Let us introduce you to MGT Capital Investments Inc. (MGT),

formerly: CHINA BIOMEDICAL GROUP INC (filings through 1998-05-11)
formerly: HTTP TECHNOLOGY INC (filings through 2002-10-28)
formerly: INTERNET HOLDINGS INC (filings through 2000-08-14)
formerly: MEDICSIGHT INC (filings through 2007-01-08)

And under the proxy filed 8/8/2016 under proposal 8 the company recommends that stockholders vote to change the company name to “JOHN MCAFEE GLOBAL TECHNOLOGIES, INC.”

If that doesn’t sound like a gogo stock you want to own, we don’t know what will entice you. This situation was first brought to our attention by the great researchers at Geo Investing. While we do not specialize in penny stocks and are hesitant to look at too many situations with extremely small capital structures, the amount of corporate governance issues and destruction of shareholder value by management at MGT is mind-boggling and most likely fraudulent.

MGT Capital is a penny stock trading at $3.18, with a market capitalization of $81.97MM and an average volume of 3MM shares. Volmanac is short MGT common stock and has a price target of $0.25, a 92% downside.

MGT, which was formerly trading at around $0.25 before management spent hundreds of thousands of dollars pumping up the stock on penny stock sites, on May 9th announced John McAfee was potentially taking over as CEO and MGT was acquiring a company with under $10,000 in revenues called D-Vasive, Inc. for a substantial amount of stock in an attempt to turn into a “cyber security” company.

mgt-chart

On May 9th, 2016 the company announced in an 8-K that MGT was entering into an asset-purchase agreement (APA) to purchase certain technology from a company called D-Vasive. We will discuss the APA later, but ex10-2 filed with the 8-K shows a Management Consulting Agreement with Future Tense Secure Systems Inc. (the “Consultant”), a few excerpts are included below:

a. Base Compensation. The Company shall pay the Consultant base compensation (the “Base Compensation”) at the annual rate of $250,000 (U.S.) payable in equal installments to be made no less often than monthly. The Consultant’s Base Compensation may be increased by the Board of Directors (the “Board”). Once increased, such increased amount shall constitute the Consultant’s Base Compensation.

c. Value Bonuses. If, during the first twelve (12) months of the initial Term of this Agreement, the volume weighted average price (“VWAP”) of the Company’s common stock is equal to or greater than $1.00 for each of ten (10) consecutive trading days on the NYSE MKT exchange, then Consultant shall be entitled to receive a cash bonus in the amount of $250,000 to paid within thirty (30) days of such triggering event. If, during the first twelve (12) months of the initial Term of this Agreement, the VWAP of the Company’s common stock is equal to or greater than $2.00 for each of ten (10) consecutive trading days on the NYSE MKT exchange, then Consultant shall be entitled to receive an additional cash bonus in the amount of $350,000 to paid within thirty (30) days of such triggering event.

The fact that Future Tense is being COMPENSATED hundreds of thousands of dollars for penny stock price movements is appalling. Future Tense Systems, seems to be a John McAfee owned company, and even has an about John McAfee section, however no related party information was mentioned in the APA at the time, which is illegal. Additionally, Future Tense Systems formerly shared google analytics keywords with other McAfee related companies, such as mcafee16.com:

future-tense

Additionally GEO Investing discovered that MGT compensated at least two pump and dump websites and newsletters to send out McAfee related information about the stock immediately after the May 9th 8-K was filed.

stockbeast.com was compensated $125,000 by MGT for a two month contract (May 6th - July 5th)
SCS, LLC was compensated $20,000 for a one day investor/media campaign

John McAfee had very little to do with the success McAfee, Inc. and was actually outed as the CEO of McAfee Associates in the early 1990s when the stock was at the low. He has not been active business or the technology business in almost 23 years. In fact, McAfee was recently wanted for questioning for the murder of his neighbor in Belize in 2012.

Additionally, he was recently found liable for another man’s 2006 death in Arizona.

Additionally, there are numerous articles reporting that McAfee is a fan of the drug MDVP (bath salts), and spent years trying to “purify” the drug and posts on different popular message boards about usage.

