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MGT > SEC Filings for MGT > Form 10-K on 28-Mar-2014All Recent SEC Filings

Show all filings for MGT CAPITAL INVESTMENTS INC

Form 10-K for MGT CAPITAL INVESTMENTS INC


28-Mar-2014

Annual Report


Item 7. Management's discussion and analysis of financial condition and results
of operations

Executive summary

MGT Capital Investments, Inc. ("MGT," "the Company," "we," "us") is a Delaware corporation, incorporated in 2000. The Company was originally incorporated in Utah in 1977. MGT is comprised of the parent company, majority-owned subsidiary MGT Gaming, Inc. ("MGT Gaming") and wholly-owned subsidiaries Medicsight, Inc. ("Medicsight"), MGT Studios, Inc. (f/k/a MGT Capital Solutions, Inc.) ("MGT Studios") including its wholly-owned subsidiary Avcom, Inc. and its majority owned subsidiary M2P Americas, Inc., and MGT Sports, Inc. ("MGT Sports") including its majority owned subsidiary FanTD LLC, ("FanTD"). Our Corporate office is located in Harrison, New York.

MGT and its subsidiaries are primarily engaged in the business of acquiring, developing and monetizing assets in the online and mobile gaming space as well as the casino industry.

On April 16, 2013, the Company entered into an Asset Purchase Agreement to acquire certain assets and liabilities of Digital Angel Corporation, a developer and publisher of mobile games designed for tablets and smartphones. The transaction closed on April 30, 2013. On September 30, 2013, the Company entered into a nonexclusive license with Gammaker PTY to further develop and market such games in exchange for a 10% share of the gross revenues generated by Gammaker on such games.

On May 20, 2013, MGT Sports completed the acquisition of 63% of the outstanding membership interests of FanTD LLC. FanTD operates a daily fantasy sports website at www.fanthrowdown.com. Launched in 2012, FanThrowdown.com offers players the opportunity to participate in real money daily fantasy gameplay for the NFL, MLB, NCAA (basketball & football), NHL, NBA and professional golf. Players select a roster of athletes across most popular sports, and winnings are determined by the same-day performance of these rosters. Daily fantasy sports compress the timeframe of traditional fantasy sports from multi-month seasons into 24-hour periods.

On September 3, 2013, the Company entered into a Contribution and Sale Agreement (the "Contribution Agreement") by and among the Company, Gioia Systems, and LLC ("Gioia") and MGT Interactive, LLC ("MGT Interactive") whereby MGT Interactive acquired certain assets from Gioia which was the inventor and owner of a proprietary method of card shuffling for the online poker market. Trademarked under the name Real Deal Poker, the technology uses patented shuffling machines, along with permutation re-sequencing, allowing for the creation of up to 16,000 decks per minute in real time. The acquisition includes seven (7) U.S. Patents and several Internet URL addresses, including www.RealDealPoker.com. The information contained in such website is not part of this annual report. Pursuant to the Contribution Agreement, Gioia contributed the assets to MGT Interactive in exchange for a 49% interest in MGT Interactive and MGT contributed $200 to MGT Interactive in exchange for a 51% interest in MGT Interactive. The $200 contributed by the Company shall be utilized as working capital, which shall be used to cover the direct and associated costs relating to the achievement of a certification from Gaming Laboratories International ("GLI"). The Company has the right to acquire an additional 14% ownership interest in MGT Interactive from Gioia in exchange for a purchase price of $300 after GLI certification is obtained. Gioia, in turn, will have the right to re-acquire the 14% interest for a period of three years at a purchase price of $500. Gioia shall have the right to certain royalty payments from the gross rake payments, and any licensing or royalty income received by MGT Interactive.

