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MGT > SEC Filings for MGT > Form 10-Q on 14-Nov-2012All Recent SEC Filings

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Form 10-Q for MGT CAPITAL INVESTMENTS INC


14-Nov-2012

Quarterly Report


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 on March 1, 2012, our Quarterly Reports on Form 10-Q filed on May 14, 2012 and August 14, 2012, 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", the "Group", "we", "us") is a holding company comprised of MGT, the parent company, and a majority-owned operating subsidiary, Medicsight Ltd, including its wholly-owned subsidiaries ("Medicsight"), and a majority-owned subsidiary MGT Gaming, Inc. ("MGT Gaming"). MGT and its subsidiaries are engaged in the business of monetizing intellectual property. The Company is also analyzing potential acquisition opportunities in healthcare marketing and technology, as well as various intellectual property assets. Medicsight is a medical technology company focusing on medical imaging software development and medical hardware devices. The Company develops and commercializes Computer-Aided Detection ("CAD") applications that analyze Computer Tomography ("CT") scans to assist radiologists in the early detection and measurement of colorectal polyps. The Company has also developed an automated carbon dioxide insufflation device (MedicCO2LON) which it commercializes through a global distributor. The Company continues to explore all strategic alternatives with respect to its majority interest in Medicsight Ltd, including the sale or licensing of its global patent portfolio. Revenue is presently limited as Medicsight attempts to commercialize its U.S. approval.

MGT Gaming is a majority owned subsidiary which holds certain intellectual property and patents focused in the casino gaming sector in which we acquired a majority interest on June 1, 2012. As part of the Company's strategy, on June 1, 2012, the Company announced the completion of the acquisition of U.S. Patent #7,892,088, entitled "Gaming Device Having a Second Separate Bonusing Event." This invention relates to gaming systems linked to an interactive sign, and includes all filed continuation patents.

Recent developments

On March 21, 2012, MGT affected a reverse split, immediately followed by a forward split of our Common Stock. At our March 20, 2012, Special Meeting of Stockholders, the Company's stockholders approved the proposal to amend the Company's Certificate of Incorporation to effect a Reverse/Forward Split of the Company's Common Stock, $0.001 par value per share at an exchange ratio of 1-for-500 shares of the Company's outstanding Common Stock, immediately followed by a forward split of the Company's outstanding Common Stock, at an exchange ratio of 15-for-1 shares of the Company's outstanding Common Stock. The amendment did not change the par value per share or the number of authorized shares of Common Stock. As a result of the Reverse Split, stockholders holding fewer than 500 shares of Common Stock, at the time of the reversal, received a cash payment instead of fractional shares and no longer had an interest in the Company. All share and per share amounts have been retrospectively adjusted for all periods presented to give effect to the Reverse/Forward Split.

On March 26, 2012, at Medicsight's General Meeting, stockholders approved a resolution to Reverse Split the Company's existing ordinary shares of 0.05 par value per share into 1 new ordinary share of 16,250 par value per share and for MGT to acquire all New Ordinary Shares representing the fractions of shares left over following the Reverse Split. The exchange ratio for the Reverse Split was 1 for 325,000. As a result of the Reverse Split, stockholders holding fewer than 325,000 shares were cancelled and not entitled to a cash payment for fractional shares.

The Company closed the following non-essential subsidiaries during the nine months ended, September 30, 2012, as part of its expense reduction plan:
Medicsight Nominees Limited, Medicsight UK Limited, MGT Investments (Gibraltar) Limited, MGT Capital Investments Limited and its wholly-owned subsidiary MGT Capital Investments (UK) Limited.

Medicsight closed its Tokyo office as part of an overall program of expense reduction and corporate simplification. In addition to closing the Tokyo office, management of Medicsight has closed several non-essential subsidiaries; Medicsight KK and Medicsight PTY Limited were closed during the quarter-ended March 31, 2012, due to the unjustifiably high legal, regulatory and accounting costs of maintaining such entities. However, in order to better exploit the FDA approval of ColonCAD, Medicsight opened a U.S. subsidiary (Medicsight, Inc.) in New York in September 2011.