Additionally McAfee made a NSFW video in 2013 in which he features “degraded women, smoking, drugs, partial nudity, and firearms” and finally gets around to describing how to uninstall McAfee Antivirus.

McAfee clearly is not a business leader and also knows virtually nothing about technology at this time. To prove this point, Future Tense Systems lists a few companies McAfee has either funded or is involved with. One company is an ssl provider called Black Cert. It is interesting to note that www.futuretensecentral.com does not even use an ssl certificate even though it is affiliated with Black Cert.

Black Cert was launched in mid 2015 and attracted attention from the tech community because of McAfee and the fact that the certificates it provided were vulnerable to SSL bugs. Additionally, examining the SSL cert for Black Cert shows it was actually issued by a competitor, Comodo!

blackcert

Additionally, the site isn’t able to load basic javascript and image assets:

blackcert-site

We have shown McAfee doesn’t really know what he is doing and is a bit crazy, but maybe the company MGT is buying, D-Vasive, is valuable? Maybe MGT is valuable?

According to MGT’s 10-K filed 8/15/2016, MGT had revenues of $0 (yes ZERO) for the first six months of 2016 and a net loss of $7.4MM. The company has $1.1MM in cash. The only interesting thing the company did was dilute common stockholders by LOWERING the strike price of previously issued warrants to insiders and issuing more warrants:

In May 2016, the Company entered into Warrant Modification Agreements (the “$3 Warrant Modification Agreements”) with holders of 517,796 of Common Stock Purchase Warrants issued in connection with the Company’s private placement offering dated May 24, 2012. The warrants entitled its holders to purchase the Company’s Common stock at an exercise price of $3 per Company share for a period of five years from the date of issuance (the “$3 Warrants”). Under the terms of the $3 Warrant Modification Agreements, the exercise price of the $3 Warrants was reduced to $0.25 per share. During the three months ended June 30, 2016, the Company issued 517,796 shares of Common stock for gross proceeds of $129 in connection with exercise of the $3 Warrants and recorded a Warrant modification expense of $431 related to the $3 Warrant Modification Agreements.

Also in May 2016, the Company entered into agreements with the holders of 2,800,000 Common Stock Purchase Warrants issued in connection with the Company’s private placement offering dated October 8, 2015 (the “2015 Warrants”). Pursuant to its terms, each 2015 Warrant entitled the holder to purchase two shares of Company’s Common stock at a price of $0.25 per share on the earlier of: (i) one year from the date of issue, or (ii) the occurrence of certain corporate events, including a private or public financing in which the Company receives gross proceeds of at least $7,500,000; a spinoff; one or more acquisitions or sales by the Company of certain assets approved by the stockholders of the Company; or a merger, consolidation, recapitalization, or reorganization approved by the stockholders of the Company (each, a “Qualifying Transaction”). In the absence of a Qualifying Transaction, the Company allowed holders of the 2015 Warrants to accelerate exercise, if the holder agreed to pay an exercise price of greater than $0.25 per share. All 2015 Warrants were exercised under this agreement, with the Company issuing a total of 5,600,000 shares of Common stock for gross proceeds of $2,298, or approximately $0.41 per share.

The company clearly knew the McAfee news would cause the stock to pop as they were paying hundreds of thousands of dollars to pump up the price and had press releases ready to go as soon as the 8-K hit on May 9th, so why were they ignoring their fiduciary duty to shareholders and issuing millions in stock at $0.25 and lowering warrant exercise prices? The SEC needs to investigate.

MGT is proposing to buy two “cyber-security companies” (D-Vasive and Demonsaw) for millions in MGT stock. In the Asset Purchase Agreement (APA) filed May 9th, 2016 MGT states that it has entered into an agreement to purchase “cyber security assets” from D-Vasive for millions in MGT stock:

