MGT CAPITAL INVESTMENTS, INC. - Quarter Report: 2009 March (Form 10-Q)

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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 March 31, 2009.
OR
o	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: 0-26886

 

MGT CAPITAL INVESTMENTS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware		13-4148725
(State of Incorporation)		(I.R.S. Employer Identification No.)

 

Kensington Centre, 66 Hammersmith Road, London W14 8UD, UNITED KINGDOM

(Address of principal executive offices, including zip code)

 

Registrant’s telephone number, including area code: 011-44-20-7605-1151

 

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 o

 

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 o  No o

 

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 o	Accelerated filer o
Non-accelerated Filer o	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 o  No x

 

As of May 14, 2009 the registrant had outstanding 32,550,590 shares of common stock, $0.001 par value, (excludes 6,349,793 common shares held as treasury stock).

 

 

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NOTE REGARDING FORWARD LOOKING STATEMENTS

 

This Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause the results of MGT Capital Investments, Inc. and its consolidated subsidiaries (the “Company”) to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including any projections of revenue, gross margin, expenses, earnings or losses from operations, synergies or other financial items; any statements of the plans, strategies and objectives of management for future operations, including the rate of market development and acceptance of medical imaging technology; the execution of restructuring plans; any statement concerning developments, performance or industry rankings relating to products or services; any statements regarding future economic conditions or performance; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. The risks, uncertainties and assumptions referred to above include the performance of contracts by suppliers, customers and partners; employee management issues; the difficulty of aligning expense levels with revenue changes; and other risks that are described herein, including but not limited to the specific risks areas discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of this report, and that are otherwise described from time to time in the Company’s Securities and Exchange Commission reports filed after this report. The Company assumes no obligation and does not intend to update these forward-looking statements.

 

The Company’s main operating currency is UK Sterling (£).

 

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INDEX

 

PART I — FINANCIAL INFORMATION
Item 1	Condensed Consolidated Balance Sheets — March 31, 2009 (unaudited) and December 31, 2008	4
	Condensed Consolidated Statements of Operations — for the three months ended March 31, 2009 (unaudited) and 2008 (unaudited)	5
	Condensed Consolidated Statement of Stockholders’ Equity and Comprehensive Income/(Loss) — March 31, 2009 (unaudited)	6
	Condensed Consolidated Statements of Cash Flows — for the three months ended March 31, 2009 (unaudited) and 2008 (unaudited)	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3	Quantitative and Qualitative Disclosure About Market Risk	29
Item 4	Controls & Procedures	29
PART II — OTHER INFORMATION
Item 1	Legal Proceedings	29
Item 1A	Risk Factors	29
Item 2	Unregistered Sale of Equity Securities and Use of Proceeds	32
Item 3	Defaults Upon Senior Securities	32
Item 4T	Submission of Matters to a Vote of Security Holders	32
Item 5	Other Information	33
Item 6	Exhibits	34
SIGNATURES		35

 

All financial amounts are in thousands except share and per share data.

 

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MGT CAPITAL INVESTMENTS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

 

		March 31 2009			December 31 2008
		(unaudited)			Revised note 3
Assets
Current assets:
Cash and cash equivalents		$	32,606		$	38,294
Marketable securities		1,120			1,884
Accounts receivable		15			134
Other receivables – related party		88			49
Prepaid expenses and other current assets		694			851
Total current assets		34,523			41,212
Property and equipment, at cost, net		610			706
Intangible assets, net of accumulated amortization of $133 (2008: $100)		266			299
Investments, at cost		776			776
Security deposits		290			301
Goodwill		—			12,157
Total assets		$	36,465		$	55,451
Liabilities
Current liabilities:
Accounts payable		$	1,901		$	2,877
Accrued expenses		1,234			1,386
Deferred revenue		75			77
Total current liabilities		3,210			4,340
Commitments and contingencies
Stockholders’ equity
Common stock, $0.001 par value: 75,000,000 shares authorized; 38,900,383 shares issued and 32,550,590 shares outstanding		39			39
Additional paid in capital		298,721			298,376
Accumulated other comprehensive (loss)		(6,140		)	(4,959		)
Accumulated deficit		(254,780		)	(239,450		)
		37,840			54,006
Treasury stock, at cost, 6,349,793 shares of common stock		(18,912		)	(18,912		)
Total stockholders’ equity		18,928			35,094
Non-controlling interest		14,327			16,017
Total equity		33,255			51,111
Total stockholders’ equity, liabilities and non-controlling interest		$	36,465		$	55,451

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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MGT CAPITAL INVESTMENTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

(unaudited)

 

		Three months ended March 31,
		2009			2008
					Revised note 3
Revenues		$	74		$	52
Cost of revenue		2			12
Gross margin		72			40
Operating expenses
Selling, general and administrative expenses		3,687			5,505
Research and development cost		459			595
Impairment of goodwill		12,157			—
		16,303			6,100
Operating loss		(16,231		)	(6,060		)
Interest and other (expense)/income		(695		)	508
Net loss before non-controlling interest		(16,926		)	(5,552		)
Net loss attributable to non-controlling interest		1,596			1,773
Net loss attributable to MGT Capital Investments, Inc.		$	(15,330	)	$	(3,779	)
Per share data:
Basic and diluted loss per share		$	(0.47	)	$	(0.10	)
Weighted average number of common shares outstanding		32,550,590			38,846,986

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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MGT CAPITAL INVESTMENTS, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE
INCOME/(LOSS)

