UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10–K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT
TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
x |
ANNUAL REPORT UNDER SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended: December 31,
2014
OR
¨ |
TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to
MGT CAPITAL INVESTMENTS, INC.
(Exact Name of Registrant as Specified in its
Charter)
Delaware |
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0–26886 |
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13–4148725 |
(State or Other
Jurisdiction
of Incorporation or Organization) |
|
(Commission
File Number) |
|
(I.R.S. Employer
Identification No.) |
500 Mamaroneck Avenue, Suite 204, Harrison,
NY 10528, USA
(Address of principal executive offices, including
zip code)
914–630–7431
(Registrant’s Telephone Number, Including
Area Code)
Securities registered
under section 12(b) of the Exchange Act: Common stock, par value $0.001 per share
Securities registered
under section 12(g) of the Exchange Act: Not applicable
Name of each exchange
on which registered: NYSE MKT
Indicate
by check mark if the Registrant is a well–known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨
No x
Indicate
by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes
¨ No x
Check
whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during
the past 12 months (or for such shorter period that the registrant was required to file), and (2) has been subject to such
filing requirements for the past 90 days. Yes x
No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S–T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No
¨
Indicate
by check mark if disclosure of delinquent filers is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10–K
or any amendment to this Form 10–K. ¨
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a non–accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting
company” in Rule 12b–2 of the Exchange Act. (Check one):
Large
Accelerated Filer ¨ |
|
Accelerated
filer ¨ |
|
|
|
Non–accelerated
Filer ¨ |
|
Smaller reporting
company x |
(Do not check if
smaller reporting company) |
|
|
Indicate
by check mark whether the Registrant is a shell Company (as defined in Rule 12b–2 of the Act). Yes
¨ No
x
As of June 30, 2014,
the last day of the registrant’s most recently completed second fiscal quarter; the aggregate market value of the registrant’s
Common stock held by non–affiliates of the registrant was approximately $8,565,902
As of April 14, 2015, the registrant had outstanding 13,529,969 shares of Common stock, $0.001 par value. (the “Common
stock”)
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
INDEX
NOTE REGARDING FORWARD
LOOKING STATEMENTS
This Annual Report on
Form 10–K, including the section entitled “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” in Item 7, 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. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,”
“may,” “plans,” “projects,” “will,” “would” and similar expressions
are intended to identify forward–looking statements, although not all forward–looking statements contain these identifying
words. 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, our ability to enforce and monetize
our patents, synergies or other financial items; any statements of the plans, strategies and objectives of management for future
operations, the execution of restructuring plans; any statements concerning the likelihood of success of our patent enforcement
litigation; any statement concerning developments, 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 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 7
of this report, and that are otherwise described from time to time in the Company’s periodic disclosure statements and for
reports filed with the Securities and Exchange Commission. The Company assumes no obligation and does not intend to update these
forward–looking statements.
PART
I
Item
1. Business
MGT Capital Investments,
Inc. (“MGT,” “the Company,” “we,” “us”) is a Delaware corporation, incorporated
in 2000. The Company was originally incorporated in Utah in 1977. MGT is comprised of the parent company, majority–owned
subsidiary MGT Gaming, Inc. (“MGT Gaming”) and wholly–owned subsidiaries Medicsight, Inc. (“Medicsight”),
MGT Studios, Inc. (f/k/a MGT Capital Solutions, Inc.) (“MGT Studios”) and its minority–owned subsidiary M2P
Americas, Inc., and MGT Sports, Inc. (“MGT Sports”) including its wholly–owned subsidiary FanTD LLC, (“FanTD”).
Our corporate office is located in Harrison, New York.
MGT and its subsidiaries
are principally engaged in the business of acquiring, developing and monetizing assets in the online and mobile gaming space and
social casino. MGT’s portfolio of assets in the online, mobile gaming and social casino gaming space includes DraftDay.com,
FantasySportsLive.com and Slot Champ. On December 30, 2014, the Company announced an exclusive partnership with Vivid Entertainment,
LLC to develop a fantasy sports gaming site which is available online at VividBetSports.com.
In addition, MGT Gaming
owns two U. S. patents covering certain features of casino slot machines. Both patents are being asserted against alleged infringers
in various actions in federal court in Mississippi. We have elected to reduce our financial exposure by entering into a contingency
arrangement with a nationally recognized law firm; this arrangement also reduces the potential recovery via legal judgments or
settlements. While the Company is optimistic with respect to prevailing in court and the potential damages, the outcome of our
patent enforcement actions cannot be predicted with any certainty nor can the timetable.
Outside of the business
of acquiring, developing and monetizing assets in the online, mobile gaming and casino gaming space, MGT’s wholly subsidiary
Medicsight owns the U.S. Food and Drug Administration (“FDA”) approved medical imaging software and has developed
an automated carbon dioxide insufflation device which receives royalties on a per–unit basis from an international manufacturer.
On June 30, 2013, the Company completed the sale of Medicsight’s global patent portfolio to Samsung Electronics Co., Ltd.
for gross proceeds of $1.5 million.
Strategy
MGT and its subsidiaries
are principally engaged in the business of acquiring, developing and monetizing assets in the online and mobile gaming space,
as well as the casino industry. The Company’s acquisition strategy is designed to obtain control of assets with a focus
on risk mitigation coupled with large potential upside. We plan to build our portfolio by seeking out large social and real money
gaming opportunities via extensive research and analysis. Next, we will attempt to secure controlling interests for modest cash
and/or stock outlays. MGT then budgets and funds operating costs to develop business operations and tries to motivate sellers
with equity upside. While the ultimate objective is to operate businesses for free cash flow, there may be opportunities where
we sell or otherwise monetize certain assets.
There can be no assurance
that any acquisitions will occur at all, or that any such acquisitions will be accretive to earnings, book value and other financial
metrics, or that any such acquisitions will generate positive returns for Company stockholders. Furthermore, it is contemplated
that any acquisitions may require the Company to raise capital; such capital may not be available on terms acceptable to the Company,
if at all.
Intellectual property
MGT Gaming owns two U.
S. patents covering certain features of casino slot machines.
In 2013, MGT sold its
portfolio of medical patents to Samsung for $1.5 million.
Competition
MGT
encounters intense competition in all its businesses, in many cases from larger companies with greater financial resources such
as the daily fantasy sports operators FanDuel, Inc. and DraftKings, Inc. or Zynga, Inc. (NASDAQ: ZNGA) and Caesars Acquisition
Company (NASDAQ: CACQ) which focus on social and real money online gaming. With respect to our patent infringement activities,
the named defendants in our lawsuits include much larger companies such as Aruze Gaming America,
Inc.
Employees
Currently, the Company
and its subsidiaries have 11 full–time employees. None of our employees is represented by a union and we believe our
relationships with our employees are good.
Available information
MGT maintains a website
at www.mgtci.com. The Company makes available free of charge, our annual report on Form 10–K, Quarterly Reports on
Form 10–Q and current reports on Form 8–K, including any amendments to the foregoing reports, as soon as
is reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission
or the SEC. These materials along with our Code of Business Conduct and Ethics are also available through our corporate website
at www.mgtci.com. A copy of this Annual Report on Form 10–K (“Annual report”) is located at the Securities
and Exchange Commission’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the
operation of the Public Reference Room can be obtained by calling the SEC at 1–800–SEC–0330. The
public may also download these materials from the Securities and Exchange Commission’s website at http://www.sec.gov.
Any amendments to, and waivers of, our Code of Business Conduct and Ethics will be posted on our corporate website. The Company
is not including the information contained at mgtci.com as a part of this Annual Report.
Item 1A. Risk factors
Discussion of our business
and operations included in this Annual Report on Form 10–K should be read together with the risk factors set forth below.
They describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties, together with
other factors described elsewhere in this report, have the potential to affect our business, financial condition, results of operations,
cash flows, strategies or prospects in a material and adverse manner. New risks may emerge at any time, and we cannot
predict those risks or estimate the extent to which they may affect our financial performance. Each of the risks described below
could adversely impact the value of our securities. These statements, like all statements in this report, speak only
as of the date of this Annual Report (unless another date is indicated), and we undertake no obligation to update or revise the
statements in light of future developments.
We cannot assure you
that we will be successful in commercializing any of the Company’s products or if any of our products are commercialized,
that they will be profitable for the Company.
The Company generates
limited revenue from operations upon which an evaluation of our prospects can be made. The Company’s prospects
must be considered keeping in mind the risks, expenses and difficulties frequently encountered in the establishment of a new business
in a constantly changing industry. There can be no assurance that the Company will be able to achieve profitable operations
in the foreseeable future, if at all.
The Company has identified
a number of specific risk areas that may affect our operations and results in the future:
Company specific risks
Our financial results
are highly concentrated in the online mobile and gaming business; if we are unable to grow online mobile and gaming revenues and
find alternative sources of revenue, our financial results will suffer.
Software, devices and
gaming accounted for substantially all of our revenues for the year ended December 31, 2014. Our success depends upon customers
choosing to use, and search advertising partners choosing to advertise, on, our online, mobile and casino gaming products. Decisions
by customers and our search advertising partners not to adopt our products at projected rates, or changes in market conditions,
may adversely affect the use or distribution of our products. Because of our revenue concentration in the online, mobile and casino
gaming business, such shortfalls or changes could have a negative impact on our financial results, or with regard to some of our
larger advertising partners specifically, our results of operations, financial condition and/or liquidity will suffer.
Our acquisition activities
may disrupt our ongoing business, may involve increased expenses and may present risks not contemplated at the time of the transactions.
We have acquired, and
may continue to acquire, companies, products and technologies that complement our strategic direction. Acquisitions involve significant
risks and uncertainties, including:
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diversion of management time and a
shift of focus from operating the businesses to issues related to integration and administration; |
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inability to successfully integrate
the acquired technology and operations into our business and maintain uniform standards, controls, policies and procedures; |
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challenges retaining the key employees,
customers and other business partners of the acquired business; inability to realize synergies expected to result from an
acquisition; |
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an impairment of acquired goodwill
and other intangible assets in future periods would result in a charge to earnings in the period in which the write–down
occurs; the internal control environment of an acquired entity may not be consistent with our standards and may require significant
time and resources to improve; |
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in the case of foreign acquisitions,
the need to integrate operations across different cultures and languages and to address the particular economic, currency,
political and regulatory risks associated with specific countries; |
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and liability for activities of the
acquired companies before the acquisition, including violations of laws, rules and regulations, commercial disputes, tax liabilities
and other known and unknown liabilities. |
Because acquisitions
are inherently risky, our transactions may not be successful and may, in some cases, harm our operating results or financial condition.
The mobile game application
business is still developing, and our efforts to develop mobile games may prove unsuccessful, or even if successful, it may take
more time than we anticipate to achieve significant revenues from this activity because, among other reasons:
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we may have difficulty optimizing the
monetization of our mobile games due to our relatively limited experience creating games that include micro–transaction
capabilities, advertising and offers; |
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we intend to continue to develop substantially
all of our games based upon our own intellectual property, rather than well–known licensed brands, and we may encounter
difficulties in generating sufficient consumer interest in and downloads of our games, particularly since we have had relatively
limited success generating significant revenues from games based on our own intellectual property; |
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man well–funded public and private
companies have released, or plan to release, mobile games, and this competition will make it more difficult for us to differentiate
our games and derive significant revenues from them; |
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mobile games have a relatively limited
history, and it is unclear how popular this style of game will become or remain or its revenue potential; |
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our mobile strategy assumes that a
large number of players will download our games because they are free and that we will subsequently be able to effectively
monetize the games; however, players may not widely download our games for a variety of reasons, including poor consumer reviews
or other negative publicity, ineffective or insufficient marketing efforts, lack of sufficient community features, lack of
prominent storefront featuring and the relatively large file size of some of our “thin–client games,” which
often utilize a significant amount of the available memory on a user’s device. Due to the inherent limitations
of the most commonly–used smartphone platforms and telecommunications networks, which only allow applications that are
less than 50 megabytes to be downloaded over a carrier’s wireless network, players must download one of our thick–client
games either via a wireless Internet (Wi–Fi) connection, or initially to their computer and then side–load the
thick–client game to their device; |
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even if our games are widely downloaded,
we may fail to retain users or optimize the monetization of these games for a variety of reasons, including poor game design
or quality, lack of community features, gameplay issues such as game unavailability, long load times or an unexpected termination
of the game due to data server or other technical issues, or our failure to effectively respond and adapt to changing user
preferences through game updates; |
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the billing and provisioning capabilities
of some smartphones and tablets are currently not optimized to enable users to purchase games or make in–app purchases,
which make it difficult for users of these smartphones and tablets to purchase our games or make in–app purchases and
could reduce our addressable market, at least in the short term; and |
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the Federal Trade Commission has indicated
that it intends to review issues related to in–app purchases, particularly with respect to games that are marketed primarily
to minors, and the commission might issue rules significantly restricting or even prohibiting in–app purchases or name
us as a defendant in a future class–action lawsuit. |
If we do not achieve
a sufficient return on our investment with respect to this business model, it will negatively affect our operating results and
may require us to make change to our business strategy.
The markets in which
we operate are highly competitive, and many of our competitors have significantly greater resources than we do.
Developing, distributing
and selling mobile games is a highly competitive business, characterized by frequent product introductions and rapidly emerging
new platforms, technologies and storefronts. For end users, we compete primarily on the basis of game quality, brand and customer
reviews. We compete for promotional and storefront placement based on these factors, as well as our relationship with the digital
storefront owner, historical performance, perception of sales potential and relationships with licensors of brands and other intellectual
property. For content and brand licensors, we compete based on royalty and other economic terms, perceptions of development quality,
porting abilities, speed of execution, distribution breadth and relationships with storefront owners or carriers. We also compete
for experienced and talented employees.
We compete with a continually
increasing number of companies, including Zynga, King Digital, Soul & Vibe Interactive, DeNA, Gree, Nexon, and Glu. In addition,
given the open nature of the development and distribution for smartphones and tablets, we also compete or will compete with a
vast number of small companies and individuals who are able to create and launch games and other content for these devices using
relatively limited resources and with relatively limited start–up time or expertise.
Some of our competitors
and our potential competitors have one or more advantages over us, either globally or in particular geographic markets, which
include:
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significantly greater financial resources; |
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greater experience with the mobile
games business model and more effective game monetization; |
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stronger brand and consumer recognition
regionally or worldwide;
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stronger strategy which may reach
our target audience better than our current strategy;
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greater experience integrating community
features into their games and increasing the revenues derived from their users; |
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the capacity to leverage their marketing
expenditures across a broader portfolio of mobile and non–mobile products; |
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larger installed customer bases from
related platforms, such as console gaming or social networking websites, to which they can market and sell mobile games; |
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more substantial intellectual property
of their own from which they can develop games without having to pay royalties; |
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lower labor and development costs and
better overall economies of scale; |
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greater platform–specific focus,
experience and expertise; and |
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broader global distribution and presence. |
If we are unable to compete
effectively or we are not as successful as our competitors in our target markets, our sales could decline, our margins could decline
and we could lose market share, any of which would materially harm our business, operating results and financial condition.
Inflation and future
expectations of inflation influence consumer spending on entertainment such as online gaming and gambling.
As a result, our profitability
and capital levels may be impacted by inflation and inflationary expectations. Additionally, inflation’s impact on our operating
expenses may affect profitability to the extent that additional costs are not recoverable through increased cost of consumer acquisition
for our portfolio of online, mobile gaming and casino gaming offerings.
Consumer tastes are
continually changing and are often unpredictable, and we compete for consumer discretionary spending against other forms of entertainment;
if we fail to develop and publish new mobile games that achieve market acceptance, our sales would suffer.
Our mobile game business
depends on developing and publishing mobile games that consumers will want to download and spend time and money playing. We must
continue to invest significant resources in research and development, analytics and marketing to introduce new games and continue
to update our successful mobile games, and we often must make decisions about these matters well in advance of product release
to timely implement them. Our success depends, in part, on unpredictable and volatile factors beyond our control, including consumer
preferences, competing games, new mobile platforms and the availability of other entertainment activities. If our games and related
applications do not meet consumer expectations, or they are not brought to market in a timely and effective manner, our business,
operating results and financial condition would be harmed. Even if our games are successfully introduced and initially adopted,
a failure to continue to update them with compelling content or a subsequent shift in the entertainment preferences of consumers
could cause a decline in our games’ popularity that could materially reduce our revenues and harm our business, operating
results and financial condition. Furthermore, we compete for the discretionary spending of consumers, who face a vast array of
entertainment choices, including games played on personal computers and consoles, television, movies, sports and the Internet.
If we are unable to sustain sufficient interest in our games compared to other forms of entertainment, our business and financial
results would be seriously harmed.
If we do not successfully
establish and maintain awareness of our brand and games, if we incur excessive expenses promoting and maintaining our brand or
our games or if our games contains defects or objectionable content, our operating results and financial condition could be harmed.
We believe that establishing
and maintaining our brand is critical to establishing a direct relationship with end users who purchase our products from direct–to–consumer
channels and to maintaining our existing relationships with distributors and content licensors, as well as potentially developing
new such relationships. Increasing awareness of our brand and recognition of our games is particularly important in connection
with our strategic focus of developing games based on our own intellectual property. Our ability to promote our brand and increase
recognition of our games depends on our ability to develop high–quality, engaging games. If consumers, digital storefront
owners and branded content owners do not perceive our existing games as high–quality or if we introduce new games that are
not favorably received by them, then we may not succeed in building brand recognition and brand loyalty in the marketplace. In
addition, globalizing and extending our brand and recognition of our games is costly and involves extensive management time to
execute successfully, particularly as we expand our efforts to increase awareness of our brand and games among international consumers.
Although we have significantly increased our sales and marketing expenditures in connection with the launch of our games, these
efforts may not succeed in increasing awareness of our brand or the new games. If we fail to increase and maintain brand awareness
and consumer recognition of our games, our potential revenues could be limited, our costs could increase and our business, operating
results and financial condition could suffer.
If we fail to deliver
our games at the same time as new mobile devices are commercially introduced, our sales may suffer.
Our business depends,
in part, on the commercial introduction of new mobile devices with enhanced features, including larger, higher resolution color
screens, improved audio quality, and greater processing power, memory, battery life and storage. For example, the introduction
of new and more powerful versions of Apple’s iPhone and iPad and devices based on Google’s Android operating system,
have helped drive the growth of the mobile games market. In addition, consumers generally purchase the majority of content, such
as our games, for a new device within a few months of purchasing it. We do not control the timing of these device launches. Some
manufacturers give us access to their mobile devices prior to commercial release. If one or more major manufacturers were to stop
providing us access to new device models prior to commercial release, we might be unable to introduce games that are compatible
with the new device when the device is first commercially released, and we might be unable to make compatible games for a substantial
period following the device release. If we do not adequately build into our title plan the demand for games for a particular mobile
device or experience game launch delays, we miss the opportunity to sell games when new mobile devices are shipped or our end
users upgrade to a new mobile device, our revenues would likely decline and our business, operating results and financial condition
would likely suffer.
We will need additional
capital to continue our operation.
We may need to obtain
additional financing for advertising, promotion and acquisition of additional products. The Company is constantly looking for
new sources of revenue that will help fund our business. There can be no assurances that this will be achieved.
If we successfully raise
additional funds through the issuance of debt, we will be required to service that debt and are likely to become subject to restrictive
covenants and other restrictions contained in the instruments governing that debt, which may limit our operational flexibility.
If we raise additional funds through the issuance of equity securities, then those securities may have rights, preferences or
privileges senior to the rights of holders of our Common stock, and holders of our Common stock will experience dilution.
We cannot be certain
that such additional debt or equity financing will be available to us on favorable terms when required, or at all. If we cannot
raise funds in a timely manner, or on acceptable terms, we may not be able to promote our brand, develop or enhance our products
and services, take advantage of future opportunities or respond to competitive pressures or unexpected requirements, and we may
be required to reduce or limit operations.
The effect of the
proposed "Unlawful Internet Gambling Funding Prohibition Act."
During the 2003 fiscal
year, the House Judiciary Committee of the US Government approved HR21 "Unlawful Internet Gambling Funding Prohibition Act".
This bill creates a new crime of accepting financial instruments, such as credit cards or electronic fund transfers, for debts
incurred in illegal internet gambling. The bill enables state and federal Attorneys General to request that injunctions be issued
to any party, such as financial institutions and internet service providers, to assist in the prevention or restraint of illegal
internet gambling. This bill still needs to be ratified by the Senate before it becomes passed as law. We may be affected by this
bill and therefore the Company's revenue stream may be affected.
Compliance with state
rules and regulations.
Various states have laws
restricting gambling. The Company believes that we are in compliance with the rules and regulations in the states we operate.
However, there can be no assurance that the state officials will have the same view. In the event that we are accused of violating
such gambling laws and restrictions, our gaming business may be disallowed or prohibited in these states. Furthermore, there can
be no assurance that no new rules and regulations restricting our business will be adopted in the states we operate. If such restrictive
rules and regulations are adopted, we may incur additional costs in complying with the rules and regulations or we may have to
cease operation in these state(s).
We have capacity
constraints and system development risks that could damage our customer relations or inhibit our possible growth, and we may need
to expand our management systems and controls quickly, which may increase our cost of operations.
Our success and our ability
to provide high quality customer service largely depends on the efficient and uninterrupted operation of our computer and communications
systems and the computers and communication systems of our third party vendors in order to accommodate any significant numbers
or increases in the numbers of consumers using our service. Our success also depends upon our and our vendors' abilities to rapidly
expand transaction–processing systems and network infrastructure without any systems interruptions in order to accommodate
any significant increases in use of our service.
We and our service providers
may experience periodic systems interruptions and infrastructure failures, which we believe will cause customer dissatisfaction
and may adversely affect our results of operations. Limitations of technology infrastructure may prevent us from maximizing our
business opportunities.
We cannot assure you
that our and our vendors' data repositories, financial systems and other technology resources will be secure from security breaches
or sabotage, especially as technology changes and becomes more sophisticated. In addition, many of our and our vendors' software
systems are custom–developed and we and our vendors rely on employees and certain third–party contractors to develop
and maintain these systems. If certain of these employees or contractors become unavailable, we and our vendors may experience
difficulty in improving and maintaining these systems. Furthermore, we expect that we and our vendors may continue to be required
to manage multiple relationships with various software and equipment vendors whose technologies may not be compatible, as well
as relationships with other third parties to maintain and enhance their technology infrastructures. Failure to achieve or maintain
high capacity data transmission and security without system downtime and to achieve improvements in their transaction processing
systems and network infrastructure could have a materially adverse effect on our business and results of operations.
Increased security
risks of online commerce may deter future use of our website, which may adversely affect our ability to generate revenue.