On May 11, 2012, the Company entered into a Contribution and Sale Agreement (the "Sale Agreement") with J&S Gaming, Inc. ("J&S"), and MGT Gaming, Inc. ("MGT Gaming") for the acquisition of U.S. Patent #7,892,088, entitled "Gaming Device Having a Second Separate Bonusing Event." Pursuant to the Sale Agreement and certain ancillary agreements executed simultaneous thereto, (i) J&S sold a patent to MGT Gaming in exchange for 1,000 shares (constituting 100% ownership) of MGT Gaming Common Stock, par value $0.001 (the "MGT Gaming Shares"); (ii) the Company purchased from J&S 550 MGT Gaming Shares constituting 55% ownership in exchange for $200,000 cash and a four (4) year warrant to purchase 350,000 shares of the Company's common stock at an exercise price of $4.00 per share (the "J&S Warrant"): (iii) the Company and J&S agreed to grant rights of first refusal, "tag-along" and "drag-along" rights to one another with respect to their respective MGT Gaming Shares; and (iv) President of J&S, agreed to provide consulting services to MGT Gaming in exchange for a fee of $5 per month, for a period of one year. Pursuant to the Sale Agreement, the Company has the right to purchase an additional 250 MGT Gaming Shares from J&S in exchange for a cash payment of $1,000 and a four (4) year warrant to purchase 250,000 shares of the Company's common stock for an exercise price of the lower of (i) $6.00 per share and (ii) 110% of the closing price of the Common Stock on the day prior to the exercise (the "J&S Option"). The Sale Agreement closed on May 24, 2012. The Company obtained stockholder approval to issue up to 600,000 shares of Common Stock issuable upon exercise of the 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 (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 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 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.

On October 9, 2012, the Company executed two identical exchange agreements (collectively, the "Agreements") settling the outstanding Senior Secured Convertible Note for a cash payment of $3.5 million and 100,000 shares of the Company's common stock. The stock was valued at $318, using the closing price on October 9, 2012. These shares were issued on November 6, 2012. The Company expensed the following relating to the extinguishment of the Senior Secured Convertible Note: deferred financing cost, $472; HB Warrant discount, $409; and Beneficial Conversion Feature, $409.

On November 2, 2012 the Company closed two separate financing agreements with various institutional investors providing $5.9 million of capital. The capital raise is comprised of the sale of $4.5 million of 1,380,362 Series A Convertible Preferred Shares (which include 2,760,724 Warrants to purchase MGT common stock), plus a separate sale of $1.4 million of 453,000 MGT Common Stock. On October 26, 2012, this transaction was approved by NYSE-MKT LLC ("The Exchange"). The Preferred Shares will be convertible into the Company's common stock at a fixed price of $3.26 per share and carry a 6% dividend. The Warrants have a five-year life and are exercisable at $3.85 per MGT share; the Company issued a total of 2.8 million Warrants in the deal. The Common Stock was sold at $3.01 per share with a total of 453,000 shares sold, under its S-3 Registration Statement, which was declared effective on September 25, 2012.

There can be no assurance that any future acquisitions will occur at all, or that any such acquisitions will be accretive to earnings, book value and other financial metrics, or that any such acquisitions will generate positive returns for Company shareholders. Furthermore, it is contemplated that any acquisitions may require the Company to raise additional capital; such capital may not be available on terms acceptable to the Company, if at all.

