, 2016, the Company entered into an employment agreement with John McAfee pursuant to which Mr. McAfee joined the Company as Executive Chairman of the Board of Directors and Chief Executive Officer of the Company. Mr. McAfee has a base annual salary of $1.00 per day; payable at such times as the Company customarily pays is other senior level employees. In addition, Mr. McAfee was granted Executive options (the “Options”) to purchase an aggregate of six million (6,000,000) shares of the Company’s common stock (the “Option Shares”), which shall be exercisable for a period of five (5) years as follows:

Mr. McAfee is also eligible to earn a cash and/or equity bonus as the Compensation Committee may determine, from time to time, based on meeting performance objectives and bonus criteria to be mutually identified by Mr. McAfee and the Nomination and Compensation Committee. Such objectives and criteria may be based on a favorable sale or merger of the Company, in addition to operating metrics.

During the year ended December 31, 2016, the Company purchased 400 bitcoin mining machines from Bitmain Technologies Limited for $630 and power supplies from Hash The Planet (“HTP”) for $53. The Company also entered a 12–month agreement with HTP to host, power, connect, monitor and service the machines for $136. The hosting data center in located in Cashmere, WA. MGT launched its bitcoin mining operations and earned its first BTC on September 3, 2016.

Legal

On September 2, 2016, the Company and John McAfee filed an action in the United States District Court for the Southern District of New York seeking a declaration that the use of or reference to the personal name of John McAfee and/or McAfee in its business, and specifically in the context of renaming the Company to “John McAfee Global Technologies, Inc.,” does not infringe upon Intel’s trademark rights or breach any agreement between the parties. Following a series of motions and counter-motions, both parties agreed to a court-supervised mediation process.

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Note 13. Operating leases, commitments and legal, continued

Legal, continued

On June 30, 2017, the Company entered into a settlement agreement with Intel Corporation in which the Company agreed not to use “John McAfee Global Technologies,” “John McAfee Privacy Phone,” “John McAfee” or “McAfee” as (or as part of) a trademark, logo, trade name, business name, slogan, service mark or brand name in connection with cybersecurity related products or services. Notwithstanding, the Company is permitted to use the name “John McAfee” in promotional and advertising materials and on product packages, provided that the name is used in a descriptive manner and in compliance with the specifications set forth in the Settlement Agreement. Additionally, the Company may use John McAfee’s likeness without restrictions.

On July 5, 2017, the United States District Court for the Southern District of New York (the “Court”) dismissed with prejudice all claims and counterclaims filed in the case entitled John McAfee et al. v. Intel Corporation et al., Case No. 1:16-CV-06934 (the “Action”). The Action relates to a complaint for declaratory judgement filed by Mr. John McAfee and MGT Capital Investments, Inc. (the “Company”) against Intel Corporation (“Intel”), seeking, among other things, a ruling that John McAfee and the Company’s intended uses of Mr. McAfee’s name were lawful and did not infringe upon or dilute any of Intel’s rights in the McAfee marks.

The dismissal of the Action was based upon a stipulation of voluntary dismissal (the “Stipulation”) entered into by the Parties pursuant to a settlement agreement (the “Settlement Agreement”) dated June 30, 2017. Under the terms of the Settlement Agreement, the Company agreed not to use “John McAfee Global Technologies,” “John McAfee Privacy Phone,” “John McAfee” or “McAfee” as (or as part of) a trademark, logo, trade name, business name, slogan, service mark or brand name in connection with cybersecurity related products or services. Notwithstanding, the Company is permitted to use the name “John McAfee” in promotional and advertising materials and on product packages, provided that the name is used in a descriptive manner and in compliance with the specifications set forth in the Settlement Agreement. Additionally, the Company may use John McAfee’s likeness without restrictions. The Court will retain jurisdiction over the Parties for purposes of enforcing this Settlement Agreement.

A number of law firms have issued press releases announcing that they are investigating claims on behalf of shareholders of the Company regarding potential violations of the Exchange Act.

On September 15, 2016, the Company received a subpoena from the U.S. Securities and Exchange Commission. The Company has cooperated fully with the Commission and its Staff in a timely manner. The Company intends to fully comply with any additional requests the Company may receive from the SEC in the future.

In September 2016, various shareholders in the Company filed putative class action lawsuits against the Company, its president and certain of its individual officers and directors. The cases were filed in the United States District Court for the Southern District of New York and alleged violations of federal securities laws and seek damages. On April 11, 2017 those cases were consolidated into a single action (the “Securities Action”) and two individual shareholders were appointed lead plaintiffs by the Court. On June 30, 2017, the lead plaintiffs filed an amended complaint. The Company is vigorously defending the lawsuits and believes it has meritorious defenses against the claims alleged in the amended complaint.

On January 24, 2017, the Company was served with a copy of a summons and complaint filed by plaintiff Atul Ojha in New York state court against certain officers and directors of the Company and the Company as a nominal defendant. The lawsuit is styled as a derivative action (the “Derivative Action”) and was originally filed on October 15, 2016. The Derivative Action substantively alleges that the defendants, collectively or individually, inadequately managed the business and assets of the Company resulting in the deterioration of the Company’s financial condition. The Derivative Action asserts claims including but not limited to breach of fiduciary duties, unjust enrichment and waste of corporate assets. On February 27, 2017, the parties to the Derivative Action executed a stipulated stay of proceedings pending full or partial resolution of the Securities Action. Thereafter, the Company plans to address the Derivative Action.

