MGT CAPITAL INVESTMENTS, INC. - Quarter Report: 2010 September (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 September 30, 2010.

 

OR

 

 

For the transition period from          to        

 

Commission file number: 0-26886

 

MGT CAPITAL INVESTMENTS, INC.

(Exact name of Registrant as specified in its charter)

 

 

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:

 

 

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 November 19, 2010 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 profit, 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 — September 30, 2010 (unaudited) and December 31, 2009		3
		Condensed Consolidated Statements of Operations — for the three months ended September 30, 2010 (unaudited) and 2009 (unaudited)		4
		Condensed Consolidated Statements of Operations — for the nine months ended September 30, 2010 (unaudited) and 2009 (unaudited)		5
		Condensed Consolidated Statement of Stockholders’ Equity and Comprehensive Loss — for the nine months ended September 30, 2010 (unaudited)		6
		Condensed Consolidated Statements of Cash Flows — for the nine months ended September 30, 2010 (unaudited) and 2009 (unaudited)		7
		Notes to Condensed Consolidated Financial Statements		8
Item 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3		Quantitative and Qualitative Disclosure About Market Risk		28
Item 4T		Controls & Procedures		29
PART II — OTHER INFORMATION
Item 1		Legal Proceedings		30
Item 1A		Risk Factors		30
Item 2		Unregistered Sale of Equity Securities and Use of Proceeds		30
Item 3		Defaults Upon Senior Securities		30
Item 4		[Removed and Reserved]		30
Item 5		Other Information		30
Item 6		Exhibits		30
SIGNATURES				31

 

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)

 

		September 30, 2010			December 31, 2009
		(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	10,569		$	22,165
Accounts receivable		61			97
Other receivables — related party		68			105
Prepaid expenses and other current assets		539			620
Deferred consideration for sale of assets		772			—
Loans receivable — related party — current		1,107			398
Total current assets		13,116			23,385
Property and equipment, at cost, net		265			290
Investments, at cost		—			224
Security deposits		188			219
Loans receivable — related party — long term		315			159
Total assets		$	13,884		$	24,277
Liabilities
Current liabilities:
Accounts payable		$	332		$	916
Accrued expenses		970			1,214
Deferred revenue		206			114
Total current liabilities		1,508			2,244
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		300,143			299,878
Accumulated other comprehensive loss		(4,888		)	(4,549		)
Accumulated deficit		(272,679		)	(265,827		)
		22,615			29,541
Treasury stock, at cost, 6,349,793 shares of common stock		(18,912		)	(18,912		)
Total stockholders’ equity		3,703			10,629
Non-controlling interest		8,673			11,404
Total equity		12,376			22,033
Total liabilities and equity		$	13,884		$	24,277

 

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 September 30,
		2010			2009
					(revised see note 3)
Revenues		$	62		$	45
Cost of revenue		1			—
Gross profit		61			45
Operating expenses
Selling, general and administrative expenses		1,822			3,754
Research and development cost		187			340
		2,009			4,094
Operating loss		(1,948		)	(4,049		)
Non-Operating income / (expenses)
Interest and other income / (expense), net		(27		)	471
Provision for loan receivable – related party		(1,711		)	—
		(1,738		)	471
Net loss from continuing operations before income tax		(3,686		)	(3,578		)
Income tax benefit		—			—
Net loss from continuing operations before non-controlling interest		(3,686		)	(3,578		)
Discontinued operations
Net loss from operations of Medicexchange, net of income taxes		—			(136		)
		—			(136		)
Net loss before non-controlling interest		(3,686		)	(3,714		)
Net loss attributable to non-controlling interest		854			1,119
Net loss attributable to MGT Capital Investments, Inc.		$	(2,832	)	$	(2,595	)
Per share data:
Basic and diluted loss per share from continuing operations		$	(0.09	)	$	(0.07	)
Basic and diluted loss per share from discontinued operations		—			(0.01		)
		$	(0.09	)	$	(0.08	)
Weighted average number of common shares outstanding		32,550,590			32,550,590