On November 11, 2013, the Company entered into an Agreement and Plan of Reorganization (the "Agreement") with MGT Capital Solutions, Inc., a wholly owned subsidiary of the Company, Avcom, Inc. and the shareholders and option holders of Avcom, Inc. ("Avcom"). Pursuant to the Agreement, the Company acquired 100% of the capital stock of Avcom. In consideration, the Preferred Stockholders of Avcom received $550 in value of the Company's Common Stock and the Common Stockholders and option holders of Avcom will receive an aggregate of $1,000 in value of the Company's Common Stock. The value of the Company's Common Stock is based on the volume weighted average closing price for the 20 trading days prior to signing the Agreement. The Avcom acquisition closed on November 26, 2013.

One half of the issuance to the Avcom Common Stockholders and option holders was placed in escrow and will be released upon the later of (i) the commercial release of an agreed upon game or (ii) six (6) months after closing. In addition, the Common Stockholders may be awarded contingent consideration of $1.0 million through the issuance of up to 333,000 of the Company's Common Stock in the event that the game reaches $3.0 million in gross revenues within 18 months of signing the Agreement.

Avcom is a game development studio producing free to play mobile and social casino-style games. Avcom's assets include physical and intellectual property associated with Mobileveg.as and freeawesome.com, as well as a game under development titled "SlotChamp". Prior to entering into the Agreement, Avcom had performed certain game development consulting services for the Company for which Avcom received an aggregate of $146 as consideration for such services.

On December 4, 2013, the Company entered into a Strategic Alliance Agreement with M2P Entertainment GmbH, a German corporation ("M2P"), the newly formed Delaware corporation, M2P Americas, Inc. ("M2P Americas") and the Company's 's existing subsidiary MGT Studios, Inc. The purpose of the transaction is to allow M2P Americas to market and exploit MP2's gaming technology in North and South America through M2P Americas. As part of the transaction, the Company acquired 50.1% of M2P Americas and M2P Entertainment acquired 49.9%. The Strategic Alliance Agreement provides that the Company and M2P will jointly cooperate to launch M2P's gaming technology in North and South America. It further provides M2P Americas with an exclusive royalty free license to M2P's gaming technology for North and South America.

Pursuant to the terms of the Strategic Alliance Agreement, the Company will advance certain expenses to M2P Americas and the Company and M2P will provide network and human resources support to M2P Americas. The parties also entered into a Stockholders Agreement dated the same date which, among other things, grants M2P an option to purchase 10% of the Company's ownership in M2P America at book value if the Company does not purchase equity in M2P prior to April 2, 2014.

Any advances by the Company or its subsidiaries to M2P Americas will be considered a loan bearing interest at 4% per annum or the applicable federal rate if greater. The Strategic Alliance Agreement has a term of 20 years.

On December 10, 2013, the Company entered into a Warrant Modification Agreement (the "Agreement") with Iroquois Master Fund Ltd. ("Iroquois"). Pursuant to the Agreement, Iroquois agreed to immediately exercise its warrant to purchase 613,496 shares of Common Stock, par value $0.001 of the Company, at an exercise price of $1.50 per share, for aggregate gross proceeds to the Company of approximately $920 and (ii) agreed to terminate its right of participation in future equity offerings of the Company. In exchange, the Company agreed to reduce the warrant exercise price from $3.85 per share to $1.50 per share, and agreed not to issue any securities at a price below $2.50 per share for a period of 90 days after the date of the Agreement (other than securities granted pursuant to a stock plan or issued in connection with an acquisition or issued pursuant to an agency agreement with a registered broker-dealer provided that we agree with the broker-dealer and publicly announce that we will not sell shares for a price below $2.50 per share); this 90 day period has expired. Iroquois acquired the warrant in connection with the Company's November 2012 financing. In connection with the Agreement, the Company paid to Chardan Capital Markets, LLC ("Chardan") a placement fee for the solicitation of the exercise of the warrants equal to 8% of the gross proceeds raised, or approximately $73 and reimbursed Chardan for $8 of its legal fees incurred.