Concerns over the security
of transactions conducted on the internet and the privacy of consumers may also inhibit the growth of the internet and other online
services generally, and online commerce in particular. Failure to prevent security breaches could significantly harm our business
and results of operations. We cannot be certain that advances in computer capabilities, new discoveries in the field of cryptography,
or other developments will not result in a compromise or breach of the algorithms used to protect our transaction data. Anyone
who is able to circumvent our or our vendors' security measures could misappropriate proprietary information, cause interruptions
in our operations or damage our brand and reputation. We may be required to incur significant costs to protect against security
breaches or to alleviate problems caused by breaches. Any well–publicized compromise of security could deter people from
using the internet to conduct transactions that involve transmitting confidential information or downloading sensitive materials,
which would have a material adverse effect on our business.
We face the risk
of system failures, which would disrupt our operations.
A disaster could severely
damage our business and results of operations because our services could be interrupted for an indeterminate length of time. Our
operations depend upon our ability to maintain and protect our computer systems.
Our systems and operations
are vulnerable to damage or interruption from fire, floods, earthquakes, hurricanes, power loss, telecommunications failures,
break–ins, sabotage and similar events. The occurrence of a natural disaster or unanticipated problems at our principal
business headquarters or at a third–party facility could cause interruptions or delays in our business, loss of data or
render us unable to provide our services. In addition, failure of a third–party facility to provide the data communications
capacity required by us, as a result of human error, natural disaster or other operational disruptions, could cause interruptions
in our service. The occurrence of any or all of these events could adversely affect our reputation, brand and business.
We face risks of
claims from third parties for intellectual property infringement that could adversely affect our business.
Our services operate
in part by making internet services and content available to our users. This creates the potential for claims to be made against
us, either directly or through contractual indemnification provisions with third parties. These claims might, for example, be
made for defamation, negligence, copyright, trademark or patent infringement, personal injury, invasion of privacy or other legal
theories. Any claims could result in costly litigation and be time consuming to defend, divert management's attention and resources,
cause delays in releasing new or upgrading existing services or require us to enter into royalty or licensing agreements.
Litigation regarding
intellectual property rights is common in the internet and software industries. We expect that internet technologies and software
products and services may be increasingly subject to third–party infringement claims as the number of competitors in our
industry segment grows and the functionality of products in different industry segments overlaps. There can be no assurance that
our services do not or will not in the future infringe the intellectual property rights of third parties. Royalty or licensing
agreements, if required, may not be available on acceptable terms, if at all. A successful claim of infringement against us and
our failure or inability to license the infringed or similar technology could adversely affect our business.
Our success and ability
to compete are substantially dependent upon our technology and data resources, which we intend to protect through a combination
of patent, copyright, trade secret and/or trademark law. We currently have no patents or trademarks issued to date on our technology
and there can be no assurances that we will be successful in securing them when necessary.
We may not be able
to protect our internet domain name, which is important to our branding strategy.
Our internet domain name,
www.draftday.com, is an extremely important part of our business. Governmental agencies and their designees generally regulate
the acquisition and maintenance of domain names. The regulation of domain names in the United States and in foreign countries
may be subject to change. Governing bodies may establish additional top–level domains, appoint additional domain name registrars
or modify the requirements for holding domain names. As a result, we may be unable to acquire or maintain relevant domain names
in all countries in which we conduct business. Furthermore, the relationship between regulations governing domain names and laws
protecting trademarks and similar proprietary rights is unclear. Therefore, we may be unable to prevent third parties from acquiring
domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary rights.
If we are unable
to maintain our popularity with third party search engines then our customer base, and therefore, our revenue will not continue
to grow.
Due to our limited capital
we do not run large advertising campaigns. Our competitors may have more resources to drive traffic to their websites in order
to optimize their internet search ranking position, including the ability to conduct national television and radio advertising
campaigns advertising our competitors’ websites. This risk particularly effects DraftDay.com, as we may not have the resources
to promote its sports-related content during televised sporting events such as the NFL Superbowl. We are, therefore, reliant on
third party search engines such as Google and Yahoo! to provide prospective customers with links to facilitate traffic to our
internet domain. We believe that these search engines are important in order to facilitate broad market acceptance of our service
and thus enhance our sales. We continue to look for new methods to optimize our ranking position with various internet search
engines, including the maintenance of reciprocal links with complementary third party sites.
Our financial position
and results of operations will vary depending on a number of factors, most of which are out of our control.
We anticipate that our
operating results will vary widely depending on a number of factors, some of which are beyond our control. These factors are likely
to include:
|
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demand for our online services by consumers; |
|
· |
costs of attracting consumers to our
website, including costs of receiving exposure on third–party websites; |
|
· |
costs related to forming strategic
relationships; |
|
· |
loss of strategic relationships; |
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· |
our ability to significantly increase
our distribution channels; |
|
· |
competition from companies offering
same or similar products and services and from companies with much deeper financial, technical, marketing and human resources; |
|
· |
the amount and timing of operating
costs and capital expenditures relating to expansion of our operations;
|
|
· |
costs and delays in introducing new
services and improvements to existing services; |
|
· |
changes in the growth rate of internet
usage and acceptance by consumers of electronic commerce; and |
|
· |
changes and introduction of new software
e.g. pop up blockers.???? |
Because we have a limited
operating history, it is difficult to accurately forecast the revenues that will be generated from our current and proposed future
product offerings.
If we are unable
to meet the changing needs of our industry, our ability to compete will be adversely affected.
We operate in an intensely
competitive industry. To remain competitive, we must be capable of enhancing and improving the functionality and features of our
online services. The internet gaming industry is rapidly changing. If competitors introduce new products and services embodying
new technologies, or if new industry standards and practices emerge, our existing services, technology and systems may become
obsolete. There can be no assurances that we will be successful in responding quickly, cost effectively and adequately to new
developments or that funds will be available to respond at all. Any failure by us to respond effectively would significantly harm
our business, operating results and financial condition.
Our future success will
depend on our ability to accomplish the following:
|
· |
license and develop leading technologies
useful in our business; |
|
· |
develop and enhance our existing products
and services; |
|
· |
develop new services and technologies
that address the increasingly sophisticated and varied needs of prospective consumers; and |
|
· |
respond to technological advances and
emerging industry standards and practices on a cost–effective and timely basis. |
Developing internet services
and other proprietary technology entails significant technical and business risks, as well as substantial costs. We may use new
technologies ineffectively, or we may fail to adapt our services, transaction processing systems and network infrastructure to
user requirements or emerging industry standards. If our operations face material delays in introducing new services, products
and enhancements, our users may forego the use of our services and use those of our competitors. These factors could have a material
adverse effect on our financial position and results of operations.
Our business may
be subject to government regulation and legal uncertainties that may increase the costs of operating our web portal, limit our
ability to attract users, or interfere with future operations of the Company.
There are currently few
laws or regulations directly applicable to access to, or commerce on, the internet. Due to the increasing popularity and use of
the internet, it is possible that laws and regulations may be adopted, covering issues such as user privacy, defamation, pricing,
taxation, content regulation, quality of products and services, and intellectual property ownership and infringement. Such legislation
could expose the Company to substantial liability as well as dampen the growth in use of the internet, decrease the acceptance
of the internet as a communications and commercial medium, or require the Company to incur significant expenses in complying with
any new regulations.
The applicability to
the internet of existing laws governing issues such as gambling, property ownership, copyright, defamation, obscenity and personal
privacy is uncertain. The Company may be subject to claims that our services violate such laws. Any new legislation or regulation
in the United States or abroad or the application of existing laws and regulations to the internet could damage our business.
In addition, because legislation and other regulations relating to online games vary by jurisdiction, from state to state and
from country to country, it is difficult for us to ensure that our players are accessing our portal from a jurisdiction where
it is legal to play our games. We therefore, cannot ensure that we will not be subject to enforcement actions as a result of this
uncertainty and difficulty in controlling access.
In addition, our business
may be indirectly affected by our suppliers or customers who may be subject to such legislation. Increased regulation of the internet
may decrease the growth in the use of the internet or hamper the development of internet commerce and online entertainment, which
could decrease the demand for our services, increase our cost of doing business or otherwise have a material adverse effect on
our business, results of operations and financial condition.
New legislation,
regulations or court rulings related to enforcing patents could harm our business and operating results.
If Congress, the U.S.
Patent and Trademark Office (the “USPTO”) or courts implement new legislation, regulations or rulings that impact
the patent enforcement process or the rights of patent holders, these changes could negatively affect our business model. For
example, limitations on the ability to bring patent enforcement claims, limitations on potential liability for patent infringement,
lower evidentiary standards for invalidating patents, increases in the cost to resolve patent disputes and other similar developments
could negatively affect our ability to assert our patent or other intellectual property rights.
In addition, on September
16, 2011, the Leahy–Smith America Invents Act (or the Leahy–Smith Act), was signed into law. The Leahy–Smith
Act includes a number of significant changes to United States patent law. These changes include provisions that affect the way
patent applications will be prosecuted and may also affect patent litigation. The USPTO is currently developing regulations and
procedures to govern administration of the Leahy–Smith Act, and many of the substantive changes to patent law associated
with the Leahy–Smith Act will not become effective until one year or 18 months after enactment. Accordingly, it is too early
to tell what, if any, impact the Leahy–Smith Act will have on the operation of our business. However, the Leahy–Smith
Act and its implementation could increase the uncertainties and costs surrounding the prosecution of patent applications and the
enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial
condition.
Further, and in general,
it is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether
any of the proposals will become enacted as laws. Compliance with any new or existing laws or regulations could be difficult and
expensive, affect the manner in which we conduct our business and negatively impact our business, prospects, financial condition
and results of operations.
If we are unable
to license or otherwise monetize our intellectual property or generate revenue and profit through those assets, there is a significant
risk that our intellectual property monetization strategy will fail.
Effective June 1, 2012,
we acquired an interest in the ‘088 Patent, entitled “Gaming Device Having a Second Separate Bonusing Event”
that we plan to license or otherwise monetize. On August 6, 2013, the Company was issued United States Patent number 8,500,554
entitled, "Gaming Device Having a Second Bonusing Event" (the "554 Patent"). The '554 Patent is a continuation
of the key patent already owned by the Company. If our efforts to generate revenue from the ‘088 Patent fail, we will incur
significant losses and may be unable to acquire additional intellectual property assets. If this occurs, our patent monetization
strategy will likely fail.
We plan to commence
additional legal proceedings against companies in the gaming industry to enforce our intellectual property rights, and we expect
such litigation to be time–consuming, which may adversely affect our financial condition and ability to operate our business.
To license or otherwise
monetize the ‘088 Patent, we have commenced legal proceedings against the owners of gaming devices pursuant to which we
allege that such companies infringed on the Patent. Our viability will be highly dependent on the outcome of this litigation,
and there is a risk that we may be unable to achieve the results that we desire from such litigation, which failure would harm
our overall business. In addition, the potential defendants in the litigation are much larger than us and have substantially greater
resources, which could make our litigation efforts more difficult.
Disputes regarding the
assertion of patents and other intellectual property rights are highly complex and technical. Once initiated, we may be forced
to litigate against others to enforce or defend our intellectual property rights or to determine the validity and scope of other
parties’ proprietary rights. The defendants or other third parties involved in potential lawsuits may allege defenses and/or
file counterclaims in an effort to avoid or limit liability and damages for patent infringement. If such defenses or counterclaims
are successful, they may preclude our ability to derive licensing revenue from our patents. A negative outcome of any such litigation,
or one or more claims contained within any such litigation, could materially and adversely impact our business.
While we believe
that the ‘088 Patent is infringed upon by certain companies, there is a risk that a court will find the ‘088 Patent
invalid, not infringed or unenforceable and/or that the USPTO will either invalidate the ‘088 Patent or materially narrow
the scope of its claims during the course of a re–examination. In addition, even with a positive trial court verdict, the
‘088 Patent may be invalidated, found not to be infringed or rendered unenforceable on appeal. This risk may occur in litigations
we bring. If this were to occur, it would have a material adverse effect on the viability of the Company and our operations.
We believe that certain
gaming companies infringe on the ‘088 Patent, but recognize that obtaining and collecting a judgment against such infringers
may be difficult or impossible. Patent litigation is inherently risky and the outcome is uncertain. Some of the parties that we
believe infringe on the ‘088 Patent are large and well–financed companies with substantially greater resources than
us. We believe that these parties would devote a substantial amount of resources in an attempt to avoid or limit a finding that
they are liable for infringing on the ‘088 Patent or, in the event liability is found, to avoid or limit the amount of associated
damages.
In addition there is
a risk that these parties may file re–examinations or other proceedings with the USPTO or other government agencies in an
attempt to invalidate, narrow the scope or render unenforceable the ‘088 Patent.
At this time, we cannot
predict the outcome of such litigation or administrative action, and if we are unsuccessful in our litigation efforts for any
reason, our business would be significantly harmed.
Moreover, in connection
with any of our present or future patent enforcement actions, it is possible that a defendant may claim and/or a court may rule
that we have violated statutory authority, regulatory authority, federal rules, local court rules, or governing standards relating
to the substantive or procedural aspects of such enforcement actions. In such event, a court may issue monetary sanctions against
us or award attorneys’ fees and/or expenses to one or more of the defendants, which could be material, and if we are required
to pay such monetary sanctions, attorneys’ fees and/or expenses, such payment could materially harm our operating results
and financial position.
In addition, it is difficult
in general to predict the outcome of patent enforcement litigation at the trial level. There is a higher rate of appeals in patent
enforcement litigation than more standard business litigation. Such appeals are expensive and time–consuming, and the outcomes
of such appeals are sometimes unpredictable, resulting in increased costs and reduced or delayed revenue.
Finally, we believe that
the more prevalent patent enforcement actions become, the more difficult it will be for us to license the ‘088 Patent without
engaging in litigation. As a result, we may need to increase the number of our patent enforcement actions to cause infringing
companies to license the ‘088 Patent or pay damages for lost royalties. This will adversely affect our operating results
due to the high costs of litigation and the uncertainty of the results.
The protection of
our intellectual property may be uncertain and we may face claims of others.
Although we have received
patents and have filed patent applications with respect to certain aspects of our technology, we generally do not rely on patent
protection with respect to our products and technologies. Instead, we rely primarily on a combination of trade secret and copyright
law, employee and third party non–disclosure agreements and other protective measures to protect intellectual property rights
pertaining to our products and technologies. Such measures may not provide meaningful protection of our trade secrets, know how
or other intellectual property in the event of any unauthorized use, misappropriation or disclosure. Others may independently
develop similar technologies or duplicate our technologies. In addition, to the extent that we apply for any patents, such applications
may not result in issued patents or, if issued, such patents may not be valid or of value. Third parties could, in the future,
assert infringement or misappropriation claims against us with respect to our current or future products and technologies, or
we may need to assert claims of infringement against third parties. Any infringement or misappropriation claim by us or against
us could place significant strain on our financial resources, divert management’s attention from our business and harm our
reputation. The costs of prosecuting or defending an intellectual property claim could be substantial and could adversely affect
our business, even if we are ultimately successful in prosecuting or defending any such claims. If our products or technologies
are found to infringe the rights of a third party, we could be required to pay significant damages or license fees or cease production,
any of which could have material adverse effect on our business. If a claim is brought against us, or we ultimately prove unsuccessful
on the claims on our merits, this could have a material adverse effect on our business, financial condition, results of operations
and future prospects.
Any failure to maintain
or protect our patent assets or other intellectual property rights could significantly impair our return on investment from such
assets and harm our brand, our business and our operating results.
Our ability to compete
in the intellectual property market largely depends on the superiority, uniqueness and value of our acquired patent assets and
other intellectual property. To protect our proprietary rights, we will rely on a combination of patent, trademark, copyright
and trade secret laws, confidentiality agreements with our employees and third parties, and protective contractual provisions.
No assurances can be given that any of the measures we undertake to protect and maintain our intellectual property assets will
have any measure of success.
Following the acquisition
of patent assets, we will likely be required to spend significant time and resources to maintain the effectiveness of those assets
by paying maintenance fees and making filings with the USPTO. We may acquire patent assets, including patent applications, which
require us to spend resources to prosecute the applications with the USPTO. Further, there is a material risk that patent related
claims (such as, for example, infringement claims (and/or claims for indemnification resulting therefrom), unenforceability claims,
or invalidity claims) will be asserted or prosecuted against us, and such assertions or prosecutions could materially and adversely
affect our business. Regardless of whether any such claims are valid or can be successfully asserted, defending such claims could
cause us to incur significant costs and could divert resources away from our other activities.
Despite our efforts to
protect our intellectual property rights, any of the following or similar occurrences may reduce the value of our intellectual
property:
|
· |
our applications for patents, trademarks
and copyrights may not be granted and, if granted, may be challenged or invalidated; |
|
· |
issued trademarks, copyrights, or patents
may not provide us with any competitive advantages versus potentially infringing parties; |
|
· |
our efforts to protect our intellectual
property rights may not be effective in preventing misappropriation of our technology; or |
|
· |
our efforts may not prevent the development
and design by others of products or technologies similar to or competitive with, or superior to those we acquire and/or prosecute. |
Moreover, we may not
be able to effectively protect our intellectual property rights in certain foreign countries where we may do business in the future
or from which competitors may operate. If we fail to maintain, defend or prosecute our patent assets properly, the value of those
assets would be reduced or eliminated, and our business would be harmed.
We are in a developing
industry with limited revenues from operations.
We have incurred significant
operating losses since inception and generate limited revenues from operations. As a result, we have generated negative cash flows
from operations and have an accumulated deficit of $299,163 as of December 31, 2014. We are operating in a developing industry
based on a new technology and our primary source of funds to date has been through the issuance of securities and borrowing funds.
There can be no assurance that management’s efforts will be successful or that the products we develop and market will be
accepted by consumers. If our products are ultimately unsuccessful in the market, this could have a material adverse effect on
our business, financial condition, results of operations and future prospects.
We face financial
risks as we are a developing company.
We have incurred significant
operating losses since inception and have limited revenue from operations. As a result, we have generated negative cash flows
from operations and our cash balances continue to reduce. While we are optimistic and believe appropriate actions are being taken
to mitigate this, there can be no assurance that attempts to reduce cash outflows will be successful and this could have a material
adverse effect on our business, financial condition, results of operations.
We may fail to attract
and retain qualified personnel.
There is intense competition
from other companies, research and academic institutions, government entities and other organizations for qualified personnel
in the areas of our activities. If we fail to identify, attract, retain and motivate these highly skilled personnel,
we may be unable to continue our marketing and development activities, and this could have a material adverse effect on our business,
financial condition, results of operations and future prospects.
If we do not effectively
manage growth or changes in our business, these changes could place a significant strain on our management and operations.
To manage our growth
successfully, we must continue to improve and expand our systems and infrastructure in a timely and efficient manner. Our
controls, systems, procedures and resources may not be adequate to support a changing and growing company. If our management
fails to respond effectively to changes and growth in our business, including acquisitions, this could have a material adverse
effect on our business, financial condition, results of operations and future prospects.
We need to manage
growth in operations to maximize our potential growth and achieve our expected revenues. Our failure to manage growth can cause
a disruption of our operations that may result in the failure to generate revenues at levels we expect.
In order to maximize
potential growth in our current markets, we may have to expand our operations. Such expansion will place a significant strain
on our management and our operational, accounting, and information systems. We expect that we will need to continue to improve
our financial controls, operating procedures and management information systems. We will also need to effectively train, motivate,
and manage our employees. Our failure to manage our growth could disrupt our operations and ultimately prevent us from generating
the revenues we expect.
General market risks
We may not be able
to access credit.
We face the risk that
we may not be able to access credit, either from lenders or suppliers. Failure to access credit from any of these sources
could have a material adverse effect on our business, financial condition, results of operations and future prospects.
We may not be able
to maintain effective internal controls.
If we fail to maintain
the adequacy of our internal accounting controls, as such standards are modified, supplemented or amended from time to time, we
may not be able to ensure that we can conclude on an on–going basis that we have effective internal controls over financial
reporting in accordance with Section 404 of the Sarbanes–Oxley Act of 2002. Failure to achieve and maintain an
effective internal control environment could cause us to face regulatory action and also cause investors to lose confidence in
our reported financial information, either of which could have a material adverse effect on our business, financial condition,
results of operations and future prospects.
Securities market risks
Our stock price and
trading volume may be volatile, which could result in losses for our stockholders.
The equity markets may
experience periods of volatility, which could result in highly variable and unpredictable pricing of equity securities. The market
price of our Common stock could change in ways that may or may not be related to our business, our industry or our operating performance
and financial condition and could negatively affect our share price or result in fluctuations in the price or trading volume of
our Common stock. We cannot predict the potential impact of these periods of volatility on the price of our Common
stock. The Company cannot assure you that the market price of our Common stock will not fluctuate or decline significantly in
the future.
If our Common stock
is delisted from the NYSE MKT LLC, the Company would be subject to the risks relating to penny stocks.
If our Common stock were
to be delisted from trading on the NYSE MKT LLC and the trading price of the Common stock were below $5.00 per share on the date
the Common stock were delisted, trading in our Common stock would also be subject to the requirements of certain rules promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These rules require additional disclosure
by broker–dealers in connection with any trades involving a stock defined as a "penny stock" and impose various
sales practice requirements on broker–dealers who sell penny stocks to persons other than established customers and accredited
investors, generally institutions. These additional requirements may discourage broker–dealers from effecting transactions
in securities that are classified as penny stocks, which could severely limit the market price and liquidity of such securities
and the ability of purchasers to sell such securities in the secondary market. A penny stock is defined generally as any non–exchange
listed equity security that has a market price of less than $5.00 per share, subject to certain exceptions.
If we need additional
capital to fund the growth of our operations, and cannot obtain sufficient capital, we may be forced to limit the scope of our
operations.
As we implement our growth
strategies, we may experience increased capital needs. We may not, however, have sufficient capital to fund our future operations
without additional capital investments. If adequate additional financing is not available on reasonable terms or at all, we may
not be able to carry out our corporate strategy and we would be forced to modify our business plans (e.g., limit our expansion,
limit our marketing efforts and/or decrease or eliminate capital expenditures), any of which may adversely affect our financial
condition, results of operations and cash flow. Such reduction could materially adversely affect our business and our ability
to compete.
Our capital needs will
depend on numerous factors, including, without limitation, (i) our profitability or lack thereof, (ii) our ability to respond
to a release of competitive products by our competitors, and (iii) the amount of our capital expenditures, including acquisitions.
Moreover, the costs involved may exceed those originally contemplated. Cost savings and other economic benefits expected may not
materialize as a result of any cost overruns or changes in market circumstances. Failure to obtain intended economic benefits
could adversely affect our business, financial condition and operating performances.
We do not anticipate
paying any cash dividends on our Common stock in the foreseeable future and our stock may not appreciate in value.
We have not declared
or paid cash dividends on our Common stock to date. We currently intend to retain our future earnings, if any, to fund the development
and growth of our business. In addition, the terms of any existing or future debt agreements may preclude us from paying dividends.
