UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10–Q
|
x |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the quarterly period ended September
30, 2015
|
¨ |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the transition period from to
Commission file number: 001–32698
MGT CAPITAL INVESTMENTS, INC.
(Exact name of Registrant as specified in
its charter)
Delaware |
13–4148725 |
(State or other jurisdiction of
incorporation or organization) |
(I.R.S. Employer
Identification No.) |
500 Mamaroneck Avenue, Suite 204,
Harrison, NY 10528
(Address of principal executive offices)
(914) 630–7431
(Registrant’s telephone number, including
area code)
Indicate by check
whether the Registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes x
No ¨
Indicate by check
mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S–T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x
No ¨
Indicate by check
mark whether the Registrant is a large accelerated filer, an accelerated filer, non–accelerated filer or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated filer,” “non–accelerated
filer” and “smaller reporting company” in Rule 12b–2 of the Exchange Act:
Large Accelerated Filer
¨ |
|
Accelerated filer ¨ |
Non–accelerated Filer ¨ |
|
Smaller reporting company x |
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Exchange Act). Yes ¨
No x
As of November 16,
2015, the registrant had outstanding 17,199,665 shares of common stock, $0.001 par value.
INDEX
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per–share
amounts)
| |
September 30, | | |
December 31, | |
| |
2015 | | |
2014 | |
| |
(Unaudited) | | |
| |
Assets: | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 428 | | |
$ | 648 | |
Accounts receivable | |
| 12 | | |
| 5 | |
Prepaid expenses and other current assets | |
| 49 | | |
| 141 | |
Current assets – Discontinued operations | |
| – | | |
| 838 | |
Investments – current | |
| 1041 | | |
| – | |
Notes receivable | |
| 1,875 | | |
| – | |
Total current assets | |
| 3,405 | | |
| 1,632 | |
| |
| | | |
| | |
Non–current assets: | |
| | | |
| | |
Restricted cash | |
| 39 | | |
| 138 | |
Property and equipment, at cost, net | |
| 5 | | |
| 11 | |
Property and equipment, at cost, net – Discontinued operations | |
| – | | |
| 32 | |
Intangible assets, net | |
| 1,259 | | |
| 1,608 | |
Intangible assets, net – Discontinued operations | |
| – | | |
| 809 | |
Goodwill | |
| 1,496 | | |
| 1,496 | |
Goodwill – Discontinued operations | |
| – | | |
| 4,948 | |
Investments – long-term | |
| 1,380 | | |
| - | |
Other non–current assets | |
| – | | |
| 2 | |
Total assets | |
$ | 7,584 | | |
$ | 10,676 | |
| |
| | | |
| | |
Liabilities: | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable | |
$ | 249 | | |
$ | 199 | |
Accrued expenses | |
| 189 | | |
| 180 | |
Current liabilities – Discontinued operations | |
| – | | |
| 988 | |
Other payables | |
| 13 | | |
| 12 | |
Amounts due to Viggle, Inc. | |
| 124 | | |
| – | |
Total current liabilities | |
| 575 | | |
| 1,379 | |
| |
| | | |
| | |
Total liabilities | |
| 575 | | |
| 1,379 | |
| |
| | | |
| | |
Commitments and contingencies: | |
| | | |
| | |
Redeemable convertible preferred stock – Temporary equity: | |
| | | |
| | |
Preferred stock, series A convertible preferred, $0.001 par value, 1,500,000 shares authorized at September 30, 2015 and December 31, 2014; 1,416,463 and 1,416,160 shares issued at September 30, 2015 and December 31, 2014, respectively; 10,451 and 9,993 shares outstanding at September 30, 2015 and December 31, 2014, respectively | |
| – | | |
| – | |
Stockholders' equity: | |
| | | |
| | |
Undesignated preferred stock, $0.001 par value; 8,583,840 and 8,583,840 shares authorized at September 30, 2015 and December 31, 2014, respectively. No shares authorized, issued and outstanding at September 30, 2015 and December 31, 2014 respectively | |
| – | | |
| – | |
Common Stock, $0.001 par value; 75,000,000 shares authorized; 14,169,665 and 10,731,160 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively | |
| 14 | | |
| 11 | |
Additional paid–in capital | |
| 310,248 | | |
| 308,288 | |
Accumulated other comprehensive loss | |
| (890 | ) | |
| (281 | ) |
Accumulated deficit | |
| (302,606 | ) | |
| (299,163 | ) |
Total stockholders' equity | |
| 6,766 | | |
| 8,855 | |
Non–controlling interests | |
| 243 | | |
| 442 | |
Total equity | |
| 7,009 | | |
| 9,297 | |
| |
| | | |
| | |
Total stockholders' equity, liabilities and non–controlling interest | |
$ | 7,584 | | |
$ | 10,676 | |
The accompanying notes
are an integral part of these Condensed Consolidated Financial Statements.
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per–share amounts, unaudited)
| |
Nine months ended September 30, | |
| |
2015 | | |
2014 | |
Revenues: | |
| | | |
| | |
Licensing | |
$ | 102 | | |
$ | 81 | |
Gaming | |
| 2 | | |
| 7 | |
| |
| 104 | | |
| 88 | |
Cost of revenues: | |
| | | |
| | |
Licensing | |
| 5 | | |
| – | |
| |
| | | |
| | |
Gross margin | |
| 99 | | |
| 88 | |
| |
| | | |
| | |
Operating expenses: | |
| | | |
| | |
General and administrative | |
| 2,293 | | |
| 3,026 | |
Research and development | |
| – | | |
| 153 | |
| |
| 2,293 | | |
| 3,179 | |
| |
| | | |
| | |
Operating loss | |
| (2,194 | ) | |
| (3,091 | ) |
| |
| | | |
| | |
Other non–operating (expense) / income: | |
| | | |
| | |
Interest and other (expense) / income | |
| (28 | ) | |
| 7 | |
Impairment of notes receivable | |
| (256 | ) | |
| – | |
Loss on sale of assets | |
| (144 | ) | |
| – | |
| |
| (428 | ) | |
| 7 | |
| |
| | | |
| | |
Net loss before income taxes and non–controlling interest | |
| (2,622 | ) | |
| (3,084 | ) |
| |
| | | |
| | |
Income tax benefit | |
| – | | |
| 1 | |
| |
| | | |
| | |
Net loss from continuing operations before non–controlling interest | |
| (2,622 | ) | |
| (3,083 | ) |
| |
| | | |
| | |
Discontinued operations – DraftDay.com: | |
| | | |
| | |
Net loss from discontinued operations | |
| (787 | ) | |
| (1,184 | ) |
Gain on termination of asset purchase agreement | |
| 250 | | |
| – | |
Loss on sale of assets | |
| (387 | ) | |
| – | |
| |
| (924 | ) | |
| (1,184 | ) |
| |
| | | |
| | |
Net loss before non–controlling interest | |
| (3,546 | ) | |
| (4,267 | ) |
| |
| | | |
| | |
Net loss attributable to non–controlling interest | |
| 103 | | |
| 373 | |
| |
| | | |
| | |
Net loss attributable to Common stockholders | |
$ | (3,443 | ) | |
$ | (3,894 | ) |
| |
| | | |
| | |
Net loss attributable to Common stockholders | |
$ | (3,443 | ) | |
$ | (3,894 | ) |
Other comprehensive loss: | |
| | | |
| | |
Unrealized loss on investments | |
| (609 | ) | |
| – | |
Comprehensive loss | |
$ | (4,052 | ) | |
$ | (3,894 | ) |
| |
| | | |
| | |
Per–share data: | |
| | | |
| | |
Basic and diluted loss per share – continuing operations | |
$ | (0.20 | ) | |
$ | (0.30 | ) |
Basic and diluted loss per share – discontinued operations | |
| (0.07 | ) | |
| (0.13 | ) |
Basic and diluted loss per share | |
| (0.27 | ) | |
| (0.43 | ) |
| |
| | | |
| | |
Weighted average number of common shares outstanding | |
| 12,911,492 | | |
| 9,175,695 | |
The accompanying notes are an integral part
of these Condensed Consolidated Financial Statements.