Revised note 3

(in thousands)

 

							Additional			Accumulated									Total			Non-
		Common Stock					Paid-In			Comprehensive			Accumulated			Treasury			Stockholders’			controlling			Total
		Shares		Amount			Capital			Income/(Loss)			Deficit			Stock			Equity			Interest			Equity
BALANCE, DECEMBER 31, 2008		38,900		$	39		$	298,376		$	(4,959	)	$	(239,450	)	$	(18,912	)	$	35,094		$	16,017		$	51,111
Stock-based compensation		—		—			345			—			—			—			345			136			481
COMPREHENSIVE LOSS
Net loss for the period		—		—			—			—			(15,330		)	—			(15,330		)	(1,596		)	(16,926		)
Translation adjustment		—		—			—			(1,181		)	—			—			(1,181		)	(230		)	(1,411		)
Total comprehensive loss		—		—			—			(1,181		)	(15,330		)	—			(16,511		)	(1,826		)	(18,337		)
BALANCE, MARCH 31, 2009		38,900		$	39		$	298,721		$	(6,140	)	$	(254,780	)	$	(18,912	)	$	18,928		$	14,327		$	33,255

 

The accompanying notes are an integral part of these statements.

 

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MGT CAPITAL INVESTMENTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, except share and per share amounts)

 (unaudited)

 

		Three Months ended March 31,
		2009			2008
					Revised note 3
Cash flows from operating activities
Net loss attributable to MGT Capital Investments, Inc.		$	(15,330	)	$	(3,779	)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss attributable to non-controlling interest		(1,596		)	(1,773		)
Stock-based compensation expense		481			1,091
Depreciation		83			110
Amortization		33			—
Loss on impairment of goodwill		12,157
Loss on impairment of marketable securities deemed other than temporary		764			—
Unrealized currency loss on foreign denominated intercompany transactions		234			—
(Increase)/decrease in assets
Accounts receivable		114			(44		)
Other receivables — related party		(46		)	(33		)
Prepaid expenses and other current assets		(330		)	(169		)
Increase/(decrease) in liabilities
Accounts payable		(1,589		)	(1,230		)
Accrued expenses		(147		)	(16		)
Deferred revenue		(1		)	3
Net cash used in operating activities		(5,173		)	(5,840		)
Cash flows from investing activities:
Cash short-term deposits		—			(2,000		)
Purchase of marketable securities		—			(3,688		)
Sale of marketable securities		—			276
Purchase of fixed assets		(14		)	(269		)
Purchase of common stock in subsidiary (net of commissions)		—			(900		)
Net cash used in investing activities		(14		)	(6,581		)
Cash flows from financing activities:
Purchase of common stock (net of commissions)		—			(1,877		)
Net cash used in financing activities		—			(1,877		)
Effects of exchange rates on cash		(501		)	132
Net change in cash and cash equivalents		(5,688		)	(14,166		)
Cash and cash equivalents, beginning of period		38,294			92,373
Cash and cash equivalents, end of period		$	32,606		$	78,207

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

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MGT CAPITAL INVESTMENTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(unaudited)

 

1. Organization, basis of presentation and liquidity

 

The accompanying unaudited condensed consolidated financial statements of MGT Capital Investments, Inc. 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. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, have been included. Operating results for the three months ended March 31, 2009 are not necessarily indicative of the results that may be expected for any subsequent quarter or for the year ending December 31, 2009. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.  The condensed consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All intercompany accounts and transactions have been eliminated.

 

MGT Capital Investments, Inc. (“MGT”, “the Company”, “the Group”, “we”, “us”) is a holding company.  We currently have controlling interests in our two main operating subsidiaries: Medicsight plc (“Medicsight”) and Medicexchange Limited (“Medicexchange”).  We also have wholly owned subsidiaries MGT Capital Investments (UK) Limited, MGT Investments (Gibraltar) Limited, Medicexchange Inc., Medicsight Nominees Limited, HTTP Tech Inc. and Medical Vision Systems Inc.

 

·                  Medicsight and its wholly owned subsidiaries is a medical imaging software development company listed on the AIM Market of the London Stock Exchange (ticker symbol MDST) that develops and commercializes enterprise-wide Computer-Aided Detection (“CAD”) applications which analyze Computer Tomography (“CT”) scans for the early detection and measurement of colorectal polyps and lung lesions.  The Company holds 86 million shares (55%) of the 155 million shares issued capital of Medicsight.

 

·                  Medicexchange and its majority owned subsidiaries provide medical imaging professionals with a global web portal containing an online sales channel for diagnostic, treatment and surgery planning solutions.  This combined with a variety of relevant clinical papers, training materials and content gives these professionals access to information and products that they otherwise would have difficulty accessing.  The Company holds 22.5 million shares (73%) of the 30.8 million issued share capital of Medicexchange.  Medicexchange’s shares are not publicly traded.

 

The Company has incurred significant operating losses since inception and has just commenced generating revenue from operations. As a result, the Company has generated negative cash flows from operations and has an accumulated deficit of $254,780 at March 31, 2009. The Company is operating in a developing industry based on new technology and its primary source of funds to date has been through the issuance of securities. While the Company is optimistic and believes appropriate actions are being taken, there can be no assurance that management’s efforts will be successful or that the products the Company develops and markets will be accepted by consumers.