 

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)

 

		Nine months ended September 30,
		2010			2009
					(revised see note 3)
Revenues		$	388		$	146
Cost of revenue		115			—
Gross profit		273			146
Operating expenses
Selling, general and administrative expenses		7,035			11,176
Research and development cost		1,100			1,670
Impairment of goodwill		—			12,157
		8,135			25,003
Operating loss		(7,862		)	(24,857		)
Non-Operating income / (expenses)
Interest and other expenses, net		—			(440		)
Provision for loan receivable – related party		(1,711		)	—
		(1,711		)	(440		)
Net loss from continuing operations before income tax		(9,573		)	(25,297		)
Income tax benefit		167			—
Net loss from continuing operations before non-controlling interest		(9,406		)	(25,297		)
Discontinued operations
Net loss from operations of Medicexchange, net of income taxes		(234		)	(840		)
Gain on sale of Medicexchange, net of income taxes		149			—
		(85		)	(840		)
Net loss before non-controlling interest		(9,491		)	(26,137		)
Net loss attributable to non-controlling interest		2,639			4,367
Net loss attributable to MGT Capital Investments, Inc.		$	(6,852	)	$	(21,770	)
Per share data:
Basic and diluted loss per share from continuing operations		$	(0.20	)	$	(0.64	)
Basic and diluted loss per share from discontinued operations		(0.01		)	(0.03		)
		$	(0.21	)	$	(0.67	)
Weighted average number of common shares outstanding		32,550,590			32,550,590

 

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 LOSS

(in thousands)

(unaudited)

Nine months ended September 30, 2010

 

		Common stock					Additional paid-in			Accumulated other comprehensive			Accumulated			Treasury			Total stockholders’			Non- controlling			Total
		Shares		Amount			capital			loss			deficit			stock			equity			interest			equity
BALANCE, DECEMBER 31, 2009		38,900		$	39		$	299,878		$	(4,549	)	$	(265,827	)	$	(18,912	)	$	10,629		$	11,404		$	22,033
Stock-based compensation		—		—			265			—			—			—			265			261			526
Disposal of Medicexchange		—		—			—			—			—			—			—			(233		)	(233		)
COMPREHENSIVE LOSS
Net loss for the period		—		—			—			—			(6,852		)	—			(6,852		)	(2,639		)	(9,491		)
Translation adjustment		—		—			—			(339		)	—			—			(339		)	(120		)	(459		)
Total comprehensive loss																			(7,191		)	(2,759		)	(9,950		)
BALANCE, SEPTEMBER 30, 2010		38,900		$	39		$	300,143		$	(4,888	)	$	(272,679	)	$	(18,912	)	$	3,703		$	8,673		$	12,376

 

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 CASH FLOWS

(in thousands, except share and per share amounts)

(unaudited)

 

		Nine months ended September 30,
		2010			2009
					(revised see note 3)
Cash flows from operating activities
Net loss before non-controlling interest		$	(9,491	)	$	(26,137	)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss from discontinued operations		234			840
Stock-based compensation expense		515			1,504
Depreciation		109			239
Accrued interest receivable		(10		)	—
Loss on impairment of goodwill		—			12,157
Loss on impairment of marketable securities		—			1,146
Loss on impairment of loan receivable		1,703			—
Gain on disposal of Medicexchange and other investments		(201		)	—
(Increase)/decrease in assets
Accounts receivable		30			83
Other receivables — related party		36			(13		)
Prepaid expenses and other current assets		145			(107		)
Increase/(decrease) in liabilities
Accounts payable		(336		)	(1,370		)
Accrued expenses and other payables		(273		)	401
Deferred revenue		9			7
Net cash used in operating activities		(7,530		)	(11,250		)
Cash flows from investing activities:
Issuance of Moneygate loans receivable – related party		(1,472		)	—
Issuance of “Dunamis Capital” loans receivable – related party		(1,100		)	—
Cash in Medicexchange subsidiaries disposed of		(1,101		)	—
Sale of marketable securities		—			947
Purchase of property, plant and equipment		(83		)	(21		)
Deposit of restricted cash		—			(1,000		)
Investment in convertible notes		—			(1,000		)
Receipt of deferred consideration		382			—
Net cash used in investing activities		(3,374		)	(1,074		)
Cash flows of discontinued operations
Net cash used in Medicexchange operating activities		(226		)	(633		)
Net cash used in discontinued operations		(226		)	(633		)
Effects of exchange rates on cash and cash equivalents		(466		)	1,576
Net change in cash and cash equivalents		(11,596		)	(11,381		)
Cash and cash equivalents, beginning of period		22,165			38,294
Cash and cash equivalents, end of period		$	10,569		$	26,913