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per–share amounts, unaudited)
| |
Three months ended September 30 | |
| |
2015 | | |
2014 | |
Revenues: | |
| | | |
| | |
Licensing | |
$ | 90 | | |
$ | 1 | |
Gaming | |
| – | | |
| – | |
| |
| 90 | | |
| 1 | |
Cost of revenues: | |
| | | |
| | |
Licensing | |
| 5 | | |
| – | |
| |
| | | |
| | |
Gross margin | |
| 85 | | |
| 1 | |
| |
| | | |
| | |
Operating expenses: | |
| | | |
| | |
General and administrative | |
| 642 | | |
| 961 | |
Research and development | |
| – | | |
| 40 | |
| |
| 642 | | |
| 1,001 | |
| |
| | | |
| | |
Operating loss | |
| (557 | ) | |
| (1,000 | ) |
| |
| | | |
| | |
Other non–operating (expense) / income: | |
| | | |
| | |
Interest and other income | |
| 8 | | |
| 2 | |
Impairment of notes receivable | |
| (256 | ) | |
| – | |
Loss on sale of assets | |
| (144 | ) | |
| – | |
| |
| (392 | ) | |
| 2 | |
| |
| | | |
| | |
Net loss before income taxes and non–controlling interest | |
| (949 | ) | |
| (998 | ) |
| |
| | | |
| | |
Income tax expense | |
| – | | |
| (10 | ) |
| |
| | | |
| | |
Net loss from continuing operations before non–controlling interest | |
| (949 | ) | |
| (1,008 | ) |
| |
| | | |
| | |
Discontinued operations – DraftDay.com: | |
| | | |
| | |
Net loss from discontinued operations | |
| (229 | ) | |
| (443 | ) |
Gain on termination of asset purchase agreement | |
| 250 | | |
| – | |
Loss on sale of assets | |
| (387 | ) | |
| – | |
| |
| (366 | ) | |
| (443 | ) |
| |
| | | |
| | |
Net loss before non–controlling interest | |
| (1,315 | ) | |
| (1,451 | ) |
| |
| | | |
| | |
Net (income) / loss attributable to non–controlling interest | |
| (6 | ) | |
| 70 | |
| |
| | | |
| | |
Net loss attributable to common stockholders | |
$ | (1,321 | ) | |
$ | (1,381 | ) |
| |
| | | |
| | |
Net loss attributable to common stockholders | |
$ | (1,321 | ) | |
$ | (1,381 | ) |
Other comprehensive loss: | |
| | | |
| | |
Unrealized loss on investments | |
| (609 | ) | |
| – | |
Comprehensive loss | |
$ | (1,930 | ) | |
$ | (1,381 | ) |
| |
| | | |
| | |
Per–share data: | |
| | | |
| | |
Basic and diluted loss per share – continuing operations | |
$ | (0.07 | ) | |
$ | (0.10 | ) |
Basic and diluted loss per share – discontinued operations | |
| (0.03 | ) | |
| (0.05 | ) |
Basic and diluted loss per share | |
| (0.10 | ) | |
| (0.15 | ) |
| |
| | | |
| | |
Weighted average number of common shares outstanding | |
| 14,123,208 | | |
| 9,685,023 | |
The accompanying notes are an integral part
of these Condensed Consolidated Financial Statements.
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENT OF CASH FLOWS
(In thousands, unaudited)
| |
Nine months ended September 30, | |
| |
2015 | | |
2014 | |
Cash flows from operating activities: | |
| | | |
| | |
Net loss before non–controlling interest | |
$ | (3,546 | ) | |
$ | (4,267 | ) |
Net loss from discontinued operations | |
| 924 | | |
| 1,184 | |
| |
| (2,622 | ) | |
| (3,083 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Depreciation | |
| 6 | | |
| 22 | |
Amortization of intangible assets | |
| 170 | | |
| 241 | |
Stock–based expense | |
| 223 | | |
| 357 | |
Reserve for note receivable | |
| 250 | | |
| – | |
Loss on sale of assets | |
| 144 | | |
| – | |
Warrant expense | |
| – | | |
| 71 | |
Change in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| (7 | ) | |
| 33 | |
Prepaid expenses and other current assets | |
| 92 | | |
| (12 | ) |
Accounts payable | |
| 50 | | |
| (38 | ) |
Accrued expenses | |
| 9 | | |
| 45 | |
Other payables | |
| 1 | | |
| (8 | ) |
Net cash used in operating activities | |
| (1,684 | ) | |
| (2,372 | ) |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Release of restricted cash and security deposit | |
| 101 | | |
| 2 | |
Sale of intangible assets | |
| 35 | | |
| – | |
Issuance of note receivable | |
| (250 | ) | |
| – | |
Net cash (used in) / provided by investing activities | |
| (114 | ) | |
| 2 | |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Proceeds from ATM sales of common stock, net of fees | |
| 1,644 | | |
| 1,285 | |
Net cash provided by financing activities | |
| 1,644 | | |
| 1,285 | |
| |
| | | |
| | |
Cash flows from discontinued operations – DraftDay.com: | |
| | | |
| | |
Net cash used in operating activities | |
| (66 | ) | |
| (1,258 | ) |
Net cash used in investing activities | |
| – | | |
| (94 | ) |
Net cash used in discontinued operations | |
| (66 | ) | |
| (1,352 | ) |
| |
| | | |
| | |
Net change in cash and cash equivalents | |
| (220 | ) | |
| (2,437 | ) |
Cash and cash equivalents, beginning of period | |
| 648 | | |
| 4,642 | |
Cash and cash equivalents, end of period | |
$ | 428 | | |
$ | 2,205 | |
The accompanying
notes are an integral part of these Condensed Consolidated Financial Statements.
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENT OF CASH FLOWS
(In thousands, unaudited)
| |
Nine months ended September 30, | |
| |
2015 | | |
2014 | |
Investments received in consideration for sale of DraftDay.com | |
$ | 3,030 | | |
$ | – | |
Issuance of notes receivable in consideration for sale of DraftDay.com | |
| 2,109 | | |
| – | |
Transfers from the non–controlling interest | |
| (96 | ) | |
| – | |
Stock issued for acquisition of DraftDay.com | |
| – | | |
| 190 | |
Stock issued for acquisition of non–controlling interest in FanTD | |
| – | | |
| 103 | |
Assets disposed and liabilities transferred through sale of assets: | |
| | | |
| | |
Property and equipment – DraftDay.com | |
| (17 | ) | |
| – | |
Intangible assets – DraftDay | |
| (561 | ) | |
| – | |
Goodwill – DraftDay.com | |
| (4,948 | ) | |
| – | |
Intangible assets – MGT Interactive | |
| (180 | ) | |
| – | |
Assets acquired and liabilities assumed through purchase of assets: | |
| | | |
| | |
Intangible assets | |
| – | | |
| 790 | |
Player deposit liability | |
| – | | |
| (547 | ) |
The accompanying
notes are an integral part of these Condensed Consolidated Financial Statements.
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per–share
amounts)
Note 1. Organization and basis of presentation
Organization
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
subsidiaries MGT Gaming, Inc. (“MGT Gaming”), MGT Interactive LLC (“MGT Interactive”), and wholly–owned
subsidiaries Medicsight, Inc. (“Medicsight”), MGT Studios, Inc. (“MGT Studios”) including its minority–owned subsidiary M2P Americas, Inc., and MGT Sports, Inc. (“MGT Sports”).
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 social casino industry. Below are descriptions of the business lines that make up our two operating segments, Gaming
and Intellectual Property.
Gaming
MGT’s portfolio
of assets in the online, mobile gaming and social casino gaming space includes DraftDay.com (see sale discussion below), MGTPLAY.com
and Slot Champ.
Sale of DraftDay.com
Effective
September 3, 2015, the Company terminated the asset purchase agreement originally entered into on June 11, 2015, as further
amended, between MGT Sports and Random Outcome USA Inc. (“RO”), (the "RO Agreement). According to its terms, the
RO Agreement could be terminated by the Company or RO if a closing had not occurred by August 31, 2015. The RO Agreement
provided for the sale of the DraftDay Business to RO for a purchase price of $4,000 plus stock and warrants of RO. On
September 8, 2015, the Company and MGT Sports entered into an Asset Purchase Agreement (the “Asset Purchase
Agreement”) with Viggle, Inc. (“Viggle”) and Viggle’s subsidiary DraftDay Gaming Group, Inc.
(“DDGG”), pursuant to which Viggle acquired all of the assets of the DraftDay.com business (the “DraftDay
Business”) from the Company and MGT Sports. In exchange for the DraftDay Business, Viggle paid MGT Sports the
following: (a) 1,269,342 shares of Viggle’s common stock, par value $0.001 per share, (b) a promissory note in the
amount of $234 due September 29, 2015 (the “September 2015 Note”), (c) a promissory note in the amount of $1,875
due March 8, 2016 (the “March 2016 Note”), and (d) 2,550,000 shares of common stock of DDGG. In addition, in
exchange for providing certain transitional services, DDGG issued to MGT Sports a warrant to purchase 1,500,000 shares of
DDGG common stock at an exercise price of $0.40 per share. Following consummation of the transactions of the Asset Purchase
Agreement, including certain agreements between Viggle and third parties, MGT Sports owns 2,550,000 shares of DDGG common
stock, Viggle owns 11,250,000 shares of DDGG common stock, and Sportech, Inc. own 9,000,000 shares of DDGG common stock. As a
result of the transaction, the Company has presented the MGT Sports segment as a discontinued operation.