 

2. Summary of Significant Accounting Policies

 

Principles of Consolidation

 

The financial statements include the accounts of our Company and our wholly and majority owned subsidiaries. Our main operating subsidiaries are Medicsight and Medicexchange. The functional currencies of our subsidiaries are their local currencies.  All intercompany transactions and balances have been eliminated.  All foreign currency translation gains and losses arising on consolidation were recorded in stockholders’ equity as a component of accumulated other comprehensive income (loss) in accordance with Statement of Financial Accounting Standards No. 52, Foreign Currency Translation.   Non-controlling interest represents the minority equity investment in any of the MGT Capital Investments, Inc. group of companies, plus the minorities’ share of the net operating result and, in accordance with  Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements, as amended, other components of equity relating to the non-controlling interest.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

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Cash and cash equivalents

 

The Company considers investments with original maturities of three months or less to be cash equivalents.

 

Marketable securities

 

The Company invests some of its cash balances in short-term highly liquid available for sale marketable securities, which are carried in our balance sheet at fair value in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115 Accounting for Certain Investments in Debt and Equity Securities, with unrealized gains and losses reported in stockholders’ equity as a component of accumulated other comprehensive income (loss) - unless the Company concludes that unrealized losses represent an other-than-temporary impairment. In that circumstance, such losses would be reflected in the consolidated statements of operations. Realized gains and losses are included in other income. Fair value is based upon quoted market prices for these or similar instruments.

 

Investments

 

Investments consists of equity ownership in various corporations where our investment is less than 20% of issued share capital. The Company records these investments at historical cost, subject to any provision for impairment.

 

Property and equipment

 

Property and equipment are stated at cost. Depreciation is calculated using the straight line method on the various asset classes over their estimated useful lives, which range from two to five years. Leasehold improvements are depreciated over the term of the lease.

 

Goodwill

 

We account for goodwill in accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets.”  Under SFAS No. 142, goodwill and intangible assets with indefinite lives are reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. We compare the book value to the market value (market capitalization plus a control premium) for the reporting unit. If the market value exceeds the book value, goodwill is considered not impaired, and thus the second step of the impairment test is not necessary. If our book value exceeds the market value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of the goodwill with the book value of the goodwill. If the carrying value of the goodwill exceeds the implied fair value of the goodwill, an impairment loss would be recognized in an amount equal to the excess. Any loss recognized cannot exceed the carrying amount of goodwill. After a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill is its new accounting basis. Subsequent reversal of a previously recognized goodwill impairment loss is prohibited once the measurement of that loss is completed.

 

As of March 31, 2009 Medicsight’s share price had fallen to a level at which book value exceeded market value.  As a consequence, we carried out an impairment review and concluded that the goodwill was fully impaired.  See note 7.

 

Impairment of long-lived assets and long-lived assets to be disposed of

 

The Company evaluates the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company’s assessment for impairment of an asset involves estimating the undiscounted cash flows expected to result from use of the asset and its eventual disposition. An impairment loss recognized is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset.

 

Foreign currency translation

 

The accounts of the Company’s foreign subsidiaries are maintained using the local currency as the functional currency. For these subsidiaries, assets and liabilities are translated into US dollars at year-end exchange rates, and income and expense accounts are translated at average monthly exchange rates. Net gains and losses from foreign currency translation are excluded from operating results and are accumulated as a separate component of stockholders’ equity.

 

Gains and losses on foreign currency transactions are reflected in selling, general and administrative expenses in the income statement.

 

Revenue Recognition

 

Medicsight

 

The Company recognizes revenue in accordance with American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as amended by SOP 98-4 and SOP 98-9, as well as Technical Practice Aids issued from time to time by the AICPA, and SEC Staff Accounting Bulletin No. 104. The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement,

 

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the product has been shipped or the services have been provided to the customer, the sales price is fixed or determinable, and collectability is probable.

 

License fee revenue is derived from the licensing of computer software. Maintenance revenue is derived from software maintenance. The Company’s software licenses are generally sold as part of an arrangement that includes maintenance and support.

 

The Company licenses software and sells maintenance through visualization solution partners and original equipment manufacturers. The Company receives regular sales reports detailing the number of licenses sold by original equipment manufacturers, value-added resellers and independent distributors (collectively, “Resellers”) to end users. The Company generally offers terms that require payment 30 days from invoicing.

 

Provided the Reseller i) assumes all risk of the purchase, ii) has the ability and obligation to pay regardless of receiving payment from the end user, and all other revenue recognition criteria are met, license revenue from Resellers is recognized upon shipment of its product to vendors (“sell-in basis”).

 

Additionally:

 

Software — revenue from license fees is recognized when notification of shipment to the end user has occurred, there are no significant Company obligations with regard to implementation and the Company’s services are not considered essential to the functionality of other elements of the arrangement.

 

Services — revenue from maintenance and support arrangements is deferred and recognized ratably over the term of the maintenance and support arrangements.

 

Multiple-element arrangements — the Company enters into arrangements with resellers that include a combination of software products, maintenance and support. For such arrangements, the Company recognizes revenue using the residual method. The Company allocates the total arrangement fee among the various elements of the arrangement based on the fair value of each of the undelivered elements determined by vendor-specific objective evidence. The fair value of maintenance and support services is established based on renewal rates. In software arrangements for which the Company does not have vendor-specific objective evidence of fair value for all elements, revenue is deferred until the earlier of when vendor-specific objective evidence is determined for the undelivered elements (residual method) or when all elements for which the Company does not have vendor-specific objective evidence of fair value have been delivered.