 

Non-cash items

 

In the nine month period ended September 30, 2010 the Company disposed of Medicexchange and other investments.  The consideration for this was $1,136 which has been deferred and is payable in installments through March 31, 2011.  When received, it will be recorded in investing activities.

 

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 nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for any subsequent quarter or for the year ending December 31, 2010.  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, 2009. 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 a controlling interest in our operating subsidiary, Medicsight plc (“Medicsight”) and a 49% holding in Moneygate Group Limited (“Moneygate”). On March 31, 2010 we disposed of our controlling interest in Medicexchange Limited (“Medicexchange”) and various other investments. We also have wholly owned subsidiaries MGT Capital Investments (UK) Limited, MGT Investments (Gibraltar) Limited, and Medicsight Nominees Limited.

 

·                  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 to assist radiologists in the early detection and measurement of colorectal polyps and lung lesions.  Medicsight currently has limited revenue and is awaiting regulatory approvals in key markets.  The Company holds 86 million shares (55%) of the 155 million issued share capital of Medicsight.

 

·                  The Company has a 49% holding in Moneygate Group Limited, a UK based firm of Independent Financial Advisors.

 

The Company has incurred significant operating losses since inception and has recently commenced generating revenue from operations.  As a result, the Company has generated negative cash flows from operations and has an accumulated deficit of $272,679 at September 30, 2010.  The Company’s subsidiary Medicsight 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

 

We believe the critical accounting policies listed below reflect significant judgments, estimates and assumptions used in the preparation of our consolidated financial statements.

 

Revenue Recognition

 

Medicsight

 

We recognize revenue when it is realized or realizable and earned.  We consider revenue realized or realizable and earned when we have persuasive evidence of an arrangement, 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.

 

Software — License fee revenue is derived from the licensing of computer software.  Maintenance revenue is derived from software maintenance.  Our software licenses are generally sold as part of an arrangement that includes maintenance and support.

 

We license software and sell maintenance through visualization solution partners and original equipment manufacturers.  We receive regular sales reporting detailing the number of licenses sold by original equipment manufacturers, value-added resellers and

 

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independent distributors (collectively, “Resellers”) to end users.  We generally offer 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”).

 

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 — we enter into arrangements with Resellers that include a combination of software products, maintenance and support.  For such arrangements, we recognize revenue using the residual method.  We allocate 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 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 we do not have vendor-specific objective evidence of fair value have been delivered.

 

Hardware — Revenue is derived from the sale of our MedicCO2LON product. This product is an automated CO2 insufflation device, and is generally sold as part of an arrangement that includes a one year warranty. The risk of incurring warranty related expense is mitigated by the warranty contractually agreed with the supplier. The Company will review the risk of warranty liabilities on a regular basis, and will make any and all appropriate provisions accordingly. At the present time, the Company feels that the warranty liability is insignificant and has therefore not made any provision.

 

MedicCO2LON is sold exclusively through our distribution partner MEDRAD Inc. Revenue is recognized as goods and orders are satisfied and goods are delivered to our distribution partner. We generally offer terms which require payments with 45 days from invoicing.

 

Equity-based compensation

 

We recognize compensation expense for all equity-based payments.  Under fair value recognition provisions, we recognize equity-based compensation net of an estimated forfeiture rate and recognize compensation cost only for those shares expected to vest over the requisite service period of the award.