MGT filed an application for a New Jersey Casino Service Industry Enterprise License ("CSIE"). According to regulations promulgated by the New Jersey Division of Gaming Enforcement (NJDGE), companies providing Internet gaming software or systems, and vendors who manage, control, or administer games and associated wagers conducted through the Internet, must obtain a CSIE.

Patent enforcement

MGT Gaming owns U.S. Patents 7,892,088 and 8,550,554 (the "'088 and '554 patents," respectively), both entitled "Gaming Device Having a Second Separate Bonusing Event and both relating to casino gaming systems in which a second game played on an interactive sign is triggered once specific events occur in a first game. On November 2, 2012, MGT Gaming filed a lawsuit (No. 3:12-cv-741) in the United States District Court for the Southern District of Mississippi alleging patent infringement. The lawsuit alleges the defendants Caesars Entertainment Corporation (NASDAQ GS: CZR), MGM Resorts International, Inc. (NYSE: MGM), WMS Gaming, Inc. - a subsidiary of WMS Industries, Inc. (NYSE: WMS), Penn National Gaming, Inc. (NASDAQ GS: PENN), 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 '088 patent. An amended version of the complaint added the '554 patent, which is a continuation of the '088 patent. 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," "Battleship," "Clue, "Amazon Fishing," "Star Trek Battle Stations," "Castle King," "Monopoly Bigger Event," and "Paradise Fishing."

On October 23, 2013, the U.S. District Court severed the originally filed action into three separate actions: MGT Gaming, Inc. v. WMS Gaming, Inc. and Caesars Entertainment Corporation (No. 3:13-cv-691, MGT Gaming, Inc. v WMS Gaming Inc. and MGM Resorts International, Inc. (No. 3:13-cv-692), and MGT Gaming, Inc. v Aruze Gaming America, Inc. and Penn National Gaming Inc. (No. 3:13-cv-693). On November 4, 2013, the District Court consolidated the three severed cases for discovery purposes. The Defendants in all three actions filed counterclaims denying infringement and asserting invalidity of both patents-in-suit. MGT Gaming filed appropriate responses to those counterclaims, reasserting the validity and infringement of the '088 and '554 patents

On November 4, 2013, Aruze also voluntarily dismissed its separate action in Nevada which had sought a declaratory judgment that Aruze does not infringe the '088 Patent and/or that the '088 Patent is invalid or unenforceable.

On November 4, 2013, WMS filed a Petition for Inter Parties Review ("IPR") with the United States Patent and Trademark Office ("PTO"), challenging the patent-in-suit and, on November 7, 2013, filed motions to stay litigation in both WMS actions during the IPR proceedings. Those motions were denied by the District Court on December 13, 2013. MGT Gaming's Preliminary Response is due on February 19, 2014.

On November 21, 2013, WMS filed a Petition for a Writ of Mandamus with the U.S. Court of Appeals for the Federal Circuit to reverse the decision of the district court in refusing to transfer venue to the Northern District of Illinois. The mandamus proceedings have been fully briefed by all parties and await decision by the appellate court.

On January 27, 2014, the District Court issued a Docket Order setting a Markman Hearing (also known as a claims construction hearing) for September 25, 2014, in Jackson, Mississippi before the Honorable District Judge Carlton W. Reeves for all three severed cases.

Results of operations

The Company achieved the following results for the years ended December 31, 2013, and 2012, respectively:

Revenues totaled $396 (2012: $409).

Operating expenses were $9,349 (2012: $4,634).

Net loss attributable to Common shareholders $10,272 (2012: $5,882) resulting in a basic and diluted loss per share of $1.84 (2012: $2.62).

The decline in revenues is attributed to the Medicsight segment which was offset by additional revenues from the new Gaming segment.

Our operating expenses have increased substantially during the year ended December 31, 2013, predominantly due to non-cash expenses such as Preferred Series A warrant modification expense of $598 (2012: $nil), stock-based expense of $2,965 (2012: $753) and depreciation and amortization expense of $399 (2012:
$146). Additionally in 2013 the Company made several acquisitions (Note 3) within the new Gaming segment and incurred $1,092 in associated operating costs.