 

As of March 31, 2009 we recorded $22 of deferred revenue relating to support and maintenance services and $41 relating to deferred license revenue, compared with $20 relating to support and license revenue and $42 relating to deferred license revenue at December 31, 2008.

 

Medicexchange

 

We recognize revenue when the following revenue recognition criteria are met: persuasive evidence of an arrangement exists, services have been rendered, the selling price is fixed or determinable, and collectability is reasonably assured. Deferred revenue is recorded when payments are received in advance of performing our service obligations.

 

As of March 31, 2009 we recorded $12 of deferred revenue relating to Medicexchange, compared with $15 at December 31, 2008.

 

Research and development

 

Costs incurred in connection with the development of software products that are intended for sale are accounted for in accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed”. Costs incurred prior to technological feasibility being established for the product are expensed as incurred.

 

Technological feasibility is established upon completion of a detailed program design or, in its absence, completion of a working model. Thereafter, all software production costs can be capitalized and subsequently reported at the lower of un-amortized cost or net realizable value. Capitalized costs are amortized based on current and future revenue for each product with an annual minimum equal to the straight-line amortization over the remaining estimated economic life of the product. Amortization commences when the product is available for general release to customers.

 

The Company concluded that no such expenditures needed to be capitalized because the Company did not incur any material software production costs and all such costs incurred represent research and development costs. The Company’s research and development costs are comprised of staff cost, consultancy costs and research and development software costs for the Medicsight CAD system.

 

For the three months ended March 31, 2009 and March 31, 2008 the Company expended $459 and $595 respectively, for research and development expenses for Medicsight CAD and its products.

 

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Fair value of financial instruments

 

On January 1, 2008 the Company adopted the provisions of SFAS No. 157, “Fair Value Measurements,” for financial assets and financial liabilities.  In accordance with Financial Accounting Standards Board Staff Position (FSP) No. SFAS 157-2, “Effective Date of FASB Statement No. 157,” the Company applied SFAS 157 for non-financial assets and non-financial liabilities on January 1, 2009. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value measurements.

 

Income taxes

 

Effective January 1, 2007 the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority.  At the adoption date of January 1, 2007 and also as of March 31, 2009, the Company did not have any unrecognized tax benefits. We do not expect that the amount of unrecognized tax benefits will significantly increase or decrease within the next twelve months.  The Company’s policy is to recognize interest and penalties related to tax matters in the income tax provision in the Consolidated Statements of Operations.  There was no interest and penalties for the three months ended March 31, 2009 and 2008. Tax years beginning in 2004 are generally subject to examination by taxing authorities, although net operating losses from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used.

 

Deferred taxes are computed based on the tax liability or benefit in future years of the reversal of temporary differences in the recognition of income or deduction of expenses between financial and tax reporting purposes. The net difference, if any, between the provision for taxes and taxes currently payable is reflected in the balance sheet as deferred taxes. Deferred tax assets and/or liabilities, if any, are classified as current and non-current based on the classification of the related asset or liability for financial reporting purposes, or based on the expected reversal date for deferred taxes that are not related to an asset or liability. Valuation allowances are recorded to reduce deferred tax assets to that amount which is more likely than not to be realized.

 

Loss per share

 

Basic loss per share is calculated by dividing net loss attributable to the ordinary 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 the ordinary shareholders by the sum of the weighted average number of common shares outstanding and the diluted potential ordinary shares.

 

The computation of diluted loss per share excludes all options because they are anti-dilutive. For the three months ended March 31, 2009 there were 15,819,168 options excluded with a weighted average exercise price of $1.31 per share.  For the three months ended March 31, 2008 there were 14,420,000 options excluded with a weighted average exercise price of $1.73.

 

Comprehensive income (loss)

 

Comprehensive income (loss) as defined by SFAS No. 130, “Reporting Comprehensive Income,” includes net income (loss) and items defined as other comprehensive income (loss). SFAS No. 130 requires that items defined as other comprehensive income (loss), such as foreign currency translation adjustments and unrealized gains and losses on certain marketable securities, be separately classified in the financial statements. Such items are reported in the consolidated statements of stockholders’ equity as comprehensive (loss).

 

Segment reporting

 

The Company follows the provisions of SFAS No. 131, “Disclosure About Segments of an Enterprise and Related Information”. The approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company’s reportable segments. SFAS No. 131 also requires disclosures about products and services, geographic areas and major customers.  We operate in two segments, Medicsight, a medical imaging company, and Medicexchange web portal for radiologists.

 

Stock options

 

The Company follows Statement of Financial Accounting Standards No. 123 (revised), Share-Based Payment SFAS 123(R) , which requires that compensation cost relating to share-based payment transactions be recognized as an expense in the financial statements, and that measurement of that cost be based on the estimated fair value of the equity or liability instrument issued.  SFAS No 123(R) also requires that forfeitures be estimated and recorded over the vesting period of the instrument.

 

Recent accounting pronouncements

 

On January 1, 2009 the Company adopted the provisions of SFAS No. 141 (Revised 2007), “Business Combinations” (SFAS No. 141R).  SFAS No. 141R significantly changes the accounting for business combinations.  Under SFAS No. 141R, an acquiring entity is required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with only limited exceptions.  SFAS No.141R also includes a substantial number of new disclosure requirements.  In April 2009 the FASB issued FSP FAS 141(R)-1 which amends SFAS No. 141(R) by establishing a model to account for certain pre-acquisition contingencies.  Under the FSP, an

 

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acquirer is required to recognize at fair value an asset acquired or a liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of that asset or liability can be determined during the measurement period.  If the acquisition-date fair value cannot be determined, then the acquirer should follow the recognition criteria in SFAS No. 5, Accounting for Contingencies, and FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss — an interpretation of FASB Statement No. 5.  SFAS No. 141(R) and FSP FAS 141(R)-1 became effective for us beginning January 1, 2009, and will apply prospectively to business combinations completed on or after that date.

