MGT Capital more questions – guest post – the author of this post has a short position in the company
- Issues debt convertible at $1 (significantly below market) and gives 300k free shares.
- Doesn’t disclose transaction for several days, and then only in an 8K.
We have been bearish on the stock of MGT Capital (MGTI) and believe this highly controversial company, which has little revenue, loses money, and was recently delisted from the NYSE remains significantly overvalued. We expect the company to report another disappointing quarter when it announces earnings (or lack there of) later this month. Despite its recent drop, MGTI’s stock is still up 400% year-to-date.
Our bearish view was recently reinforced when the company announced a note exchange that we believe should be alarming to anyone who owns the stock. On October 28, 2016, MGTI announced an agreement to exchange $1.5 million of 12% non-convertible Debt and warrants for 300,000 shares exercisable at $3.31 per share for $1.5 million of new 8% Debt Convertible at $1.00 per shares and 300,000 restricted shares.
MGTI’s stock priced closed at $1.34 on the date of the exchange agreement. So investors should be asking why the company was willing to offer debt that is convertible at $1 per share, a price 25% below where the stock was trading at the time of the deal (and a price significantly below where the stock is currently trading). Shareholders should also ask why, as part of the exchange, the company also gave 300,000 free shares in exchange for warrants that are significantly out of the money, and in our opinion are worthless.
One could argue the exchange benefits the company because it lowers its annual interest expense by $60,000. However, the original note was scheduled to mature in approximately three years so the approximate $180k savings (3*$60k) the company will receive from this exchange is far outweighed by the costs which include $400k (if not more) of value in the form of the 300k free shares, and the significant and dilutive value of the 1.5 million shares underlying the new convertible note.
Another way to understand how terrible this deal may be for shareholders is to assume that that note holders sold or sold short the 1.5 million shares underlying the convert and the 300k shares they got for free. Lets assume they did so at $1.34 per share. Under this scenario the note holders would have received:
- $2.0 million for the 1.5 million shares
- $0.4 million for the 300k shares
- $0.4 million in interest payments (1.5mm*3*8%)
- $2.8 million of total consideration
If they had not done the exchange and kept the original 12% debt, the note holder would have received (assuming the warrants expire worthless):
- $1.5 million upon repayment of the note in 2019
- $0.5 million in interest payments (1.5mm*3*12%)
- $2.0 million of total consideration
So, why would MGTI offer new notes that are worth $2.8 million (if not more if one uses a higher stock price) when the company would have had to pay only $2.0 million had it not done the exchange?
We are also troubled by the company’s disclosure regarding this exchange. In particular, we wonder why the company waited 6 days after the exchange was agreed to before announcing it to shareholders. We also wonder why the company did not issue a press release announcing the exchange and instead disclosed it on November 3rd in an 8-k (which we suspect many shareholders did not read).
We remain short MGTI
Set forth below is information from the company’s 8k regarding the exchange:
On October 28, 2016, MGT Capital Investments, Inc. (the “Company”) entered into a Note Exchange Agreement (“Note Exchange Agreement”) and a Warrant Exchange Agreement (the “Warrant Exchange Agreement”) with the holder (“Holder”) of certain 12% unsecured promissory notes in the aggregate principal amount of $1,500,000 (the “Notes”) previously issued by the Company pursuant to a Securities Purchase Agreement dated August 2, 2016 (the “Purchase Agreement”). Pursuant to the Note Exchange Agreement, the Company and the Holder agreed to exchange the Notes, including accrued but unpaid interest thereon, for an 8% Senior Unsecured Promissory Note in the aggregate principal amount of $1,500,000 (the “New Note”). The New Note is 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, subject to adjustments as set forth in the New Note.
Pursuant to the Warrant Exchange Agreement, the Company and the Holder also agreed to exchange certain warrants to purchase three hundred thousand (300,000) shares of common stock issued to the Holder under the Purchase Agreement for three hundred thousand (300,000) shares of the Company’s restricted stock.
The Company has offered to other holders of promissory notes issued under the Purchase Agreement, in the aggregate principal amount of $800,000, the opportunity to exchange such notes under the same terms described above.
Set forth below is information from the company’s 8k regarding the debt that will be eliminated as part of the exchange:
On August 2, 2016 (the “Closing Date”), MGT Capital Investments, Inc. (the “Company”) entered into a Securities Purchase Agreement (the “Purchase Agreement”) with selected accredited investors (each an “Investor” and collectively, the “Investors”). Pursuant to the terms of the Purchase Agreement, the Company sold $2,050,000 in unsecured promissory notes (“Notes) in a private placement (the “Offering”). The Notes mature on September 30, 2019 or such other date as set forth in the Note. The Notes bear interest at a rate of twelve per cent (12%) per annum, to be paid quarterly in arrears, with the first payment due on September 30, 2016 to be calculated on a pro-rata basis. In addition, for each one thousand dollars ($1,000.00) invested by an Investor, the Investor shall receive two detachable Warrants ( “Warrant”), each of which is exercisable for one hundred (100) shares of the Company’s common stock: Each Warrant has an initial exercise price of $3.31 per share, and is exercisable for a period of thirty-six (36) months from the date of issuance.