Patent enforcement

On November 2, 2012, MGT Gaming filed a lawsuit claiming patent infringement against multiple companies believed to be violating MGT Gaming's patent No. 7,892,088 ("the '088 Patent") entitled "Gaming Device Having a Second Separate Bonusing Event." The 088 patent is directed to a gaming system in which a second game played on an interactive sign is triggered once specific events occur in a first game. The lawsuit, which was filed in the United States District Court for the Southern District of Mississippi (Jackson Division), alleges the defendants Caesars Entertainment, MGM Resorts International, Inc., WMS Gaming, Inc. - a subsidiary of WMS Industries, Inc., Penn National Gaming, Inc., and Aruze Gaming America, Inc. either manufacture, sell or lease gaming systems in violation of MGT Gaming's patent rights, or operate casinos that offer gaming systems in violation of MGT Gaming's patent rights. The allegedly infringing products manufactured, distributed, used, sold and/or offered for sale by defendants include at least those identified under the trade names: "Pirate Battle," "Reel'em In Compete to Win," "Great and Powerful Oz," "Battleship," "Clue," and "Paradise Fishing."

MGT Gaming is seeking preliminary and permanent injunctions against all defendants enjoining them from any continued acts of patent infringement, as well as to recover damages adequate to compensate for the infringement in an amount to be proven at trial, and to recover, in any event, a reasonable royalty from each defendant for its infringement, trebled, plus interest and costs as fixed by the court.

MGT Gaming has entered into a contingent fee arrangement with Nixon & Vanderhye P.C. ("the law firm") representing MGT Gaming as plaintiff in the lawsuit. MGT Gaming will pay out-of-pocket expenses (as that term is defined in the retainer agreement) until such time, if ever, the lawsuit produces revenue. At that time, the law firm is entitled to a percentage of such revenue, after out-of-pocket expenses are deducted. This contingent fee arrangement reduces the potential value of any legal settlements or judgments, but also reduces the possibility of unpredictable and uncontrollable legal expenses.

NYSE-MKT LLC

On June 8, 2011, the Company received notice from the NYSE-MKT LLC notifying that it is not in compliance with the following Exchange continued listing standards: Section 1003(a)(i) of the Company Guide, resulting from stockholders' equity on March 31, 2011, of less than $2.0 million and losses from continuing operations and/or net losses in two of its three most recent fiscal years;
Section 1003(a)(ii) of the Company Guide with stockholders' equity of less than $4.0 million and losses from continuing operations and/or net losses in three of its four most recent fiscal years; and Section 1003(a)(iii) with stockholders' equity of less than $6.0 million and losses from continuing operations and/or net losses in its five most recent fiscal years.

On August 23, 2011, the Exchange accepted the Company's plan of compliance submitted to the Exchange in response to the deficiency letter. The Exchange granted the Company an extension until December 8, 2012 ("extension period"), to regain compliance with Sections 1003(a) (i) - (iii) of the Exchange's Company Guide.

The Company was subsequently notified by the Exchange of its noncompliance with
Section 1003(f)(v) of the Company Guide (low trading price) and Section 704 (failure to hold an annual meeting). The Company resolved these deficiencies as of April 13, 2012 and June 1, 2012, respectively.

The Company will be subject to periodic review by Exchange staff during the extension period and prior to compliance with 1003(a)(i), (ii), (iii) of the Exchange's Company Guide. Failure to make progress consistent with the plans of compliance or to regain compliance with the continued listing standards by the end of the extension period could result in the Company being delisted from the Exchange.

The Company's stock trading symbol is currently "MGT.BC" to denote its noncompliance. The trading symbol will continue to bear this additional indicator until the Company regains its compliance with the Exchange continued listing requirements.

On October 12, 2012, the Company announced in a Current Report filed on Form 8-K, that MGT has been operating under a Plan of Compliance approved by the Exchange on August 23, 2011 that allowed the Company until December 8, 2012 to regain compliance with the deficiencies noted above. During this period, the Company has been subject to periodic review by Exchange Staff, and was informed of the requirement to make progress consistent with the Plan or to regain compliance with the continued listing standards by the end of the extension period. On October 5, 2012, the Company was informed that the Exchange staff concluded the Company has not made a reasonable demonstration of its ability to complete the initiatives and meet the equity standards by the end of the 18-month Equity Plan Period, and has therefore begun the delisting process.