 

In April 2009 the Financial Accounting Standards Board (“FASB”) issued three Staff Positions (“FSPs”) that are intended to provide additional application guidance and enhance disclosures about fair value measurements and impairments of securities.  FSP FAS 157-4 clarifies the objective and method of fair value measurement even when there has been a significant decrease in market activity for the asset being measured.  FSP FAS 115-2 and FAS 124-2 establish a new model for measuring other-than-temporary impairments for debt securities, including establishing criteria for when to recognize a write-down through earnings versus other comprehensive income.  FSP FAS 107-1 and APB 28-1 expands the fair value disclosures required for all financial instruments within the scope of SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to interim periods.  All of these FSPs are effective for us beginning April 1, 2009.  We are assessing the potential impact that the adoption of FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2 may have on our consolidated financial statements.  FSP FAS 107-1 and APB 28-1 will result in increased disclosures in our interim periods.

 

3. Non-controlling interest

 

On January 1, 2009 the Company adopted the provisions of SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements — an Amendment of ARB No. 51.”  SFAS No. 160 establishes accounting and reporting standards for the non-controlling interest (formerly known as minority interest) in a subsidiary (which may include variable interest entities) and for the deconsolidation of a subsidiary.  Significant changes include: Balance sheet and income statement presentation and expanded disclosures; Accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation; Recognition and measurement of a gain or loss when a subsidiary is deconsolidated.  For balance sheet presentation, non-controlling interests are now recorded within equity and so-called “mezzanine” display is not permitted.  In income statements, the amount of income attributable to the non-controlling interest is not a deduction that impacts net income.  As a result of these requirements, various financial statements ratios have been impacted.  The Statement requires prospective application except for the presentation and disclosure requirements, which must be applied retrospectively for all periods presented. Proir periods were reclassified to conform to the current period presentation.

 

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4. Cash and cash equivalents

 

We invest our cash in short-term deposits with major banks.  At March 31, 2009 we held $32,606 in cash and cash equivalents.

 

Cash and cash equivalents consist of cash and temporary investments with maturities of 90 days or less when purchased.

 

Concentrations

 

The Company maintains its cash and cash equivalents at major financial institutions in Europe.  Cash held in foreign institutions is not insured by the FDIC and amounted to $32,606 as of March 31, 2009 and $38,294 as of December 31, 2008.  The Company periodically evaluates the relative credit standing of financial institutions considered in its cash investment strategy.

 

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5.  Marketable securities

 

Investments in marketable securities consisting of HipCricket Inc. and a fund managed by Bank Sarasin & Company Limited as of December 31 were as follows:

 

		Market value			Cost			Unrealized gains			Transfer to net loss
At December 31, 2008		$	1,884		$	2,985		$	—		$	(1,101	)
At March 31, 2009		$	1,120		$	1,884		$	—		$	(764	)

 

In the three months ended March 31, 2009 we accounted for all losses in net income as we considered the reductions in value to be other than temporary.

 

Valuation of investments held at fair value

 

On January 1, 2008 the Company adopted the provisions of SFAS No. 157, “Fair Value Measurements,” for financial assets and financial liabilities.  SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.  Effective January 1, 2009 the Company adopted the provisions of SFAS No. 157 related to other nonfinancial assets and liabilities, in accordance with Financial Accounting Standards Board Staff Position (FSP) No. SFAS 157-2, “Effective Date of FASB Statement No. 157.”

 

The adoption of SFAS 157 also requires the Company to attribute our investments using the fair value hierarchy defined in the statement. The hierarchy consists of the following three levels with associated definitions:

 

Level 1 inputs are unadjusted, quoted prices in active markets for identical assets or liabilities

 

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.  Level 2 inputs include quoted prices for identical assets or liabilities in markets that are not active, that is, markets in which there are few transactions.

 

Level 3 inputs are unobservable inputs that are supported by little or no market activity.  These inputs require significant management judgment and reflect our estimate of assumptions that market participants would use in pricing the asset.

 

We have valued HipCricket Inc using its closing price on the AIM market of the London Stock Exchange as of March 31, 2009. Due to the low number of market transactions for HipCricket Inc each transaction can potentially and has historically had a significant effect on the share price. It is for this reason we deem these to be a Level 2 input in the fair value hierarchy. However, we still believe that this is the best price at which to determine the current value.

 

Our investments in other marketable securities relate to holdings in corporate bonds issued by highly rated companies.  We have valued these investments at market prices as of December 31, 2008 and consider these to be Level 1 inputs as these are active markets.

 

The following table analyzes our investments holdings using the fair value hierarchy.

 

		Level 1			Level 2		Total
HipCricket Inc		$	—		186		$	186
Other marketable securities		934			—		934
Total		$	934		186		$	1,120

 

The following table analyzes the losses incurred on the investments during the three months ended March 31, 2009

 

		Loss on impairment deemed other than temporary			Other realized losses		Total
HipCricket Inc		$	739		—		$	739
Other marketable securities		25			—		25
Total		$	764		—		$	764

 

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6.     Investments at cost

 

We account for investments in non-marketable securities under the cost method of accounting where we own less than a 20% interest in each of the companies and we do not have significant influence over the entity. We continually review each investment to assess for other-than-temporary decreases in value.