The following table
summarizes fair values of the net assets assumed in consideration for the sale of the DraftDay Business assets:
Viggle common shares received at closing share price of $1.30 | |
$ | 1,650 | |
Viggle promissory notes | |
| 2,109 | |
DDGG common shares received at fair market value of $0.40 per share(1) | |
| 1,020 | |
DDGG stock purchase warrants received (2) | |
| 360 | |
DraftDay.com assets (3) | |
| 5,526 | |
The transaction resulted
in a loss on the sale of $387.
| (1) | DDGG common shares were valued based on recent equity sales by DDGG to Viggle. Viggle purchased
shares of DDGG at a price of $0.40 per share. |
| (2) | The Company determined fair value of the warrants received utilizing a Black–Scholes option
pricing model. The Company utilized the following assumptions: fair value of common share of DDGG stock – $0.40 per share,
exercise price of $0.40, risk free rate of 0.65%, expected volatility of 98% which is the 3–year historical volatility of
the Company’s common stock. |
| (3) | DraftDay.com assets consist of the following: |
IT equipment | |
$ | 17 | |
Domain | |
| 39 | |
Customer list | |
| 101 | |
Source Code | |
| 421 | |
Goodwill | |
| 4,948 | |
Total | |
$ | 5,526 | |
Intellectual property
MGT Gaming owns two
U. S. patents covering certain features of casino slot machines. MGT’s wholly owned subsidiary Medicsight owns U.S. Food
and Drug Administration (“FDA”) approved medical imaging software and has designed an automated carbon dioxide insufflation
device on which the Company receives royalties from an international distributor.
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
against certain companies which either manufacture, sell or lease gaming systems alleged to be in violation of MGT Gaming’s
patent rights, or operate casinos that offer gaming systems that are alleged to be in violation of MGT Gaming’s ’088
patent, including Penn National Gaming, Inc. (“Penn”) (NASDAQ GS: PENN), and Aruze Gaming America, Inc. (“Aruze
America”). An amended complaint added the ’554 patent, a continuation of the ’088 patent.
In May
2014, Aruze America successfully sought a stay of the Mississippi action pending resolution of a Petition filed by a
co–defendant for Inter Parties Review (“IPR”) with the Patent Trial and Appeal Board (“PTAB”)
of the United States Patent and Trademark Office (“PTO”), challenging the’088 patent.
Aruze America and a related company,
Aruze Macau, subsequently filed additional IPR Petitions seeking review of the ’088 and ‘554 patents. Aruze
America also filed a Request for Ex Parte Re–examination of the ’088 patent that was subsequently denied.
On July 29, 2015, MGT,
Aruze America, Aruze Macau, and Penn agreed, through their respective counsel, to settle all pending disputes, including the Mississippi
litigation and all proceedings at the PTO. The parties subsequently jointly terminated the Mississippi litigation and the
PTO proceedings. The Company received a payment of $90, which was earned as licensing revenue.
Sale of assets – MGT Interactive
On April 21,
2015, Gioia Systems, LLC (“Gioia”) filed a complaint against the Company, the Company’s majority owned
subsidiary, MGT Interactive, LLC and Interactive directors with the United States District Court for the Southern
District of New York. MGT Interactive, LLC was also included as a derivative plaintiff in the
actions, LLC’s complaint asserts claims for breach of contract and breach of fiduciary duty relating to the September 2013
Contribution Agreement and related agreements between Gioia, the Company and MGT Interactive, LLC.
On August 28,
2015, the Company and MGT Interactive along with Gioia entered into an Assignment and Sale Agreement (the
“Agreement”). MGT Interactive sold certain tangible and intellectual property assets in exchange for
Gioia’s 49% membership interest in Interactive along with a cash payment of $35. The Agreement also required Gioia to
cause the Court to dismiss its complaint against the Company. As a result of the Agreement, the Company recognized a $144
loss on sale of assets.
The following summarizes
the recognition of the Agreement:
Cash | |
$ | 35 | |
49% membership interest | |
| (96 | ) |
Intangible assets | |
| (179 | ) |
Additional paid in capital | |
| 96 | |
Loss on sale | |
$ | 144 | |
Basis of presentation
The accompanying unaudited
Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10–Q and Rule 8–03 of Regulation S–X. Accordingly,
they do not include all of the information and notes required by accounting principles generally accepted in the United States
of America. However, in the opinion of the management of the Company, all adjustments necessary for a fair presentation of the
financial position and operating results have been included in these statements. These Condensed Consolidated Financial Statements
should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included in the Company’s
Annual Report on Form 10–K for the fiscal year ended December 31, 2014, as filed with the SEC on April 15, 2015. Operating
results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected
for any subsequent quarters or for the year ending December 31, 2015.
Note 2. Going Concern and Management
plans
The accompanying condensed
consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. As of September 30, 2015, the Company had incurred significant
operating losses since inception and continues to generate losses from operations and has an accumulated deficit of $302,606. These
matters raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial
statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification
of liabilities that might be necessary should the Company be unable to continue as a going concern.
Commercial results
have been limited and the Company has not generated significant revenues. The Company cannot assure its stockholders that the Company’s
revenues will be sufficient to fund its operations. If adequate funds are not available, the Company may be required to curtail
its operations significantly or to obtain funds through entering into arrangements with collaborative partners or others that may
require the Company to relinquish rights to certain of our technologies or products that the Company would not otherwise relinquish.
The Company's primary
source of operating funds since inception has been debt and equity financings. On December 30, 2013, and as amended on March 27,
2014, the Company entered into an At the Market Offering Agreement (the “ATM Agreement”) with Ascendiant Capital Markets,
LLC (the “Manager”). Pursuant to the ATM Agreement, the Company may offer and sell shares of its Common Stock (the
“Shares”) having an aggregate offering price of up to $8.5 million from time to time through the Manager. The Company
intends to use the net proceeds from any sales of Shares in the offering for working capital, capital expenditures, and general
business purposes. For the Nine months ended September 30, 2015, the Company sold approximately 3,155,000 Shares under the ATM
Agreement for gross proceeds of approximately $1,695 before related expenses. The proceeds will be used for general corporate purposes.
As of November 14, 2015, the Company has approximately $5.4 million remaining under the program, assuming sufficient Shares are
available to be issued.
At September 30, 2015,
MGT’s cash, cash equivalents and restricted cash were $467. The Company intends to raise additional capital, either through
debt or equity financings or through the continued sale of the Company’s assets in order to achieve its business plan objectives.
Management believes that it can be successful in obtaining additional capital; however, no assurance can be provided that the Company
will be able to do so. There is no assurance that any funds raised will be sufficient to enable the Company to attain profitable
operations or continue as a going concern. To the extent that the Company is unsuccessful, the Company may need to curtail or cease
its operations and implement a plan to extend payables or reduce overhead until sufficient additional capital is raised to support
further operations. There can be no assurance that such a plan will be successful.
On September 8, 2015,
the Company and MGT Sports entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Viggle, Inc.
(“Viggle”) and Viggle’s subsidiary DraftDay Gaming Group, Inc. (“DDGG”), pursuant to which Viggle
acquired all of the assets of the DraftDay.com business (the “DraftDay Business”) from
the Company and MGT Sports. In exchange for the DraftDay Business, Viggle paid MGT Sports the following: (a) 1,269,342
shares of Viggle’s common stock, par value $0.001 per share, (b) a promissory note in the amount of $234 due September 29,
2015 (the “September 2015 Note”), (c) a promissory note in the amount of $1,875 due March 8, 2016 (the “March
2016 Note”), and (d) 2,550,000 shares of common stock of DDGG.
The Company anticipates,
but cannot guarantee, that following the sale of the DraftDay Business its operating costs will be reduced by approximately $125
per month.
Note 3. Summary of significant accounting policies
Use of estimates and assumptions and critical accounting
estimates and assumptions
The preparation of
financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date(s) of the financial statements
and the reported amounts of revenues and expenses during the reporting period(s).
Critical accounting
estimates are estimates for which (a) the nature of the estimate is material due to the levels of subjectivity and judgment necessary
to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact of the estimate on financial
condition or operating performance is material. The Company’s critical accounting estimates and assumptions affecting the
financial statements were “Carrying Value of the Long–lived Assets,” “Valuation Allowance for Deferred
Tax Assets,” “Valuation of Equity Instruments ” and “Valuation of Investments.”
Management bases its
estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements
taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources.
Management regularly
evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts
and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates
are adjusted accordingly. Actual results could differ from those estimates.
Principles of consolidation
All intercompany transactions
and balances have been eliminated. Non–controlling interest represents the minority equity investment in MGT subsidiaries,
plus the minority investors’ share of the net operating results and other components of equity relating to the non–controlling
interest.
Reclassification of discontinued operations
In accordance with
ASC 205–20 regarding the presentation of discontinued operations the assets, liabilities and activity of the DraftDay.com
business have been reclassified as a discontinued operation for all periods presented.
Assets and liabilities related to the discontinued
operations of DraftDay.com are as follows:
| |
As of | |
| |
September 30, 2015 | | |
December 31, 2014 | |
Cash and cash equivalents | |
$ | – | | |
$ | 807 | |
Other current assets | |
| – | | |
| 30 | |
Property and equipment | |
| – | | |
| 32 | |
Intangible assets | |
| – | | |
| 809 | |
Goodwill | |
| | | |
| 4,948 | |
Total assets | |
| – | | |
$ | 6,626 | |
| |
| | | |
| | |
Accounts payable | |
$ | – | | |
$ | 46 | |
Player deposits | |
| – | | |
| 942 | |
Total liabilities | |
| – | | |
$ | 988 | |
DraftDay.com’s losses for the three
and nine months ended September 30, 2015 and 2014 are included in “Loss from discontinued operations” in the Company’s
Condensed Consolidated Statements of Operations and Comprehensive Loss.