Fiscal year ended December 31, 2013 vs. Fiscal year ended December 31, 2012

Medicsight software/devices

During the year ended December 31, 2013, ColonCAD sales decreased to $45 from $152 for the same period last year. Insufflator sales decreased to $33 compared to $70 for the same period last year. The decline is due to the delay in launching the next generation of the insufflator via our distributor Ultrasound.

Cost of revenue was $nil (2012: $92, attributable to the Insufflator devices).

Gross margin decreased to $78 from $130 for the same period last year due to lower revenues for this segment in 2013.

Selling, general and administrative expenses decreased to $15 in 2013, compared to $1,802 for the same period last year. Management substantially reduced headcount and streamlined operations in the first half of 2012, all non-US operations we closed. In addition in 2013 the Company did not allocate executive compensation to Medicsight from MGT Corporate, a decrease of $757 compared to 2012.

There was no research and development expense for this segment in Fiscal 2013 compared to $83 in 2012, due to the streamlining of operations in the first half of 2012.

Medicsight services

During the year ended December 31, 2013, revenue of $97 was recognized from consulting services (2012: $187). Cost of revenue was $63 (2012: $173). The decline is attributed to an employee departure during the quarter ended June 30, 2013 in this segment. Management is currently evaluating and assessing options for this segment.

Selling, general and administrative expenses were $7 (2012: $25).

Intellectual property (f/k/a MGT Gaming)

No revenues were generated in Fiscal 2013 as the Company continues to pursue its patent enforcement strategy.

Selling, general and administrative expenses were $595 (2012: $208), attributed to intellectual property amortization and consulting and legal fees.

Gaming

During the year ended December 31, 2013, revenue of $221 was recognized through our Gaming segment.

Our cost of revenue was $496, which primarily consisted of overlay incurred on the Fanthrowdown website. The website offers daily Fantasy Sports contests and charges entry fees to play. Occasionally, as an incentive for user activity some contests may pay out higher prize money than the charged entry fees, the expense is recognized as overlay and included in cost of revenues. Management expects these costs to decrease substantially as the site builds its user base and increases liquidity.

There is no comparable revenue or cost of revenue for the same period last year as this is a new segment for 2013.

Our selling, general and administrative expenses were $1,092, which primarily related to information technology and marketing costs associated with the Fanthrowdown website. There is no comparable selling, general and administrative expense for last year as this is a new segment beginning May 20, 2013.

In the year ended December 31, 2013 the Company recognized $73 of research and development expense (2012: $nil), attributed to product development costs in MGT Interactive and MGT Studios.

Unallocated corporate/other

Selling, general and administrative expenses during the year ended December 31, 2013 increased to $7,567 from $2,516 in 2012. A substantial portion of this increase relates non-cash expenses such as stock-based expense of $2,965 (2012:
$753), Preferred Series A warrant modification expense of $598 (2012: $nil) and depreciation and amortization expense of $399 (2012: $146). In addition the Company did not allocate executive compensation expense to Medicsight from MGT Corporate this year, resulting in an increase of $757 from 2012.

The Company recorded $30 in interest and other income for Fiscal 2013 (2012: an expense of $99, primarily attributed to interest payments on the Convertible Note).

Liquidity and capital resources

                                                               Year ended December 31,
                                                               2013               2012
Working capital summary:
Cash and cash equivalents (excluding $140 and $2,039
restricted cash in December 31, 2013, and 2012,
respectively)                                              $      4,642       $      3,443
Other current assets                                                175                349
Current liabilities                                                (985 )             (581 )
Working capital surplus                                    $      3,832       $      3,211




                                                           Year ended December 31,
                                                             2013             2012
Cash flow summary:
Cash (used in) / provided by:
Operating activities                                     $     (5,058 )     $  (3,467 )
Investing activities                                            2,222            (250 )
Financing activities                                            4,035           3,439
Effects of exchange rates on cash and cash equivalents              -              17
                                                         $      1,199       $    (261 )

On December 31, 2013, MGT's cash and cash equivalents were $4,642 excluding $140 of restricted cash. The Company continues to exercise discipline with respect to current expense levels, as revenues remain limited. Our cash and cash equivalents have increased during 2013, primarily from $2,222 and $4,035 provided by investing and financing activities respectively.