2.4. Purchase Price. Subject to the terms and conditions set forth in Section 2.5, in consideration for the sale, transfer, assignment, conveyance and delivery by D-Vasive to Buyer of the Assets and Sellers’ agreement to retain and satisfy the Excluded Liabilities, Parent shall (i) pay to Sellers Three Hundred Thousand U.S. Dollars ($300,000), less Registered IP Fees due and unpaid by D-Vasive at Closing unless otherwise agreed upon by the Parties (the “Closing Cash”), (ii) issue to Sellers of Seller’s designees(s), and deliver to Escrow Agent four million and seven hundred and sixty thousand (4,760,000) unregistered shares of Common Stock (the “Escrow Shares”) to be held in escrow in accordance with the Escrow Agreement and subject to adjustment, in accordance with the Escrow Agreement; and (iii) issue and delivery to Sellers or Sellers’ designees(s) nineteen million and forty thousand (19,040,000) unregistered shares of Common Stock (the “Closing Shares” together with Escrow Shares as “Purchase Price Shares”) The Closing Cash, the Escrow Cash and Closing Shares are collectively referred to as the “Purchase Price”. The Purchase Price Shares shall be allocated to Sellers according to Annex A.

The Proxy Materials filed 8/15/2016 give a snapshot of D-Vasive financials. The company has revenue of $9,911 and net income of $2,525 (not in millions or thousands FYI). Our favorite (discovered by Geo Investing) is Note 4 which shows that D-Vasive did not have a computer until at least March 31, 2015 and most likely later:

note-4

D-Vasive is a poorly coded app downloaded by less than 10,000 people. It is not a real asset and a pretty terrible product - not worth the almost 25MM shares (over $75MM at todays share price) MGT is paying to acquire the asset. D-Vasive later raised $100,000 in capital through a convert (more on this later) on May 23rd, 2016. While the company is incorporated in Wyoming, the Company HQ is actually in Rhode Island according to this filing. Below is a picture the headquarters according to google maps:

dvasive-hq

In an Asset Purchase Agreement (APA) filed May 26th, 2016, MGT states that it has entered into an agreement to acquire assets from Demonsaw, LCC, (which was only incorporated June 25th, 2015):

2.4. Purchase Price. Subject to the terms and conditions set forth in Section 2.5, in consideration for the sale, transfer, assignment, conveyance and delivery by Demonsaw to Buyer of the Assets and Sellers’ agreement to retain and satisfy the Excluded Liabilities, Parent shall (i) issue to Sellers of Seller’s designees(s), and deliver to Escrow Agent four million (4,000,000) unregistered shares of Common Stock (the “Escrow Shares”) to be held in escrow in accordance with the Escrow Agreement and subject to adjustment, in accordance with the Escrow Agreement; and (iii) issue and delivery to Sellers or Sellers’ designees(s) sixteen million (16,000,000) unregistered shares of Common Stock (the “Closing Shares” together with Escrow Shares as “Purchase Price Shares”) The Purchase Price Shares shall be allocated to Sellers according to Annex A.

Both of these sites are linked to McAfee through Future Tense Systems, however no related party transactions were reported until 8/8/2016. In the updated proxy statement, these related party transactions are disclosed which show value from the transaction flowing to entities in which McAfee’s spouse has equity interests:

As discussed above, upon the closing of the transaction contemplated under the APA, John McAfee will be appointed as the Company’s Executive Chairman of the Board of Directors and Chief Executive Officer. The wife of Mr. McAfee, Janice Dyson, is the sole director of Future Tense Secure Systems, Inc. and owns 33% of the currently outstanding shares of common stock of such company. Future Tense Secure Systems, Inc., in turn, owns 50.4% of the outstanding shares of common stock of D-Vasive. Further, Future Tense Secure Systems, Inc. owns 23% of the membership interest of Demonsaw.

Additionally, MGT filed updated proxy materials on 8/15/2016 which describe the updated D-Vasive purchase and proxy materials in more detail, stating that D-Vasive has acquired Demonsaw LLC and now the total APA consideration is 43,800,000 shares:

Subsequent to the execution of the APA, the Company and MGT Cybersecurity, Inc., a Delaware corporation wholly owned by the Company, entered into an asset purchase agreement (the “Demonsaw APA”) with Demonsaw LLC, a Delaware company (“Demonsaw”) and the shareholders of Demonsaw, for the purchase of certain technology and assets of Demonsaw for 20,000,000 shares of the Company’s common stock. The Demonsaw APA includes customary representations and warranties of the parties as well as termination and closing conditions.