The Company informed the Exchange of its intention to pursue the right of appeal and requested a hearing pursuant to Sections 1203 and 1009(d) of the Company Guide. The hearing is set on December 12, 2012. The Company has taken certain steps to improve its balance sheet including the transactions of November 2, 2012, described in the Liquidity and capital resources section. There can be no assurance that the Company's request for continued listing will be granted at this hearing. In the event that the Company's appeal is unsuccessful, the Company expects that its common stock will trade on OTC-QB no later than any official delisting from the Exchange.

Other discussions

In July 2011, the Company announced in a Current Report on Form 8-K that it had initiated an internal investigation through a Special Committee regarding the potential misappropriation and/or misdirection of Company funds. In August 2011, the Company issued a press release based upon the substantially completed results of the investigation. The Company had concluded that no adjustments or restatements of prior issued financial statements were required. Although the investigation remains on-going, management is confident that the Company's financial statements will not require a material restatement as a result of any additional irregularities that may be uncovered in the future.

In the event the investigation results in any finding of wrongdoing, the Company plans, consistent with the best interests of the Company and its stockholders, to pursue recovery and/or restitution to the fullest extent provided by law. However, in such an event, there can be no assurance of any recovery, or that any recovery will exceed the costs of collection, the costs of any litigation (including settlements as well as legal fees) relating to this matter, or any other costs associated with this matter, including but not limited to payment of taxes or fines, and the findings of unreported claims on the Company's assets.

Critical accounting policies and estimates

The Company's financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). Certain accounting policies have a significant impact on amounts reported in the financial statements. A summary of those significant accounting policies can be found in Note 2 to the Company's financial statements contained in the 2011, Annual Report on Form 10-K and Part I (Note 2) contained in the 2012, Quarterly Reports on Form 10-Q.

Results of operations

The Company achieved the following results in the three and nine months ended September 30, 2012:

Revenue from software licenses/devices and services totaled $67 (2011: $167) and $336 (2011: $431).

Operating expenses were $726 (2011: $2,110) and $2,703 (2011: $7,286).

Net loss attributable to MGT Capital Investments, Inc. $890 (2011: $1,202) and $2,386 (2011: $4,144) and resulted in a loss per share of $0.41 (2011: $1.03) and $1.12 (2011: $3.54).

Revenue declined due to slow market adoption of ColonCAD software. Operating expenses declined due to an overall program of expense reduction and corporate simplification.

Three months ended September 30, 2012 and September 30, 2011

Medicsight software/devices

In the three months ended September 30, 2012, ColonCAD sales decreased to $9 from $151 for the same period last year. There were no new sales of ColonCAD; revenue is attributed to recurring license maintenance fees. MedicCO2LON had no revenue compared to $16 for the same period last year. The decline is due to a delay in launching the next generation of the insufflator.

Cost of revenue was $nil (2011: $5) attributable to MedicCO2LON devices.

Selling, general and administrative expenses decreased to $239 in 2012, compared to $1,149 for the same period last year. Management substantially reduced headcount and streamlined operations in the first half of 2012. Several satellite offices and subsidiaries were closed and our London office relocated to a significantly smaller space. The majority of the impact of these decisions were reflected in the statement of operations during 2012.

Research and development expenses decreased to $10 compared to $303 for the same period last year, primarily due to the reduction of headcount and associated overhead recognized in the first half of 2012.

Medicsight services

In the three months ended September 30, 2012, revenue of $58 was recognized through consulting services. There is no comparable revenue for the same period last year as this is a new segment for 2012. Cost of revenue for the three months ended September 30, 2012, was $53 (2011: $nil).

Selling, general and administrative expenses were $5 (2011: $nil).