Operating activities

Our net cash used in operating activities differs from the net loss predominantly because of various non-cash adjustments such as depreciation, amortization of intangibles, modification of Preferred Series A warrants, accretion of convertible note discount, amortization of deferred financing cost, loss on extinguishment of convertible note, stock-based compensation and movements in working capital.

Investing activities

Restricted cash

With fewer than 345,012 shares of Preferred Stock outstanding, $2,000 was released out of restricted cash as 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 (Note 9).

Avcom

On November 11, 2013, the Company entered into an Agreement and Plan of Reorganization (the "Agreement") with MGT Capital Solutions, Inc., a wholly owned subsidiary of the Company, Avcom, Inc. and the shareholders and option holders of Avcom, Inc. ("Avcom"). Pursuant to the Agreement, the Company acquired 100% of the capital stock of Avcom. In consideration, the Preferred Stockholders of Avcom received $550 in value of the Company's Common Stock and the Common Stockholders and option holders of Avcom will receive an aggregate of $1,000 in value of the Company's Common Stock. The value of the Company's Common Stock is based on the volume weighted average closing price for the 20 trading days prior to signing the Agreement. The Avcom acquisition closed on November 26, 2013.

One half of the issuance to the Avcom Common Stockholders and option holders was placed in escrow and will be released upon the later of (i) the commercial release of an agreed upon game or (ii) six (6) months after closing. In addition, the Common Stockholders may be awarded contingent consideration of $1,000 through the issuance of up to 333,000 of the Company's Common Stock in the event that the game reaches $3,000 in gross revenues within 18 months of signing the Agreement. Although the Company is currently evaluating the accounting treatment of the Agreement, the Company believes that the acquisition will constitute a "Significant Acquisition" for accounting purposes.

Avcom is a game development studio producing free to play mobile and social casino-style games. Avcom's assets include physical and intellectual property associated with Mobileveg.as and freeawesome.com, as well as a game under development titled "SlotChamp". Prior to entering into the Agreement, Avcom had performed certain game development consulting services for the Company for which Avcom received an aggregate of $146 as consideration for such services.

Real Deal Poker

On September 3, 2013, the Company entered into a Contribution and Sale Agreement (the "Contribution Agreement") with Gioia Systems, LLC. ("Gioia") and MGT Interactive) whereby MGT Interactive acquired certain assets from Gioia, the inventor and owner of a proprietary method of card shuffling for the online poker market. Trademarked under the name Real Deal Poker, the technology uses patented shuffling machines, along with permutation re-sequencing, allowing for the creation of up to 16,000 decks per minute in real time. The acquisition includes seven (7) U.S. Patents and several Internet URL addresses, including www.RealDealPoker.com. Pursuant to the Contribution Agreement, Gioia contributed the assets to MGT Interactive in exchange for a 49% interest in MGT Interactive and MGT contributed $200 to MGT Interactive in exchange for a 51% interest in MGT Interactive. The $200 contributed by the Company will be utilized as working capital to cover the direct and associated costs relating to the achievement of a certification from Gaming Laboratories International ("GLI"). The Company has the right to acquire an additional 14% ownership interest in MGT Interactive from Gioia in exchange for a purchase price of $300 after GLI certification is obtained. Gioia, in turn, will have the right to re-acquire the 14% interest for a period of three years at a purchase price of $500. Gioia has the right to certain royalty payments from the Gross Rake payments, and any licensing or royalty income received by MGT Interactive.