 

In 2000 MGT invested in Eurindia Limited, (“Eurindia”) a UK company that invested in IT start-up companies.  MGT has a 6% holding in Eurindia and accounts for this investment on a cost basis. During 2007 we received two dividends totaling $423 ($0.72 per share) which we recorded in Other Income.  Eurindia Limited’s management has informed us that they intend to pay a liquidating dividend of between 30 cents and 50 cents per share during the first half of 2009.  In Fiscal 2008 we assumed the dividend to be the lower of these two values and impaired our holding to the value of 30 cents a share.  As of March 31, 2009 we still consider that this approximates the investment’s fair value.  We consider this input to be a Level 3 input under the SFAS 157 fair value hierarchy, which is a significant unobservable input.

 

In 2007 the Company invested $960 in C preference shares of XShares Group LLC, an investment advisor that creates, issues and supports exchange traded funds with a particular healthcare specialty. In the year ended December 31, 2008 the Company invested an additional $2,040 in shares of XShares Group LLC bringing the total invested to $3,000. We account for these investments on a cost basis as our total holdings are less than 20%. In Fiscal 2008 we reviewed the carrying value of our investment in XShares LLC. XShares LLC was in the process of attempting to raise funds to drive the business forward. As this process had not been completed we impaired this investment to $600.  As of March 31, 2009 we believe that the $600 valuation still approximates fair value.

 

We estimated this impairment based on management’s review and discussion of the strategy and business plan of XShares LLC and review of draft Fiscal 2008 financial accounts prepared by an independent accountant. These inputs are subject to management’s judgment and we have therefore deemed them to be Level 3 inputs in the fair value hierarchy. The value of our investment has been reduced as previously invested cash has been used to fund business operations and as yet the business is not generating sufficient cash. However, we have reviewed XShares LLC’s business plan and we have adjusted our investment to a level we believe reflects the future market valuation and with no active market we believe this is the best method with which to determine the value of our investment.

 

The following table presents the changes in Level 3 instruments for the three months ended March 31, 2009.

 

		January 1, 2009			Purchases		Impairment losses included in earnings		March 31, 2009			Change in impairment losses relating to instruments still held at March 31, 2009
Eurindia Limited		$	176		—		—		$	176		$	—
XShares LLC		600			—		—		600			—
		$	776		—		—		$	776		$	—

 

7. Goodwill

 

Balance at December 31, 2008		$	12,157
Impairment of goodwill		(12,157		)
Balance at March 31, 2009		$	—

 

At December 31, 2008, our goodwill totaled $12.2 million, which was entirely related to our shareholding in Medicsight plc.  We assess the impairment of goodwill of our reporting units annually, or more often if events or changes in circumstances indicate that the carrying value may not be recoverable.  This assessment is based upon an analysis of both the market value and discounted anticipated future cash flow of the reporting unit.

 

The shares of Medicsight plc are traded on the AIM exchange of the London Stock Exchange.  We consider this to be a Level 1 input in the fair value hierarchy as defined in SFAS No. 157 “Fair Value Measurements”, as this is an unadjusted quoted price in an active market.

 

The estimate of future cash flow is based upon, among other things, certain assumptions about expected future operating performance and an appropriate discount rate determined by our management.  Our estimates of discounted cash flows may differ from actual cash flows due to, among other things, timings of regulatory approvals, economic conditions in the healthcare IT market, changes to our business model or changes in operating performance.

 

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In addition, estimates of discounted cash flows would involve assumptions on a business with limited revenue history and developing revenue models, which increase the risk of differences between the projected and actual performance. Significant differences between these estimates and actual cash flows could materially affect our future financial results.  We consider these to be Level 3 inputs in the fair value hierarchy as defined in SFAS No. 157 “Fair Value Measurements”, as this is an unobservable input with little or no market activity that require significant management judgment.

 

We conducted our annual impairment test of goodwill as of December 31, 2008 in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.”  As a result of this test we determined that no adjustment to the carrying value of goodwill was required.

 

In the period between December 31, 2008 and March 31, 2009, the market value of Medicsight plc, as traded on the AIM Market of the London Stock Exchange, declined from $53.0 million to $13.2 million.  Following this decline in value we conducted an impairment test of goodwill as of March 31, 2009 in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.”  Due to the uncertainties involved in using the unobservable inputs to estimate future cash flows, we used market price, Level 1 inputs as the basis of our impairment review.  As a result of this test we determined that the carrying amount of Medicsight plc exceeded its fair value and recorded an impairment loss of $12.2 million during the quarter ended March 31, 2009.

 

8. Interest and other income/(expense)

 

We had the following interest and other income amounts:

 

		Three months ended March 31,
		2009			2008
Loss on marketable securities		$	(764	)	$	—
Interest income		69			508
Total		$	(695	)	$	508

 

The loss on marketable securities relates to losses considered other than temporary on our holdings in HipCricket and other marketable securities.