As a result of the above described transaction, the APA by and among the Company and D–Vasive was amended to, among other things, specify that the assets of D–Vasive being purchased pursuant to the APA include the assets of Demonsaw, and the issuance of Company common shares to D–Vasive shall increase to 43,800,000 from 23,800,000.

The proxy statement is a notice for shareholders of record at the close of business on July 28th, 2016 to vote for 9 proposals at the annual shareholder meeting on September 8th, 2016:

  1. To elect the five (5) nominees named in the attached proxy statement as directors to be elected for the term provided herein and until their successors have been elected and qualified.
  2. To ratify the appointment of Friedman LLP as the Company’s independent registered certified public accounting firm for the year ending December 31, 2016.
  3. To authorize the issuance of 43,800,000 shares (“Purchase Price Shares”) of Common Stock to certain sellers (“Sellers”) set forth on the signature page of that certain Asset Purchase Agreement, dated May 9, 2016, as amended July 7, 2016 (the “APA”)(1), a copy of such amendment is attached as Annex A to this proxy statement pursuant to which the Company shall purchase certain assets from such Sellers in accordance with NYSE MKT Company Guide Section 712.
  4. To approve the Company’s 2016 Stock Option Plan (the “Plan”) and approve the issuance of 6,000,000 options and 2,000,000 restricted stock under the Plan to certain officers of the Company.
  5. To authorize an amendment to the Company’s Restated Certificate of Incorporation to increase the Company’s authorized common stock from 75,000,000 shares to 250,000,000 shares of common stock.
  6. To authorize the Company’s Board of Directors to reduce the ratio of the previously approved reverse stock split from a range of 1–for–8 to 1–for–40 to a ratio of not less than 1–for–2 and to authorize the Board of Directors to extend the implementation of the previously approved stock split (at a new ratio of not less than 1–for–2) to any time after the Meeting, but before the 2017 annual meeting of stockholders.
  7. To ratify the employment agreements for Mr. Robert Ladd and Mr. John McAfee.
  8. To ratify amendment of the Company’s Restated Certificate of Incorporation to change its name to be “John McAfee Global Technologies, Inc.”
  9. To transact any other business as may properly come before the meeting or any adjournment or postponement thereof.

We discuss each of these proposals and how they will affect common stock holders:

1) Election of directors - standard

2) On January 25, 2016, MGT dismissed Marcum, and Friedman LLP (“Friedman”) became our independent auditor. Changing auditors is never a bullish sign for a company.

3) Issuing 43,800,000 shares (over $120MM in value at the current MGT share price) for the purchase of a company with 1 computer and $10,000 in revenue is not the best deal for common stockholders. Additionally, this value will flow to insiders and obviously be dilutive to common stockholders, as they will only own 37.25% of the combined company. See Below:

mgt-dilution

Additionally, Annex A provides a breakdown as to who will own the shares which will be used to acquire the assets. It is interesting to note that most of the value is flowing to holders of D-Vasive and Demonsaw convertible notes. Remember the D-Vasive convert was registered on May 23rd, 2016 AFTER the APA was announced on May 9th, 2016. The convert issued was for $100,000 in capital and through the APA these convert holders will receive 8,800,000 shares of MGT (a current value of over $25MM). This is an immense value destruction for MGT common shareholders, blatant lack of fiduciary duty by MGT management, and clearly an illegal insider transaction in our opinion.

mgt-economics

4) Additional stock options will be dilutive for common stock holders, regardless of the exercise price or dates. In the warrant agreement filed 8/8/2016 Section 7, note L states:

Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holders of not less than []% of the then outstanding Warrants issued pursuant to the SPA.

Earlier in this article we showed how MGT amended warrant exercise prices during the latest filing period, and we would posit they will continue to do so, siphoning value from shareholders.

5) Authorizing more common stock will allow management to continue to steal value from shareholders, as they have repeatedly done in the past.

6) Changing reverse split language shows management will continue to engage in financial engineering tactics to help future pump and dump schemes and potentially give management/insiders more liquidity to dispose of the 43,800,000 shares they will be selling in the open market after the transaction clears.

7) The terms of the warrants mentioned are irrelevant as the company has the ability to amend exercise prices, which is value destructive for common shareholders.