Summarized financial information for DraftDay.com’s
operations for the three and nine months ended September 30, 2015 and 2014 are presented below:
| |
Three months ended September 30, | | |
Nine months ended September 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Revenue | |
$ | 176 | | |
$ | 297 | | |
$ | 640 | | |
$ | 615 | |
Cost of revenue | |
| (39 | ) | |
| (168 | ) | |
| (225 | ) | |
| (384 | ) |
Gross margin | |
| 137 | | |
| 129 | | |
| 415 | | |
| 231 | |
Operating expenses | |
| (366 | ) | |
| (572 | ) | |
| (1,202 | ) | |
| (1,415 | ) |
Net loss | |
$ | (229 | ) | |
$ | (443 | ) | |
$ | (787 | ) | |
$ | (1,184 | ) |
Investments
Equity security investments
available for sale, at market value, reflect unrealized appreciation and depreciation, as a result of temporary changes in market
value during the period, in shareholders’ equity, net of income taxes in “accumulated other comprehensive income (loss)”
in the consolidated balance sheets. For non–publicly traded securities, market prices are determined through the use
of pricing models that evaluate securities. For publicly traded securities, market value is based on quoted market prices
or valuation models that use observable market inputs.
Loss per share
Basic loss per share
is calculated by dividing net loss applicable to common shareholders by the weighted average number of common shares outstanding
during the period. Diluted loss per share is calculated by dividing the net loss attributable to common shareholders by the sum
of the weighted average number of common shares outstanding plus potential dilutive common shares outstanding during the period.
Potential dilutive securities, comprised of the convertible Preferred Stock, unvested restricted shares and stock options, are
not reflected in diluted net loss per share because such shares are anti–dilutive.
The computation of
diluted loss per share for the three and nine months ended September 30, 2015, excludes 10,451 shares in connection to the convertible
Preferred Stock, 1,020,825 warrants and 9,000 unvested restricted shares, as they are anti–dilutive due to the Company’s
net loss. For the three and nine months ended September 30, 2014, the computation excludes 9,845 shares in connection to the convertible
Preferred Stock, 1,020,825 warrants and 130,000 unvested restricted shares, as they are anti–dilutive due to the Company’s
net loss.
Recent accounting pronouncements
In September 2015,
the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015–16,
simplifying the Accounting for Measurement–Period Adjustments that eliminates the requirement to restate prior period financial
statements for measurement period adjustments. The new guidance requires that the cumulative impact of a measurement period adjustment
(including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The new guidance
does not change what constitutes a measurement period adjustment. The Company does not expect the adoption of this ASU to significantly
impact the consolidated financial statements.
In August 2015, the
FASB issued ASU 2015–15 Interest– Imputation of Interest, final guidance that requires debt issuance costs related
to a recognized debt liability to be presented in the balance sheet as a direct deduction from the debt liability rather than as
an asset. This publication has been updated to reflect an SEC staff member’s comment in June 2015 that the staff will not
object to an entity presenting the cost of securing a revolving line of credit as an asset, regardless of whether a balance is
outstanding. The Company does not expect the adoption of this ASU to significantly impact the consolidated financial statements.
In May 2015, the FASB
issued ASU 2015–07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its
Equivalent). This ASU removes, from the fair value hierarchy, investments which measure fair value using net asset value per share
practical expedient. Instead, an entity is required to include those investments as a reconciling line item so that the total fair
value amount of investments in the disclosure is consistent with the amount on the balance sheet. For public companies, this ASU
is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendment
should be applied retrospectively to all periods presented. The Company is expected to make the required changes to the fair
value hierarchy disclosure as of the effective date of this new guidance.
In
April 2015, the FASB issued ASU 2015–05, Intangibles – Goodwill
and Other – Internal–Use Software (Subtopic 350–40). This ASU provides guidance about whether a cloud computing
arrangement includes a software license. If a cloud computing arrangement includes a software license, then the software license
element of the arrangement should be accounted for consistent with the acquisition of other software licenses. If a cloud computing
arrangement does not include a software license, the arrangement should be accounted for as a service contract. For public business
entities, the amendments will be effective for annual periods, including interim periods within those annual periods, beginning
after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU
2015–05 on our financial statements and disclosures.
Note 4. Goodwill and intangible assets
The Company’s
intangible assets for continuing operations consisted of the following:
| |
Goodwill | |
Balance at January 1, 2015 | |
$ | 1,496 | |
Disposals | |
| – | |
Balance at September 30, 2015 | |
$ | 1,496 | |
| |
Intangible Assets | |
Balance at January 1, 2015 | |
$ | 1,608 | |
Disposals | |
| (179 | ) |
Amortization expense | |
| (170 | ) |
Balance at September 30, 2015 | |
$ | 1,259 | |
| |
Estimated remaining useful life | |
September 30, 2015 | |
Intellectual property | |
6 years | |
$ | 1,913 | |
Trademarks | |
2 years | |
| 65 | |
Less: Accumulated amortization | |
| |
| (719 | ) |
Intangible assets, net | |
| |
$ | 1,259 | |
In the three and nine
months ended September 30, 2015 the Company recorded an amortization expense of $55 and $170, respectively (2014: $62 and $241).
Note 5. Note receivable
On February 26, 2015,
the Company signed a letter of intent with Tera Group, Inc., owner of TeraExchange, LLC, a Swap Execution Facility regulated by
the U.S. Commodity Futures Trading Commission, to negotiate a merger agreement. Since the merger agreement was not executed by
the execution date, the merger was aborted. Simultaneous with the letter of intent, on February 26, 2015, the Company purchased
a promissory note in the principal amount of $250 bearing interest at the rate of 5% per annum from the aggregate unpaid principal
balance and all accrued and unpaid interest are due and payable upon demand at any time after August 15, 2015. As of November 14,
2015, the Company has fully reserved against the collectability of this note and the corresponding accrued interest.
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 NYSE MKT 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.
For the three months
ended September 30, 2015 and 2014, respectively, the Company issued 155 and 146 of Dividend Shares to the Preferred Stock holders.
For the nine months ended September 30, 2015 and 2014, respectively, the Company issued 458 and 432 of Dividend Shares to the Preferred
Stock holders.
Note 7. Stock incentive plan and stock–based compensation
Stock incentive plan
The Company’s
board of directors established the 2012 Stock Incentive Plan (the “Plan”) on April 15, 2012, and the Company’s
shareholders ratified the Plan at the annual meeting of the Company’s stockholders on May 30, 2012. The Company has 415,000
shares of Common Stock that are reserved to grant Options, Stock Awards and Performance Shares (collectively the “Awards”)
to “Participants” under the Plan. The Plan is administered by the board of directors or the Compensation Committee
of the board of directors, which determines the individuals to whom awards shall be granted as well as the type, terms and conditions
of each award, the option price and the duration of each award.
At the annual meeting of the stockholders
of MGT held on September 27, 2013, stockholders approved an amendment to the Plan (the “Amended and Restated Plan”)
to increase the amount of shares of Common stock that may be issued under the Amended and Restated Plan to 1,335,000 shares from
415,000 shares, an increase of 920,000 shares and to add a reload feature.
Options granted under
the Plan vest as determined by the Company’s Compensation and Nominations Committee and expire over varying terms, but not
more than seven years from date of grant. In the case of an Incentive Stock Option that is granted to a 10% shareholder on the
date of grant, such Option shall not be exercisable after the expiration of five years from the date of grant. No option grants
were issued during the three and nine months ended September 30, 2015, and 2014.
Issuance of restricted shares – directors, officers
and employees
The restricted shares
are valued using the closing market price on the date of grant, of which the share–based compensation expense is recognized
over their vesting period. The unvested shares are subject to forfeiture if the applicable recipient is not a director, officer
and/or employee of the Company at the time the restricted shares are to vest.
A summary of the Company’s
employee’s restricted stock as of September 30, 2015, is presented below:
| |
Number of shares | | |
Weighted average grant date fair value | |
Non–vested at January 1, 2015 | |
| 110,000 | | |
$ | 1.48 | |
Granted | |
| 55,000 | | |
| 0.56 | |
Vested | |
| (100,500 | ) | |
| 0.97 | |
Forfeited | |
| (55,500 | ) | |
| 1.28 | |
Non–vested at September 30, 2015 | |
| 9,000 | | |
$ | 1.98 | |
For the three and nine
months ended September 30, 2015 the Company has recorded $18 and $82, respectively, (2014: $37 and $254) in employee and director
stock–based compensation expense, which is a component of selling, general and administrative expense in the condensed Consolidated
Statement of Operations.
In the three and nine
months ended September 30, 2015, and 2014, the Company did not allocate any stock–based compensation expense to non–controlling
interest.
Unrecognized compensation cost
As of September 30,
2015, unrecognized compensation costs related to non–vested stock–based compensation arrangements, was $3 (2014: $141),
and is expected to be recognized over a weighted average period of 0.04 (2014: 0.93) years.