 

9. Comprehensive income (loss)

 

Comprehensive income (loss), as defined by SFAS No. 130, “Reporting Comprehensive Income”, includes net income (loss) and items defined as other comprehensive income.  SFAS No. 130 requires that items defined as other comprehensive income (loss), such as foreign currency translation adjustments and unrealized gains and losses on certain marketable securities, be separately classified in the financial statements.  Such items are reported in the consolidated statements of stockholders’ equity as comprehensive income (loss) as follows:

 

		Three months ended March 31,
		2009			2008
Net loss as reported		$	(16,926	)	$	(5,552	)
Unrealized foreign exchange (loss) gain		(1,411		)	132
Unrealized gain on marketable securities		—			131
Comprehensive loss		$	(18,337	)	$	(5,289	)
Comprehensive loss attributable to non-controlling interest		1,826			1,773
Comprehensive loss attributable to MGT Capital Investments, Inc.		$	(16,511	)	$	(3,516	)

 

 

The unrealized foreign exchange loss predominantly relates to the movement, in the three month period ended March 31, 2009, on the difference between Medicsight’s net assets translated at the period end rate and the reserves translated at historical rates.

 

The total accumulated other comprehensive loss as of March 31, 2009 is the result of foreign currency translation.

 

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10. Segment reporting

 

Under SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, 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.  Our chief operating decision-making group is composed of the Chief Executive Officer and members of senior management.  Our reportable operating segments are Medicsight and Medicexchange.

 

The accounting policies of the segments are the same as those described in the summary of significant accounting policies.  We evaluate performance of our operating segments based on revenue and operating income (loss).

 

Medicsight listed on the AIM Market of the London Stock Exchange on June 21, 2007.  AIM listing rules require Medicsight to publish results under International Financial Reporting Standards (“IFRS”) in sterling.

 

The following is a reconciliation between Medicsight’s published financial statements and the US GAAP consolidated results:

 

		Medicsight plc			Medicsight plc			Medicsight plc			Medicexchange			Corporate and other			Total
		(IFRS)			GAAP Adj’ts			(US GAAP)			(US GAAP)			(US GAAP)			(US GAAP)
Three months March 31, 2009
Net revenue to external customers		$	61		$	—		$	61		$	13		$	—		$	74
Operating loss		(3,504		)	(30		)	(3,534		)	(263		)	(12,434		)	(16,231		)
Assets		24,329			—			24,329			2,621			9,515			36,465
Three months March 31, 2008
Net revenue to external customers		$	34		$	—		$	34		$	18		$	—		$	52
Operating loss		(4,040		)	13			(4,027		)	(934		)	(1,099		)	(6,060		)
Assets		49,138			—			49,138			3,682			48,065			100,885

 

The principal GAAP adjustments are the accounting for stock options and cumulative translation adjustments.

 

The main operations and fixed assets of Medicsight are in the UK while Medicexchange’s are in the US and China.

 

11. Stock-Based Compensation

 

We have issued stock options from MGT and our principal subsidiary companies, Medicsight and Medicexchange.

 

MGT Stock Option Plan

 

On December 5, 2007 we approved the 2007 MGT stock option plan and granted options for 1,975,000 shares under this plan.  At March 31, 2009 there were 1,975,000 options outstanding and 658,333 of the options issued were exercisable.  Options issued under this plan vest in equal one-thirds after employees have been employed for 12, 24 and 36 months from the date of grant.

 

Medicsight Stock Option Plans

 

We have nine Stock Option Plans in Medicsight, whose shares were listed on the AIM Market of the London Stock Exchange on September 21, 2007.

 

Plan A - on February 26, 2003 we approved stock option plan “A” and in the three month period ended March 31, 2003 we granted options for 2,971,000 shares under this plan.  At March 31, 2009 there were 231,500 options outstanding, all of which were exercisable.

 

Plan B - on August 15, 2005 we approved stock option plan “B” and between July 1, 2003 and March 31, 2005 we granted options for 3,420,500 shares under this plan.  At March 31, 2009 there were 448,500 options outstanding, all of which were exercisable.

 

Plan C — on August 15, 2005 we approved stock option plan “C” and between April 1, 2005 and June 30, 2006 we granted options for 515,000 shares under this plan.  Options issued under this plan vest in equal one-thirds after employees have been employed for 12, 24 and

 

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36 months from date of grant.  At March 31, 2009 there were 268,333 options outstanding and 251,667 of the options issued were exercisable.

 

Plan D - On July 13, 2006 we approved stock option plan “D” and granted options for 1,375,000 shares under this plan.  Options under this plan vest in equal one-thirds after employees have been employed for 12, 24 and 36 months from the date of grant. At March 31, 2009 there were 811,667 options outstanding and 583,334 of the options issued were exercisable.

 

Plan E - on February 22, 2007 we approved and granted options for 5,900,000 shares under stock option plan “E”.  Options under this plan vest in equal one-thirds after employees have been employed for 12, 24 and 36 months from the grant date. At March 31, 2009 there were 5,449,168 options outstanding and 3,667,500 of the options issued were exercisable.

 

Plan F - on May 16, 2007 we approved and subsequently granted options for 350,000 shares under stock option plan “F”.  Options under this plan vest in equal one-thirds after employees have been employed for 12, 24 and 36 months from the grant date.  At March 31, 2009 there were 350,000 options outstanding and 116,667 of the options issued were exercisable.

 

Plan G - on December 18, 2007 we approved and subsequently granted options for 3,025,000 shares under stock option plan “G”.  Options under this plan vest in equal one-thirds after employees have been employed for 12, 24 and 36 months from the grant date.  At March 31, 2009 there were 2,950,000 options outstanding and 983,333 the options issued were exercisable.

 

Plan H - on June 2, 2008 we approved and subsequently granted options for 750,000 shares under stock option plan “H”. Options under this plan vest in equal one thirds after employees have been employed for 12, 24 and 36 months from the grant date.  At March 31, 2009 there were 750,000 options outstanding and none of the options were exercisable.