8) Changing the name to “John McAfee Global Technologies, Inc.”, what a joke.

Now the SEC EDGAR Company header will read:

formerly: CHINA BIOMEDICAL GROUP INC (filings through 1998-05-11)
formerly: HTTP TECHNOLOGY INC (filings through 2002-10-28)
formerly: INTERNET HOLDINGS INC (filings through 2000-08-14)
formerly: MEDICSIGHT INC (filings through 2007-01-08)
formerly: MGT Capital Investments Inc. (filings through 2016-09-08)

9) Fine

In addition to these instances of malpractice and potentially outright fraud, we could go on and on about the corporate governance issues at MGT. For starters, in the proxy statement they mentioned an insider simply forgot to file a form 4 for purchase of securities:

Section 16(a) of the Exchange Act requires the Company’s directors, executive officers and persons who own more than 10% of the Company’s stock (collectively, “Reporting Persons”) to file with the SEC initial reports of ownership and changes in ownership of the Company’s securities. Based solely on a review of the reports furnished to us, or written representations from Reporting Persons that all reportable transaction were reported, we believe that during the fiscal year ended December 31, 2015, our officers, directors and greater than ten percent stockholders timely filed all reports and did not miss any filings as required to file under Section 16(a) except that Joshua Silverman, who was required to file a Form 4 in connection with his purchase of the Company’s securities on October 8, 2015, filed a form 5 reporting such purchase in February 2016.

MGT attempts to masquerade as a technology company but the company continues to show that it doesn’t understand anything about technology. The proxy statement states that MGT only has TWO employees:

Currently, the Company and its subsidiaries have 2 full–time employees. None of our employees are represented by a union and we believe our relationships with our employees are good.

MGT does not have a working corporate phone number. We called the number listed for MGT and received a message that the number “is currently not set up to take calls.” Additionally, the MGT Website is built using SquareSpace. While a great company and product offering for the DIY types looking to create a drag-and-drop site, we have to wonder, shouldn’t a company promising to revolutionize security understand basic HTML and be tech-savvy enough to build their own custom site? Even more damaging, the site is hosted on a shared server and shares an IP address will hundreds of other sites, calling into question the Company’s understanding of the meaning secure. If the company cannot set up a basic server, we can’t imagine how it could possibly be able to create better security products than the hundreds of public and private companies focusing on the space pouring billions of dollars into R&D.

Based on what we could uncover in our preliminary research, the new pro forma MGT team post-APA seems to consist of 2 MGT employees without a phone, Bath Salt user John McAfee, 1 computer, and one remote programmer in Rhode Island working on an app no one wants or uses.

MGT continues to release press about products and businesses which have nothing to do with the company’s operations and is attempting to seduce uninformed retail investors with buzz words. The company currently has a page about bitcoin:

In order to meet the processing demand for our future cybersecurity products that are Blockchain based, MGT will need a large number of ASIC computers. Our announced strategy is particularly cost effective, as mining computers are perfectly suited for this task and can earn a great ROI

MGT has secured a location with contracted low cost hydro power in central Washington state to launch a facility generating over two PetaHash in processing power. This facility is expected to be fully operational by August 1, 2016, and has expansion capacity to nearly 10 PetaHash. The size and power efficiency of the facility will allow MGT to emerge as a domestic leader in crypto currency mining at an opportune time.

We wonder if John McAfee may have written the above statement while on Bath Salts? MGT doesn’t even have its own server or a working phone and is acquiring a “technology” company with one computer for a a current valuation of over $125MM. It will have 4 employees and has yet to set up one server - these statements about bitcoin are nonsensical.

What is sad is that retail investors are the ones who end up getting hurt in these situations and will get hurt owning MGT common stock. This is why accredited investor laws exist, as no institutional or sophisticated investor would put capital anywhere near this company. MGT seems to be going around these laws to take advantage of retail investors and is selling them on a product that has no revenues or market potential. We hope the SEC intervenes and halts MGT before more retail investors lose money and are hurt.

Volmanac remains short MGT common stock and has a price target of $0.25, a 92% downside and will attempt to alert the SEC and other governing bodies to the fraud and lack of corporate governance which is occurring at MGT.