Stock–based compensation –
non–employees
For the three and nine months ended September 30, 2015 the Company granted and issued a total of 80,166 and 296,624 shares
respectively, to non-employees for services rendered. The shares were recorded at $26 and $141 respectively,
using the closing market value on respective dates of issuance.
Subsequent to September 30, 2015, and through
the date of filing the Quarterly Report on Form 10–Q, the Company granted and issued a total of 30,000 shares to non–employees
for services rendered. The shares were recorded at $10 using the closing market value on respective dates of issuance.
Warrants
As of September 30,
2015 the Company had 1,020,825 warrants outstanding at weighted average exercise price of $3.47, and an intrinsic value of $nil.
As of September 30,
2015, all issued warrants are exercisable and expire through 2018.
Note 8. Non–controlling interest
At September 30, 2015
the Company’s non–controlling interest was as follows:
| |
MGT Gaming | | |
MGT Interactive | | |
M2P Americas | | |
Total | |
Non–controlling interest at January 1, 2015 | |
$ | 370 | | |
$ | 92 | | |
$ | (20 | ) | |
$ | 442 | |
Non–controlling share of loss / (income) | |
| (105 | ) | |
| 4 | | |
| (2 | ) | |
| (103 | ) |
Transfers from non–controlling interest | |
| | | |
| (96 | ) | |
| | | |
| (96 | ) |
Non–controlling interest at September 30, 2015 | |
$ | 265 | | |
$ | – | | |
$ | (22 | ) | |
$ | 243 | |
Note 9. Operating leases, commitments and security deposit
On August 20, 2014,
the Company entered into a First Lease Modification and Extension Agreement, extending for a period of one year the current lease
on the Harrison office. The lease expires on November 30, 2015.
Total lease rental
expense for the three months ended September 30, 2015 and 2014, was $27 and $30, respectively. Total lease rental expense for the
nine months ended September 30, 2015 and 2014, was $69 and $92, respectively.
On October 26, 2015,
the Company entered into an Office License Agreement commencing December 1, 2015. The term expires on November 30, 2016 and carries
a monthly fee of $4. The Company paid a refundable
service retainer of $6 and a non–refundable set up fee of $1.
On September 28, 2015,
the Company provided Robert Ladd, President and Chief Executive Officer, and Robert Traversa, Treasurer and Chief Financial Officer,
with written notices of its intent not to renew their employment agreements. The employment agreements will expire in accordance
with their terms on November 30, 2015.
On October 7, 2015,
the Company entered into an amended and restated employment agreement with Robert Ladd, its Chief Executive Officer and President,
effective October 1, 2015. The agreement amends and restates in its entirety the employment agreement entered into between the
Company and Mr. Ladd on November 19, 2012 and amended January 28, 2014.The term of the agreement shall expire on November 30, 2016,
subject to automatic renewals of one year. The agreement provides for a base salary of $199 per year. Pursuant to the agreement,
the Company also granted Mr. Ladd 200,000 shares of unregistered common stock. Mr. Ladd is eligible for bonus compensation and
equity awards as may be approved in the discretion of the Compensation Committee and the Board of Directors. Upon termination
of his employment for reasons other than death, disability, or cause or upon resignation for good reason, Mr. Ladd will be entitled
to a severance payment equal to the higher of the aggregate amount of his base salary for the then remaining term of the agreement
or twelve times the average monthly base salary paid or accrued during the three full calendar months immediately preceding such
termination. All unvested stock options shall immediately vest and the exercise period of such options shall be extended to the
later of the longest period permitted by the Company’s stock option plans or ten years following the termination date. The
agreement also contains non–compete and change of control provisions.
Note 10. Segment reporting
Operating segments
are defined as components of an enterprise about which separate financial information is available that is evaluated regularly
by the chief operating decision maker, or decision–making group in deciding how to allocate resources and in assessing performance.
The Company’s chief operating decision–making group is composed of the Chief Executive Officer and Chief Financial
Officer. The Company operates in two segments, Gaming and Intellectual Property. Medicsight’s Software and Devices and Services
are no longer considered separate business segments and have been merged into the Intellectual Property segment. Certain corporate
expenses are not allocated to segments.
The Company evaluates
performance of its operating segments based on revenue and operating (loss). Segment information as of September 30, 2015, and
December 31, 2014, are as follows:
| |
Intellectual property | | |
Gaming – Continuing Operations | | |
Unallocated corporate/other | | |
Total | | |
Gaming
–Discontinued Operations | |
Three months ended September 30, 2015 | |
| | | |
| | | |
| | | |
| | | |
| | |
Revenue | |
$ | 90 | | |
$ | – | | |
$ | – | | |
$ | 90 | | |
$ | 176 | |
Cost of revenue | |
| (5 | ) | |
| – | | |
| – | | |
| (5 | ) | |
| (39 | ) |
Gross margin | |
| 85 | | |
| – | | |
| – | | |
| 85 | | |
| 137 | |
Operating profit/(loss ) | |
| 13 | | |
| (8 | ) | |
| (562 | ) | |
| (557 | ) | |
| (229 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Three months ended September 30, 2014 | |
| | | |
| | | |
| | | |
| | | |
| | |
Revenue | |
$ | 1 | | |
$ | – | | |
$ | – | | |
$ | 1 | | |
$ | 297 | |
Cost of revenue | |
| – | | |
| – | | |
| – | | |
| – | | |
| (168 | ) |
Gross margin | |
| 1 | | |
| – | | |
| – | | |
| 1 | | |
| 129 | |
Operating profit/(loss) | |
| (83 | ) | |
| (321 | ) | |
| (596 | ) | |
| (1,000 | ) | |
| (443 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Nine months ended September 30, 2015 | |
| | | |
| | | |
| | | |
| | | |
| | |
Revenue | |
$ | 102 | | |
$ | 2 | | |
$ | – | | |
$ | 104 | | |
$ | 640 | |
Cost of revenue | |
| (5 | ) | |
| – | | |
| – | | |
| (5 | ) | |
| (225 | ) |
Gross margin | |
| 97 | | |
| 2 | | |
| – | | |
| 99 | | |
| 415 | |
Operating profit/(loss ) | |
| (214 | ) | |
| (33 | ) | |
| (1,947 | ) | |
| (2,194 | ) | |
| (787 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Nine months ended September 30, 2014 | |
| | | |
| | | |
| | | |
| | | |
| | |
Revenue | |
$ | 81 | | |
$ | 7 | | |
$ | – | | |
$ | 88 | | |
$ | 615 | |
Cost of revenue | |
| – | | |
| – | | |
| – | | |
| – | | |
| (384 | ) |
Gross margin | |
| 81 | | |
| 7 | | |
| – | | |
| 88 | | |
| 231 | |
Operating profit/(loss ) | |
| (269 | ) | |
| (1,040 | ) | |
| (1,782 | ) | |
| (3,091 | ) | |
| (1,184 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
September 30, 2015 | |
| | | |
| | | |
| | | |
| | | |
| | |
Cash and cash equivalents (excludes $39 of restricted cash) | |
$ | – | | |
$ | – | | |
$ | 428 | | |
$ | 428 | | |
$ | – | |
Property and equipment | |
| – | | |
| 2 | | |
| 3 | | |
| 5 | | |
| – | |
Intangible assets | |
| 1,234 | | |
| 25 | | |
| – | | |
| 1,259 | | |
| – | |
Goodwill | |
| – | | |
| 1,496 | | |
| – | | |
| 1,496 | | |
| – | |
December 31, 2014 | |
| | | |
| | | |
| | | |
| | | |
| | |
Cash and cash equivalents (excludes $138 of restricted cash) | |
$ | 11 | | |
$ | 12 | | |
$ | 625 | | |
$ | 648 | | |
$ | 807 | |
Property and equipment | |
| – | | |
| 6 | | |
| 5 | | |
| 11 | | |
| 32 | |
Intangible assets | |
| 1,577 | | |
| 31 | | |
| – | | |
| 1,608 | | |
| 809 | |
Goodwill | |
| – | | |
| 1,496 | | |
| – | | |
| 1,496 | | |
| 4,948 | |
Additions: | |
| | | |
| | | |
| | | |
| | | |
| | |
Property and equipment | |
| – | | |
| – | | |
| – | | |
| – | | |
| 41 | |
Intangible assets | |
| – | | |
| – | | |
| – | | |
| – | | |
| 790 | |
Note 11. Fair Value
The authoritative
guidance for fair value measurements defines fair value as the exchange price that would be received for an asset or paid to transfer
a liability (an exit price) in the principal or the most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. Market participants are buyers and sellers in the principal market that are
(i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact. The guidance describes a fair value
hierarchy based on the levels of inputs, of which the first two are considered observable and the last unobservable, that may be
used to measure fair value which are the following:
Level 1 –
Quoted prices in active markets for identical assets or liabilities
Level 2 – Inputs
other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are observable or corroborated by observable market data or
substantially the full term of the assets or liabilities
Level 3 – Unobservable
inputs that are supported by little or no market activity and that are significant to the value of the assets or liabilities
The following table provides the liabilities
carried at fair value measured on a recurring basis as of April 30, 2015 and October 31, 2014:
September 30, 2015 | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Investments – Viggle common shares | |
$ | 1,041 | | |
$ | – | | |
$ | – | | |
$ | 1,041 | |
Investments – DDGG | |
$ | – | | |
$ | – | | |
$ | 1,380 | | |
$ | 1,380 | |
December 31, 2014 | |
| Level 1 | | |
| Level 2 | | |
| Level 3 | | |
| Total | |
– | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | – | |
Investments – DDGG
| |
September 30, 2015 | |
Balance at December 31, 2014 | |
$ | – | |
Receipt of Investments – DDGG | |
| 1,380 | |
Change in fair value | |
| – | |
Balance at September 30, 2015 | |
$ | 1,380 | |
Note 12. Subsequent events
The Company has evaluated events that occurred
subsequent to September 30, 2015, and through the date of the Condensed Consolidated Financial Statements.