There is no guarantee that shares of our Common stock will appreciate in value or that the price at which our stockholders have
purchased their shares will be able to be maintained.
If securities or
industry analysts do not publish research or reports about our business, or publish inaccurate or unfavorable research reports
about our business, our share price and trading volume could decline.
The trading market for
our Common stock will, to some extent, depend on the research and reports that securities or industry analysts publish about us
or our business. We do not have any control over these analysts. If one or more of the analysts who cover us should downgrade
our shares or change their opinion of our business prospects, our share price would likely decline. If one or more of these analysts
ceases coverage of our company or fails to regularly publish reports on us, we could lose visibility in the financial markets,
which could cause our share price and volume to decline.
Item 1B. Unresolved staff
comments
Not applicable.
Item 2. Properties
Our principal corporate
office currently occupies 2,718 square feet of office space at 500 Mamaroneck Avenue, Suite 204, Harrison, New York 10528, under
a lease that expires on November 30, 2015. The Company leases additional space in New York City, NY (occupied by MGT Studios)
under a month–to–month arrangement. The Company believes our office is in good condition and is sufficient to conduct
our operations.
Item 3. Legal proceedings
MGT Gaming owns U.S.
Patents 7,892,088 and 8,550,554 (the “‘088 and ‘554 patents,” respectively), both entitled "Gaming
Device Having a Second Separate Bonusing Event” and both relating to casino gaming systems in which a second game played
on an interactive sign is triggered once specific events occur in a first game. On November 2, 2012, MGT Gaming filed a lawsuit
(No. 3:12–cv–741) in the United States District Court for the Southern District of Mississippi alleging patent infringement
against certain companies which either manufacture, sell or lease gaming systems in violation of MGT Gaming's patent rights, or
operate casinos that offer gaming systems in violation of MGT Gaming's ‘088 patent, including WMS Gaming, Inc. – a
subsidiary of Scientific Games, Inc. (“WMS”)(NASDAQ: SGMS), Penn National Gaming, Inc. (“Penn”) (NASDAQ
GS: PENN), and Aruze Gaming America, Inc. (“Aruze America”). An amended complaint added the '554 patent, a continuation
of the ‘088 patent. The allegedly infringing products include at least those identified under the trade names: "Amazon
Fishing" and "Paradise Fishing."
On October 23, 2013 the
U.S. District Court severed the originally filed action into three separate actions: The Defendants in all three actions filed
counterclaims denying infringement and asserting invalidity of both patents–in–suit. MGT Gaming filed appropriate
responses, reasserting the validity and infringement of the ‘088 and ‘554 patents.
On November 4, 2013,
WMS filed a Petition for Inter Parties Review ("IPR") with the United States Patent and Trademark Office ("PTO"),
challenging the’088 patent–in–suit. On April 30, 2014 the Patent Trial and Appeal Board (“PTAB”)
instituted the IPR, allowing the IPR to proceed on all claims in suit. The IPR proceeding has subsequently been dismissed by agreement
between WMS and MGT Gaming as part of a settlement of all claims between WMS and MGT, including a dismissal of MGT’s court
action against WMS.
Aruze Macau, a sister
company of Aruze, Aruze America, subsequently filed its own IPR Petition seeking review of the ‘088 patent based on the
same prior art cited by WMS in its IPR. Aruze America also filed a Request for Ex Parte Reexamination of that patent and a Petition
for IPR of the ‘554 patent, both based on different prior art. Aruze America’s Reexamination Request has been denied
by the PTO. Its Petition for IPR remains pending, with MGT’s Preliminary Response due on March 16, 2015.
MGT sought dismissal of
Aruze Macau’s IPR Petition based on the grounds that Aruze America, not Aruze Macau, was the real party in interest and/or
was in privity with Aruze Macau, and that the Aruze entities delayed more than 12 months after the filing of MGT’s infringement
action against Aruze America based on the ‘088 patent and are therefore barred from filing an IPR against that patent. On
February 20, 2015, the PTAB denied MGT’s request for dismissal of the Aruze Macau IPR Petition, but granted MGT the right
to conduct further discovery on the real party in interest, privity and one year bar issues that it had raised in its dismissal
request. MGT is pursuing such discovery and will reassert the one–year bar as well as addressing Aruze Macau’s arguments
on the merits. The PTAB held an initial conference call in that proceeding on March 16, 2015, the same day that MGT’s Preliminary
Response to Aruze America’s concurrent IPR Petition directed to the ‘554 patent was filed. MGT is seeking denial of
that latter Petition on the grounds that Aruze America has not made out a prima facie case of either anticipation or obviousness
based on the prior art asserted in that proceeding.
By motions filed on May
12, 2014, Aruze sought a transfer of the Mississippi infringement action to Nevada as well as a stay pending resolution of IPR
proceedings before the PTAB. Only the latter motion has been granted and the Mississippi action remains stayed at present.
On September 29,
2014, Iroquois Capital Management, LLC, Iroquois Master Fund and Joshua Silverman (collectively, “Iroquois”) entered
into a settlement agreement with the Company (the “Iroquois Settlement Agreement”). Pursuant to the Iroquois
Settlement agreement, Iroquois dropped all claims against the Company, and the Company agreed to: (i) nominate Joshua Silverman,
together with H. Robert Holmes, Robert B. Ladd, and Michael Onghai (collectively, the “2014 Nominees”), for election
to the Board at the Company’s 2014 annual meeting of stockholders (the “2014 Annual Meeting”); (ii) recommend
a vote for the 2014 Nominees and solicit proxies from the Issuer’s stockholders for the election of the 2014 Nominees at
the 2014 Annual Meeting; (iii) immediately appoint Mr. Silverman as an observer to the Board until the 2014 Annual Meeting; (iv)
hold the 2014 Annual Meeting no later than December 31,2014; and (v) appoint Mr. Silverman to at least one committee of the Board
promptly following the 2014 Annual Meeting, but in no event later than fifteen (15) business days thereafter.
On December 18,
2014, the Company held the 2014 Annual Meeting, at which the 2014 Nominees, including Mr. Silverman, were elected as members of
the Board, to serve until the next annual meeting of the Company or until their successors are duly elected, appointed and qualified.
After his election to the Board, Mr. Silverman was appointed as a member of the Company’s Audit Committee, Nomination and
Compensation Committees.
In addition,
the Iroquois Settlement Agreement also required Iroquois to agree to a number of standstill restrictions during the period
beginning on September 29, 2014 and ending upon the conclusion of the 2015 annual meeting of stockholders (the “2015 Annual
Meeting”); provided, however, that in the event the Company does not satisfy at least one of the Standstill Conditions (as
hereinafter defined) prior to, or as of the deadline for submissions of stockholder nominations for the 2015 Annual Meeting pursuant
to the Company’s Bylaws (the “2015 Stockholder Nomination Deadline Date”), then Iroquois shall no longer be bound
by the standstill provisions of the Iroquois Settlement Agreement and shall be permitted to nominate a slate of nominees for election
at the 2015 Annual Meeting provided that the Iroquois Director has resigned as a director as of the 2015 Stockholder Nomination
Deadline Date. The “Standstill Conditions” are that either: (1) the Company’s stock price doubles between the
date of the Iroquois Settlement Agreement and the 2015 Stockholder Nomination Deadline Date; (2) the Company enters into a merger,
sale, business combination or disposition of substantially all of the Company’s assets prior to the 2015 Stockholder Nomination
Deadline Date; or (3) each of the Company’s existing business lines are profitable as of the 2015 Stockholder Nomination
Deadline Date. If the Company does not satisfy at least one of the Standstill Conditions prior to, or as of, the 2015
Stockholder Nomination Deadline Date, and Mr. Silverman resigns from the Board prior to the date that is 10 days prior the 2015
Stockholder Nomination Deadline Date, then the standstill period shall end on the 2015 Stockholder Nomination Deadline Date.
The standstill provisions that
Iroquois agreed to pursuant to the Iroquois Settlement Agreement provide, among other things, that Iroquois will not: (i)
acquire beneficial ownership of any additional securities of the Company, without the Company’s prior written consent;
(ii) submit any stockholder proposals; (iii) engage in any solicitation of proxies (or written consents) or otherwise become
a participant in a solicitation in opposition to the recommendation or proposal of the Board; (iv) form or join any
partnership, limited partnership, syndicate or other group within the meaning of Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended with respect to the Common Stock or deposit any shares of Common Stock in a voting trust or similar
arrangement; (v) call, or request the call of, a special meeting of the Company’s stockholders, or make a request for a
list of the Company’s stockholders; (vi) vote for any nominee(s) for election to the Board, other than those nominated
or supported by the Board; (vii) except as provided in the Iroquois Settlement Agreement, seek to place a representative or
other affiliate, associate or nominee on the Board or seek the removal of any member of the Board or a change in the size or
composition of the Board; (viii) effect or seek to effect, in any capacity other than as a member of the Board, offer or
propose to effect, or cause or participate in, or assist or facilitate any other person to do the same (whether publicly or
otherwise) (a) any acquisition of any material assets or businesses of the Company or its subsidiaries, or any sale, lease,
exchange, pledge, mortgage, or transfer thereof; (b) any tender offer or exchange offer, merger, acquisition or other
business combination involving the Company or its subsidiaries; or (c) any recapitalization, restructuring, liquidation,
dissolution or other extraordinary transaction with respect to the Company or its subsidiaries; (ix) make, or assist or
encourage any third party to make, any demands for books and records and other materials pursuant to Section 220 of the
Delaware General Corporate Law or pursue any litigation related thereto against the Company; and (x) disclose publicly,
or privately in a manner that could reasonably be expected to become public, any intention, plan or arrangement inconsistent
with the foregoing.
Item 4. Mine safety disclosures
None.
PART II
Item 5. Market for registrant’s
common equity, related stockholder matters and issuer’s purchases of equity securities
Market information
Our Common stock is traded
on the NYSE MKT LLC (“NYSE MKT”) under the symbol “MGT”.
The following table sets
forth the high and low last reported sales prices of our Common stock for each quarterly period during 2014 and 2013.
| |
High | | |
Low | |
2014: | |
| | | |
| | |
Fourth quarter | |
$ | 1.08 | | |
$ | 0.57 | |
Third quarter | |
| 1.90 | | |
| 0.64 | |
Second quarter | |
| 2.00 | | |
| 1.05 | |
First quarter | |
| 2.73 | | |
| 1.78 | |
| |
| | | |
| | |
2013: | |
| | | |
| | |
Fourth quarter | |
$ | 3.77 | | |
$ | 2.70 | |
Third quarter | |
| 5.02 | | |
| 3.45 | |
Second quarter | |
| 5.29 | | |
| 3.05 | |
First quarter | |
| 3.90 | | |
| 2.76 | |
On April 13, 2015, the
Company’s Common stock closed on NYSE MKT at $0.59 per share.
As of April 13, 2015,
there were 377 stockholders of record of our Common stock.
Dividends
The Company has never declared or paid cash
dividends on its Common stock and has no intention to do so in the foreseeable future.
For the years ending
December 31, 2014, and 2013, the Company issued an aggregate of 580 and 21,394 shares of Convertible Preferred Series A stock
respectively, as dividend shares to record stockholders. The issuances of Convertible Preferred Series A Stock as dividend shares
to record stockholders did not result in any proceeds to the Company.
Securities authorized for issuance under equity compensation
plans
No
option grants were issued during the year ended December 31, 2014. Further reference
is made to the information contained in the Equity Compensation Plan table contained in Item 12 of this Annual Report.
Recent sales of unregistered securities
In the three months ended
December 31, 2014, the Company issued 148 shares of Series A Convertible Preferred stock as dividend shares to holders, representing
dividends due from October 1, 2014 to December 31, 2014.
The above issuances were
made in reliance on an exemption from registration set forth in Section 4(a)(2) of the Securities Act of 1933, as amended. The
issuances did not result in any proceeds to the Company.
Issuer purchases of equity securities
There were no repurchases
of the Company’s Common stock during the year ended December 31, 2014.
Item
6. Selected financial data.
Not applicable.
Item 7. Management’s
discussion and analysis of financial condition and results of operations
Amounts in thousands,
except shares and per share amount.
Executive summary
MGT Capital Investments,
Inc. (“MGT,” “the Company,” “we,” “us”) is a Delaware corporation, incorporated
in 2000. The Company was originally incorporated in Utah in 1977. MGT is comprised of the parent company, majority–owned
subsidiaries MGT Gaming, Inc. (“MGT Gaming”), MGT Interactive LLC (“MGT Interactive”), and wholly–owned
subsidiaries Medicsight, Inc. (“Medicsight”), MGT Studios, Inc. (f/k/a MGT Capital Solutions, Inc.) (“MGT Studios”)
including its minority–owned subsidiary M2P Americas, Inc., and MGT Sports, Inc. (“MGT Sports”) including its
wholly–owned subsidiary FanTD LLC, (“FanTD”). Our corporate office is located in Harrison, New York.
MGT and its subsidiaries
are primarily engaged in the business of acquiring, developing and monetizing assets in the online and mobile gaming space, as
well as the casino industry.
MGT Sports
MGT Sports operates DraftDay.com,
the daily fantasy sports industry’s third largest daily fantasy sports wagering site, based upon player activity, contest
sizes and similar metrics. The website offers players the opportunity to participate in real money daily fantasy gameplay for
the NFL, MLB, NCAA (basketball & football), NHL, NBA and professional golf. Player funds associated to the DraftDay.com website
are maintained in a segregated account and are not used for operating activities. Players select a roster of athletes across most
popular sports, and winnings are determined by the same–day performance of these rosters. Daily fantasy sports compress
the timeframe of traditional fantasy sports from multi–month seasons into 24–hour periods. DraftDay is a leader in
the popular quick–pick style of skill–based fantasy sports gaming. In addition, the Company has launched an online
portal for fantasy sports news and commentary, FantasySportsLive.com.
On May 20, 2013, MGT
Sports completed the acquisition of 63% of the outstanding membership interests of FanTD LLC. During the year ended December 31,
2014 the Company acquired the remaining 37% interest in FanTD.
On April 7, 2014, the
Company closed on the Asset Purchase Agreement (the “CRG Agreement”) with CardRunners Gaming, Inc. (“CRG”),
and certain key stockholders of CRG. The CRG Agreement provided for the Company’s purchase of all of the business assets
and intellectual property related to DraftDay.com. (Note 4)
On December 30, 2014,
the Company announced an exclusive partnership with Vivid Entertainment, LLC to develop a fantasy sports gaming site which is
available online at VividBetSports.com.
On September 30, 2006,
the United States Congress passed the Unlawful Internet Gambling Enforcement Act of 2006 (“UIGEA”). The criminal provisions
of UIGEA provide that no person engaged in the business of betting or wagering may knowingly accept directly or indirectly virtually
any type of payment from a player in unlawful internet gambling (i.e. bets that are unlawful under other state or Federal laws).
The Company has been advised by counsel that the fantasy sports are exempt from the definition of unlawful internet gambling provided
that:
|
· |
They are not based on the current membership
of an actual sports team or on the score, point spread or performance of teams; |
|
· |
All prizes and awards are established
and made known before the start of the contest; |
|
· |
Winning outcomes are based on the skill
of the participants and predominately by accumulated statistics of individual performances of athletes, but not solely on
a single performance of an athlete. |
MGT Gaming
MGT Gaming owns U.S.
Patents 7,892,088 and 8,550,554 (the “‘088 and ‘554 patents,” respectively), both entitled "Gaming
Device Having a Second Separate Bonusing Event” and both relating to casino gaming systems in which a second game played
on an interactive sign is triggered once specific events occur in a first game. On November 2, 2012, MGT Gaming filed a lawsuit
(No. 3:12–cv–741) in the United States District Court for the Southern District of Mississippi alleging patent infringement
against certain companies which either manufacture, sell or lease gaming systems in violation of MGT Gaming's patent rights, or
operate casinos that offer gaming systems in violation of MGT Gaming's ‘088 patent, including WMS Gaming, Inc. – a
subsidiary of Scientific Games, Inc. (“WMS”)(NASDAQ: SGMS), Penn National Gaming, Inc. (“Penn”) (NASDAQ
GS: PENN), and Aruze Gaming America, Inc. (“Aruze America”). An amended complaint added the '554 patent, a continuation
of the ‘088 patent. The allegedly infringing products include at least those identified under the trade names: "Amazon
Fishing" and "Paradise Fishing."
On October 23, 2013 the
U.S. District Court severed the originally filed action into three separate actions: The Defendants in all three actions filed
counterclaims denying infringement and asserting invalidity of both patents–in–suit. MGT Gaming filed appropriate
responses, reasserting the validity and infringement of the ‘088 and ‘554 patents.
On November 4, 2013,
WMS filed a Petition for Inter Parties Review ("IPR") with the United States Patent and Trademark Office ("PTO"),
challenging the’088 patent–in–suit. On April 30, 2014 the Patent Trial and Appeal Board (“PTAB”)
instituted the IPR, allowing the IPR to proceed on all claims in suit. The IPR proceeding has subsequently been dismissed by agreement
between WMS and MGT Gaming as part of a settlement of all claims between WMS and MGT, including a dismissal of MGT’s court
action against WMS.
Aruze Macau, a sister
company of Aruze, Aruze America, subsequently filed its own IPR Petition seeking review of the ‘088 patent based on the
same prior art cited by WMS in its IPR. Aruze America also filed a Request for Ex Parte Reexamination of that patent and a Petition
for IPR of the ‘554 patent, both based on different prior art. Aruze America’s Reexamination Request has been denied
by the PTO. Its Petition for IPR remains pending, with MGT’s Preliminary Response due on March 16, 2015.
MGT sought dismissal
of Aruze Macau’s IPR Petition based on the grounds that Aruze America, not Aruze Macau, was the real party in interest and/or
was in privity with Aruze Macau, and that the Aruze entities delayed more than 12 months after the filing of MGT’s infringement
action against Aruze America based on the ‘088 patent and are therefore barred from filing an IPR against that patent. On
February 20, 2015, the PTAB denied MGT’s request for dismissal of the Aruze Macau IPR Petition, but granted MGT the right
to conduct further discovery on the real party in interest, privity and one year bar issues that it had raised in its dismissal
request. MGT is pursuing such discovery and will reassert the one–year bar as well as addressing Aruze Macau’s arguments
on the merits. The PTAB held an initial conference call in that proceeding on March 16, 2015, the same day that MGT’s Preliminary
Response to Aruze America’s concurrent IPR Petition directed to the ‘554 patent was filed. MGT is seeking denial of
that latter Petition on the grounds that Aruze America has not made out a prima facie case of either anticipation or obviousness
based on the prior art asserted in that proceeding.
By motions filed on May
12, 2014, Aruze sought a transfer of the Mississippi infringement action to Nevada as well as a stay pending resolution of IPR
proceedings before the PTAB. Only the latter motion has been granted and the Mississippi action remains stayed at present.
MGT Studios
MGT Studios is publisher
of social games and real money games of skill.
On November 11, 2013,
the Company entered into an Agreement and Plan of Reorganization (the “Avcom Agreement”) with MGT Capital Solutions,
Inc., a wholly owned subsidiary of the Company, Avcom, Inc. and the stockholders and option holders of Avcom, Inc. (“Avcom”).
Pursuant to the Avcom Agreement, the Company acquired 100% of the capital stock of Avcom. In consideration, the Preferred stockholders
of Avcom received $550 in value of the Company’s Common stock and the Common stockholders and option holders of Avcom will
receive an aggregate of $1,000 in value of the Company’s Common stock. The value of the Company’s Common stock is
based on the volume weighted average closing price for the 20 trading days prior to signing the Avcom Agreement. The acquisition
contemplated by the Avcom Agreement closed on November 26, 2013.
One half of the issuance
to the Avcom Common stockholders and option holders was placed in escrow and will be released upon the later of (i) the commercial
release of an agreed upon game or (ii) six (6) months after closing. In addition, the Common stockholders may be awarded contingent
consideration of $1.0 million through the issuance of up to 333,000 shares of the Company’s Common stock in the event that
the game reaches $3.0 million in gross revenues within 18 months of signing the Avcom Agreement.
Avcom is a game development
studio producing free to play mobile and social casino–style games. Avcom’s assets include physical and intellectual
property associated with Mobilevegas and freeawesome.com, as well as a game under development titled “SlotChamp”.
Prior to entering into the Avcom Agreement, Avcom had performed certain game development consulting services for the Company for
which Avcom received an aggregate of $146 as consideration for such services in 2013.
On December 4, 2013,
the Company entered into a Strategic Alliance Agreement with M2P Entertainment GmbH, a German corporation (“M2P”),
the newly formed Delaware corporation, M2P Americas, Inc. (“M2P Americas”) and the Company’s existing subsidiary
MGT Studios. The purpose of the transaction is to allow M2P Americas to market and exploit MP2’s gaming technology in North
and South America through M2P Americas. As part of the transaction, the Company acquired 50.1% of M2P Americas and M2P acquired
49.9%. The Strategic Alliance Agreement provides that the Company and M2P will jointly cooperate to launch M2P’s gaming
technology in North and South America. It further provides M2P Americas with an exclusive royalty free license to M2P’s
gaming technology for North and South America.
Pursuant to the terms
of the Strategic Alliance Agreement, the Company will advance certain expenses to M2P Americas and the Company and M2P will provide
network and human resources support to M2P Americas. The parties also entered into a Stockholders Agreement dated the same date
which, among other things, grants M2P an option to purchase 10% of the Company’s ownership in M2P Americas at book value
if the Company does not purchase equity in M2P prior to April 2, 2014. This agreement was subsequently amended to extend
the purchase date to May 31, 2014.
On May 31, 2014, M2P
exercised its option to purchase 10% of the outstanding equity interests of M2P Americas from the Company. As a result, the
Company’s ownership of M2P Americas is now 40.1%, and M2P’s ownership is 59.9%.
MGT filed a completed
application for a New Jersey Casino Service Industry Enterprise License (“CSIE”). According to regulations promulgated
by the New Jersey Division of Gaming Enforcement (NJDGE), companies providing Internet gaming software or systems, and vendors
who manage, control, or administer games and associated wagers conducted through the Internet, must obtain a CSIE. The Company
expects a determination from NJDGE after it reviews the Personal History Disclosure forms to be provided by a significant
minority stockholder of the Company. Completion of this paperwork is beyond the control of MGT; therefore the Company is unable
to predict when or if a CSIE License will be granted.