 

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model.  The Black-Scholes option valuation model requires the development of assumptions that are input into the model.  These assumptions are the expected stock volatility, the risk-free interest rate, the option’s expected life and the dividend yield on the underlying stock. Expected volatility is calculated based on the historical volatility of our common stock over the expected option life and other appropriate factors.  Risk-free interest rates are calculated based on continuously compounded risk-free rates for the appropriate term.  The dividend yield is assumed to be zero as we have never paid or declared any cash dividends on our common stock and do not intend to pay dividends on our common stock in the foreseeable future.  The expected forfeiture rate is estimated based on historical experience.

 

Determining the appropriate fair value model and calculating the fair value of equity-based payment awards require the input of the subjective assumptions described above.  The assumptions used in calculating the fair value of equity-based payment awards represent management’s best estimates, which involve inherent uncertainties and the application of management judgment.  As a result, if factors change and we use different assumptions, our equity-based compensation expense could be materially different in the future.  In addition, we are required to estimate the expected forfeiture rate and recognize expense only for those shares expected to vest.  If our actual forfeiture rate is materially different from our estimate, the equity-based compensation expense could be significantly different from what we have recorded in the current period.

 

Research and development

 

We incur costs in connection with the development of software products that are intended for sale.  Costs incurred prior to technological feasibility being established for the product are expensed as incurred.  Technological feasibility is established upon completion of a detail program design or, in its absence, completion of a working model.  Thereafter, all software production costs are capitalized and subsequently reported at the lower of unamortized 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

 

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remaining estimated economic life of the product.  Amortization commences when the product is available for general release to customers.

 

We concluded that capitalizing such expenditures on completion of a working model was inappropriate because we did not incur any material software production costs and therefore have decided to expense all research and development costs.  Our research and development costs are comprised of staff, consultancy and other costs expensed on the Medicsight products.

 

Fair value of financial instruments

 

On January 1, 2008 the Company adopted certain provisions of FASB ASC 820, Fair Value Measurements and Disclosures, for financial assets and financial liabilities and on January 1, 2009 for non-financial assets and non-financial liabilities.  This establishes a framework for measuring fair value and expands disclosure about fair value measurements.  Applying fair value measurements to our financial instruments requires management’s judgment, especially when using Level 2 and Level 3 inputs.

 

Financial instruments

 

The Company holds financial instruments.  Short term trade receivables and payables are held at cost at amounts that approximate their fair value due to their short term nature. The Company also has receivables due from Moneygate (see note 5) that represent a concentration of credit risk.

 

Investments

 

Investments in various corporations where our investment is less than 20% of issued share capital are accounted for under the cost method.  Investments where we hold between 20% and 50% of issued share capital and we have significant influence over the investee are accounted for under the equity method.  Moneygate is accounted for under the equity method.

 

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

 

We evaluate 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.  Our 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.

 

Calculating the estimated fair value of an asset involves significant judgments and a variety of assumptions.  Judgments that we make concerning the value of its intangible assets include assessing time and cost involved for development, time to market, and risks of regulatory failure or obsolescence (due to market, environmental or technological advances for example).  For calculating fair value based on discounted cash flows, we forecast future operating results and future cash flows, which include long-term forecasts of revenue growth, gross profits and capital expenditures.

 

Recent accounting pronouncements

 

In October 2009 the Financial Accounting Standards Board (“FASB”) issued an update to Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition, with regards to multiple-deliverable arrangements.  The update is effective for revenue arrangements entered into in fiscal years beginning on or after June 15, 2010. We do not expect the adoption of this update to have a material impact on our financial position or results of operations.

 

In October 2009 the Financial Accounting Standards Board (“FASB”) issued an update to Accounting Standards Codification (“ASC”) Topic 985, Software, with regards to certain revenue arrangements that include software elements.  The update is effective for revenue arrangements entered into in fiscal years beginning on or after June 15, 2010. We do not expect the adoption of this update to have a material impact on our financial position or results of operations.