On October 8, 2015,
the Company entered into separate subscription agreements (the “Subscription Agreement”) with accredited investors
(the “Investors”) relating to the issuance and sale of $700 of units (the “Units”) at a purchase price
of $0.25 per Unit, with each Unit consisting of one share (the “Shares”) of the Company’s common stock, par value
$0.001 per share (the “Common Stock”) and a three year warrant (the “Warrants”) to purchase two shares
of Common Stock at an initial exercise price of $0.25 per share (such sale and issuance, the “Private Placement”).
The Warrants are exercisable
at a price of $0.25 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, subject to approval of the lead investor, in which the Company receives gross proceeds of at least
$7,500; 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”). The Warrants may be exercised by means of a “cashless exercise” following the four–month
anniversary of the date of issue, provided that the Company has consummated a Qualifying Transaction and there is no effective
registration statement registering the resale of the shares of Common Stock underlying the Warrants (the “Warrant Shares”).
The Company is prohibited from effecting an exercise of any Warrant to the extent that, as a result of any such exercise, the holder
would beneficially own more than 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to the
issuance of shares of Common Stock upon exercise of such Warrant, which beneficial ownership limitation may be increased by the
holder up to, but not exceeding, 9.99%. The Warrants are also subject to certain adjustments upon certain actions by the Company
as outlined in the Warrants. Prior to receipt of shareholder approval, the warrants, when aggregated with the shares of common
stock issued in the offering, shall not be exercisable into more than 19.99% of the number of shares of Common Stock outstanding
as of the closing date.
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 with the SEC on April 15, 2015, 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,” “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. (“MGT Studios”) and its minority–owned subsidiary M2P Americas, Inc., and MGT Sports, Inc.
(“MGT Sports”). Our corporate office is located in Harrison, New York.
MGT and its subsidiaries
are principally engaged in the business of acquiring, developing and monetizing assets in the online and mobile gaming space as
well as the social casino industry. MGT’s portfolio of assets in the online, mobile gaming and social casino gaming space
includes DraftDay.com (see September 8, 2015 development below), FantasySportsLive.com, MGT Play and Slot Champ. The Company also
provides a white–label service to third party marketers.
In addition, MGT Gaming
owns two U.S. patents covering certain features of casino slot machines. Both patents were asserted against alleged infringers
in various actions in federal court in Mississippi. On July 29, 2015, MGT, Aruze America, Aruze Macau, and Penn agreed, through
their respective counsel, to settle all pending disputes, including the Mississippi litigation and all proceedings at the PTO.
The parties have subsequently jointly terminated the Mississippi litigation and the PTO proceedings. The Company received a payment of $90, which was earned as licensing revenue.
On September 8, 2015,
the Company and MGT Sports entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Viggle, Inc.
(“Viggle”) and Viggle’s subsidiary DraftDay Gaming Group, Inc. (“DDGG”), pursuant to which Viggle
acquired all of the assets of the DraftDay.com business (the “DraftDay Business”, “DraftDay.com”) from
the Company and MGT Sports. In exchange for the acquisition of DraftDay.com, Viggle paid MGT Sports the following: (a) 1,269,342
shares of Viggle’s common stock, par value $0.001 per share, (b) a promissory note in the amount of $234 due September 29,
2015 (the “September 2015 Note”), (c) a promissory note in the amount of $1,875 due March 8, 2016 (the “March
2016 Note”), and (d) 2,550,000 shares of common stock of DDGG. In addition, in exchange for providing certain transitional
services, DDGG will issue to MGT Sports a warrant to purchase 1,500,000 shares of DDGG common stock at an exercise price of $0.40
per share. Following consummation of the transactions contemplated by the Asset Purchase Agreement, including certain agreements
between Viggle and third parties, MGT Sports owns 2,550,000 shares of DDGG common stock, Viggle owns 11,250,000 shares of DDGG
common, and Sportech, Inc. own 9,000,000 shares of DDGG common stock. The Company anticipates, but cannot guarantee, that following
the sale of the DraftDay Business its operating costs will be reduced by approximately $125 per month. As a result of the transaction,
the Company has presented the MGT Sports segment as a discontinued operation.
On August 28,
2015, the Company and MGT Interactive along with Gioia entered into an Assignment and Sale Agreement (the
“Agreement”). MGT Interactive sold certain tangible and intellectual property assets in exchange for
Gioia’s 49% membership interest in Interactive along with a cash payment of $35. The Agreement also required Gioia to
cause the Court to dismiss its complaint against the Company. As a result of the Agreement, the Company recognized a $144
loss on sale of assets.
Outside of the business
of acquiring, developing and monetizing assets in the online, mobile gaming and casino gaming space, MGT’s wholly owned subsidiary
Medicsight owns U.S. Food and Drug Administration approved medical imaging software and has designed an automated carbon dioxide
insufflation device which receives royalties from an international manufacturer.
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 3 to the Company’s financial statements contained in the 2014 Annual
Report on Form 10–K and Part I (Note 3) contained in this Quarterly Report on Form 10–Q.
Results of operations
The Company currently
has two operational segments, Gaming and Intellectual Property Medicsight’s Software and Devices and Services are no longer
considered separate business segments and have been merged into the Intellectual Property segment. Certain corporate expenses are
not allocated to segments. Certain corporate expenses are not allocated to a particular segment.
Three months ended September 30, 2015 and 2014
The Company achieved
the following results for the three months ended September 30, 2015, and 2014, respectively:
|
· |
Revenues from continuing operations totaled $90 (2014: $1). |
|
· |
Operating expenses were $642 (2014: $1,001). |
|
· |
Loss from discontinued operations were $366 (2014: $443). |
|
· |
Net loss attributable to Common shareholders was $1,321 (2014: $1,381) and resulted in a basic and diluted loss per share of $0.10 (2014: $0.13). Net loss from continuing operations before non–controlling interest was $949 (2014: $1,008). |
Our operating expenses
decreased approximately 36% during the quarter ended September 30, 2015 compared to quarter ended September 30, 2014. The decrease
is primarily attributed to reductions in professional fees, corporate governance and stock–based compensation expense along
with certain expenses allocated to the discontinued operations.
Intellectual property
In the three months
ended September 30, 2015, the Company recognized $90 in licensing revenue related to the gaming patent, compared to $1 for the
same period last year, which was primarily from the Insufflator.
Selling, general and
administrative expenses for the three months ended September 30, 2015 were $72 (2014: $84), attributed to legal and consulting
costs and amortization of the intellectual property assets.
Gaming – Continuing operations
During the three months
ended September 30, 2015, our selling, general and administrative expenses for this segment were $8 (2014: $281). In the prior
year the expenses consisted of employee compensation, information technology and office related expenses in MGT Studios. The company
did not incur any research and development costs for the three months ended September 30, 2015, (2014: $40). The decreases are
due to the headcount and overhead expense reductions in 2015 as the Company focused on monetizing DraftDay.com.
Gaming – Discontinued operations
(DraftDay.com)
During the three months
ended September 30, 2015, the Company recognized $176 in revenues for this segment as compared to $297 for the same period last
year. The decrease is attributable to selling and discontinuing the operation during the three months ended September 30, 2015.
Our cost of revenue
for the three months ended September 30, 2015 was $39 (2014: $168), which primarily consisted of overlay incurred on the DraftDay
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.
During the three months
ended September 30, 2015, our selling, general and administrative expenses were $366 (2014: $572), primarily consisting of marketing
expenses, employee compensation, information technology and office related expenses. The decrease is attributable to selling and
discontinuing the operation during the three months ended September 30, 2015.
Unallocated corporate / other
Selling, general and
administrative expenses during the three months ended September 30, 2015 were $562 (2014: $597), primarily due to lower corporate
governance and stock–based compensation expense.
The Company recorded
$8 in interest income, recognized an impairment of $256 on a note receivable, and recorded a loss of $144 on the sale of assets
during the quarter ended September 30, 2015.
During the comparable
period ended September 30, 2014, the Company recognized interest income of $2.
