Convertible note and warrants

6 Months Ended

Jun. 30, 2012

Warrants and Rights Note Disclosure [Abstract]

Schedule of Stockholders' Equity Note, Warrants or Rights [Table Text Block]

Note 9: Convertible note and warrants

On May 24, 2012, the Company entered into a securities purchase agreement (the “SPA”) with Hudson Bay Fund Ltd. (the “Investor”). The SPA provided for the purchase of an 18 month promissory note with an interest rate of 8% (the “Senior Secured Convertible Note” or the “Note”) convertible into up to 1,166,667 shares of Company Common Stock at a conversion price of $3.00 per share and a warrant (the “Hudson Bay Warrant” or the “HB Warrant”) to purchase up to 875,000 shares of Common Stock at an exercise price of $3.00 per share for proceeds of $3,500 (the “Hudson Bay Transaction”). The Note is convertible at the option of the holder at a conversion price of $3.00 per share and the Company can require conversion into Company Common Stock if the Weighted Average Price of the Common Stock equals or exceeds 200% of the conversion price for no less than twenty (20) Trading Days during any thirty (30) consecutive Trading Day period occurring following the issuance date, subject to a 9.99% beneficial ownership ceiling for Investor’s ownership of Company Common Stock at any one time. The Note is also redeemable by the Company from and after the seven (7) month anniversary of the issuance date, subject to certain equity conditions, in cash at a price equal to the greater of (i) 125% of the Conversion Amount to be redeemed and (ii) the product of (A) the Conversion Amount being redeemed multiplied by (B) the quotient determined by dividing (x) the greatest Closing Sale Price of the shares of Common Stock during the period beginning on the date immediately preceding the date of notice of redemption and ending on the date the redemption date, by (y) the lowest Conversion Price in effect during such period, as such terms are defined in the Note. The Conversion Price of the Note is subject to adjustment in case of a combination or subdivision of stock or in the event of the grant of rights with equity features. The HB Warrant is exercisable at the option of the holder at a $3.00 per share exercise price and the Company can require exercise if the Weighted Average Price of the Company’s Common Stock equals or exceeds 250% of the exercise price for no less than twenty (20) Trading Days during any thirty (30) consecutive Trading Day period occurring following the issuance date, as such terms are defined in the HB Warrant. The HB Warrant exercise price is subject to adjustment in the case of combination or subdivision of stock or in the event of the granting of any stock appreciation rights, phantom stock rights or other rights with equity features. The Note allows for payment of Common Stock in lieu of cash interest payments due pursuant to the Note. The Company obtained stockholder approval at a special meeting of the stockholders held on August 1, 2012 to issue up to 140,000 shares of Common Stock in satisfaction of interest due pursuant to the Note as well as 2,041,667 shares of Common Stock issuable pursuant to the Note and HB Warrant. In connection with the Hudson Bay Transaction, MGT agreed to issue 75,000 shares of Common Stock to Chardan Capital Markets, LLC (“Chardan”) and certain affiliates of Chardan in consideration of investment banking services rendered. Stockholder approval was also obtained on August 1, 2012 for the issuance of 75,000 shares of Common Stock to Chardan. The Hudson Bay Transaction required MGT and certain of its subsidiaries to provide all of its assets as collateral, to pledge the stock of its subsidiaries and certain of MGT’s affiliates to execute voting and lockup agreements. The proceeds of the Hudson Bay Transaction will be used by the Company for general working capital purposes.

The proceeds of the note were allocated between the HB Warrant and the Note based on their relative fair values.

Senior Secured Convertible Note consists of the following as of:

	June 30, 2012			December 31, 2011
Senior secured convertible note	$	3,500		$	—
Less: unamortized debt discount		(957	)		—
Convertible notes	$	2,543			—

The conversion feature embedded in the Note was evaluated to determine if such conversion feature should be bifurcated from its host instrument and accounted for as a free standing derivative. The Company determined that the conversion feature did not need to be bifurcated.

Financing and issuance costs totaling $688 were incurred in connection with the issuance of the Note and HB Warrants. These costs include legal and placement fees, including the issuance of 75,000 shares of restricted common stock. The stock was recorded at the fair market value of $315 at the date of closing, which was accrued for at June 30, 2012, and was subsequently issued on August 9, 2012. The total costs were allocated based on relative fair values to deferred financing costs in the amount of $588 and HB Warrant issuance costs of $100. Deferred financing costs are amortized through periodic charges to non-operating expense over the maximum term of the related instrument using the effective interest method. Amortization expense for the remainder of 2012 is anticipated to be $175, with the remaining costs being fully amortized in 2013.

The following sets forth the Company’s activity related to its Note during the three and six-months ended June 30, 2012 and 2011, respectively:

	Three and six months ended,
	June 30, 2012		June 30, 2011
Proceeds from issuance of convertible notes payable	$	3,500	$	—
Fair value of warrants recorded as corresponding debt discount		500		—
Beneficial conversion feature on convertible note		500		—
Amortization of debt discount		43		—
Interest expense		23		—
Amortization of deferred financing costs		33		—

We estimated the fair value of the HB Warrant as of the date of issuance, June 1, 2012, using a closed-formula option pricing method for barrier-type options that took into account the terms of the option rights of the holder and also the Company’s Mandatory Exercise Option, which is consistent with using a Monte Carlo option pricing method. The options pricing methods used the following input assumptions: expected stock price volatility 75.0%; warrant term five (5) years; risk-free rate of 0.80%; dividend yield 0.0%. As the trading volume of the Company’s publicly traded shares was approximately 30,000 per day and the issuable shares under the Note and HB warrant were over 2.0 million, and further because these issuable shares had not yet been registered for public sale at the issuance date, the price of the underlying shares was discounted approximately 30% for options pricing purposes. The fair value of the total HB warrants issued, given the terms of the HB Warrant agreement, was determined to be $500. The discount was recognized as an increase of additional paid-in capital and a discount to the convertible Note. The discount to the convertible Note payable is being amortized through periodic charges to other non-operating expense over the 18 month period from the date of issuance to the date the Note is due using the effective interest method.

A beneficial conversion feature of the Note was calculated to be $500 after adjusting the effective conversion price for the fair value of the HB Warrants issued.

The estimates discussed above require us to make assumptions based on historical results, observance of trends in our stock price, future expectations and other relevant risk factors. If other assumptions had been used, the HB Warrant valuation as calculated and recorded under the accounting guidance could have been affected.

Volatility is a key factor in option pricing models. For purposes of determining expected volatility, the Company used significant judgment to identify a peer group. The historical volatility of the Company’s own common stock was not deemed pertinent to the estimate, because of the recent change in the Company’s operations and business plan. The risk-free rate for the period coincides with the expected life of the HB Warrants and is based on the U.S. Treasury Department yield curve in effect at time of closing.