 

In December 2009 the FASB issued an update to ASC Topic 810, Consolidations, with regards to improvements to financial reporting by enterprises involved with variable interest entities. The adoption of this update on January 1, 2010 has not had a material impact on our financial position or results of operations.

 

In April 2010 the FASB issued an update to ASC Topic 605, Milestone Method of Revenue Recognition, relating to research and development projects. The amendments in the ASU are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. We do not expect the adoption of this update to have a material impact on our financial position or results of operations.

 

In August 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-21, Accounting for Technical Amendments to Various SEC Rules and Schedules. ASU 2010-21 amends various SEC paragraphs in the FASB Accounting Standards Codifications pursuant to SEC Final Rule, Technical Amendments to Rules, Forms, Schedules

 

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and Codification of Financial Reporting Policies. The Company does not expect the provisions of ASU 2010-21 to have a material effect on the financial position, results of operations or cash flows of the Company.

 

In August 2010, the FASB issued ASU 2010-22, Accounting for Various Topics. ASU 2010-22 amends various SEC paragraphs in the FASB Accounting Standards Codification based on external comments received and the issuance of Staff Accounting Bulletin (“SAB”) No. 112, which amends or rescinds portions of certain SAB topics. The Company does not expect the provisions of ASU 2010-22 to have a material effect on the financial position, results of operations or cash flows of the Company.

 

3. Divestment of investments and discontinued activities

 

On March 31, 2010 the Company sold its stock in Medicexchange and various non-core investments to an unrelated third party in return for consideration of £750 ($1,136).  This consideration is deferred and will be paid in installments through March 2011.  As of September 30, 2010 £250 ($379) had been received. The third payment installment in the original agreement was due on August 30, 2010, without interest. At the request of the third party, and in discussion and negotiation with management, it was agreed that the remaining installments would be modified. The revised agreement now includes the following payment installments; October 30, 2010, £75 ($113); December 15, 2010, £175 ($265); and February 28, 2011, £250 ($379).

 

The October 30, 2010 payment has been received and the next payment is due on December 15, 2010. As compensation for delaying the third installment payment, the last payment will be received one month earlier than in the original agreement.

 

The investments disposed of and the related consideration is as follows:

 

Asset		Consideration
Medicexchange Limited		$	927
Medicexchange Inc.		1
Hipcricket, Inc.		205
Eurindia Limited		1
XShares equity		1
XShares convertible notes		1
Total		$	1,136

 

Eurindia and the XShares convertible notes and equity investment had been fully impaired so the consideration received represents the gain on sale recorded in the Consolidated Statement of Operations.  HipCricket was recorded in the financial statements at $224 meaning a loss on sales of $19 was recorded (see note 7).

 

Before their disposal, Medicexchange Limited and Medicexchange Inc. were consolidated into the MGT Consolidated Financial Statements.  Consideration of $928 was allocated to Medicexchange and MGT recorded a profit on disposal of $149, net of tax. This profit on disposal has been recognized in discontinued operations. In the nine months ended September 30, 2010, discontinued operations contains transactions up to the date of disposal, March 31, 2010. Within this period, Medicexchange attained revenue of $15, operating expenses of $249, and a net loss from operations of $234. In the nine months ended September 30, 2009, Medicexchange attained revenue of $37, operating expenses of $877, and a net loss from operations of $840.

 

4. Cash and cash equivalents

 

We invest our cash in short-term deposits with major banks.  At September 30, 2010 we held $10,569 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 Federal Deposit Insurance Corporation and amounted to $10,569 as of September 30, 2010 and $22,165 as of December 31, 2009.  The Company periodically evaluates the relative credit standing of financial institutions considered in its cash investment strategy.

 

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5. Loans receivable — related party

 

Moneygate

 

In Fiscal 2009 we purchased 49% of the share capital of Moneygate Group Limited (“Moneygate”).  Moneygate is a related party as we have significant influence over it and have representation on the board of directors.  On acquisition we provided loan facilities of £250 ($395) for working capital and £2,000 ($3,162) for acquisitions. During the nine months ended September 30, 2010 we allowed a portion of the acquisition facility to be used for working capital as acquisitions have been delayed.