MGT Interactive
On September 3, 2013,
the Company entered into a Contribution and Sale Agreement (the “Contribution Agreement”) by and among the Company,
Gioia Systems, and LLC (“Gioia”) and MGT Interactive, LLC whereby MGT Interactive acquired certain assets from Gioia
which was the inventor and owner of a proprietary method of card shuffling for the online poker market. Trademarked under the
name Real Deal Poker, the technology uses patented shuffling machines, along with permutation re–sequencing, allowing for
the creation of up to 16,000 decks per minute in real time. The acquisition includes seven (7) U.S. Patents and several Internet
URL addresses, including www.RealDealPoker.com. Pursuant to the Contribution Agreement, Gioia contributed the assets to MGT Interactive
in exchange for a 49% interest in MGT Interactive and MGT contributed $200 to MGT Interactive in exchange for a 51% interest in
MGT Interactive. The $200 contributed by the Company has been utilized as working capital to cover the direct and associated costs
relating to the achievement of a certification from Gaming Laboratories International (“GLI”). The Company has the
right to acquire an additional 14% ownership interest in MGT Interactive from Gioia in exchange for a purchase price of $300 after
GLI certification is obtained. Gioia, in turn, will have the right to re–acquire the 14% interest for a period of three
years at a purchase price of $500. Gioia shall have the right to certain royalty payments from the gross rake payments, and any
licensing or royalty income received by MGT Interactive after certain revenue targets are exceeded.
Medicsight
Medicsight owns medical
imaging software that has received U.S. FDA approval and European CE Mark. The software is designed to detect colorectal polyps
during a virtual colonoscopy performed using CT Tomography. Software sales have been very limited in the past two years. The Company
also has developed an automated carbon dioxide insufflation device and receives royalties on a per–unit basis from an international
manufacturer. On June 30, 2013, the Company completed the sale of Medicsight’s global patent portfolio to Samsung Electronics
Co., Ltd. for gross proceeds of $1.5 million.
Results of operations
The Company currently
has four operational segments, Medicsight Software/Devices, Medicsight Services, Gaming and Intellectual Property. Intellectual
Property was previously referred to as MGT Gaming. Gaming is a new segment for the year ended December 31, 2014. Certain corporate
expenses are not allocated to a particular segment.
|
· |
Revenue totaled $1,056 (2013: $396). |
|
· |
Operating expenses were $6,075 (2013:
$9,349). |
|
· |
Net loss attributable to Common stockholders
was $5,330 (2013: $10,272) resulting in a basic and diluted loss per share of $0.56 (2013: $1.84). |
The increase in revenues
is attributed to DraftDay, acquired in the second quarter of 2014.
Our operating expenses
have decreased substantially during the year ended December 31, 2014, predominantly due to lower corporate governance costs of
$629 (2013: $2,430), professional fees of $944 (2013: $1,693), non–cash expenses such as stock–based expense of $449
(2013: $2,965) and Preferred Series A warrant modification expense of $nil (2013: $598).
Fiscal years ended December 31,
2014 versus 2013
Gaming
During the year ended
December 31, 2014, the Company recognized $971 in revenue for this segment (2013: $221), the increase is attributed to DraftDay,
acquired in the second quarter of 2014.
Our cost of revenue was
$610 (2013: $496), which primarily consisted of overlay incurred on the DraftDay website. The website offers daily Fantasy Sports
contests and charges entry fees to play. Occasionally, as an incentive for user activity some contests may pay out higher prize
money than the charged entry fees, the expense is recognized as overlay and included in cost of revenues. Management expects these
costs to decrease substantially as the site builds its user base and increases liquidity.
Our selling, general
and administrative expenses were $3,160 (2013: $1,092), primarily consisting of marketing expenses, employee compensation, IT
and office related expenses in MGT Studios, FanTD and MGT Sports. The increase is primarily attributed to operating costs in DraftDay,
acquired in the second quarter of 2014.
In the year ended December
31, 2014 the Company recognized $188 of research and development expense (2013: $73), attributed to product development costs
in MGT Studios.
In the fourth quarter
of 2014, MGT Studios wrote down $135 (2013: $nil) relating to Digital Angel intangible assets.
Medicsight software/devices
Revenues were $85 (2013:
$78), primarily consisting of newly launched Insufflator sales via our distributor Ultrasound Technologies, Ltd.
There were no expenses
attributed to this segment (2013: $15).
Medicsight services
As a result of employee
departure in the second quarter of 2013 the company did not recognize any revenue in 2014 (2013: $97) or cost of revenue (2013:
$63) for this segment during the year ended December 31, 2014. Selling, general and administrative expenses were also $nil (2013:
$7). Management is currently evaluating and assessing options for this segment.
Intellectual property (f/k/a MGT Gaming)
This segment currently
does not generate revenue as the Company continues to pursue its patent enforcement strategy.
Selling, general and
administrative expenses were $486 (2013: $595), attributed to intellectual property amortization and consulting and legal fees.
Unallocated corporate/other
Selling, general and
administrative expenses during the year ended December 31, 2014, decreased to $2,242 from $6,967 in 2013. Stock–based compensation
expense was lower by approximately $2.5 million compared to last year and corporate governance and professional fees have decreased
by approximately $1.5 million as there were no investor and public relations costs this year. Additionally, in 2013, the Company
recorded a non–recurring expense of $598 related to warrant modification.
The Company recorded
$1 in interest and other expense for the year ended December 31, 2014 (2013: $43).
Liquidity and capital resources
| |
December 31 | | |
December 31 | |
| |
2014 | | |
2013 | |
Working capital summary: | |
| | | |
| | |
Cash and cash equivalents (excluding $138 and $140 of restricted cash in December
2014 and December 2013, respectively) | |
$ | 1,455 | | |
$ | 4,642 | |
Other current assets | |
| 177 | | |
| 175 | |
Current liabilities | |
| (1,379 | ) | |
| (985 | ) |
Working capital surplus | |
$ | 253 | | |
$ | 3,832 | |
| |
Year ended December 31,
2014 | |
| |
2014 | | |
2013 | |
Cash flow summary: | |
| | | |
| | |
Cash (used in) / provided by: | |
| | | |
| | |
Operating activities | |
$ | (4,552 | ) | |
$ | (5,058 | ) |
Investing activities | |
| (101 | ) | |
| 2,222 | |
Financing activities | |
| 1,466 | | |
| 4,035 | |
Net (decrease) increase in cash and cash equivalents | |
$ | (3,187 | ) | |
$ | 1,199 | |
On December 31, 2014,
MGT’s cash and cash equivalents were $1,455 excluding $138 of restricted cash. Player funds associated to the DraftDay.com
website are maintained in a segregated account and are not used for operating activities. The Company continues to exercise discipline
with respect to current expense levels, as revenues remain limited. Our cash and cash equivalents have decreased during 2014 primarily
from $4,552 used in operating activities.
The Company is operating
in a developing industry based on new technology and its primary source of funds to date has been through issuances of securities.
The Company intends to raise additional capital through equity investors. The Company needs to raise additional capital in order
to be able to accomplish its business plan objectives. Management believes that it will be successful in obtaining additional financing
based on its history of raising funds; however, no assurance can be provided that the Company will be able to do so. There
is no assurance that any funds it raises will be sufficient to enable the Company to attain profitable operations or continue as
a going concern. If adequate funds are not available to us, we may be required to curtail operations significantly or to obtain
funds through entering into arrangements with collaborative partners or others that may require us to relinquish rights to certain
of our technologies or products that we would not otherwise relinquish. There can be no assurance that such a plan will be successful.
Operating activities
Our net cash used in
operating activities differs from the net loss predominantly because of various non–cash adjustments such as depreciation,
amortization of intangibles, modification of Preferred Series A Warrants, change in fair value of warrants, gain on sale of patent,
stock–based compensation and movements in working capital.
Investing activities
Restricted cash
With fewer than 345,012
shares of Preferred stock outstanding, $2,000 was released out of restricted cash as the Company is no longer subject to the Cash
Maintenance provision of the Purchase Agreement under which the Preferred stock was originally sold in October 2012 (Note 8).
Avcom
On November 11, 2013,
the Company entered into an Agreement and Plan of Reorganization (the “Avcom Agreement”) with MGT Capital Solutions,
Inc., a wholly owned subsidiary of the Company, Avcom, Inc. and the stockholders and option holders of Avcom, Inc. (“Avcom”).
Pursuant to the Avcom Agreement, the Company acquired 100% of the capital stock of Avcom. In consideration, the Preferred stockholders
of Avcom received $550 in value of the Company’s Common stock and the Common stockholders and option holders of Avcom will
receive an aggregate of $1,000 in value of the Company’s Common stock. The value of the Company’s Common stock is
based on the volume weighted average closing price for the 20 trading days prior to signing the Avcom Agreement. The Avcom acquisition
closed on November 26, 2013.
One half of the issuance
to the Avcom Common stockholders and option holders was placed in escrow and will be released upon the later of (i) the commercial
release of an agreed upon game or (ii) six (6) months after closing. In addition, the Common stockholders may be awarded contingent
consideration of $1,000 through the issuance of up to 333,000 of the Company’s Common stock in the event that the game reaches
$3,000 in gross revenues within 18 months of signing the Avcom Agreement.
Avcom is a game development
studio producing free to play mobile and social casino–style games. Avcom’s assets include physical and intellectual
property associated with Mobileveg.as and freeawesome.com, as well as a game under development titled “SlotChamp”.
Prior to entering into the Avcom Agreement, Avcom had performed certain game development consulting services for the Company for
which Avcom received an aggregate of $146 as consideration for such services.
Real Deal Poker
On September 3, 2013,
the Company entered into a Contribution and Sale Agreement (the “Contribution Agreement”) with Gioia Systems, LLC.
(“Gioia”) and MGT Interactive) whereby MGT Interactive acquired certain assets from Gioia, the inventor and
owner of a proprietary method of card shuffling for the online poker market. Trademarked under the name Real Deal Poker, the technology
uses patented shuffling machines, along with permutation re–sequencing, allowing for the creation of up to 16,000 decks
per minute in real time. The acquisition includes seven (7) U.S. Patents and several Internet URL addresses, including www.RealDealPoker.com.
Pursuant to the Contribution Agreement, Gioia contributed the assets to MGT Interactive in exchange for a 49% interest in MGT
Interactive and MGT contributed $200 to MGT Interactive in exchange for a 51% interest in MGT Interactive. The $200 contributed
by the Company will be utilized as working capital to cover the direct and associated costs relating to the achievement
of a certification from Gaming Laboratories International (“GLI”). The Company has the right to acquire an additional
14% ownership interest in MGT Interactive from Gioia in exchange for a purchase price of $300 after GLI certification is obtained.
Gioia, in turn, will have the right to re–acquire the 14% interest for a period of three years at a purchase price of $500.
Gioia has the right to certain royalty payments from the Gross Rake payments, and any licensing or royalty income received by
MGT Interactive.
Simultaneously with the
entry into the Contribution Agreement, the Company and Gioia entered into a Limited Liability Company Agreement which serves as
the operating agreement for MGT Interactive, and a consulting agreement (the “Consulting Agreement”) with Gioia to
provide services to the Company primarily related to obtaining GLI Certification. The Consulting Agreement terminates on the earlier
of January 31, 2014 or the date on which GLI Certification is obtained. In the event that GLI Certification is obtained prior
to January 31, 2013, the Consulting Agreement shall be extended for an additional year. Pursuant to the Consulting Agreement,
Gioia will receive a monthly consulting fee of $10 of which $5 is paid in cash per month and $5 is deferred until GLI certification
is obtained. The Company expensed $179 for Fiscal 2013. Testing concluded on January 29, 2014, and GLI reported random behavior
suitable for the applications that were analyzed. The Company is discussing with GLI the final steps to certification.
MGT filed for an application for a New Jersey Casino Services Industry Enterprise License with the New Jersey Department
of Gaming, as required, to offer internet gambling services. Although obtaining the license is beyond the Company’s control,
the Company hopes to obtain the license sometime in 2015.
FanTD
On May 20, 2013, the
Company completed the acquisition of 63% of FanTD in exchange for an aggregate purchase of $3,220 consisting of 600,000 shares
of MGT Common stock at a fair value of $5.03 per share for a total of $3,018 and a cash payment of $202. The fair value of the
37% non–controlling interest retained by the sellers in this transaction amounted to $1,882. The Company’s acquisition
of FanTD is the Company’s initial venture in the online and mobile gaming and wagering space.
On July 23, 2013, MGT
Sports acquired certain assets from Daily Joust, Inc. The purchase price consisted of a cash payment of $50 for $136 in customer
deposits and assumption of a $136 customer liability.
On June 25, 2013, MGT
Sports acquired Fantasy Sports Live, which was effectively a customer list associated with a specific gaming application for $30
in cash and the assumption of a $46 customer deposit liability.
Digital Angel
On May 2, 2013, the Company
purchased certain mobile game application assets from Digital Angel Corporation. The purchase price consisted of a cash payment
in the amount of $136 and 50,000 restricted shares of the Company’s Common stock with an aggregate fair value of $202 as
of the date this transaction was completed. The Company determined the acquisition constitutes a purchase of assets in accordance
with guidance of ASC 805 “Business Combinations.”
Sale of medical imaging patents
On June 30, 2013, MGT
closed the sale of Medicsight’s portfolio of medical imaging patents to Samsung Electronics Co, Ltd. (“Samsung”).
The Company had no prior relationship with Samsung. Gross proceeds of $1,500 was reduced by a broker commission of $501 paid to
Munich Innovation Group GmbH, foreign withholding tax of $248 and an escrow agent fee of $1. The seller deposited $750 of proceeds
into a restricted cash account upon the completion of the sale of which $651 was released to the Company on July 3, 2013. The
remaining $99 is currently in escrow pending reclaim of foreign withholding tax.
Financing activities
Warrant exercises
On April 26, 2013, the
Company made an offer to the holders of the Company’s $3.85 Common stock Purchase Warrants (the “Warrants”),
providing if such investors exercised one Warrant, they would have the right to exchange up to two additional Warrants for 5/8ths
per share of Common stock per Warrant exchanged. The results of the offer were that holders of 715,742 Warrants elected to exercise
their Warrants. Total proceeds received from the exercise of 715,742 Warrants were $2,757.
During the year ending
December 31, 2013, 357,204 of the Company’s $3.00 Common stock Purchase Warrants were exercised. Of the warrant conversions,
210,529 were cashless and 146,675 were exercised for total proceeds of $440.
In addition, the allowed
maximum of 1,431,486 Warrants were exchanged for 894,683 shares of the Company’s Common stock, issuable upon shareholder
and Exchange approval. On September 27, 2013, at MGT’s annual meeting of stockholders, stockholders approved the issuance
of up to 894,683 shares of Common stock in exchange for the cancellation of 1,431,486 warrants to purchase shares of Common stock
at $3.85 per share. The shares were subsequently issued on October 8, 2013. The stock was valued at $3,230, using the closing
market price on September 27, 2013.
On December 10, 2013,
the Company entered into a Warrant Modification Agreement (the “Agreement”) with Iroquois Master Fund Ltd. (“Iroquois”).
Pursuant to the Agreement, Iroquois agreed to immediately exercise its warrant to purchase 613,496 shares of Common stock, par
value $0.001 of the Company, at an exercise price of $1.50 per share, for aggregate gross proceeds to the Company of $920 and
(ii) agreed to terminate its right of participation in future equity offerings of the Company. In exchange, the Company agreed
to reduce the warrant exercise price from $3.85 per share to $1.50 per share, and agreed not to issue any securities at a price
below $2.50 per share for a period of 90 days after the date of the Agreement (other than securities granted pursuant to a stock
plan or issued in connection with an acquisition or issued pursuant to an agency agreement with a registered broker–dealer
provided that we agree with the broker–dealer and publicly announce that we will not sell shares for a price below $2.50
per share); this 90 day period has expired. Iroquois acquired the warrant in connection with the Company's November 2012 financing.
In connection with the Agreement, the Company paid to Chardan Capital Markets, LLC a placement fee for the solicitation of the
exercise of the warrants equal to 8% of the gross proceeds raised, or approximately $73 and reimbursed Chardan for $9 of its legal
fees, resulting in net proceeds of $838.
Century
On December 2, 2013,
the Company entered into a Settlement Agreement (the “Settlement Agreement”) with Century. Pursuant to the Settlement
Agreement, both parties agreed to the following: (i) the Company’s obligation to grant the Warrant and to issue the underlying
Common stock, and Century’s right to receive the Warrant and the underlying Common stock is cancelled, (ii) Century will
make a cash payment to the Company of $100 and (iii) the Company will issue to Century 100,000 shares of Common stock subject
to NYSE MKT exchange approval. These shares were subsequently issued on December 26, 2013. The stock was valued at $301, using
the closing market price on December 2, 2013. Proceeds under the Settlement Agreement were received on December 10, 2013 (Note
10).
Risks and uncertainties
related to our future capital requirements
The Company has incurred
significant operating losses since inception and continues to generate losses from operations. As a result, the Company has generated
negative cash flows from operations and has an accumulated deficit of $299,163 at December 31, 2014. 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 the products
or patent monetization strategy will be successful. Furthermore, it is contemplated that any acquisitions may require the Company
to raise capital; such capital may not be available on terms acceptable to the Company, if at all.
On December 30, 2013,
and as amended on March 27, 2014, the Company entered into an At the Market Offering Agreement (the “ATM Agreement”)
with Ascendiant Capital Markets, LLC (the “Manager”).
Pursuant to the ATM Agreement,
the Company may offer and sell shares of its Common stock (the “Shares”) having an aggregate offering price of up
to $8.5 million from time to time through the Manager. The Shares sold in the offering will be issued pursuant to the Company’s
effective shelf registration statement on Form S–3 (File No. 333–182298) previously filed with the Securities and
Exchange Commission (the “SEC”) in accordance with the provisions of the Securities Act of 1933, as amended (the “Securities
Act”), as supplemented by a prospectus supplement dated December 30, 2013 for the sale of up to $8.5 million of Shares,
which the Company filed with the SEC pursuant to Rule 424(b)(5) under the Securities Act.
The Manager is not required
to sell any specific number or dollar amount of Shares but will use its commercially reasonable efforts, as the Company's agent
and subject to the terms of the ATM Agreement, to sell the Shares offered, as instructed by the Company. Such instructions will
include notice as to the maximum amount of shares of the Company’s Common stock to be sold by the Manager on a daily basis
and the minimum price per share at which such shares may be sold.
The ATM Agreement provides
that the Company will pay the Manager a fee of 3.0% of the gross sales price of any Shares sold through the Manager. The ATM Agreement
contains customary representations, warranties and agreements of the Company and the Manager and customary conditions to completing
future sale transactions, indemnification rights and obligations of the parties and termination provisions.
The Company intends to
use the net proceeds from any sales of Shares in the offering for working capital, capital expenditures, and general business
purposes. The Company's management will have significant flexibility in applying the net proceeds of this offering.
At December 31, 2014,
MGT’s cash, cash equivalents and restricted cash were $1,455, including $11 held in MGT Gaming.
To date we have primarily
financed our operations through private placements of equity and debt securities. To the extent that additional capital is raised
through the sale of equity or equity–related securities of the Company or its subsidiaries, the issuance of such securities
could result in dilution to our stockholders.
No assurance can be given,
however, that we will have access to the capital markets in the future, or that financing will be available on acceptable terms,
if at all, to satisfy our cash requirements to implement our business strategies.
If we are unable to access
the capital markets or obtain acceptable financing, our results of operations and financial conditions could be materially and
adversely affected. We may be required to raise substantial additional funds through other means.
Commercial results have
been limited and we have not generated significant revenues. We cannot assure our stockholders that our revenues will be sufficient
to fund our operations. If adequate funds are not available to us, we may be required to curtail operations significantly or to
obtain funds through entering into arrangements with collaborative partners or others that may require us to relinquish rights
to certain of our technologies or products that we would not otherwise relinquish.
Currently the Company anticipates it has sufficient
cash on hand, along with the ATM agreement and combined with the anticipated gross margin from DrafDay and the gross margin from
the expected launch of its social slot machine game, Slotchamp, to continue operations at least through March 31, 2016.
There can be no assurance
that any additional acquisitions will occur at all, or that any such acquisitions will be accretive to earnings, book value and
other financial metrics, or that any such acquisitions will generate positive returns for Company stockholders. Furthermore, it
is contemplated that any acquisitions may require the Company to raise additional capital; such capital may not be available on
terms acceptable to the Company, if at all.
For the year
ended December 31, 2014, and through April 14, 2015, the Company sold approximately 4,100,000 shares of our Common stock under
the ATM Agreement through an “at the market” equity offering program for gross proceeds of approximately $2,949,
before related expenses. The proceeds will be used for general corporate purposes, including, but not limited to,
commercialization of our products, capital expenditures and working capital. As of April 14, 2015, the Company has
approximately $5.6 million remaining under the program, assuming sufficient shares are available to be issued.
The Company intends to
use the net proceeds from any future offerings for general corporate purposes, including, but not limited to, obtaining regulatory
approvals, commercialization of its products, capital expenditures and working capital.
At The Market Offering Agreement
On December 30, 2013,
and as amended on March 27, 2014, the Company entered into an At the Market Offering Agreement (the “ATM Agreement”)
with Ascendiant Capital Markets, LLC (the “Manager”).
Pursuant to the ATM Agreement,
the Company may offer and sell shares of its Common stock (the “Shares”) having an aggregate offering price of up
to $8.5 million from time to time through the Manager. The Shares sold in the offering will be issued pursuant to the Company’s
effective shelf registration statement on Form S–3 (File No. 333–182298) previously filed with the Securities and
Exchange Commission (the “SEC”) in accordance with the provisions of the Securities Act of 1933, as amended (the “Securities
Act”), as supplemented by a prospectus supplement dated December 30, 2013 for the sale of up to $8.5 million of Shares,
which the Company filed with the SEC pursuant to Rule 424(b)(5) under the Securities Act.
The Manager is not required
to sell any specific number or dollar amount of Shares but will use its commercially reasonable efforts, as the Company's agent
and subject to the terms of the ATM Agreement, to sell the Shares offered, as instructed by the Company. Such instructions will
include notice as to the maximum amount of shares of the Company’s Common stock to be sold by the Manager on a daily basis
and the minimum price per share at which such shares may be sold.
The ATM Agreement provides
that the Company will pay the Manager a fee of 3.0% of the gross sales price of any Shares sold through the Manager. The ATM Agreement
contains customary representations, warranties and agreements of the Company and the Manager and customary conditions to completing
future sale transactions, indemnification rights and obligations of the parties and termination provisions.
For the year ended
December 31, 2014, and through March 30, 2015, the Company sold approximately 3,400,000 shares of our Common stock under the ATM
Agreement through an “at the market” equity offering program for gross proceeds of approximately $2,573, before related
expenses. The proceeds will be used for general corporate purposes, including, but not limited to, commercialization of our products,
capital expenditures and working capital. As of March 30, 2015, the Company has approximately $6.0 million remaining under the
program, assuming sufficient shares are available to be issued.
The Company intends to
use the net proceeds from any sales of Shares in the offering for working capital, capital expenditures, and general business
purposes. The Company's management will have significant flexibility in applying the net proceeds of this offering.