Nine months ended September 30, 2015 and 2014
The Company achieved
the following results for the nine months ended September 30, 2015, and 2014, respectively:
|
· |
Revenues from continuing operations totaled $104 (2014: $88). |
|
· |
Operating expenses were $2,293 (2014: $3,179). |
|
· |
Losses of $924 from discontinued operations (2014: $1,184). |
|
· |
Net loss attributable to Common shareholders was $3,443 (2014: $3,894) and resulted in a basic and diluted loss per share of $0.27 (2014: $0.78). Net loss from continuing operations before non–controlling interest was $2,622 (2014: $3,083). |
Our operating expenses
decreased approximately 28% during the nine months ended September 30, 2015 compared to nine months ended September 30, 2014. The
decrease is primarily attributed to reductions in professional fees, corporate governance and stock–based compensation expense
along with certain expenses related to the discontinued operations.
Intellectual property
In the nine months
ended September 30, 2015, the Company recognized $102 primarily related to gaming patent, compared to $81 for the same period last
year, mostly attributed to the Insufflator.
Selling, general and
administrative expenses for the nine months ended September 30, 2015 were $311 (2014: $350), related to legal and consulting costs
and amortization of the intellectual property assets.
Gaming – Continuing operations
During the nine months
ended September 30, 2015, our selling, general and administrative expenses for this segment were $35 (2014: $894). In the prior
year the expenses consisted of employee compensation, information technology and office related expenses in MGT Studios. The company
did not incur any research and development costs for the nine months ended September 30, 2015, (2014: $153). The decreases are
due to the headcount and overhead expense reductions in 2015 as the Company focused on monetizing DraftDay.com.
Gaming – Discontinued operations
(DraftDay.com)
During the nine months
ended September 30, 2015, the Company recognized $640 in revenues for this segment as compared to $615 for the same period last
year. The revenues were lower in the previous year, as the Company did not acquire DraftDay until the second quarter of 2014.
Our cost of revenue
for the nine months ended September 30, 2015 was $225 (2014: $384), which primarily consisted of overlay incurred on the DraftDay
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.
During the nine months
ended September 30, 2015, our selling, general and administrative expenses were $1,202 (2014: $1,415), primarily consisting of
marketing expenses, employee compensation, information technology and office related. The decrease is attributable to selling and
discontinuing the operation during the three months ended September 30, 2015.
Unallocated corporate / other
Selling, general and
administrative expenses during the nine months ended September 30, 2015 were $1,947 (2014: $1,782), primarily due to reclassification.
The Company recorded
$28 in interest expense, recognized an impairment of $256 on a note receivable, and recorded a loss of $144 on the sale of assets
during the nine months ended September 30, 2015. During the comparable period ended September 30, 2014, the Company recognized
interest expense of $1 and recorded an impairment of $135 on intangible assets.
Liquidity and capital resources
| |
September 30, | | |
December 31, | |
| |
2015 | | |
2014 | |
Working capital summary: | |
| | | |
| | |
Cash and cash equivalents (excluding $39 and $138 of restricted cash as of June 30, 2015 and December 31, 2014 respectively) | |
$ | 428 | | |
$ | 648 | |
Other current assets | |
| 2,977 | | |
| 146 | |
Current assets – Discontinued operations | |
| – | | |
| 838 | |
Current liabilities | |
| (575 | ) | |
| (391 | ) |
Current liabilities – Discontinued operations | |
| – | | |
| (988 | ) |
Working capital surplus | |
$ | 2,830 | | |
$ | 253 | |
| |
Nine months ended September 30, | |
| |
2015 | | |
2014 | |
Cash flow summary: | |
| | | |
| | |
Cash (used in) / provided by: | |
| | | |
| | |
Operating activities | |
$ | (1,684 | ) | |
$ | (2,372 | ) |
Investing activities | |
| (114 | ) | |
| 2 | |
Financing activities | |
| 1,644 | | |
| 1,285 | |
Discontinued operations | |
| (66 | ) | |
| (1,352 | ) |
Net decrease in cash and cash equivalents | |
$ | (220 | ) | |
$ | (2,437 | ) |
On September 30, 2015,
MGT’s cash and cash equivalents were $428 excluding $39 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 decreased during the nine
months ended September 30, 2015, primarily due to $1,684 used in operating activities, the $250 note sold to Tera and mostly offset
by the release of restricted cash and security deposit of $101 and $1,644 in net proceeds from ATM sales of common stock.
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 and stock–based compensation, and change in fair value of warrants and movement in working capital.
Risks and uncertainties related to
our future capital requirements
The accompanying condensed
consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. As of September 30, 2015, the Company had incurred significant
operating losses since inception and continues to generate losses from operations and has an accumulated deficit of $302,606. These
matters raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial
statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification
of liabilities that might be necessary should the Company be unable to continue as a going concern.
Commercial results
have been limited and the Company has not generated significant revenues. The Company cannot assure its stockholders that the Company’s
revenues will be sufficient to fund its operations. If adequate funds are not available, the Company may be required to curtail
its operations significantly or to obtain funds through entering into arrangements with collaborative partners or others that may
require the Company to relinquish rights to certain of our technologies or products that the Company would not otherwise relinquish.
The Company's primary
source of operating funds since inception has been debt and equity financings. On December 30, 2013, and as amended on March 27,
2014, the Company entered into an At the Market Offering Agreement (the “ATM Agreement”) with Ascendiant Capital Markets,
LLC (the “Manager”). Pursuant to the ATM Agreement, the Company may offer and sell shares of its Common Stock (the
“Shares”) having an aggregate offering price of up to $8.5 million from time to time through the Manager. The Company
intends to use the net proceeds from any sales of Shares in the offering for working capital, capital expenditures, and general
business purposes. For the nine months ended September 30, 2015, the Company sold approximately 3,155,000 Shares under the ATM
Agreement for gross proceeds of approximately $1,644 before related expenses. The proceeds will be used for general corporate purposes.
As of August 14, 2015, the Company has approximately $5.4 million remaining under the program, assuming sufficient Shares are available
to be issued.
At September 30, 2015,
MGT’s cash, cash equivalents and restricted cash were $467. The Company intends to raise additional capital, either through
debt or equity financings or through the continued sale of the Company’s assets in order to achieve its business plan objectives.
Management believes that it can be successful in obtaining additional capital; however, no assurance can be provided that the Company
will be able to do so. There is no assurance that any funds raised will be sufficient to enable the Company to attain profitable
operations or continue as a going concern. To the extent that the Company is unsuccessful, the Company may need to curtail or cease
its operations and implement a plan to extend payables or reduce overhead until sufficient additional capital is raised to support
further operations. There can be no assurance that such a plan will be successful.
On September 8, 2015,
the Company and MGT Sports entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Viggle, Inc.
(“Viggle”) and Viggle’s subsidiary DraftDay Gaming Group, Inc. (“DDGG”), pursuant to which Viggle
acquired all of the assets of the DraftDay.com business (the “DraftDay Business”, “DraftDay.com”) from
the Company and MGT Sports. In exchange for the acquisition of DraftDay.com, Viggle paid MGT Sports the following: (a) 1,269,342
shares of Viggle’s common stock, par value $0.001 per share, (b) a promissory note in the amount of $234 due September 29,
2015 (the “September 2015 Note”), (c) a promissory note in the amount of $1,875 due March 8, 2016 (the “March
2016 Note”), and (d) 2,550,000 shares of common stock of DDGG. In addition, in exchange for providing certain transitional
services, DDGG will issue to MGT Sports a warrant to purchase 1,500,000 shares of DDGG common stock at an exercise price of $0.40
per share. Following consummation of the transactions contemplated by the Asset Purchase Agreement, including certain agreements
between Viggle and third parties, MGT Sports owns 2,550,000 shares of DDGG common stock, Viggle owns 11,250,000 shares of DDGG
common, and Sportech, Inc. own 9,000,000 shares of DDGG common stock. The Company anticipates, but cannot guarantee, that following
the sale of the DraftDay Business its operating costs will be reduced by approximately $125 per month. As a result of the transaction,
the Company has presented the MGT Sports segment as a discontinued operation.
On October 8, 2015,
the Company entered into separate subscription agreements (the “Subscription Agreement”) with accredited investors
(the “Investors”) relating to the issuance and sale of $700 of units (the “Units”) at a purchase price
of $0.25 per Unit, with each Unit consisting of one share (the “Shares”) of the Company’s common stock, par value
$0.001 per share (the “Common Stock”) and a three year warrant (the “Warrants”) to purchase two shares
of Common Stock at an initial exercise price of $0.25 per share (such sale and issuance, the “Private Placement”).
The Warrants are exercisable
at a price of $0.25 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, subject to approval of the lead investor, in which the Company receives gross proceeds of at least
$7,500; 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”). The Warrants may be exercised by means of a “cashless exercise” following the four month anniversary
of the date of issue, provided that the Company has consummated a Qualifying Transaction and there is no effective registration
statement registering the resale of the shares of Common Stock underlying the Warrants (the “Warrant Shares”). The
Company is prohibited from effecting an exercise of any Warrant to the extent that, as a result of any such exercise, the holder
would beneficially own more than 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to the
issuance of shares of Common Stock upon exercise of such Warrant, which beneficial ownership limitation may be increased by the
holder up to, but not exceeding, 9.99%. The Warrants are also subject to certain adjustments upon certain actions by the Company
as outlined in the Warrants.