Note 13. Operating leases, commitments and legal, continued

Legal, continued

On March 3, 2017 and April 4, 2017 respectively, two additional actions were filed against the Company by its shareholder Barry Honig (“Honig”). The first action was filed in federal court in North Carolina (the “North Carolina Action”) against the Company and its president and alleges claims for libel, slander, conspiracy, interference with prospective economic advantage, and unfair trade practices. The North Carolina Action substantively alleges that the defendants defamed Honig by causing or allowing certain statements to be published about Honig in news blogs and articles authored by a journalist, who is also a defendant in the case. On June 5, 2017, the Company filed a motion to dismiss the lawsuit, and on July 17, 2017 the plaintiff filed on opposition brief to the motion to dismiss. The Company and its president are vigorously defending the suit and believe they have good and meritorious defenses.

The second action was brought by Honig and certain shareholders in the United States District Court for the Southern District of New York (the “Breach of Contract Action”) against the Company and certain of its officers and directors. The Breach of Contract Action alleges claims for tortious interference with contractual relations, breach of contract, and unjust enrichment related to the Company’s unsuccessful attempt to acquire D–Vasive and Demonsaw in 2016 and the alleged resulting harm to certain D–Vasive and Demonsaw noteholders. The damages claimed include (a) an amount of $46,750, (b) together with interest, costs and reasonable attorneys’ fees as provided by law and relevant agreements, and (c) any further or different relief as this Court deems lawful and proper under the circumstances. The Company filed a motion to dismiss on June 5, 2017 and the plaintiffs filed an amended complaint on June 26, 2017. On June 30, 2017, the court granted a motion for extension of time filed by the Company and granted the Company until August 28, 2017 to file its response. The Company and its officers and directors believe that they have meritorious defense against the claims alleged in the amended complaint.

The Company believes that there is little merit to each of the above actions and has no indication or reason to believe that it is or will be liable for any alleged wrongdoing. The Company is consulting with its counsel to determine the appropriate legal strategy but intends to defend against the actions vigorously. The Company cannot presently rule out that adverse developments in one or more of the above actions could have a materially adverse effect on the Company, and has notified its Director’s and Officer’s Liability Insurance carrier.

The Company cannot presently rule out that adverse developments in one or more of the Securities Action, Derivative Action, Defamation Action or Breach of Contract Action actions could have a materially adverse effect on the Company, and has notified its Director’s and Officer’s Liability Insurance carrier.

Note 14. Related Party Transactions

Janice Dyson, wife of John McAfee, the Company’s Executive Chairman of the Board of Directors and Chief Executive Officer’s, is the sole director of Future Tense Secure Systems, Inc. (“FTS”) and owns 33% of the currently outstanding shares of common stock of such company. On March 3, 2017, the Company and FTS entered into the Demonsaw LLC Membership Interest Purchase Agreement (the “Purchase Agreement”). Pursuant to the Purchase Agreement, Future Tense sold its 46% membership interest in Demonsaw, LLC, a Delaware limited liability company for 2,000,000 unregistered shares of MGT’s common stock.

On May 9, 2016, the Company entered a consulting agreement with FTS, pursuant to which FTS would provide advice, consultation, information and services to the Company including assistance with executive management, business and product development and potential acquisitions or related transactions. During the three months ended June 30, 2017 and 2016, the Company recorded consulting fees of $73 and $646, respectively, to FTS for such services. During the six months ended June 30, 2017 and 2016, the Company recorded consulting fees of $135 and $646, respectively, to FTS for such services. As of June 30, 2017, the Company owed $0 to FTS, which is included in accounts payable in the accompanying unaudited condensed consolidated balance sheet.

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Note 15. Segment reporting

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision–making group in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision–making group is composed of the Chief Executive Officer. The Company operates in two segments, Cybersecurity and Bitcoin Mining. Certain corporate expenses are not allocated to segments.

The Company evaluates performance of its operating segments based on revenue and operating loss. The following table summarizes our segment information as of and for the three and six months ended June 30, 2017 and 2016:

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Note 16. Subsequent events

The Company has evaluated the impacts of subsequent events through August 9, 2017, and has determined that no such events occurred that were required to be reflected in the condensed consolidated financial statements, except as described below.

Conversion of August 2016 Notes

On July 7, 2017, holders of the Company’s August 2016 Notes converted a total of $175 principal value into a total of 233,334 shares of the Company’s common stock.

Shares Issued to Consultants

During July and August 2017, the Company issued an aggregate of 715,000 shares of its common stock to consultants.

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

This Quarterly Report on Form 10–Q contains forward–looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward–looking statements. The statements contained herein that are not purely historical are forward–looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward–looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “estimates,” “should,” “expect,” “guidance,” “project,” “intend,” “plan,” “believe” and similar expressions or variations intended to identify forward–looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward–looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward–looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in our Annual Report on Form 10–K filed with the SEC on April 20, 2017, in addition to other public reports we filed with the Securities and Exchange Commissions (“SEC”). The forward–looking statements set forth herein speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward–looking statements to reflect events or circumstances after the date of such statements.

Executive summary

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