Commitments
STATS licensing agreement
On May 1, 2014, the Company
entered into a licensing agreement with STATS LLC (“STATS”) effective February 1, 2014. In exchange for the right
and license to both use certain of STATS’ proprietary information for use with daily and seasonal games and to power the
scoring with the Company’s fantasy sports games on the Company’s websites, the Company has agreed to pay the following
monthly license fees of $11 per month for February–March 2014, $26 per month for April-June 2014 and $20 per month July-October
2014 and $18 per–month thereafter through expiration of the agreement on December 31, 2015. The Company expensed $186 for
the year ended December 31, 2014.
Lease agreements
In September 2011, the
Company entered into a 39–month lease agreement for office space located in Harrison, New York, terminating on November
30, 2014. Under the agreement our total rental payments over the 39–month lease period are $240, inclusive of three months
of free rent and a refundable rental deposit of $39, held in a restricted cash account.
On August 20, 2014 the
Company entered into a First Lease Modification and Extension Agreement, extending for a period of one year the current lease
on the Harrison office. Under the agreement the total rental payments over the next twelve months are $71.
Off–balance sheet arrangements
None.
Critical accounting policies and estimates
Our discussion and analysis
of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The notes to
the consolidated financial statements contained in this Annual Report describe our significant accounting policies used in the
preparation of the consolidated financial statements. The preparation of these financial statements requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates. We continually evaluate our critical accounting policies and estimates.
We believe the critical
accounting policies listed below reflect significant judgments, estimates and assumptions used in the preparation of our consolidated
financial statements.
Software developed for internal use
The Company follows Accounting
Standards Codification (“ASC”) 350–40 “Intangibles–Internal Use Software” on accounting
for the costs of computer software developed or obtained for internal use. Costs incurred during the preliminary stage are expensed
as incurred by the Company. Certain qualifying costs incurred during the application development stage are capitalized as software
by the Company. The Company begins capitalization when the preliminary project stage is complete and it is probable that the project
will be completed and the software will be used to perform the function intended.
Intangible assets
Estimates of future cash
flows and timing of events for evaluating long–lived assets for impairment are based upon management’s judgment. If
any of our intangible or long–lived assets are considered to be impaired, the amount of impairment to be recognized is the
excess of the carrying amount of the assets over its fair value. Applicable long–lived assets are amortized or depreciated
over the shorter of their estimated useful lives, the estimated period that the assets will generate revenue, or the statutory
or contractual term in the case of patents. Estimates of useful lives and periods of expected revenue generation are reviewed
periodically for appropriateness and are based upon management’s judgment.
Goodwill
Goodwill represents the
excess of the purchase price over the fair value of the assets acquired and liabilities assumed. The Company is required to perform
impairment reviews at each of its reporting units annually and more frequently in certain circumstances.
In accordance with ASC
350–20 “Goodwill” , the Company is able to make a qualitative assessment of whether it is more likely than
not that a reporting unit’s fair value is less than its carrying amount before applying the two–step goodwill impairment
test. If the Company concludes that it is more likely than not that the fair value of a reporting unit is not less than its carrying
amount it is not required to perform the two–step impairment test for that reporting unit.
Virtual currency accrual
Users of the Company’s
website maintain virtual currency balances which are accumulated as users participate in the Company’s online games. The
amounts may become payable in cash by the Company once the user’s virtual currency balance exceeds a certain minimum threshold;
a virtual currency balance of $0.01or $0.02 based upon initial date of enrollment on the site. User accounts expire after six
months of inactivity. The Company records an accrual for potential virtual currency payouts at the end of each reporting period
based on historical payout experience and current virtual currency balances. At December 31, 2014 and 2013, the Company recorded
a liability of $10 and $10, respectively, relating to potential future virtual currency payouts.
The Company recognizes
revenue when it is realized or realizable and earned. We consider revenue realized or realizable and earned when there is persuasive
evidence of an arrangement and that 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. Our material revenue streams are related to the delivery of software
license fees, maintenance services, hardware, consulting services and gaming fees. We enter into revenue arrangements that may
consist of multiple deliverables of software and services due to the needs of our customers. In addition to these general revenue
recognition criteria, the following specific revenue recognition policies are followed:
Multiple–element
arrangements - For our multiple–element arrangements, deliverables are separated into more than one unit of accounting when
(i) the delivered element(s) have value to the customer on a stand–alone basis, and (ii) delivery of the undelivered element(s)
is probable and substantially in our control.
The revenue allocated
to each deliverable will then be recorded in accordance with existing revenue recognition guidance for stand–alone component
sales and services.
|
· |
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.
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. |
|
· |
Maintenance – Revenue
from maintenance and support arrangements is deferred and recognized ratably over the term of the maintenance and support
arrangements. |
|
· |
Hardware –Revenue
is recognized as orders are satisfied and delivered by our supplier. |
|
· |
Services–consulting – Consulting revenue
is earned over the period in which the Company provides the related services. The Company recognizes consulting revenue as
it meets the terms of the underlying contract on the terms of the agreement. |
|
· |
Gaming fees – Revenue
represents income earned as entry fees for a daily fantasy sports contest and is presented net of any bonus points applied
by customers. Once a contest concludes, the Company recognizes the income earned as revenue. |
|
· |
Advertising –Revenue is
recognized as advertisements are delivered, an executed contract exists, the price is fixed or determinable and collectability
has been reasonably assured. Delivery generally occurs when the advertisement has been displayed or the offer has been completed
by the user. |
Research and development
The Company incurs 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 remaining estimated
economic life of the product. Amortization commences when the product is available for general release to customers.
The Company concluded
that capitalizing such expenditures after completion of a working model was inappropriate because the Company did not incur any
material software production costs and therefore expenses were all research and development costs. Our research and development
costs are comprised of staff, consultancy and other costs expensed on our products.
Equity–based compensation
The Company recognizes
compensation expense for all equity–based payments in accordance with ASC 718 “Compensation – StockCompensation".
Under fair value recognition provisions, the Company recognizes equity–based compensation net of an estimated forfeiture
rate and recognizes compensation cost only for those shares expected to vest over the requisite service period of the award.
Restricted stock awards
are granted at the discretion of the Company. These awards are restricted as to the transfer of ownership and generally vest over
the requisite service periods, typically over an eighteen month period (vesting on a straight–line basis). The fair value
of a stock award is equal to the fair market value of a share of Company stock on the grant date.
The fair value of 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, the dividend yield on the underlying stock and the expected
forfeiture rate. 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 the Company has never paid or declared any cash dividends
on our Common stock and does 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 requires 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’s judgment. As a result, if factors
change and the Company uses different assumptions, our equity–based compensation could be materially different in the future.
In addition, the Company is 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 could be
significantly different from what the Company has recorded in the current period.
The Company accounts
for share–based payments granted to non–employees in accordance with ASC 505-40, “Equity Based Payments to
Non–Employees”. The Company determines the fair value of the stock–based payment as either the fair value
of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If
the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions
as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments
is reached, or (2) the date at which the counterparty’s performance is complete. The fair value of the equity instruments
is re-measured each reporting period over the requisite service period.
Segment reporting
Operating segments are
defined as components of an enterprise about which separate financial information is available that is evaluated regularly by
the chief operating decision maker, or decision–making group in deciding how to allocate resources and in assessing performance.
Our chief operating decision–making group is composed of the chief executive officer and chief financial officer. We operate
in four operational segments, Medicsight Software/Devices, Medicsight Services, Gaming and Intellectual Property. MGT Gaming is
now referred to as Intellectual Property. Gaming is a new segment for the current year. Certain corporate expenses are not allocated
to segments.
Recent accounting pronouncements
In April 2014, the
U.S. Financial Accounting Standards Board issued Accounting Standards Update 2014–08, Reporting Discontinued Operations
and Disclosures of Disposals of Components of an Entity (ASU 2014–08). This new standard (i) raises the threshold
for disposals to qualify as discontinued operations (ii) allows companies to have significant continuing involvement
and continuing cash flows with the discontinued operation, and (iii) provides for new and additional disclosures of
discontinued operations and individually material disposal transactions. The Company anticipates adopting the new standard when
it becomes effective in the first quarter of 2015.
In May 2014, the Financial
Accounting Standards Board issued Accounting Standards Update 2014–09, Revenue from Contracts with Customers. Amendments
in this Update create Topic 606, Revenue from Contracts with Customers, and supersede the revenue recognition requirements
in Topic 605, Revenue Recognition, including most industry–specific revenue recognition guidance throughout the
Industry Topics of the Codification. In addition, the amendments supersede the cost guidance in Subtopic 605–35, Revenue
Recognition—Construction–Type and Production–Type Contracts, and create new Subtopic 340–40, Other
Assets and Deferred Costs—Contracts with Customers. In summary, the core principle of Topic 606 is that an entity recognizes
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services. This Accounting Standards Update is the final version
of Proposed Accounting Standards Update 2011–230—Revenue Recognition (Topic 605) and Proposed Accounting Standards
Update 2011–250—Revenue Recognition (Topic 605): Codification Amendments, both of which have been deleted. Accounting
Standards Update 2014–09. The amendments in this Update are effective for the Company for annual reporting periods beginning
after December 15, 2016, including interim periods within that reporting period. The Company is currently evaluating the effects
of ASU 2014–09 on the consolidated financial statements.
In June 2014, FASB issued
Accounting Standards Update 2014–12, Compensation – Stock Compensation (Topic 718), which clarifies accounting
for share–based payments for which the terms of an award provide that a performance target could be achieved after the requisite
service period. That is the case when an employee is eligible to retire or otherwise terminate employment before the end of the
period in which a performance target could be achieved and still be eligible to vest in the award if and when the performance
target is achieved. The updated guidance clarifies that such a term should be treated as a performance condition that affects
vesting. As such, the performance target should not be reflected in estimating the grant–date fair value of the award. Compensation
cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent
the compensation cost attributable to the periods for which the requisite service has already been rendered. The guidance will
be effective for the annual periods (and interim periods therein) ending after December 15, 2015. Early application is permitted.
The Company is currently evaluating the effects of ASU 2014–12 on the consolidated financial statements.
In
August 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-15, Presentation of Financial
Statements- Going Concern. The Update provides U.S. GAAP guidance on management’s responsibility in evaluating
whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures.
For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial
doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are
issued. This Accounting Standards Update is the final version of Proposed Accounting Standards Update 2013-300—Presentation
of Financial Statements (Topic 205): Disclosure of Uncertainties about an Entity’s Going Concern Presumption, which has
been deleted. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual
periods and interim periods thereafter. The Company is currently evaluating the effects of ASU 2014-15 on the consolidated financial
statements.
In November 2014, the
Financial Accounting Standards Board issued Accounting Standards Update 2014–16, Derivatives and Hedging. For
hybrid financial instruments issued in the form of a share, Topic 815 requires an entity to determine the nature of the host contract
by considering all stated and implied substantive terms and features of the hybrid financial instrument, weighing each term and
feature on the basis of relevant facts and circumstances. Certain classes of shares include features that entitle the holders
to preferences and rights (such as conversion rights, redemption rights, voting powers, and liquidation and dividend payment preferences)
over the other stockholders. Shares that include embedded derivative features are referred to as hybrid financial instruments,
which must be separated from the host contract and accounted for as a derivative if certain criteria are met under Subtopic 815–10.
One criterion requires evaluating whether the nature of the host contract is more akin to debt or to equity and whether the economic
characteristics and risks of the embedded derivative feature are “clearly and closely related” to the host contract.
In making that evaluation, an issuer or investor may consider all terms and features in a hybrid financial instrument including
the embedded derivative feature that is being evaluated for separate accounting or may consider all terms and features in the
hybrid financial instrument except for the embedded derivative feature that is being evaluated for separate accounting. The use
of different methods can result in different accounting outcomes for economically similar hybrid financial instruments. Additionally,
there is diversity in practice with respect to the consideration of redemption features in relation to other features when determining
whether the nature of a host contract is more akin to debt or to equity. The amendments apply to all reporting entities that are
issuers of, or investors in, hybrid financial instruments that are issued in the form of a share. This Accounting Standards Update
is the final version of Proposed Accounting Standards Update EITF–13G—Derivatives and Hedging—Determining Whether
the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity (Topic 815),
which has been deleted. This update is effective for public business entities for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2015. Early application is permitted. The Company is currently evaluating the effects
of ASU 2014–16 on the consolidated financial statements.
In November 2014, the
Financial Accounting Standards Board issued Accounting Standards Update 2014–Business Combinations (Topic 805): Pushdown
Accounting. The amendments in ASU 2014-17 provide an acquired entity with an option to apply pushdown accounting in its separate
financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. An acquired entity
may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs. An acquired
entity should determine whether to elect to apply pushdown accounting for each individual change-in-control event in which an
acquirer obtains control of the acquired entity. If pushdown accounting is not applied in the reporting period in which the change-in-control
event occurs, an acquired entity will have the option to elect to apply pushdown accounting in a subsequent reporting period to
the acquired entity’s most recent change-in-control event. An election to apply pushdown accounting in a reporting period
after the reporting period in which the change-in-control event occurred should be considered a change in accounting principle
in accordance with Topic 250, Accounting Changes and Error Corrections. If pushdown accounting is applied to an individual change-in-control
event, that election is irrevocable. The amendments in ASU 2014-17 are effective on November 18, 2014. After the effective date,
an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control
event. However, if the financial statements for the period in which the most recent change-in-control event occurred already have
been issued or made available to be issued, the application of this guidance would be a change in accounting principle. The Company
is currently evaluating the effects of ASU 2014–17 on the consolidated financial statements.
Item
7A. Quantitative and qualitative disclosure about market risk
We are a smaller reporting
company and therefore, we are not required to provide information required by this Item on Form 10–K.
Item
8. Financial statements and supplementary data
See Financial Statements
and Schedules attached hereto.
Item 9.
Changes in and disagreements with accountants on accounting and financial disclosure
None.
Item 9A.
Controls and procedures
(a) Evaluation of disclosure controls and procedures.
The Company has established
controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or
submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s
rules and forms and is accumulated and communicated to management, including the principal executive officer and principal
financial officer, to allow timely decisions regarding required disclosure. Under the supervision and with the participation
of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company
conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as such term
is defined in Rules 13a–15(e) and 15d–15(e) under the Securities Exchange Act as of the end of the
period covered by this report (the “Evaluation Date”). There are inherent limitations to the effectiveness of any
system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of
the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives. Based on such evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective
to provide reasonable assurance that information required to be disclosed by the Company (including its combined subsidiaries)
in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the communication to the Company’s management, including the Company’s Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Management’s annual report on internal control
over financial reporting.
SEC rules implementing
Section 404 of the Sarbanes–Oxley Act of 2002 require our 2014 Annual Report on Form 10–K to contain management’s
report regarding the effectiveness of internal control over financial reporting. As a basis for our report, we tested and evaluated
the design, documentation, and operating effectiveness of our internal control.
Management is responsible
for establishing and maintaining effective internal control over financial reporting, as defined in Rule 13a–15(f) under
the Exchange Act, of MGT Capital Investments, Inc. and its subsidiaries. The Company’s internal control over financial
reporting consists of policies and procedures that are designed and operated to provide reasonable assurance about the reliability
of the Company’s financial reporting and its process for preparing financial statements in accordance with generally accepted
accounting principles (“GAAP”). There are inherent limitations in the effectiveness of any system of internal
control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective
internal controls can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes
in conditions, the effectiveness of internal control may vary over time.
Under the supervision
and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted
an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in the
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Management's assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting
controls, process documentation, accounting policies, and our overall control environment. Based on this evaluation, our management
concluded that our internal control over financial reporting was effective as of December 31, 2014.
This annual report does
not include an attestation report of the Company’s independent public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the Company’s independent public accounting firm
pursuant to permanent rules of the Securities and Exchange Commission that permit the Company to provide only management’s
report in this annual report.
(c) Changes in internal control over financial reporting.
There have been no changes
in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
Item 9B. Other information.
None.
PART III
Item 10. Directors,
Executive Officers and Corporate Governance
Name |
|
Age |
|
Position |
H. Robert Holmes |
|
71 |
|
Chairman of the Board, Chairman of
the Nomination and Compensation Committee, Audit Committee Member, Independent Director |
Michael Onghai |
|
45 |
|
Chairman of the Audit Committee, Nomination
and Compensation Committee Member, Independent Director |
Robert B. Ladd |
|
56 |
|
President, Chief Executive Officer
and Director |
Joshua Silverman |
|
44 |
|
Audit Committee, Nomination and Compensation
Committee Member, Independent Director |
Robert P. Traversa |
|
50 |
|
Treasurer, Chief
Financial Officer and Corporate Secretary |
Directors are elected
based on experience, qualifications and in accordance with the Company’s by–laws to serve until the next annual stockholders
meeting and until their successors are elected in their stead. Officers are appointed by the Board and hold office until
their successors are chosen and qualified, until their death or until they resign or have been removed from office. All corporate
officers serve at the discretion of the Board. There are no family relationships between any director or executive officer and
any other director or executive officer of the Company.
H. Robert Holmes
was elected as a director in May 2012. From 2008 to 2012, Mr. Holmes has served on the board of Dejour Energies Inc. (NYSE–MKT:
DEJ, 2008–2013). Mr. Holmes was the founder and general partner of Gilford Partners Hedge Fund. From 1980–1992, Mr.
Holmes was the Co–Founder, President of Gilford Securities, Inc. Previously, Mr. Holmes served in various positions with
Paine Webber and Merrill Lynch. Mr. Holmes has served on the Board of Trustees North Central College in Naperville, II; Board
of Trustees of Sacred Heart Schools, Chairman of Development Committee, in Chicago, IL; Board of Trustees of Crested Butte Academy
where he was Chairman of Development Committee; and the Board of Trustees Mary Wood Country Day School, Rancho Mirage, CA. The
board believes that Mr. Holmes has the experience, qualifications, attributes and skills necessary to serve as a director because
of his years of business experience and service as a director for many companies over his career.
Michael Onghai
was appointed a director in May 2012. Mr. Onghai has been the CEO of LookSmart (NASDAQ CM: LOOK), since February 2013. He has
been the founder and Chairman of AppAddictive, an advertising and social commerce platform since July 2011. Mr. Onghai is the
President of Snowy August Management LLC, a special situations fund concentrating on the Asian market, spin–offs and event–driven
situations. Mr. Onghai is the founder of Stock Sheet, Inc., and Daily Stocks, Inc. – the web's early providers of financial
information and search engine related content for financial information. Mr. Onghai has founded several other internet technology
companies for the last two decades. Mr. Onghai is an advisor to several internet incubators and is a panelist who advises FundersClub
on which companies to accept for its pioneering venture capital platform. Mr. Onghai has earned his designation as a Chartered
Financial Analyst (2006) and holds a B.S. in Electrical Engineering and Computer Science from the University of California, Los
Angeles and graduated from the Executive Management Certificate Program in Value Investing (The Heilbrunn Center for Graham &
Dodd Investing) Graduate School of Business at Columbia Business School. The board believes that Mr. Onghai has the experience,
qualifications, attributes and skills necessary to serve as a director and chairman of the Audit Committee because of his years
of business experience and financial expertise.
Robert B. Ladd
joined the Company in December 2010 as a Director. He was named Interim President and CEO in February 2011, and appointed President
and CEO in January 2012. Mr. Ladd is the Managing Member of Laddcap Value Advisors, LLC, which serves as the investment manager
for various private partnerships, including Laddcap Value Partners LP. Prior to forming his investment partnership in 2003, Mr.
Ladd was a Managing Director at Neuberger Berman, a large international money management firm catering to individuals and institutions.
From 1992 through November 2002, Mr. Ladd was a portfolio manager for various high net worth clients of Neuberger Berman. Prior
to this experience, Mr. Ladd was a securities analyst at Neuberger from 1988 through 1992. Mr. Ladd is a former Director of InFocus
Systems, Inc. (NASDAQ – INFS, 2007 to 2009), and served on the board of Delcath Systems, Inc. (NASDAQ – DCTH, 2006–2012).
Mr. Ladd has earned his designation as a Chartered Financial Analyst (1986). Based on Mr. Ladd’s familiarity with the Company
in serving as our Chief Executive Officer since 2011 and his overall background and experience as an executive in the financial
industry, the Nominating Committee of the Board concluded that Mr. Ladd has the requisite experience, qualifications, attributes
and skill necessary to serve as a member of the Board.
Joshua Silverman is
the Co–founder, and is a Principal and Managing Partner of Iroquois Capital Management, LLC, the Registered Investment Advisor
to Iroquois Capital LP and Iroquois Capital (Offshore) Ltd. (collectively, “Iroquois”). Mr. Silverman has served
as Co–Chief Investment Officer of Iroquois since inception in 2003. From 2000 to 2003, Mr. Silverman served as Co–Chief
Investment Officer of Vertical Ventures, LLC, a merchant bank. Prior to forming Iroquois, Mr. Silverman was a Director of Joele
Frank, a boutique consulting firm specializing in mergers and acquisitions. Previously, Mr. Silverman served as Assistant Press
Secretary to The President of The United States. Mr. Silverman received his B.A. from Lehigh University in 1992. Based on Mr.
Silverman’s overall background and experience as an executive in the financial industry, Board believes that Mr. Silverman
has the requisite experience, qualifications, attributes and skill necessary to serve as a member of the Board.
Robert P. Traversa
joined the Company on March 1, 2011 as a senior advisor to executive management and was appointed the Company’s Chief
Financial Officer in May 2011. Mr. Traversa served as a director of the Company from May, 2012 until December, 2014. Prior to
joining the company, he was a senior vice president at Neuberger Berman LLC, a large international money management firm catering
to individuals and institutions. He joined Neuberger Berman in 1994 and was most recently a senior member of an investment team
within the Private Asset Management Division. His earlier career at Neuberger encompassed positions supporting management, operations
and technology. Mr. Traversa was a financial analyst at Bankers Trust in the Investment Management Division from 1990 until 1994.
He began his career on the audit staff at Price Waterhouse in 1987. Mr. Traversa is a NY State Certified Public Accountant.
Arrangements relative to appointment as Director
Under an Amended and
Restated Securities Purchase Agreement dated December 9, 2010 (the “Purchase Agreement”) between the Company and Laddcap
Value Partners, LP (the “Purchaser”), the Purchaser agreed to purchase 195,000 shares of the Company’s Common
stock for $1,000. The Company appointed Robert B. Ladd, as director to fill the vacancy caused by the resignation of Tim Paterson–Brown.
The Purchase Agreement closed on December 13, 2010. On February 9, 2011, all 239,520 shares of the Company's Common stock held
by the Purchaser were transferred from the Purchaser to Laddcap Value Partners III LLC (“Laddcap”). Mr. Ladd is the
managing member of Laddcap.