Off–balance sheet arrangements
We have no obligations,
assets or liabilities which would be considered off–balance sheet arrangements. We do not participate in transactions that
create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which
would have been established for the purpose of facilitating off–balance sheet arrangements.
Item 3. Quantitative and
qualitative disclosures about market risk
Not required for smaller
reporting companies.
Item 4. Controls and procedures
(a) Evaluation
of disclosure controls and procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule
13a–15(e) or 15d–15(e) of the Exchange Act of 1934. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures as of September 30, 2015 (the end of the period covered
by this Quarterly Report on Form 10–Q), have been designed and are functioning effectively to provide reasonable assurance
that the information required to be disclosed by us in our reports filed or submitted under the Exchange Act is (i) recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) that such information is
accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate
to allow timely decisions regarding required disclosure.
(b) Changes in
internal control over financial reporting. There have been no changes in our internal control over financial reporting that
occurred during the quarter ended September 30, 2015, that have materially affected or are reasonably likely to materially
affect our internal control over financial reporting.
PART II. OTHER INFORMATION
Item
1. Legal proceedings
On April 21,
2015, Gioia Systems, LLC (“Gioia”) filed a complaint against the Company, the Company’s majority owned
subsidiary, MGT Interactive, LLC and Interactive directors with the United States District Court for the Southern District
of New York. MGT Interactive, LLC was also included as a derivative plaintiff in the action. Gioia Systems,
LLC’s complaint asserts claims for breach of contract and breach of fiduciary duty relating to the September 3, 2013
Contribution Agreement and related agreements between Gioia, the Company and MGT Interactive, LLC. This litigation was
settled on October 2, 2015.
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 against certain companies which either manufacture, sell or lease gaming systems alleged to be in
violation of MGT Gaming’s patent rights, or operate casinos that offer gaming systems that are alleged to be in violation
of MGT Gaming’s ’088 patent, including Penn National Gaming, Inc. (“Penn”), and Aruze Gaming America,
Inc. (“Aruze America”). An amended complaint added the ’554 patent, a continuation of the ’088 patent.
In May 2014, Aruze America successfully sought a stay of the Mississippi action pending resolution of a Petition filed by a co–defendant
for Inter Parties Review (“IPR”) with the Patent Trial and Appeal Board (“PTAB”) of the United States
Patent and Trademark Office (“PTO”), challenging the’088 Patent. Aruze America and a related company, Aruze
Macau, subsequently filed additional IPR Petitions seeking review of the ’088 and ‘554 patents. Aruze America also
filed a Request that was subsequently denied for Ex Parte Re–examination of the ’088 patent. On July 29, 2015,
MGT, Aruze America, Aruze Macau, and Penn agreed, through their respective counsel, to settle all pending disputes, including
the Mississippi litigation and all proceedings at the PTO. The parties subsequently jointly terminated the Mississippi litigation
and the PTO proceedings. The Company received a payment of $90, which was earned as licensing revenue.
Item 1–A. Risk factors
Following our September
8, 2015 asset purchase agreement with Viggle Inc., we own 10% of DraftDay Gaming Group, Inc., which operates a daily fantasy sports
website. Companies with daily fantasy sports offerings operate in an unclear and evolving regulatory environment. If a regulator,
state attorney general or US Attorney takes the position that DraftDay's business operates in violation of applicable laws, or
if laws are changed, it could force DraftDay to cease operating in certain states or to change its business models in ways that
could materially and negatively impact its business. Current regulations require that DraftDay operate in a manner that may result
in financial risk.
At a U.S. federal level, Unlawful Internet Gambling Enforcement
Act of 2006 (UIGEA) prohibits online gambling practices, but exempts fantasy sports, as long as they operate within certain parameters.
The UIGEA specifically exempts fantasy sports games, educational games, or any online contest that "has an outcome that reflects
the relative knowledge of the participants, or their skill at physical reaction or physical manipulation (but not chance), and,
in the case of a fantasy or simulation sports game, has an outcome that is determined predominantly by accumulated statistical
results of sporting events, including any non-participant's individual performances in such sporting events..." However, all
prizing must be determined and announced in advance of the competition and cannot be influenced by the fees or number of participants.
This creates financial risk because DraftDay must determine prizes for games in advance, and if DraftDay does not have enough paying
players in a game to cover the amount of the prize for the game, DraftDay could experience significant losses.
Even if DraftDay operates in compliance with UIGEA, individual
states can take more restrictive positions. In most U.S. states, fantasy sports currently is generally considered a game of skill
and therefore not considered gambling. However, some states either use a more restrictive test of whether a game is one of skill
or have specific laws outlawing pay-to-play fantasy sports. Therefore, DraftDay does not operate in Arizona, Iowa, Louisiana, Montana,
Nevada, Vermont or Washington. In addition, on November 10, 2015, the Attorney General of New York issued a letter to FanDuel and
DraftKings, two of the largest competitors in the fantasy sports industry, stating that it believes that their activities constitute
illegal gambling under the laws of the State of New York and instructing them to cease their offerings to New York residents. As
a result, DraftDay has ceased its fantasy sports offerings to New York residents, pending further developments on the matter. The
legislative and regulatory environment for daily fantasy sports is evolving. The fantasy sports market has been subject to a significant
amount of publicity and scrutiny in recent months. A number of states have recently undertaken reviews of the fantasy sports market
to determine whether to regulate the market. Either the U.S. government or additional states could potentially pass laws or interpret
their current laws in ways in a manner that would cause DraftDay to cease operating in those states, or to change the manner in
which it operates. Any such change could materially and adversely affect DraftDay's business.
Item 2. Unregistered sales of equity securities
and use of proceeds
In the quarter ended
September 30, 2015, the Company issued 155 shares of Series A Convertible Preferred stock as dividend shares to holders, representing
dividends due from July 1, 2015, through September 30, 2015.
The above issuances
were made in reliance on an exemption from registration set forth in Section 4(2) of the Securities Act. The issuances did not
result in any proceeds to the Company.
Item
3. Defaults upon senior securities
None.
Item
4. Mine safety disclosures
Not Applicable.
Item
5. Other information
None
Item 6. Exhibits
|
31.1 |
Certification pursuant to Section 302 of the Sarbanes–Oxley Act of 2002 |
|
31.2 |
Certification pursuant to Section 302 of the Sarbanes–Oxley Act of 2002 |
|
32.1 |
Certification pursuant to Section 906 of the Sarbanes–Oxley Act of 2002 |
|
32.2 |
Certification pursuant to Section 906 of the Sarbanes–Oxley Act of 2002 |
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101.INS |
XBRL Instance Document |
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101.SCH |
XBRL Taxonomy Extension Schema |
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101.CAL |
XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
XBRL Taxonomy Extension Labels Linkbase Document |
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101.PRE |
XBRL Taxonomy Extension Presentation Linkbase Document |
SIGNATURES
In accordance with
the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
MGT CAPITAL INVESTMENTS, INC
November 16, 2015 |
By: |
/s/ ROBERT B. LADD |
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Robert B. Ladd |
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President and Chief Executive Officer |
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(Principal Executive Officer) |
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November 16, 2015 |
By: |
/s/ ROBERT P. TRAVERSA |
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Robert P. Traversa |
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Treasurer and Chief Financial Officer |
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(Principal Financial Officer) |
In accordance with
the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Exhibit 31.1
CERTIFICATION PURSUANT TO SARBANES–OXLEY
ACT OF 2002
I, Robert B. Ladd, certify that:
1. |
I have reviewed this Quarterly Report on Form 10–Q of MGT Capital Investments, Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the Audit Committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
November 16, 2015 |
By: |
/s/ ROBERT B. LADD |
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Robert B. Ladd |
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President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION PURSUANT TO SARBANES–OXLEY
ACT OF 2002
I, Robert P. Traversa, certify that:
1. |
I have reviewed this Quarterly Report on Form 10–Q of MGT Capital Investments, Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the Audit Committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
November 16, 2015 |
By: |
/s/ ROBERT P. TRAVERSA |
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Robert P. Traversa |
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Treasurer and Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES–OXLEY ACT OF 2002
I, Robert B. Ladd, President and Chief
Executive Officer of MGT Capital Investments, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes–Oxley
Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge:
(1) |
the Quarterly Report on Form 10–Q of the Company for the period ended September 30, 2015 (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and |
(2) |
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
November 16, 2015 |
By: |
/s/ ROBERT B. LADD |
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Robert B. Ladd |
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President and Chief Executive Officer |
Exhibit 32.2
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES–OXLEY ACT OF 2002
I, Robert P. Traversa, Principal Financial
Officer of MGT Capital Investments, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes–Oxley
Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge:
(1) |
the Quarterly Report on Form 10–Q of the Company for the period ended September 30, 2015 (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and |
(2) |
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
November 16, 2015 |
By: |
/s/ ROBERT P. TRAVERSA |
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Robert P. Traversa |
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Treasurer and Chief Financial Officer |
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