Note 6. Series A Convertible Preferred Stock

On November 2, 2012, the Company closed a private placement sale of 1,380,362 shares of Series A Convertible Preferred Stock (“Preferred Stock”), (including 2,760,724 warrants to purchase MGT Common Stock) for an aggregate of $4.5 million. This transaction was approved by the Exchange on October 26, 2012. The Preferred Stock is convertible into the Company's Common Stock at a fixed price of $3.26 per share and carries a 6% dividend. The warrants have a five–year life and are exercisable at $3.85 per share. Total issuance cost for this private placement for the year ended December 31, 2012, was $88.

Significant terms of the Preferred Stock, as specified in the Certificate of Designation are as follows:

Cash maintenance

The Company shall maintain a cash balance of at least $2,000 as long as at least 345,092 shares of Preferred Stock remains outstanding. In February and March 2013, 241,748 and 30,000 shares of the Company’s Series A Convertible Preferred Stock were converted into 241,748 and 30,000 shares, of the Company’s Common Stock, respectively. In April 2013, 1,123,809 shares of the Preferred Stock were converted into 1,125,763 shares of the Company’s Common Stock, which included 1,954 shares of accrued interest on the Preferred Stock. As of December 31, 2013 and 2012, respectively, 9,413 and 1,380,362 shares of the Preferred Stock remained outstanding.

With fewer than 345,012 shares of Preferred Stock outstanding, the Company is no longer subject to the Cash Maintenance provision of the Purchase Agreement under which the Preferred Stock was originally sold in October 2012.

Conversion option

At any time and from time to time on or after the Effective Date, the Preferred Stock shall be convertible (in whole or in part), at the option of the Holder, into such number of fully paid and non–assessable shares of Common Stock as is determined by dividing (x) the aggregate Stated Value of $3.26 per shares (“Stated Value”) of Preferred Stock that are being converted plus any accrued but unpaid dividends thereon as of such date that the Holder elects to convert by (y) the Conversion Price ($3.26) then in effect on the date (the “Conversion Date”).

For the year ending December 31, 2013 1,406,747 of Preferred were converted into 1,406,747 shares of MGT Common Stock. For the year ending December 31, 2012, no share of Preferred were converted to MGT Common Stock.

Dividends

The Preferred Stock shall pay a six percent (6%) annual dividend on the outstanding Preferred Stock, payable quarterly on March 31, June 30, September 30 and December 31 of each year (the “Dividend Date”), with the first dividend payable for the period commencing on the Issuance Date. The Company has the option to pay each quarterly dividend in cash or additional shares of Preferred Stock (the "Dividend Shares").

For the years ended December 31, 2013 and 2012, respectively, the Company issued 21,394 and 14,404 Dividend Shares, in connection with this Preferred Stock dividend.

Liquidation preference

Upon the liquidation, dissolution or winding up of the business of the Corporation, whether voluntary or involuntary, each holder of Preferred Stock shall be entitled to receive, for each share thereof, a preferential amount in cash equal to (and not more than) the Stated Value (the “Liquidation Amount”) plus all accrued and unpaid dividends.

The Preferred Stock Certificate of Designation and Warrant agreement (“Warrants”) each contain a fundamental transactions clause that provides for the conditional redemption of these instruments under certain circumstances that are not within the Company’s sole control. Management has therefore concluded that the Preferred Stock requires temporary equity classification in accordance with ASC 480–10–S99 “Accounting for Redeemable Equity Instruments” at its allocated value and the warrants require classification at fair value. When the Preferred Stock and Warrants were issued, the fair value of the Warrants exceeded the proceeds received from the sale and issuance of the Preferred Stock and Warrants. The Warrants were recorded at their fair value and the excess over the proceeds received was recorded as a deemed dividend. Changes in the fair value of the Warrants at each reporting date are included in the statement of operations. The carrying amount of the Preferred Shares requires no further adjustment unless and until the conditional redemption events are probable. The Company does not consider the conditional redemption events to be probable, as these events refer to fundamental change of control situations that do not currently exist, in the opinion of management. Accordingly, management concluded that the conversion option embedded in the preferred shares does not require bifurcation from the host contract, as the Preferred Stocks have the characteristics of a residual interest and therefore are clearly and closely related to the Common Stocks issuable upon the exercise of the conversion option. Further, since the issuance date fair value of the warrants exceeded the proceeds received from the sale and issuance of the Preferred Stock, accounting recognition of the beneficial conversion feature was not required.