Involvement in certain legal proceedings
To the best of our knowledge,
during the past ten years, none of the following occurred with respect to any director, director nominee or executive officer:
|
(1) |
any bankruptcy petition filed by or
against any business of which such person was a general partner or executive officer either at the time of the bankruptcy
or within two years prior to that time; |
|
(2) |
any conviction in a criminal proceeding
or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); |
|
(3) |
being subject to any order, judgment
or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily
enjoining, barring, suspending or otherwise limiting his or her involvement in any type of business, securities or banking
activities; |
|
(4) |
being found by a court of competent
jurisdiction (in a civil action), the SEC or the Commodities Futures Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been reversed, suspended or vacated; |
|
(5) |
being the subject of, or a party to,
any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended
or vacated, relating to an alleged violation of: |
|
(i) |
any federal or state securities or
commodities law or regulation; |
|
(ii) |
any law or regulation respecting financial
institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement
or restitution, civil money penalty or temporary or permanent cease–and–desist order, or removal or prohibition
order; or |
|
(iii) |
any law or regulation prohibiting mail
or wire fraud or fraud in connection with any business entity; or |
|
(6) |
being the subject of, or a party to,
any sanction or order, not subsequently reversed, suspended or vacated, of any self–regulatory organization (as defined
in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of
the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has
disciplinary authority over its members or persons associated with a member (covering stock, commodities or derivatives exchanges,
or other SROs). |
Corporate code of ethics
On June 25, 2012, the
Board revised the Code of Conduct and Ethics which applies to all directors and employees including the company’s principal
executive officer, principal financial officer and principal accounting officer or persons performing similar functions. Prior
to June 25, 2012, the Company’s employees and directors were subject to the previous Code of Ethics adopted by the Board
on December 28, 2007.
Copies of the Code of
Business Conduct and Ethics, the Anti–Fraud Policy, the Whistleblower Policy and the MGT Share Dealing Code can be obtained,
without charge by writing to the Corporate Secretary at MGT Capital Investments, Inc., 500 Mamaroneck Avenue, Suite 204,
Harrison, NY 10528, or through our corporate website at Mgtci.com.
Section 16(a) beneficial ownership
reporting compliance
Section 16(a) of
the Exchange Act requires the Company’s directors, executive officers and persons who own more than 10% of the Company’s
stock (collectively, “Reporting Persons”) to file with the SEC initial reports of ownership and changes in ownership
of the Company’s Common stock. Reporting Persons are required by SEC regulations to furnish the Company with copies of all
Section 16(a) reports they file. Other than as disclosed below and based solely on a review of the reports furnished to us,
or written representations from reporting persons that all reportable transaction were reported, we believe that during the fiscal
year ended December 31, 2014, our officers, directors and greater than ten percent stockholders timely filed all reports and did
not miss any filings as required to file under Section 16(a).
Audit Committee and Audit Committee
financial expert
On November 25, 2004,
the Board established an Audit Committee to carry out its audit functions. At December 31, 2014, the membership of the Audit Committee
was Michael Onghai, H. Robert Holmes and Joshua Silverman.
The Board has determined
that Michael Onghai, an independent director, is the Audit Committee financial expert, as defined in Regulation S–K promulgated
under the Exchange Act, serving on its Audit Committee.
Item
11. Executive compensation
Summary compensation table
The following table summarizes
Fiscal Years 2014 and 2013 compensation for services in all capacities of the Company’s named executive officers and other
individuals:
Name | |
Principal Position | |
Year | |
Salary | | |
Bonus | | |
Stock
awards (1) | | |
All other
compensation | | |
Total
compensation | |
Robert B. Ladd | |
Chief Executive Officer | |
2014 | |
$ | 285 | | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | 285 | |
| |
| |
2013 | |
$ | 285 | | |
$ | 143 | | |
$ | – | | |
$ | – | | |
$ | 428 | |
Robert P. Traversa | |
Chief Financial Officer | |
2014 | |
$ | 275 | | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | 275 | |
| |
| |
2013 | |
$ | 275 | | |
$ | 138 | | |
$ | – | | |
$ | – | | |
$ | 413 | |
|
(1) |
This column discloses the dollar amount
of the aggregate grant date fair value of restricted stock granted in the year. |
Grants of Plan–Based Awards
There were no plan–based
awards in Fiscal 2014.
Outstanding equity awards at December 31,
2014
There were no outstanding
equity awards at December 31, 2014.
Employment agreements
On November 19, 2012,
the Company entered into an employment agreement with Robert B. Ladd, to act as its President and Chief Executive Officer. Upon
execution of the agreement, Mr. Ladd was granted a $100 cash payment and 50,000 shares of restricted Common stock. The agreement
provides for a two year term, subject to automatic renewals. The agreement provides for a base salary of $285 per year. Pursuant
to the employment agreement, Mr. Ladd is eligible for a cash and/or equity bonus as determined by the Compensation Committee.
Pursuant to the agreement, in the event that Mr. Ladd dies or is permanently disabled or he is terminated without good cause or
he resigns for Good Reason. Mr. Ladd is entitled to (i) a severance payment equal to the higher of his base salary for the remaining
term of this agreement or twelve times the average monthly Base Salary paid or accrued during the three full calendar months immediately
preceding such determination; (ii) expense compensation in an amount equal to twelve times the sum of the average Base Salary
during the full calendar months preceding such termination; (iii) immediate vesting of all stock options; (iv) vacation pay for
any vacations days earned but not taken; (v) medical insurance for 12 months; and (vi) the cost of office space, not to exceed
$3 per month. Good Reason includes a change of control. If payments are subject to the excise tax imposed by Section 4999 of the
Code, the Company will pay Mr. Ladd an additional amount so that the net amount retained by Mr. Ladd shall be equal to what his
Total Payments would have been without the Excise Tax and any state and local income taxes. If the Company terminates Mr. Ladd
for Cause or Mr. Ladd resigns without Good Reason, he shall only be entitled to any compensation earned but not paid at such time.
Mr. Ladd’s employment agreement was filed as an exhibit to the Current Report on Form 8–K we filed with the SEC on
November 23, 2012; all defined terms not otherwise defined herein are defined in such employment agreement.
On January 28, 2014,
the Company entered into an amendment to Mr. Ladd’s employment agreement which extended the agreement’s term for an
additional year, through November 30, 2015.
On November 19, 2012,
the Company entered into an employment agreement with Robert P. Traversa to act as its Treasurer and Chief Financial Officer.
The agreement provides for a two year term, subject to automatic renewals. Upon execution of the agreement, Mr. Traversa was granted
a $100 cash payment and 50,000 shares of restricted Common stock. The agreement provides for a base salary of $275 per year. Pursuant
to the employment agreement, Mr. Traversa is eligible for a cash and/or equity bonus as determined by the Compensation Committee.
Pursuant to the agreement, in the event that Mr. Traversa dies or is permanently disabled or he is terminated without good cause
or he resigns for Good Reason. Mr. Traversa is entitled to (i) a severance payment equal to the higher of his base salary for
the remaining term of this agreement or twelve times the average monthly Base Salary paid or accrued during the three full calendar
months immediately preceding such determination; (ii) expense compensation in an amount equal to twelve times the sum of the average
Base Salary during the full calendar months preceding such termination; (iii) immediate vesting of all stock options; (iv) vacation
pay for any vacations days earned but not taken; (v) medical insurance for 12 months; and (vi) the cost of office space, not to
exceed $3.00 per month. Good Reason includes a change of control. If payments are subject to the excise tax imposed by Section
4999 of the Code, the Company will pay Mr. Traversa an additional amount so that the net amount retained by Mr. Traversa shall
be equal to what his Total Payments would have been without the Excise Tax and any state and local income taxes. If the Company
terminates Mr. Traversa for Cause or Mr. Traversa resigns without Good Reason, he shall only be entitled to any compensation earned
but not paid at such time. Mr. Traversa’s employment agreement was filed as an exhibit to the Current Report on Form 8–K
we filed with the SEC on November 23, 2012; all defined terms not otherwise defined herein are defined in such employment agreement.
On January 28, 2014,
the Company entered into an amendment to Mr. Traversa’s employment agreement which extended the agreement’s term for
an additional year, through November 30, 2015.
Director compensation
The following table sets
forth the compensation of persons who served as a member of our Board of Directors during all or part of 2014, other than Robert
B. Ladd and Robert P. Traversa whose compensations is discussed under "Executive Compensation" below and neither of
whom is separately compensated for Board service.
Name | |
Fees earned or
paid in cash | | |
Stock awards | | |
All other compensation | | |
Total | |
H. Robert Holmes | |
$ | 30 | | |
$ | – | | |
$ | – | | |
$ | 30 | |
Michael Onghai | |
$ | 25 | | |
$ | – | | |
$ | – | | |
$ | 25 | |
Joshua Silverman | |
$ | 1 | | |
$ | – | | |
$ | – | | |
$ | 1 | |
Directors are reimbursed
for their out–of–pocket expenses incurred in connection with the performance of Board duties.
Independent director compensation
Our policy is each independent
director receives annual compensation of $20. In addition, independent directors, receive $5 as total compensation for committee
service. The Chairman of the Board receives an additional $5. For fiscal year 2015, the Company does not propose any change in
fees for the independent directors.
Item 12. Security
ownership of certain beneficial owners and management and related stockholder matters
Securities authorized for issuance under equity compensation
plans
No
option grants were issued during the year ended December 31, 2014. The table below provides information on our equity compensation
plans as of December 31, 2014:
| |
Number of securities to be issued upon exercise
of outstanding options, warrants and rights | | |
Weighted–average exercise price of outstanding
options, warrants and rights | | |
Number of securities remaining available for
future issuance under equity compensation plans (excluding securities reflected in column (a)) | |
Plan category: | |
(a) | | |
(b) | | |
(c) | |
Equity compensation plans approved by security holders | |
| – | | |
$ | – | | |
$ | 625,967 | (1) |
Equity compensation plans not approved by security holders | |
| – | | |
| – | | |
| – | |
Total | |
| – | | |
| – | | |
| 625,967 | (1) |
|
(1) |
On September 27, 2013, the Company’s
stockholders approved an increase of the number of shares of Common stock issuable under the Company’s 2012 Stock Incentive
Plan to 1,335,000 shares. As of December 31, 2014, the Company issued an aggregate of 709,033 restricted shares under the
Company’s 2012 Stock Incentive Plan, as amended. |
Security owner of certain beneficial
owners
The following tables
set forth certain information regarding beneficial ownership and voting power of the Common stock as of March 30, 2015, of:
|
· |
Each person serving as
a director, a nominee for director, or executive officer of the Company; |
|
· |
All executive officers
and directors of the Company as a group; and |
|
· |
All persons who, to our
knowledge, beneficially own more than five percent of the Common stock or Series A Preferred stock. |
“Beneficial ownership”
here means direct or indirect voting or investment power over outstanding stock and stock which a person has the right to acquire
now or within 60 days after March 30, 2015. See the accompanying footnotes to the tables below for more detailed explanations
of the holdings. Except as noted, to our knowledge, the persons named in the tables beneficially own and have sole voting and
investment power over all shares listed
Each share of Common
stock has one vote per share of Common stock held and each share of Series A Preferred stock has one vote per share of Series
A Preferred stock held.
The following table sets
forth certain information regarding beneficial ownership of Common stock as of March 30, 2015:
|
· |
Each person known by the
Company to be the beneficial owner of more than 5% of the outstanding Common stock; |
|
· |
Each person serving as
a director, a nominee for director, or executive officer of the Company; and |
|
· |
All executive officers
and directors of the Company as a group. |
Percentage beneficially
owned is based upon 13,529,969 shares of Common stock issued and outstanding as of April 13, 2015.
| |
Numbers of shares
beneficially owned | | |
Percentage of Common
equity beneficially owned | |
Directors and officers: (1) | |
| | | |
| | |
Robert B. Ladd (2) | |
| 785,471 | | |
| 6 | % |
Robert P. Traversa | |
| 281,616 | | |
| 2 | % |
Joshua Silverman (3)(4)(5) | |
| 1,039,096 | | |
| 8 | % |
H. Robert Holmes | |
| 88,819 | | |
| * | |
Michael Onghai | |
| 44,545 | | |
* | |
Total current officers and directors as a group (4
persons): | |
| 2,239,547 | | |
17 | % |
* Less
than 1%
|
(1) |
Unless otherwise noted, the addresses
for the above persons are care of the Company at 500 Mamaroneck Avenue, Suite 204, Harrison, NY 10528. |
|
(2) |
Mr. Ladd owns 163,000 shares of Common
stock directly. Mr. Ladd may also be deemed to be the beneficial owner of an additional 622,471 shares of Common
stock held by Laddcap Value Partners III LLC, a Delaware limited liability company (“Laddcap”), by virtue of his
ability to vote or control the vote or dispose or control the disposition of the shares of Common stock held by Laddcap through
his position as Managing Member of Laddcap. |
|
(3) |
Common stock As reported on Amendment
Number 4 to the Schedule 13D filed by, among others, Iroquois Capital Management, LLC (“Iroquois”), Iroquois Master
Fund Ltd. and Mr. Silverman with the SEC on October 2, 2014, Mr. Silverman is a managing member of Iroquois and Iroquois Master
Fund Ltd. Iroquois directly owns 48,378 shares of Common stock and Iroquois Master Fund Ltd. directly owns 990,358
shares of Common stock. Iroquois is the investment advisor to Iroquois Master Fund Ltd. As a managing member of
Iroquois, Mr. Silverman may be deemed the beneficial owner of the 1,039,096 shares of Common stock owned by Iroquois and Iroquois
Master Fund Ltd. |
|
(4) |
Excluded from Iroquois Master Fund,
Ltd.’s beneficial ownership is 9,221 shares of Common Stock issuable upon conversion of shares of Series A Convertible
Preferred Stock held by Iroqouis Master Fund, Ltd. and 437,500 shares of Common Stock issuable upon the exercise of warrants,
both of which are subject to a conversion cap that precludes Iroquois Master Fund, Ltd. from converting or exercising the
Series A Convertible Preferred Stock and warrants, respectively, to the extent that Iroquois Master Fund, Ltd. would, after
such conversion or exercise, beneficially own (as determined in accordance with Section 13(d) of the Exchange Act) in excess
of 9.99% of the shares of Common Stock outstanding (the “Conversion Cap”). Because Iroquois Master
Fund, Ltd. has exceeded the Conversion Cap, it cannot convert or exercise its rights under the Series A Convertible Preferred
Stock or warrants, respectively, within 60 days hereof and thus is not deemed to beneficially own those shares of Common Stock
underlying the Preferred Stock and warrants. |
|
(5) |
Mr. Silverman’s address is 641
Lexington Avenue, 26th Floor, New York, New York 10022. |
| |
Numbers of shares
beneficially owned | | |
Percentage of Common
equity beneficially owned | |
5% beneficial owners: | |
| | | |
| | |
Iroquois Capital Management, LLC (1)(2)(3) | |
| 1,039,096 | | |
| 8 | % |
Total 5% beneficial owners: | |
| 1,039,096 | | |
| 8 | % |
|
(1) |
As reported on Amendment Number 4 to
the Schedule 13D filed by, among others, Iroquois, Iroquois Master Fund Ltd. and Joshua Silverman with the SEC on October
2, 2014, Iroquois directly owns 48,378 shares of Common Stock and Iroquois Master Fund Ltd. directly owns 990,358 shares of
Common Stock. Iroquois is the investment advisor to Iroquois Master Fund Ltd., such that Iroquois may be deemed
the beneficial owner of the 990,358 shares of Common Stock owned by Iroquois Master Fund Ltd. |
|
(2) |
Excluded from Iroquois Master Fund,
Ltd.’s beneficial ownership is 9,221 shares of Common Stock issuable upon conversion of shares of Series A Convertible
Preferred Stock held by Iroqouis Master Fund, Ltd. and 437,500 shares of Common Stock issuable upon the exercise of warrants,
both of which are subject to a conversion cap that precludes Iroquois Master Fund, Ltd. from converting or exercising the
Series A Convertible Preferred Stock and warrants, respectively, to the extent that Iroquois Master Fund, Ltd. would, after
such conversion or exercise, beneficially own (as determined in accordance with Section 13(d) of the Exchange Act) in excess
of the Conversion Cap. Because Iroquois Master Fund, Ltd. has exceeded the Conversion Cap, it cannot convert or exercise
its rights under the Series A Convertible Preferred Stock or warrants, respectively, within 60 days hereof and thus is not
deemed to beneficially own those shares of Common Stock underlying the Preferred Stock and warrants . |
|
(3) |
Iroquois’ address is 641 Lexington
Avenue, 26th Floor, New York, New York 10022. |
Item
13. Certain relationships and related transactions and director independence
Director independence
Each of the Company’s
current independent directors: H. Robert Holmes and Michael Onghai are considered independent under Section 803A of NYSE MKT rules,
accordingly to which the Company must comply.
Item
14. Principal accountant fees and services
EisnerAmper LLP (“Eisner”)
served as our independent auditors for the fiscal year ended December 31, 2012. On April 18, 2013, we dismissed Eisner, and Marcum
LLP (“Marcum”) became our independent auditor. The following is a summary of the fees billed to the Company for professional
services rendered for the fiscal years ended December 31, 2014 and 2013.
| |
Year ended December 31, | |
| |
2014 | | |
2013 | |
Audit | |
$ | 218 | | |
$ | 142 | |
Tax | |
| 32 | | |
| 20 | |
Total | |
$ | 250 | | |
$ | 162 | |
Audit fees consist of
fees billed for services rendered for the audit of our financial statements and review of our financial statements included in
our quarterly reports on Form 10–Q.
Tax fees consist of fees
billed for professional services related to the preparation of our U.S. federal and state income tax returns and tax advice.
The Audit Committee pre–approved
all audit–related fees. After considering the provision of services encompassed within the above disclosures about fees,
the Audit Committee has determined that the provision of such services is compatible with maintaining Marcum’s independence.
Pre–approval policy of services
performed by independent registered public accounting firm
The Audit Committee’s
policy is to pre–approve all audit and non–audit related services, tax services and other services. Pre–approval
is generally provided for up to one year, and any pre–approval is detailed as to the particular service or category of services
and is generally subject to a specific budget. The Audit Committee has delegated the pre–approval authority to its chairperson
when expedition of services is necessary. The independent registered public accounting firm and management are required to periodically
report to the full Audit Committee regarding the extent of services provided by the independent registered public accounting firm
in accordance with this pre–approval and the fees for the services performed to date.
PART IV
Item
15. Exhibits and Financial Statement Schedules.
Financial statements
The consolidated
financial statements of the Company for the fiscal years covered by this Annual Report are located on pages 45 to 76 of
this Annual Report.
Exhibit No. |
|
Description |
|
|
|
2.1 |
|
Articles of Merger of Medicsight, Inc., a Utah corporation (1) |
2.2 |
|
Certificate of Merger of Medicsight, Inc., a Delaware corporation
(1) |
3.1 |
|
Restated Certificate of Incorporation of MGT Capital Investments,
Inc. (2) |
3.2 |
|
Amended and Restated Bylaws of MGT Capital Investments, Inc. (3) |
10.1 |
|
Subscription agreement between Moneygate Group Limited and MGT
Capital Investments Limited (4) |
10.2 |
|
Working capital facility agreement between MGT Capital Investments
Limited and Moneygate Group Limited (4) |
10.3 |
|
Facility agreement between MGT Capital Investments Limited and
Moneygate Group Limited (4) |
10.4 |
|
Agreement for the Purchase of Assets dated March 31, 2010 between
MGT Capital Investments, Inc. and MGT Investments Limited and Rivera Capital Management Limited (5) |
10.5 |
|
Amended and Restated Securities Purchase Agreement dated December
9, 2010 between MGT Capital Investments, Inc. and Laddcap Value Partners, LP (5) |
10.6 |
|
Registration Rights Agreement dated December 9, 2010 between MGT
Capital Investments, Inc. and Laddcap Value Partners, LP (5) |
10.7 |
|
Form of Revolving Line of Credit and Security Agreement dated April
12, 2011, between MGT Capital Investments, Inc. and Laddcap Value Partners, LP (5) |
10.8 |
|
Form of Revolving Credit Note dated April 12, 2011, for the benefit
of Laddcap Value Partners, LP (5) |
10.9 |
|
Contribution and Sale Agreement, dated as of May 9, 2012, by and
among J&S Gaming, Inc., MGT Capital Investments, Inc. and MGT Gaming, Inc. (6) |
10.10 |
|
Common Stock Warrant dated May 9, 2012 (6) |
10.12 |
|
Stockholder Agreement dated May 9, 2012, by and among J&S Gaming,
Inc., MGT Gaming, Inc. and MGT Capital Investment, Inc. (6) |
10.13 |
|
Patent Assignment, dated as of May 9, 2012, by and between J&S
Gaming, Inc. and MGT Holdings, Inc. (6) |
10.14 |
|
Securities Purchase Agreement, dated May 24, 2012, by and between
MGT Capital Investments, Inc. and the investor listed on the Schedule of Buyers attached thereto. (7) |
10.15 |
|
Form of Senior Secured Convertible Note (7) |
10.16 |
|
Form of Warrant (7) |
10.17 |
|
Form of Exchange Agreement (8) |
10.18 |
|
Form of Subscription Agreement (9) |
10.19 |
|
Form of Certificate of Designations (9) |
10.20 |
|
Form of Warrant (9) |
10.21 |
|
Form of Registration Rights Agreement (9) |
10.22 |
|
Employment Agreement dated November 19, 2012, by and between the
Company and Robert Ladd (10) |
10.23 |
|
Employment Agreement dated November 19, 2012, by and between the
Company and Robert P. Traversa (10) |
10.24 |
|
Amendment to Executive Employment Agreement of Robert B. Ladd as
of January 28, 2014. (11) |
10.25 |
|
Amendment to Executive Employment Agreement of Robert P. Traversa
as of January 28, 2014. (11) |
10.26 |
|
Asset Purchase Agreement by and between the Company and CardRunners
Gaming, Inc. effective April 1, 2014. (12) |
21.1 |
|
Subsidiaries* |
23.1 |
|
Consent of Marcum LLP, independent registered public accounting
firm, dated March 28, 2014* |
99.1 |
|
Settlement Agreement, dated September 29, 2014, by and among MGT
Capital Investments, Inc., Iroquois Capital Management L.L.C., Iroquois Master Fund Ltd. and Joshua Silverman (13) |
31.1 |
|
Certification pursuant to Section 302 of the Sarbanes–Oxley Act of 2002 of Principal Executive
Officer* |
31.2 |
|
Certification pursuant to Section 302 of the Sarbanes–Oxley Act of 2002 of Principal Financial
Officer* |
32.1 |
|
Certification pursuant to Section 906 of the Sarbanes–Oxley Act of 2002 of Principal Executive
Officer* |
32.2 |
|
Certification pursuant to Section 906 of the Sarbanes–Oxley Act of 2002 of Principal Financial
Officer* |
101.INS
|
|
XBRL Instance Document* |
101.SCH |
|
XBRL Taxonomy Extension Schema* |
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document* |
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document* |
101.LAB |
|
XBRL Taxonomy Extension Labels Linkbase Document* |
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document* |
1) |
Incorporated herein by reference to
the Company’s Current Report on Form 8–K filed on January 19, 2007. |
2) |
Incorporated herein by reference to
the Company’s Quarterly Report on Form 10–Q, filed November 13, 2013. |
3) |
Incorporated herein by reference to
the Company’s Current Report filed on Form 8–K, filed January 30, 2014. |
4) |
Incorporated herein by reference to
the Company’s Quarterly Report on Form 10–Q, filed November 12, 2009. |
5) |
Incorporated herein by reference to
the Company’s Annual Report on Form 10–K filed April 15, 2011. |
6) |
Incorporated herein by reference to
the Company’s Current Report on Form 8–K filed May 16, 2012. |
7) |
Incorporated herein by reference to
the Company’s Current Report on Form 8–K filed May 30, 2012. |
8) |
Incorporated herein by reference to
the Company’s Current Report on Form 8–K filed October 9, 2012. |
9) |
Incorporated herein by reference to
the Company’s Current Report on Form 8–K filed October 26, 2012. |
10) |
Incorporated herein by reference to
the Company’s Current Report on Form 8–K filed October 26, 2012. |
11) |
Incorporated herein by reference to
the Company’s Current Report filed on Form 8–K, filed January 30, 2014. |
12) |
Incorporated herein by reference to
the Company’s Current Report on Form 8–K filed April 7, 2014. |
13) |
Incorporated herein by reference to
the Company’s Current Report on Form 8–K filed September 29, 2014. |
SIGNATURES
In accordance with Section 13
or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
MGT CAPITAL INVESTMENTS, INC |
April 15, 2015 |
|
|
|
|
|
|
By: |
/s/ ROBERT B. LADD |
|
|
Robert B. Ladd |
|
|
Chief Executive Officer (Principal Executive Officer) |
April 15, 2015 |
|
|
|
|
|
|
By: |
/s/ ROBERT P. TRAVERSA |
|
|
Robert P. Traversa |
|
|
Chief Financial Officer (Principal Financial Officer) |
In accordance with the
Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ Robert B.