MGT Gaming

No revenue was generated in the three months ended September 30, 2012, management continues to explore options on monetizing its patent portfolio.

Selling, general and administrative expenses were $75 (2011: $nil), attributed to consulting and legal fees associated with the patent. There are no comparable expenses for the same period last year as this is a new segment for 2012.

Unallocated corporate/other

In the three months ended September 30, 2012, selling, general and administrative expenses increased to $397 from $658 for the same period last year. This increase relates to the recognition of stock based compensation awards issued in the current year.

Interest and other income / (expense) was $(70) for the three months ended September 30, 2012 (2011: $nil), which is attributed to interest payments on the Convertible Note.

Nine months ended September 30, 2012 and September 30, 2011

Medicsight software/devices

In the nine months ended September 30, 2012, revenue from ColonCAD licenses decreased to $145 compared to $212 for the same period last year. Revenue remains limited as management is exploring ways to commercialize the product in the U.S. In the nine months ended September 30, 2012, MedicCO2LON sales decreased to $70 from $219 for the same period last year. The decline is due to a delay in launching the next generation of the insufflator. Cost of revenue of $36 as compared to $105 for the same period last year which was attributable to the decline of sales of MedicCO2LON devices.

Selling, general and administrative expenses were reduced to $1,292 in 2012, compared to $5,461 for the nine months ending September 30, 2011. Management substantially reduced headcount and streamlined operations in 2011. Several satellite offices and subsidiaries were closed and our London office relocated to a significantly smaller space. The majority of the impact of these decisions was reflected in the statement of operations for the nine months ended 2012.

Research and development is made up of staff, staff related consultancy, stock options and product development software costs expensed on the research and development of Medicsight's products. In the nine months ended September 30, 2012, the research and development expenses decreased to $83 compare to $1,067 for the same period last year, as the Company implemented an expense and headcount reduction program within Medicsight.

Medicsight services

In the nine months ended September 30, 2012, revenue of $121 was recognized through consulting services in this new segment versus $nil for the same period last year. Cost of revenue of $116 (2011: $nil) is attributed to compensation and business development costs.

Selling, general and administrative expenses were $19 (2011: $nil) attributed to overhead costs.

MGT Gaming

No revenue was generated in the nine months ended September 30, 2012, management continues to explore options on monetizing its patent portfolio.

Selling, general and administrative expenses were $144 (2011: $nil), attributed to retaining legal counsel related to acquiring the gaming patent and the amortization expense of the gaming patent.

Unallocated corporate/other

In the nine months ended September 30, 2012, selling, general and administrative expenses increased to $1,165 as compared to $758 for the same period last year. The Company is continuing its progress in transitioning from software to monetization of intellectual property. The increase in the Company's SG&A expense is commensurate with our recent intellectual property acquisition of MGT Gaming and its related patent. As MGT continues to execute on its patent acquisition strategy it expects that SG&A costs will increase modestly for the remainder of 2012, primarily due to executive compensation and higher professional fees.

The amortization of deferred financing costs and accretion of debt discount incurred as a result of the June 2012 issuance of the convertible note for the nine months ended September 30, 2012 were $115 and $183, respectively.

Interest and other income/(expense) were $(95) for the nine months ended September 30, 2012 as compared to $32 for the same period last year. The increase of expense is associated with the convertible note issued on June 2012.

Functional currency

Effective July 1, 2012, in connection with the closing of the Medicsight UK office at quarter end June 2012, and final transfer of all operations to the U.S., along with MGT's proceeds from the sale of $3.5 million Note on June 1, 2012, the Company reassessed the operational currency designation of each of its subsidiaries and as a result of the aforementioned activities, determined to prospectively change operational currency from the previous local currency, U.K. Sterling () ("GBP") to U.S. dollar ($). Under ASC 830-10 when the functional currency changes from a foreign currency to the reporting currency translation . . .

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