The warrants were recorded at fair value as of October 29, 2012 of $6,731 based upon the following Black Scholes Model (“BSM”) to value warrants containing circumstances that are not within the Company’s sole control: risk free rate 0.760%; expected term five (5) years; annual volatility 75.0%; exercise price $3.85, adjusted market value of $3.98 per share. The adjusted market value was determined based on market conditions for our common shares, characterized by significant price volatility when compared to seasoned issuers. The Company expects that our share price will continue to be more volatile for the indefinite future. The volatility is attributable to a several factors, most notably the fact that our common shares are thinly traded. Share Price is one of the inputs needed to determine the fair value of derivative instruments, as used in the BSM. The Company feels that the share price volatility would distort a BSM calculation is based on a single day’s closing price, thereby dissuading us from utilizing the closing price on October 26, 2012. The Company has determined that a more representative measurement would be to utilize an average of the daily weighted average stock price of the Company’s Common Stock for the 30 days prior to the deal close. This calculation minimizes the impact of specific daily news or market trading distortions caused by an imbalance of orders on a single day.

On December 31, 2012, the warrants were re–measured at fair value of $6,364, based upon the following BSM inputs: risk free rate 0.760%; expected term five (5) years; annual volatility 75.0%; exercise price $3.85, closing stock price of $3.86. The Company recorded a gain of $365, caused by the change in fair value of its derivative liability from inception through December 31, 2012.

In connection with the sale of the Preferred Stock, the Company entered into a registration rights agreement with the investors agreeing to file a registration statement within 60 days of the closing and to have the registration statement declared effective within 150 days of the closing if the registration statement is not subject to a full review and within 180 days of the closing if the registration statement is subject to a full review. The Company filed a Registration Statement (Registrant No. 333–185284) with the SEC on November 30, 2012, which was declared effective on January 11, 2013.

On April 26, 2013, the Company made an offer to the holders of the Company’s $3.85 Common Stock Purchase Warrants issued on October 29, 2012 (the “Warrants”), providing if such holders exercised one Warrant, they would have the right to exchange up to two additional Warrants for 5/8ths per share of Common Stock per Warrant exchanged. The results of the offer were that holders of 715,742 Warrants elected to exercise their Warrants. The Warrants had a fair value of $1,680 carried as a derivative liability on the exercise date. The Warrants were fair valued based upon the following Black Scholes Model (“BSM”): risk free rate 0.68 % – 0.85 %; expected term five (4.44) years; annual volatility 75%; exercise price $3.85, market value of $3.90 – $4.27 per share. The exercise of the Warrants allowed the Company to reclassify $1,680 from derivative liability into shareholders’ equity. During the years ended December 31, 2013 and 2012, the Company recognized $30 and $557 mark–to–market loss associated to this agreement.

On May 20, 2013, the Company entered into Warrant Waiver Agreements with four holders of Warrants who collectively held more than 60 % of the Warrants, which per the original Warrants, triggers the modification of all Warrants in the series. The modification addresses the ability of warrant holders to redeem the Warrants for cash in a “Fundamental Transaction” as defined in the Warrant to provide that the Warrant holders do not have the right to redeem the Warrants for cash in any Fundamental Transaction that is not approved by the Company’s Board of Directors or that occurs in a transaction or as a result of an event that was not in the Company’s sole control. The modification changes the accounting treatment of the Warrants. The Company committed to issue an aggregate of 162,460 shares of its Common Stock in consideration for the modification. On September 27, 2013, at MGT’s Annual Meeting of Stockholders, stockholders approved a resolution for the issuance of up to 162,460 shares of Common Stock (the “Modification Shares”) in consideration for the modification of certain provisions contained in an aggregate of 2,044,982 warrants which modifications allowed the Company to treat such warrants as equity rather than as a derivative liability. The shares were subsequently issued on October 8, 2013. The stock was valued at $ 598 using the closing market price on September 27, 2013. On May 20, 2013, the Company had 2,044,982 warrants outstanding with a fair value of $6,525 carried as a derivative liability. The warrants were fair valued based upon the following Black Scholes Model (“BSM”): risk free rate 0.850 %; expected term five (4.44) years; annual volatility 75 %; exercise price $3.85, market value of $5.03 per share. The modification agreement allowed the Company to reclassify the $6,525 from derivative liability into shareholders’ equity. For the year ended December 31, 2013, the Company recognized $1,811 mark–to–market loss, respectively, associated with this agreement.