Ladd |
|
President, CEO and Director |
|
April 15, 2015 |
Robert B. Ladd |
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
/s/ Robert P.
Traversa |
|
Treasurer, Chief Financial Officer and Director |
|
April 15, 2015 |
Robert P. Traversa |
|
(Principal Financial Officer) |
|
|
|
|
|
|
|
/s/ H. Robert Holmes |
|
Director |
|
April 15, 2015 |
H. Robert Holmes |
|
|
|
|
|
|
|
|
|
/s/ Michael Onghai |
|
Director |
|
April 15, 2015 |
Michael Onghai |
|
|
|
|
|
|
|
|
|
/s/ Joshua Silverman |
|
Director |
|
April 15, 2015 |
Joshua Silverman |
|
|
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Audit Committee of the
Board of Directors and Stockholders
of MGT Capital Investments, Inc.
We have audited the
accompanying consolidated balance sheets of MGT Capital Investments, Inc. and Subsidiaries (the “Company”) as of
December 31, 2014 and 2013, and the related consolidated statements of operations, redeemable preferred stock and changes
in stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits
in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial
statements referred to above present fairly, in all material respects, the consolidated financial position of MGT Capital Investments,
Inc. and Subsidiaries as of December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for
the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Marcum LLP
New York, NY
April 15, 2015
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per–share
amounts)
| |
December 31, | | |
December 31, | |
| |
2014 | | |
2013 | |
Assets: | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 1,455 | | |
$ | 4,642 | |
Accounts receivable | |
| 5 | | |
| 43 | |
Prepaid expenses and other current
assets | |
| 172 | | |
| 132 | |
Total current assets | |
| 1,632 | | |
| 4,817 | |
| |
| | | |
| | |
Non–current assets: | |
| | | |
| | |
Restricted cash | |
| 138 | | |
| 140 | |
Property and equipment, at cost, net | |
| 43 | | |
| 45 | |
Intangible assets, net | |
| 2,417 | | |
| 2,423 | |
Goodwill | |
| 6,444 | | |
| 6,444 | |
Other non–current assets | |
| 2 | | |
| 4 | |
Total assets | |
$ | 10,676 | | |
$ | 13,873 | |
| |
| | | |
| | |
Liabilities: | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable | |
$ | 245 | | |
$ | 228 | |
Accrued expenses | |
| 180 | | |
| 94 | |
Player deposit liability | |
| 952 | | |
| 647 | |
Other payables | |
| 2 | | |
| 16 | |
Total current liabilities | |
| 1,379 | | |
| 985 | |
| |
| | | |
| | |
Commitments and contingencies: | |
| | | |
| | |
| |
| | | |
| | |
Redeemable convertible Preferred stock – Temporary equity: | |
| | | |
| | |
Preferred stock, series A convertible preferred, $0.001 par value; 1,416,160
and 1,416,160 shares authorized at December 31, 2014 and December 31, 2013, respectively; 9,993 and 9,413 shares issued and
outstanding at December 31, 2014 and December 31, 2013, respectively | |
| – | | |
| – | |
Stockholders' equity: | |
| | | |
| | |
Undesignated Preferred stock, $0.001 par value; 8,583,840
and 8,583,840 shares authorized at December 31, 2014 and 2013, respectively. No shares authorized, issued and outstanding
at December 31, 2014 and December 31, 2013 respectively | |
| – | | |
| – | |
Common stock, $0.001 par value; 75,000,000 shares
authorized; 10,731,160 and 8,848,686 shares issued and outstanding at December 31, 2014 and December 31, 2013, respectively | |
| 11 | | |
| 9 | |
Additional paid–in capital | |
| 308,288 | | |
| 304,886 | |
Accumulated other comprehensive loss | |
| (281 | ) | |
| (281 | ) |
Accumulated deficit | |
| (299,163 | ) | |
| (293,833 | ) |
Total stockholders' equity attributable to MGT Capital
Investments, Inc. | |
| 8,855 | | |
| 10,781 | |
Non–controlling interests | |
| 442 | | |
| 2,107 | |
Total stockholders’ equity | |
| 9,297 | | |
| 12,888 | |
| |
| | | |
| | |
Total liabilities, redeemable
convertible preferred stock and stockholders' equity | |
$ | 10,676 | | |
$ | 13,873 | |
The accompanying notes are an integral part
of these consolidated financial statements.
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per–share
amounts)
| |
Years ended December
31, | |
| |
2014 | | |
2013 | |
Revenues: | |
| | | |
| | |
Software and devices | |
$ | 85 | | |
$ | 78 | |
Services – Consulting | |
| – | | |
| 97 | |
Gaming | |
| 971 | | |
| 221 | |
| |
| 1,056 | | |
| 396 | |
Cost of revenues: | |
| | | |
| | |
Services – Consulting | |
| – | | |
| 63 | |
Gaming | |
| 610 | | |
| 496 | |
| |
| 610 | | |
| 559 | |
| |
| | | |
| | |
Gross margin | |
| 446 | | |
| (163 | ) |
| |
| | | |
| | |
Operating expenses: | |
| | | |
| | |
General and administrative | |
| 5,507 | | |
| 9,115 | |
Sales and marketing | |
| 380 | | |
| 161 | |
Research and development | |
| 188 | | |
| 73 | |
| |
| 6,075 | | |
| 9,349 | |
| |
| | | |
| | |
Operating loss | |
| (5,629 | ) | |
| (9,512 | ) |
| |
| | | |
| | |
Other non–operating (expense) / income: | |
| | | |
| | |
Interest and other (expense) / income | |
| (1 | ) | |
| 30 | |
Impairment of intangible assets | |
| (135 | ) | |
| – | |
Gain on sale of patent, net | |
| – | | |
| 750 | |
Change in fair value of warrants | |
| – | | |
| (2,204 | ) |
| |
| (136 | ) | |
| (1,424 | ) |
| |
| | | |
| | |
Net loss before income taxes and non–controlling interest | |
| (5,765 | ) | |
| (10,936 | ) |
| |
| | | |
| | |
Net loss attributable to non–controlling interest | |
| 435 | | |
| 734 | |
| |
| | | |
| | |
Net loss attributable to MGT | |
$ | (5,330 | ) | |
$ | (10,202 | ) |
| |
| | | |
| | |
Less: | |
| | | |
| | |
Quarterly dividend on Series A Preferred stock | |
| – | | |
| (70 | ) |
Net loss applicable to Common stockholders | |
$ | (5,330 | ) | |
$ | (10,272 | ) |
| |
| | | |
| | |
Per–share data: | |
| | | |
| | |
Basic and diluted loss per share | |
$ | (0.56 | ) | |
$ | (1.84 | ) |
| |
| | | |
| | |
Weighted average number of common shares outstanding | |
| 9,493,057 | | |
| 5,590,620 | |
The accompanying notes are an integral part
of these consolidated financial statements.
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
REDEEMABLE PREFERRED STOCK AND CHANGES IN
STOCKHOLDERS' EQUITY
(In thousands)
| |
Redeemable
Convertible Preferred stock | | |
Common
stock | | |
Additional
paid–in | | |
Accumulated
comprehensive
income / | | |
Accumulated | | |
Total
stockholders' | | |
Non–controlling | | |
| |
| |
Shares | | |
Amounts | | |
Shares | | |
Amounts | | |
capital | | |
(loss) | | |
deficit | | |
equity | | |
Interest | | |
Total
equity | |
At January 1, 2013 (restated) | |
| 1,395 | | |
$ | 47 | | |
| 3,251 | | |
$ | 3 | | |
$ | 282,998 | | |
$ | (281 | ) | |
$ | (283,631 | ) | |
$ | (911 | ) | |
$ | 768 | | |
$ | (143 | ) |
Reclassification of derivative liability – Series A Preferred
Warrants into equity | |
| | | |
| | | |
| | | |
| | | |
| 8,206 | | |
| | | |
| | | |
| 8,206 | | |
| | | |
| 8,206 | |
Reclassification of derivative liability – J&S Warrants
into equity | |
| | | |
| | | |
| | | |
| | | |
| 1,164 | | |
| | | |
| | | |
| 1,164 | | |
| | | |
| 1,164 | |
Quarterly dividend on Series A Preferred stock | |
| 21 | | |
| 69 | | |
| | | |
| | | |
| (67 | ) | |
| | | |
| | | |
| (67 | ) | |
| | | |
| (67 | ) |
Conversion of Series A Preferred stock to Common stock | |
| (1,407 | ) | |
| (116 | ) | |
| 1,407 | | |
| 4 | | |
| 116 | | |
| | | |
| | | |
| 120 | | |
| | | |
| 120 | |
Proceeds from the exercise of $3.85 warrants | |
| | | |
| | | |
| 237 | | |
| | | |
| 440 | | |
| | | |
| | | |
| 440 | | |
| | | |
| 440 | |
Proceeds from the exercise of $3 warrants | |
| | | |
| | | |
| 716 | | |
| | | |
| 2,757 | | |
| | | |
| | | |
| 2,757 | | |
| | | |
| 2,757 | |
Stock issued for acquisition – Digital Angel | |
| | | |
| | | |
| 50 | | |
| | | |
| 202 | | |
| | | |
| | | |
| 202 | | |
| | | |
| 202 | |
Stock issued for acquisition – FanTD | |
| | | |
| | | |
| 600 | | |
| | | |
| 3,018 | | |
| | | |
| | | |
| 3,018 | | |
| 1,882 | | |
| 4,900 | |
Exchange of warrants | |
| | | |
| | | |
| 895 | | |
| 1 | | |
| (1 | ) | |
| | | |
| | | |
| – | | |
| | | |
| – | |
Stock issued in relation to modification of Series A Preferred Warrants | |
| | | |
| | | |
| 162 | | |
| | | |
| 598 | | |
| | | |
| | | |
| 598 | | |
| | | |
| 598 | |
Proceeds from the exercise of Series A Preferred Warrants | |
| | | |
| | | |
| 613 | | |
| | | |
| 838 | | |
| | | |
| | | |
| 838 | | |
| | | |
| 838 | |
Investment in MGT Interactive | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| – | | |
| 191 | | |
| 191 | |
Stock issued for acquisition – Avcom | |
| | | |
| | | |
| 491 | | |
| 1 | | |
| 1,551 | | |
| | | |
| | | |
| 1,552 | | |
| | | |
| 1,552 | |
Stock issued for services (includes $100 of cash proceeds upon discounted
transfer of shares) | |
| | | |
| | | |
| 427 | | |
| | | |
| 1,709 | | |
| | | |
| | | |
| 1,709 | | |
| | | |
| 1,709 | |
Stock–based compensation | |
| | | |
| | | |
| | | |
| | | |
| 1,357 | | |
| | | |
| | | |
| 1,357 | | |
| | | |
| 1,357 | |
Net loss for the period | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (10,202 | ) | |
| (10,202 | ) | |
| (734 | ) | |
| (10,936 | ) |
At December 31, 2013 | |
| 9 | | |
$ | – | | |
| 8,849 | | |
$ | 9 | | |
$ | 304,886 | | |
$ | (281 | ) | |
$ | (293,833 | ) | |
$ | 10,781 | | |
$ | 2,107 | | |
$ | 12,888 | |
Issuance of common stock for cash | |
| | | |
| | | |
| 1,403 | | |
| 2 | | |
| 1,464 | | |
| | | |
| | | |
| 1,466 | | |
| | | |
| 1,466 | |
Acquisition of Draft Day | |
| | | |
| | | |
| 95 | | |
| | | |
| 190 | | |
| | | |
| | | |
| 190 | | |
| | | |
| 190 | |
Acquisition of non–controlling interest in FanTD | |
| | | |
| | | |
| 53 | | |
| | | |
| 1,219 | | |
| | | |
| | | |
| 1,219 | | |
| (1,230 | ) | |
| (11 | ) |
Warrants issued for services | |
| | | |
| | | |
| | | |
| | | |
| 80 | | |
| | | |
| | | |
| 80 | | |
| | | |
| 80 | |
Stock issued for services | |
| | | |
| | | |
| 185 | | |
| | | |
| 159 | | |
| | | |
| | | |
| 159 | | |
| | | |
| 159 | |
Stock–based compensation | |
| | | |
| | | |
| 147 | | |
| | | |
| 290 | | |
| | | |
| | | |
| 290 | | |
| | | |
| 290 | |
Net loss for the period | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (5,330 | ) | |
| (5,330 | ) | |
| (435 | ) | |
| (5,765 | ) |
At December 31, 2014 | |
| 9 | | |
$ | – | | |
| 10,732 | | |
$ | 11 | | |
$ | 308,288 | | |
$ | (281 | ) | |
$ | (299,163 | ) | |
$ | 8,855 | | |
$ | 442 | | |
$ | 9,297 | |
The accompanying notes are an integral part
of these consolidated financial statements.
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| |
Years ended December
31, 2014 | |
| |
2014 | | |
2013 | |
Cash flows from operating activities: | |
| | | |
| | |
Net loss | |
$ | (5,765 | ) | |
$ | (10,936 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Depreciation | |
| 43 | | |
| 31 | |
Amortization of intangible assets | |
| 661 | | |
| 368 | |
Stock–based expense | |
| 449 | | |
| 2,965 | |
Warrant expense | |
| 80 | | |
| – | |
Impairment of intangible assets | |
| 135 | | |
| – | |
Stock–based compensation – modification of Preferred Series A
Warrants | |
| – | | |
| 598 | |
Change in fair value of warrants | |
| – | | |
| 2,204 | |
Gain on sale of patent | |
| – | | |
| (750 | ) |
Change in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| 38 | | |
| (34 | ) |
Prepaid expenses and other current assets | |
| (40 | ) | |
| 268 | |
Accounts payable | |
| 17 | | |
| (14 | ) |
Accrued expenses | |
| 86 | | |
| (222 | ) |
Player deposit liability | |
| (242 | ) | |
| – | |
Other payables | |
| (14 | ) | |
| 464 | |
Net cash used in operating activities | |
| (4,552 | ) | |
| (5,058 | ) |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Purchase of property and equipment | |
| (41 | ) | |
| (12 | ) |
Cash acquired in purchase of DraftDay | |
| 547 | | |
| – | |
Cash paid for purchase of DraftDay | |
| (600 | ) | |
| – | |
Cash paid for purchase of FanTD | |
| (11 | ) | |
| (124 | ) |
Release of restricted cash | |
| 2 | | |
| 1,899 | |
Release of security deposit | |
| 2 | | |
| – | |
Receipt from sale of patent | |
| – | | |
| 750 | |
Cash acquired in purchase of Avcom, net of cash paid | |
| – | | |
| 9 | |
Receipts from sale of intangible assets | |
| – | | |
| 6 | |
Purchase of intangible assets | |
| – | | |
| (90 | ) |
Purchase of intangible assets – Fantasy Sports Live | |
| – | | |
| (30 | ) |
Purchase of intangible assets – Daily Joust | |
| – | | |
| (50 | ) |
Purchase of intangible assets – Digital Angel | |
| – | | |
| (136 | ) |
Net cash (used in) / provided by investing activities | |
| (101 | ) | |
| 2,222 | |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Proceeds from ATM sales of Common stock, net of fees | |
| 1,466 | | |
| – | |
Proceeds from exercise of warrants | |
| – | | |
| 3,197 | |
Proceeds from modification of Preferred Series A warrants | |
| – | | |
| 838 | |
Proceeds from issuance of Common stock | |
| – | | |
| 100 | |
Repayment of loan – related party | |
| – | | |
| (100 | ) |
Net cash provided by investing activities | |
| 1,466 | | |
| 4,035 | |
| |
| | | |
| | |
Net change in cash and cash equivalents | |
| (3,187 | ) | |
| 1,199 | |
Cash and cash equivalents, beginning of year | |
| 4,642 | | |
| 3,443 | |
Cash and cash equivalents, end of year | |
$ | 1,455 | | |
$ | 4,642 | |
The accompanying notes are an integral part
of these consolidated financial statements.
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
Supplemental non–cash disclosures
(investing and financing activities):
| |
Years ended December
31, 2014 | |
| |
2014 | | |
2013 | |
Transfers from the non–controlling interest in FanTD | |
$ | 1,116 | | |
$ | – | |
Stock issued for acquisition – DraftDay | |
| 190 | | |
| – | |
Stock issued for acquisition – FanTD, LLC | |
| 103 | | |
| 3,018 | |
Stock issued for acquisition – Avcom | |
| – | | |
| 1,552 | |
Stock issued for acquisition – Digital Angel | |
| – | | |
| 202 | |
Stock issued for exercise of warrants | |
| – | | |
| 3,197 | |
Reclassification of derivative liability– Preferred Series A warrants into equity | |
| – | | |
| 8,206 | |
Reclassification of derivative liability– J&S warrants into equity | |
| – | | |
| 1,164 | |
Intangible asset contributed by non–controlling interest | |
| – | | |
| 191 | |
Series A Convertible Preferred stock, dividends paid in kind | |
| – | | |
| 70 | |
Conversion of Series A Preferred to Common stock | |
| – | | |
| (116 | ) |
Series A Convertible Preferred stock, dividends paid in kind | |
| – | | |
| 69 | |
Assets acquired and liabilities assumed through purchase of assets: | |
| | | |
| | |
Prepaid expenses and other current assets | |
| – | | |
| 31 | |
Security deposit | |
| – | | |
| 2 | |
Property and equipment | |
| – | | |
| 32 | |
Intangible assets | |
| 790 | | |
| 631 | |
Goodwill | |
| – | | |
| 4,948 | |
Player deposit liability | |
| (547 | ) | |
| – | |
Other payables | |
| – | | |
| (126 | ) |
Loan payable – related party | |
| – | | |
| (100 | ) |
Assets acquired and liabilities assumed through purchase of Avcom: | |
| | | |
| | |
Prepaid expenses and other current assets | |
| – | | |
| 29 | |
Property and equipment | |
| – | | |
| 7 | |
Intangible assets | |
| – | | |
| 65 | |
Goodwill | |
| – | | |
| 1,496 | |
Other payables | |
| – | | |
| (44 | ) |
Long–term debt | |
| – | | |
| (10 | ) |
The accompanying notes are an integral part
of these consolidated financial statements.
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands except share and per–share
amounts)
Note 1. Organization
MGT Capital Investments,
Inc. (“MGT,” “the Company,” “we,” “us”) is a Delaware corporation, incorporated
in 2000. The Company was originally incorporated in Utah in 1977. MGT is comprised of the parent company, majority–owned
subsidiaries MGT Gaming, Inc. (“MGT Gaming”), MGT Interactive LLC (“MGT Interactive”), and wholly–owned
subsidiaries Medicsight, Inc. (“Medicsight”), MGT Studios, Inc. (f/k/a MGT Capital Solutions, Inc.) (“MGT Studios”)
and its minority–owned subsidiary M2P Americas, Inc., and MGT Sports, Inc. (“MGT Sports”) including its wholly–owned
subsidiary FanTD LLC, (“FanTD”). Our Corporate office is located in Harrison, New York.
MGT and its subsidiaries
are primarily engaged in the business of acquiring, developing and monetizing assets in the casino, online and mobile gaming space,
as well as the casino industry.
MGT Sports
MGT Sports operates DraftDay.com
(Note 4), the daily fantasy sports industry’s third largest daily fantasy sports wagering site, based upon player activity,
contest sizes and similar metrics. The website offers players the opportunity to participate in real money daily fantasy gameplay
for the NFL, MLB, NCAA (basketball & football), NHL, NBA and professional golf. Players select a roster of athletes across
most popular sports, and winnings are determined by the same–day performance of these rosters. Daily fantasy sports compress
the timeframe of traditional fantasy sports from multi–month seasons into 24–hour periods. DraftDay is a leader in
the popular quick–pick style of skill–based fantasy sports gaming. In addition, the Company has launched an online
portal for fantasy sports news and commentary, FantasySportsLive.com (Note 4).
On December 30, 2014,
the Company announced an exclusive partnership with Vivid Entertainment, LLC to develop a fantasy sports gaming site which is
available online at VividBetSports.com.
On September 30, 2006,
the United States Congress passed the Unlawful Internet Gambling Enforcement Act of 2006 (“UIGEA”). The criminal provisions
of UIGEA provide that no person engaged in the business of betting or wagering may knowingly accept directly or indirectly virtually
any type of payment from a player in unlawful internet gambling (i.e. bets that are unlawful under other state or Federal laws).