Simultaneously with the entry into the Contribution Agreement, the Company and Gioia entered into a Limited Liability Company Agreement which serves as the operating agreement for MGT Interactive, and a consulting agreement (the "Consulting Agreement") with Gioia to provide services to the Company primarily related to obtaining GLI Certification. The Consulting Agreement terminates on the earlier of January 31, 2014 or the date on which GLI Certification is obtained. In the event that GLI Certification is obtained prior to January 31, 2013, the Consulting Agreement shall be extended for an additional year. Pursuant to the Consulting Agreement, Gioia will receive a monthly consulting fee of $10 of which $5 is paid in cash per month and $5 is deferred until GLI certification is obtained. The Company expensed $179 for Fiscal 2013. Testing concluded on January 29, 2014, and GLI reported random behavior suitable for the applications that were analyzed. The Company is discussing with GLI the final steps to certification.

FanTD

On May 20, 2013, the Company completed the acquisition of 63% of FanTD in exchange for an aggregate purchase of $3,220 consisting of 600,000 shares of MGT Common Stock at a fair value of $5.03 per share for a total of $3,018 and a cash payment of $202. The fair value of the 37% non-controlling interest retained by the sellers in this transaction amounted to $1,882. The Company's acquisition of FanTD is the Company's initial venture in the online and mobile gaming and wagering space.

On July 23, 2013, MGT Sports acquired certain assets from Daily Joust, Inc. The purchase price consisted of a cash payment of $50 for $136 in customer deposits and assumption of a $136 customer liability.

On June 25, 2013, MGT Sports acquired Fantasy Sports Live, which was effectively a customer list associated with a specific gaming application for $30 in cash and the assumption of a $46 customer deposit liability.

Digital Angel

On May 2, 2013, the Company purchased certain mobile game application assets from Digital Angel Corporation. The purchase price consisted of a cash payment in the amount of $136 and 50,000 restricted shares of the Company's Common Stock with an aggregate fair value of $202 as of the date this transaction was completed. The Company determined the acquisition constitutes a purchase of assets in accordance with guidance of ASC 805 "Business Combinations".

Sale of medical imaging patents

On June 30, 2013, MGT closed the sale of Medicsight's portfolio of medical imaging patents to Samsung Electronics Co, Ltd. ("Samsung"). The Company had no prior relationship with Samsung. Gross proceeds of $1,500 was reduced by a broker commission of $501 paid to Munich Innovation Group GmbH, foreign withholding tax of $248 and an escrow agent fee of $1. The seller deposited $750 of proceeds into a restricted cash account upon the completion of the sale of which $651 was released to the Company on July 3, 2013. The remaining $99 is currently in escrow pending reclaim of foreign withholding tax.

MGT Gaming

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"); and (ii) the Company purchased from J&S 550 MGT Gaming Shares constituting 55% ownership in exchange for $200 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").

Medicsight

During the year ending December 2012, the Company purchased 67 shares of Medicsight Ltd's ordinary shares for cash consideration of $51.

Financing activities

Warrant exercises

On April 26, 2013, the Company made an offer to the holders of the Company's $3.85 Common Stock Purchase Warrants (the "Warrants"), providing if such investors 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. Total proceeds received from the exercise of 715,742 Warrants were $2,757.

During the year ending December 31, 2013, 357,204 of the Company's $3.00 Common Stock Purchase Warrants were exercised. Of the warrant conversions, 210,529 were cashless and 146,675 were exercised for total proceeds of $440.

In addition, the allowed maximum of 1,431,486 Warrants were exchanged for 894,683 shares of the Company's Common Stock, issuable upon shareholder and Exchange approval. On September 27, 2013, at MGT's annual meeting of stockholders, stockholders approved the issuance of up to 894,683 shares of Common Stock in exchange for the cancellation of 1,431,486 warrants to purchase shares of Common Stock at $3.85 per share. The shares were subsequently issued . . .

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