 

Plan I - on December 16, 2008 we approved and subsequently granted options for 1,805,000 shares under stock option plan “I”. Options under this plan vest in equal one thirds after employees have been employed for 12, 24 and 36 months from the grant date.  At March 31, 2009 1,785,000 options were outstanding and none of the options were exercisable.

 

Medicexchange Stock Option Plans

 

We have two stock option plans in Medicexchange, whose shares are not publicly traded.

 

Plan A - on July 20, 2006 we approved Medicexchange stock option plan “A” and granted options for 950,000 shares under this plan.  Options issued under this plan vest in equal one-thirds after employees have been employed for 12, 24 and 36 months from the date of grant. At March 31, 2009 there were 650,000 options outstanding and 466,666 of the options issued were exercisable.

 

Plan B — on July 26, 2007 we approved Medicexchange stock option plan “B” and granted options for 300,000 shares under this plan. Options issued under this plan vest equal one-thirds after employees have been employed for 12, 24 and 36 months from the date of grant.  At March 31, 2009 there were 150,000 options outstanding and 50,000 of the options issued were exercisable.

 

The assumptions used in the Black-Scholes option valuation model used in the calculation of grant date fair value for the above options are highly subjective and can materially affect the resulting valuation. These assumptions are based on multiple factors including United Kingdom treasury bonds for the risk-free rate at the time of grant, expected future exercising patterns (we cannot base the estimate on the historical exercise patterns as no options have been exercised) and the volatility of the MGT stock price.

 

The following table summarizes stock option activity for the three months ended March 31, 2009:

 

		Outstanding								Exercisable
		Number of shares		Weighted- average exercise price						Number of shares		Weighted- average exercise price
Outstanding at December 31, 2008		16,137,500		£	0.91		$	(1.31	)	5,679,166		£	0.98		$	(1.42	)
Granted		—		—			—
Exercised		—		—			—
Forfeited		(318,332	)	0.65			(0.93		)
Outstanding at March 31, 2009		15,819,168		£	0.92		$	(1.31	)	7,457,500		£	0.87		$	(1.23	)

 

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The following is a summary of the status of the stock options outstanding at March 31, 2009:

 

		Outstanding options										Exercisable options
				Remaining
		Number		Contractual life (years)		Average exercise price						Number		Average exercise price
MGT Capital Investments, Inc. 2007 Plan		1,975,000		8.7					$	3.69		658,333					$	3.69
Medicsight Plan A		231,500		4.3		£	0.75		$	(1.07	)	231,500		£	0.75		$	(1.07	)
Medicsight Plan B		448,500		5.5		£	0.75		$	(1.07	)	448,500		£	0.75		$	(1.07	)
Medicsight Plan C		268,333		6.3		£	0.75		$	(1.07	)	251,667		£	0.75		$	(1.07	)
Medicsight Plan D		811,667		7.3		£	0.83		$	(1.18	)	583,334		£	0.83		$	(1.18	)
Medicsight Plan E		5,449,168		7.9		£	0.50		$	(0.71	)	3,667,500		£	0.50		$	(0.71	)
Medicsight Plan F		350,000		8.2		£	0.75		$	(1.07	)	116,667		£	0.75		$	(1.07	)
Medicsight Plan G		2,950,000		8.7		£	1.10		$	(2.00	)	983,333		$	1.10		$	(2.00	)
Medicsight Plan H		750,000		9.2		£	0.69		$	(1.56	)	—		—			—
Medicsight Plan I		1,785,000		9.7		£	0.24		$	(0.34	)	—		—			—
Medicexchange Plan A		650,000		7.5		£	0.40		$	(0.57	)	466,666		£	0.40		$	(0.57	)
Medicexchange Plan B		150,000		8.3		£	1.00		$	(1.42	)	50,000		£	1.00		$	(1.42	)

 

On March 11, 2008 we modified the vesting terms for 450,000 options in Medicsight plan E, and 150,000 options in Medicexchange plan B for a former employee and allowed these options to be transferred to his estate. The total modification charge for the three months ended March 31, 2009 was $37 compared with $333 for the three months ended March 31, 2008.

 

We recorded the following amounts related to stock-based expenses in the Statement of Operations for the following periods:

 

		Three months ended March 31,			Three months ended March 31,
		2009			2008
Selling, general and administrative		$	453		$	1,040
Research and development		28			51
Total		$	481		$	1,091

 

Of the $481 stock-based expense in the quarter, $136 was allocated to non-controlling interest.

 

No compensation costs were capitalized.

 

The aggregate intrinsic value for options outstanding and exercisable at March 31, 2009 was $nil. The aggregate intrinsic value for all outstanding options was $nil.

 

A summary of non-vested options at March 31, 2009 and the change during the three months ended March 31, 2009 is presented below:

 

		Number of options		Weighted average grant date fair value
Non-vested at January 1, 2009		10,458,334		£	0.35		$	(0.51	)
Granted		—
Vested		(1,841,666	)	0.26			(0.37		)
Forfeited		(255,000	)	0.32			(0.45		)
Non-vested at March 31, 2009		8,361,668		£	0.42		$	(0.60	)

 

At March 31, 2009 there was $5,036 of total unrecognized compensation cost related to non-vested stock-based compensation arrangements granted under the option plans.

 

Non-vested awards are expected to be recognised over a weighted average period of 1.15 years.

 

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