 

On, August 3, 2010 Moneygate agreed to convert all monies advanced to July 31, 2010, of £1,247 ($1,888) and future monies up to £2,000 ($3,162) in total in to convertible loan notes. On August 3, 2010, MGT Capital Investments Limited, a company incorporated in England and Wales (“MGT UK”), and a wholly owned subsidiary of MGT Capital Investments, Inc., entered into an agreement with an unrelated third party for the sale of its Moneygate convertible loan note of £2,000 ($3,162).

 

Under the terms of the its agreement with Moneygate, the Company advanced additional working capital funding. At September 30, 2010, £900 ($1,423) had been advanced for working capital and £410 ($648) for acquisitions.  In October 2010, additional funding was advanced to Moneygate and as at October 31, 2010, £1,025 ($1,620) had been advanced for working capital and £460 ($727) for acquisitions.

 

Under the terms of the convertible note sale discussed above these additional funds would have been sold as part of the convertible loan sale.

 

On November 18, 2010, the previously executed agreement to sell the Moneygate convertible loan notes of up to £2,000 ($3,162) to a third party was terminated. Concurrent with the termination, the Company amended its convertible loan with Moneygate to remove the convertible feature and fix its amount repayable at £1,485 ($2,305) with no future advances. The amended loan agreement is repayable on or before 2 years from November 18, 2010. The loan will accrue 5% interest per annum and is collateralized by a debenture over the assets of Moneygate.

 

The Company engaged an outside valuation firm to perform a valuation on the Company’s investment and loan note receivable from Moneygate. This report concluded that on the scenario of Moneygate being unsuccessful in raising adequate finance then the value of the Company’s loan note receivable from Moneygate was £199 ($315). On this basis we have impaired the carrying value of the loan notes receivable to this amount, incurring a charge in the period of $1,711.

 

Moneygate is classified as a related party because the Company has representation on its board of directors (see note 12).

 

Dunamis Capital

 

On September 6, 2010, Medicsight made a short term loan of $1,100 (£696) to Dunamis Capital. This is due to be repaid on December 31, 2010, along with interest of $36 (£23). As of September 30, 2010 interest of $7 (£5) has been accrued. Dunamis is a related party as two directors of Medicsight are also directors of Dunamis Capital (see Note 12).

 

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.

 

Eurindia Limited

 

In 2000 MGT invested in Eurindia Limited (“Eurindia”), a UK company that invested in IT start-up companies.  MGT had a 6% holding in Eurindia and accounted for this investment on a cost basis.  As of December 31, 2009 this investment had been fully impaired.  On March 31, 2010 we disposed of all of our holding in Eurindia for $1 leading to a gain on sale of $1 (see notes 3 and 7).

 

XShares Group

 

In 2007 and 2008 we invested $3,000 in Series C preferred shares of XShares Group, Inc. (“XShares”), an investment advisor that creates, issues and supports exchange traded funds with a particular healthcare specialty.  In the year ended December 31, 2009 the Company also invested $2,000 in XShares convertible notes with a principal of $2,100.  As of December 31, 2009 the equity

 

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investment and the convertible notes were fully impaired. On March 31, 2010 we disposed of all of our equity holdings in XShares for $1 and the convertible notes for $1, leading to a gain on sale of $2 (see notes 3 and 7).

 

HipCricket Inc.

 

In Fiscal 2007 we invested $2,000 in HipCricket Inc., a company engaged in mobile marketing.  In the year ended December 31, 2009 HipCricket Inc. was delisted from the AIM Market and we accounted for it as an investment held at cost.  As of December 31, 2009 the investment was held at a book value of $224.  On March 31, 2010 we disposed of all of our holdings in HipCricket for $205 resulting in a loss on sale of $19 (see notes 3 and 7).

 

The following table presents the changes in Level 3 instruments for the nine months ended September 30, 2010.

 

		January 1, 2010			Sales		Profit / (loss) on sale included in earnings		September 30, 2010			Change in impairment losses relating to instruments still held at September 30, 2010
Eurindia Limited		$	—		(1	)	1		$	—		$	—
XShares Group, Inc.		—			(1	)	1		—			—
HipCricket Inc.		224			(205	)	(19	)	—			—
		$	224		(207	)	(17	)	$	—		$	—

 

7. Interest and other income / (expense)

 

We had the following interest and other income amounts from continuing operations:

 

		Three months ended September 30,						Nine months ended September 30,
		2010			2009			2010			2009
Loss on sale of HipCricket		$	—		$	—		$	(19	)	$	—
Gain on sale of XShares convertible notes		—			—			1			—
Gain on sale of XShares equity		—			—			1			—
Gain on sale of Eurindia		—			—			1			—
Impairment Gain / (Loss) on Eurindia		—			38			—			(176		)
Impairment Loss on HipCricket		—			—			—			(701		)
Impairment Loss on XShares		—			—			—			(230		)
Impairment Loss on Moneygate loan receivable		—			—			—			—
Interest income		15			32			66			303
Gain / (Loss) on other marketable securities		—						—			(37		)
Other expenses		(50		)	—			(50		)	—
Currency gain on short term investments		—			401			—			401
Total		$	(35	)	$	471		$	—		$	(440	)

 

8. Comprehensive income (loss)

 

Comprehensive income (loss) includes net income (loss) and items defined as other comprehensive income.  Items defined as other comprehensive income, such as foreign currency translation adjustments and unrealized gains and losses on certain marketable securities are separately classified in the financial statements.  Such items are reported in the consolidated statements of stockholders’ equity as comprehensive income as follows:

 

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		Three months ended September 30,						Nine months ended September 30,
		2010			2009			2010			2009
Net loss before non-controlling interest, as reported		$	(3,686	)	$	(3,714	)	$	(9,491	)	$	(26,137	)
Unrealized foreign exchange gain (loss)		645			(748		)	(459		)	1,429
Unrealized (loss) on marketable securities		—			(38		)	—			—
Comprehensive loss		$	(3,041	)	$	(4,500	)	$	(9,950	)	$	(24,708	)
Comprehensive loss attributable to non-controlling interest		595			1,393			2,759			3,444
Comprehensive loss attributable to MGT Capital Investments, Inc.		$	(2,446	)	$	(3,107	)	$	(7,191	)	$	(21,264	)

 

The total accumulated other comprehensive loss as of September 30, 2010 is the result of net foreign currency translation losses.

 

9. Reconciliation of Medicsight’s results and US GAAP consolidated results

 

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 reconciliation between Medicsight’s published financial statements and the US GAAP consolidated results:

 

		Medicsight plc			Medicsight plc			Medicsight plc			Discontinued operations			Corporate and Other			Total
		(IFRS)			GAAP Adj’ts			(US GAAP)			(US GAAP)			(US GAAP)			(US GAAP)
Nine months ended September 30, 2010
Net revenue to external customers		$	388		$	—		$	388		$	—		$	—		$	388
Operating loss		(5,508		)	(359		)	(5,867		)	—			(1,995		)	(7,862		)
Assets		$	11,873		$	—		$	11,873		$	—		$	2,011		$	13,884
Nine months ended September 30, 2009
Net revenue to external customers		$	146		$	—		$	146		$	—		$	—		$	146
Operating loss		(10,183		)	143			(10,040		)	—			(14,817		)	(24,857		)
Assets		$	21,350		$	—		$	21,350		$	—		$	2,927		$	24,277

 

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 United Kingdom.

 

10. Stock-based compensation

 

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

 

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 September 30, 2010 there were 475,000 options outstanding and 316,668 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 grant date.

 

Medicsight stock option plans

 

We have twelve 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 September 30, 2010 there were no options outstanding.

 

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 September 30, 2010 there were 150,000 options outstanding, all of which were exercisable.

 

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