The Company has been advised by counsel that the fantasy sports are exempt from the definition of unlawful internet gambling provided
that:
|
· |
They are not based on the current membership
of an actual sports team or on the score, point spread or performance of teams; |
|
· |
All prizes and awards are established
and made known before the start of the contest; |
|
· |
Winning outcomes are based on the skill
of the participants and predominately by accumulated statistics of individual performances of athletes, but not solely on
a single performance of an athlete. |
MGT Gaming
MGT Gaming owns U.S.
Patents 7,892,088 and 8,550,554 (the “‘088 and ‘554 patents,” respectively), both entitled "Gaming
Device Having a Second Separate Bonusing Event” and both relating to casino gaming systems in which a second game played
on an interactive sign is triggered once specific events occur in a first game. On November 2, 2012, MGT Gaming filed a lawsuit
(No. 3:12–cv–741) in the United States District Court for the Southern District of Mississippi alleging patent infringement
against certain companies which either manufacture, sell or lease gaming systems in violation of MGT Gaming's patent rights, or
operate casinos that offer gaming systems in violation of MGT Gaming's ‘088 patent, including WMS Gaming, Inc. – a
subsidiary of Scientific Games, Inc. (“WMS”)(NASDAQ: SGMS), Penn National Gaming, Inc. (“Penn”) (NASDAQ
GS: PENN), and Aruze Gaming America, Inc. (“Aruze America”). An amended complaint added the '554 patent, a continuation
of the ‘088 patent. The allegedly infringing products include at least those identified under the trade names: "Amazon
Fishing" and "Paradise Fishing."
On October 23, 2013 the
U.S. District Court severed the originally filed action into three separate actions: The Defendants in all three actions filed
counterclaims denying infringement and asserting invalidity of both patents–in–suit. MGT Gaming filed appropriate
responses, reasserting the validity and infringement of the ‘088 and ‘554 patents.
On November 4, 2013,
WMS filed a Petition for Inter Parties Review ("IPR") with the United States Patent and Trademark Office ("PTO"),
challenging the’088 patent–in–suit. On April 30, 2014 the Patent Trial and Appeal Board (“PTAB”)
instituted the IPR, allowing the IPR to proceed on all claims in suit. The IPR proceeding has subsequently been dismissed by agreement
between WMS and MGT Gaming as part of a settlement of all claims between WMS and MGT, including a dismissal of MGT’s court
action against WMS.
Aruze Macau, a sister
company of Aruze, Aruze America, subsequently filed its own IPR Petition seeking review of the ‘088 patent based on the
same prior art cited by WMS in its IPR. Aruze America also filed a Request for Ex Parte Reexamination of that patent and a Petition
for IPR of the ‘554 patent, both based on different prior art. Aruze America’s Reexamination Request has been denied
by the PTO. Its Petition for IPR remains pending, with MGT’s Preliminary Response due on March 16, 2015.
MGT sought dismissal
of Aruze Macau’s IPR Petition based on the grounds that Aruze America, not Aruze Macau, was the real party in interest and/or
was in privity with Aruze Macau, and that the Aruze entities delayed more than 12 months after the filing of MGT’s infringement
action against Aruze America based on the ‘088 patent and are therefore barred from filing an IPR against that patent. On
February 20, 2015, the PTAB denied MGT’s request for dismissal of the Aruze Macau IPR Petition, but granted MGT the right
to conduct further discovery on the real party in interest, privity and one year bar issues that it had raised in its dismissal
request. MGT is pursuing such discovery and will reassert the one–year bar as well as addressing Aruze Macau’s arguments
on the merits. The PTAB held an initial conference call in that proceeding on March 16, 2015, the same day that MGT’s Preliminary
Response to Aruze America’s concurrent IPR Petition directed to the ‘554 patent was filed. MGT is seeking denial of
that latter Petition on the grounds that Aruze America has not made out a prima facie case of either anticipation or obviousness
based on the prior art asserted in that proceeding.
By motions filed on May
12, 2014, Aruze sought a transfer of the Mississippi infringement action to Nevada as well as a stay pending resolution of IPR
proceedings before the PTAB. Only the latter motion has been granted and the Mississippi action remains stayed at present.
MGT Studios
MGT Studios is publisher
of social games and real money games of skill.
On November 11, 2013,
the Company entered into an Agreement and Plan of Reorganization (the “Avcom Agreement”) with MGT Capital Solutions,
Inc., a wholly owned subsidiary of the Company, Avcom, Inc. and the stockholders and option holders of Avcom, Inc. (“Avcom”).
Pursuant to the Avcom Agreement, the Company acquired 100% of the capital stock of Avcom (Note 4).
Avcom is a game development
studio producing free to play mobile and social casino–style games. Avcom’s assets include physical and intellectual
property associated with Mobilevegas and freeawesome.com, as well as a game under development titled “SlotChamp”.
Prior to entering into the Avcom Agreement, Avcom had performed certain game development consulting services for the Company for
which Avcom received an aggregate of $146 as consideration for such services in 2013.
On December 4, 2013,
the Company entered into a Strategic Alliance Agreement with M2P Entertainment GmbH, a German corporation (“M2P”),
the newly formed Delaware corporation, M2P Americas, Inc. (“M2P Americas”) and the Company’s existing subsidiary
MGT Studios. The purpose of the transaction is to allow M2P Americas to market and exploit MP2’s gaming technology in North
and South America through M2P Americas. As part of the transaction, the Company acquired 50.1% of M2P Americas and M2P acquired
49.9%. The Strategic Alliance Agreement provides that the Company and M2P will jointly cooperate to launch M2P’s gaming
technology in North and South America. It further provides M2P Americas with an exclusive royalty free license to M2P’s
gaming technology for North and South America.
Pursuant to the terms
of the Strategic Alliance Agreement, the Company will advance certain expenses to M2P Americas and the Company and M2P will provide
network and human resources support to M2P Americas. The parties also entered into a Stockholders Agreement dated the same date
which, among other things, grants M2P an option to purchase 10% of the Company’s ownership in M2P Americas at book value
if the Company does not purchase equity in M2P prior to April 2, 2014. This agreement was subsequently amended to extend
the purchase date to May 31, 2014.
On May 31, 2014, M2P
exercised its option to purchase 10% of the outstanding equity interests of M2P Americas from the Company. As a result, the
Company’s ownership of M2P Americas is now 40.1%, and M2P’s ownership is 59.9%.
Any advances by the Company
or its subsidiaries to M2P Americas will be considered a loan bearing interest at 4% per annum or the applicable federal rate
if greater. The Strategic Alliance Agreement has a term of 20 years.
MGT filed a completed
application for a New Jersey Casino Service Industry Enterprise License (“CSIE”). According to regulations promulgated
by the New Jersey Division of Gaming Enforcement (NJDGE), companies providing Internet gaming software or systems, and vendors
who manage, control, or administer games and associated wagers conducted through the Internet, must obtain a CSIE. The Company
expects a determination from NJDGE after it reviews the Personal History Disclosure forms to be provided by a significant
minority stockholder of the Company. Completion of this paperwork is beyond the control of MGT; therefore the Company is unable
to predict when or if a CSIE License will be granted.
MGT Interactive
On September 3, 2013,
the Company entered into a Contribution and Sale Agreement (the “Contribution Agreement”) by and among the Company,
Gioia Systems, and LLC (“Gioia”) and MGT Interactive, LLC whereby MGT Interactive acquired certain assets from Gioia
which was the inventor and owner of a proprietary method of card shuffling for the online poker market trademarked under the name
Real Deal Poker (Note 4).
Medicsight
Medicsight owns medical
imaging software that has received U.S. FDA approval and European CE Mark. The software is designed to detect colorectal polyps
during a virtual colonoscopy performed using CT Tomography. Software sales have been very limited in the past two years. The Company
also has developed an automated carbon dioxide insufflation device and receives royalties on a per–unit basis from an international
manufacturer. On June 30, 2013, the Company completed the sale of Medicsight’s global patent portfolio to Samsung Electronics
Co., Ltd. for gross proceeds of $1.5 million.
Note 2. Liquidity and financial condition
The Company has incurred
significant operating losses since inception and continues to generate losses from operations. As a result, the Company has generated
negative cash flows from operations and has an accumulated deficit of $299,163 at December 31, 2014. The Company is operating
in a developing industry based on new technology and its primary source of funds to date has been through issuances of securities.
While the Company is optimistic and believes appropriate actions are being taken, there can be no assurance that the products
or patent monetization strategy will be successful. Furthermore, it is contemplated that any acquisitions may require the Company
to raise capital; such capital may not be available on terms acceptable to the Company, if at all.
Commercial results have
been limited and we have not generated significant revenues. We cannot assure our stockholders that our revenues will be sufficient
to fund our operations. If adequate funds are not available to us, we may be required to curtail operations significantly or to
obtain funds through entering into arrangements with collaborative partners or others that may require us to relinquish rights
to certain of our technologies or products that we would not otherwise relinquish.
On December 30, 2013,
and as amended on March 27, 2014, the Company entered into an At the Market Offering Agreement (the “ATM Agreement”)
with Ascendiant Capital Markets, LLC (the “Manager”).
Pursuant to the ATM Agreement,
the Company may offer and sell shares of its Common stock (the “Shares”) having an aggregate offering price of up
to $8.5 million from time to time through the Manager. The Shares sold in the offering will be issued pursuant to the Company’s
effective shelf registration statement on Form S–3 (File No. 333–182298) previously filed with the Securities and
Exchange Commission (the “SEC”) in accordance with the provisions of the Securities Act of 1933, as amended (the “Securities
Act”), as supplemented by a prospectus supplement dated December 30, 2013 for the sale of up to $8.5 million of Shares,
which the Company filed with the SEC pursuant to Rule 424(b)(5) under the Securities Act.
The Manager is not required
to sell any specific number or dollar amount of Shares but will use its commercially reasonable efforts, as the Company's agent
and subject to the terms of the ATM Agreement, to sell the Shares offered, as instructed by the Company. Such instructions will
include notice as to the maximum amount of shares of the Company’s Common stock to be sold by the Manager on a daily basis
and the minimum price per share at which such shares may be sold.
The ATM Agreement provides
that the Company will pay the Manager a fee of 3.0% of the gross sales price of any Shares sold through the Manager. The ATM Agreement
contains customary representations, warranties and agreements of the Company and the Manager and customary conditions to completing
future sale transactions, indemnification rights and obligations of the parties and termination provisions.
The Company intends to
use the net proceeds from any sales of Shares in the offering for working capital, capital expenditures, and general business
purposes.
At December 31, 2014,
MGT’s cash, cash equivalents and restricted cash were $1,455, including $11 held in MGT Gaming.
For the year ended
December 31, 2014, and through April 14, 2015, the Company sold approximately 4,100,000 shares of our Common stock under the
ATM Agreement through an “at the market” equity offering program for gross proceeds of approximately $2,949
before related expenses. The proceeds will be used for general corporate purposes, including, but not limited to,
commercialization of our products, capital expenditures and working capital. As of April 14, 2015, the Company has
approximately $5.6 million remaining under the program, assuming sufficient shares are available to be issued.
Currently the Company anticipates it has sufficient
cash on hand, along with the ATM agreement and combined with the anticipated gross margin from DrafDay and the gross margin from
the expected launch of its social slot machine game, Slotchamp, to continue operations at least through March 31, 2016.
Note 3. Summary of significant accounting policies
Basis of presentation
The Company’s financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US
GAAP”) and the rules and regulations of the SEC.
Use of estimates and assumptions and critical accounting
estimates and assumptions
The preparation of financial
statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date(s) of the financial statements and the
reported amounts of revenues and expenses during the reporting period(s).
Critical accounting estimates
are estimates for which (a) the nature of the estimate is material due to the levels of subjectivity and judgment necessary to
account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact of the estimate on financial
condition or operating performance is material. The Company’s critical accounting estimates and assumptions affecting the
financial statements were:
|
(1) |
Allowance for doubtful accounts:
Management’s estimate of the allowance for doubtful accounts is based on historical sales, historical loss levels,
and an analysis of the collectability of individual accounts; and general economic conditions that may affect a client’s
ability to pay. The Company evaluated the key factors and assumptions used to develop the allowance in determining that it
is reasonable in relation to the financial statements taken as a whole. |
|
(2) |
Fair value of long–lived assets:
Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily
determinable. If long–lived assets are determined to be recoverable, but the newly determined remaining estimated useful
lives are shorter than originally estimated, the net book values of the long–lived assets are depreciated over the newly
determined remaining estimated useful lives. The Company considers the following to be some examples of important indicators
that may trigger an impairment review: (i) significant under–performance or losses of assets relative to expected historical
or projected future operating results; (ii) significant changes in the manner or use of assets or in the Company’s overall
strategy with respect to the manner or use of the acquired assets or changes in the Company’s overall business strategy;
(iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a significant decline in
the Company’s stock price for a sustained period of time; and (vi) regulatory changes. The Company evaluates acquired
assets for potential impairment indicators at least annually and more frequently upon the occurrence of such events. |
|
(3) |
Valuation allowance for deferred
tax assets: Management assumes that the realization of the Company’s net deferred tax assets resulting from its
net operating loss (“NOL”) carry–forwards for Federal income tax purposes that may be offset against future
taxable income was not considered more likely than not and accordingly, the potential tax benefits of the net loss carry–forwards
are offset by a full valuation allowance. Management made this assumption based on (a) the Company has incurred recurring
losses, (b) general economic conditions, and (c) its ability to raise additional funds to support its daily operations by
way of a public or private offering, among other factors. |
|
(4) |
Estimates and assumptions used in
valuation of equity instruments: Management estimates expected term of share options and similar instruments, expected
volatility of the Company’s common shares and the method used to estimate it, expected annual rate of quarterly dividends,
and risk free rate(s) to value share options and similar instruments. |
These significant accounting
estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to these estimates or assumptions,
and certain estimates or assumptions are difficult to measure or value.
Management bases its
estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the financial
statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources.
Management regularly
evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in
facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those
estimates are adjusted accordingly. Actual results could differ from those estimates.
Principles of consolidation
All intercompany transactions
and balances have been eliminated. Non–controlling interest represents the minority equity investment in MGT subsidiaries,
plus the minority investors’ share of the net operating results and other components of equity relating to the non–controlling
interest.
A variable interest entity
is defined in Accounting Standards Codification ("ASC") Topic 810 "Consolidation" ("ASC 810") as
a legal entity where either (a) the total equity at risk is not sufficient to permit the entity to finance its activities without
additional subordinated support; (b) equity interest holders as a group lack either i) the power to direct the activities of the
entity that most significantly impact on its economic success, ii) the obligation to absorb the expected losses of the entity,
or iii) the right to receive the expected residual returns of the entity; or (c) the voting rights of some investors in the entity
are not proportional to their economic interests and the activities of the entity involve or are conducted on behalf of an investor
with a disproportionately small voting interest.
ASC 810 requires a variable
interest entity to be consolidated by its primary beneficiary, being the interest holder, if any, which has both (1) the power
to direct the activities of the entity which most significantly impact on the entity's economic performance, and (2) the right
to receive benefits or the obligation to absorb losses from the entity which could potentially be significant to the entity.
The Company evaluates its subsidiaries, and any other entities in which it holds a variable interest, in order
to determine whether the Company is having the power to direct the activities of the entity and is the primary beneficiary of the
entity. The Company consolidated M2P America, a variable interest entity, in which the Company holds minority interest but the Company
controls the board and managment of M2P America and is the primary beneficiary of M2P America.
Business combinations
As specified in ASC
805 “Business Combinations.” the Company adheres to the following guidelines: (i) record purchase consideration
issued to sellers in a business combination at fair value on the date control is obtained, (ii) determine the fair value of any
non–controlling interest, and (iii) allocate the purchase consideration to all tangible and intangible assets acquired and
liabilities assumed based on their acquisition date fair values. The Company commences reporting the results from operations on
a consolidated basis effective upon the date of acquisition.
Software developed for internal use and for sale
The Company follows ASC
350–40 “Intangibles–Internal Use Software” on accounting for the costs of computer software developed
or obtained for internal use. Costs incurred during the preliminary stage are expensed as incurred by the Company. Certain qualifying
costs incurred during the application development stage are capitalized as software by the Company. The Company begins capitalization
when the preliminary project stage is complete and it is probable that the project will be completed and the software will be
used to perform the function intended.
The Company incurs 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 remaining estimated
economic life of the product. Amortization commences when the product is available for general release to customers.
The Company concluded
that capitalizing such expenditures after completion of a working model was inappropriate because the Company did not incur any
material software production costs and therefore expenses were all research and development costs. Our research and development
costs are comprised of staff, consultancy and other costs expensed on our products.
Cash, cash equivalents and restricted cash
The Company considers
investments with original maturities of three months or less to be cash equivalents. Restricted cash primarily represents cash
not available for immediate and general use by the Company.
As of December 31, 2014,
our cash balance was $1,455 (2013: $4,642). Of the total cash balance, $652 is covered under the US Federal Depository Insurance
Corporation. We invest our cash in short–term deposits with major banks. Cash and cash equivalents consist of cash and temporary
investments with original maturities of 90 days or less when purchased.
As of December 31, 2014
restricted cash was $138 (2013: $140), which included $99 (2013: $99) held in escrow relating to the sale of the Company’s
portfolio of medical imaging patents pending reclaim of foreign withholding tax. Proceeds from the patent sale were placed into
escrow prior to receipt by the Company pursuant to an escrow agreement between the Company and Munich Innovations GmbH (Note5).
The escrow agent distributed the escrow deposit in accordance with and subject to any deductions specified in the patent sale
agreement. The remaining $39 of restricted cash supports a letter of credit, in lieu of a rental deposit, for our Harrison, NY
office lease.
Property and equipment
Property and equipment
are stated at cost less accumulated depreciation. 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.
Intangible assets
Intangible assets consist
of patents, trademarks, domain names, software and customer lists. Estimates of future cash flows and timing of events for evaluating
long–lived assets for impairment are based upon management’s judgment. If any of our intangible or long–lived
assets are considered to be impaired, the amount of impairment to be recognized is the excess of the carrying amount of the assets
over its fair value. Applicable long–lived assets are amortized or depreciated over the shorter of their estimated useful
lives, the estimated period that the assets will generate revenue, or the statutory or contractual term in the case of patents.
Estimates of useful lives and periods of expected revenue generation are reviewed periodically for appropriateness and are based
upon management’s judgment.
Goodwill
Goodwill represents
the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. The Company is required
to perform impairment reviews at each of its reporting units annually and more frequently in certain circumstances. The
Company performs the annual assessment on December 31.
In accordance with ASC
350–20 “Goodwill”, the Company is able to make a qualitative assessment of whether it is more likely than
not that a reporting unit’s fair value is less than its carrying amount before applying the two–step goodwill impairment
test. If the Company concludes that it is more likely than not that the fair value of a reporting unit is not less than its carrying
amount it is not required to perform the two–step impairment test for that reporting unit.
Virtual currency accrual
Users of the Company’s
website maintain virtual currency balances which are accumulated as users participate in the Company’s online games. The
amounts may become payable in cash by the Company once the user’s virtual currency balance exceeds a certain minimum threshold;
a virtual currency balance of $0.01 or $0.02 based upon initial date of enrollment on the site. User accounts expire after six
months of inactivity. The Company records an accrual for potential virtual currency payouts at the end of each reporting period
based on historical payout experience and current virtual currency balances. At December 31, 2014, and 2013, the Company recorded
a liability of $10 and $10, respectively, relating to potential future virtual currency payouts.
Revenue recognition
The Company recognizes
revenue when it is realized or realizable and earned. We consider revenue realized or realizable and earned when there is persuasive
evidence of an arrangement and that 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. Our material revenue streams are related to the delivery of software
license fees, maintenance services, hardware, consulting services and gaming fees. We enter into revenue arrangements that may
consist of multiple deliverables of software and services due to the needs of our customers. In addition to these general revenue
recognition criteria, the following specific revenue recognition policies are followed:
Multiple–element
arrangements - For our multiple–element arrangements, deliverables are separated into more than one unit of accounting when
(i) the delivered element(s) have value to the customer on a stand–alone basis, and (ii) delivery of the undelivered element(s)
is probable and substantially in our control.
The revenue allocated
to each deliverable will then be recorded in accordance with existing revenue recognition guidance for stand–alone component
sales and services.
|
· |
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.
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. |
|
· |
Maintenance – Revenue
from maintenance and support arrangements is deferred and recognized ratably over the term of the maintenance and support
arrangements. |
|
· |
Hardware –Revenue
is recognized as orders are satisfied and delivered by our supplier. |
|
· |
Services–consulting – Consulting revenue
is earned over the period in which the Company provides the related services. The Company recognizes consulting revenue as
it meets the terms of the underlying contract on the terms of the agreement. |
|
· |
Gaming fees – Revenue
represents income earned as entry fees for a daily fantasy sports contest and is presented net of any bonus points applied
by customers. Once a contest concludes, the Company recognizes the income earned as revenue. |
|
· |
Advertising –Revenue is
recognized as advertisements are delivered, an executed contract exists, the price is fixed or determinable and collectability
has been reasonably assured. Delivery generally occurs when the advertisement has been displayed or the offer has been completed
by the user. |
Advertising costs
The Company expenses
advertising costs as incurred. During the years ended December 31, 2014 and 2013, respectively, the Company expensed $199 and
$70 in advertising costs.
Equity–based compensation
The Company
recognizes compensation expense for all equity–based payments in accordance with ASC 718 “Compensation
– Stock Compensation". Under fair value recognition provisions, the Company recognizes equity–based
compensation net of an estimated forfeiture rate and recognizes compensation cost only for those shares expected to vest over
the requisite service period of the award.
Restricted stock awards
are granted at the discretion of the Company. These awards are restricted as to the transfer of ownership and generally vest over
the requisite service periods, typically over an eighteen month period (vesting on a straight–line basis). The fair value
of a stock award is equal to the fair market value of a share of Company stock on the grant date.
The fair value of 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, the dividend yield on the underlying stock and the expected
forfeiture rate. 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 the Company has never paid or declared any cash dividends
on our Common stock and does 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 requires 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’s judgment. As a result, if factors
change and the Company uses different assumptions, our equity–based compensation could be materially different in the future.
In addition, the Company is 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 could be
significantly different from what the Company has recorded in the current period.
The Company accounts
for share–based payments granted to non–employees in accordance with ASC 505-40, “Equity Based Payments to
Non–Employees”. The Company determines the fair value of the stock–based payment as either the fair value
of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If
the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions
as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments
is reached, or (2) the date at which the counterparty’s performance is complete. The fair value of the equity instruments
is re-measured each reporting period over the requisite service period.
Income taxes
The Company applies the
elements of ASC 740–10 “Income Taxes — Overall” regarding accounting for uncertainty in income
taxes. This 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. As of December 31, 2014, the Company did not have any unrecognized tax benefits. The Company does 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 years ended December 31, 2014 and 2013. Tax years beginning in 2011
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.
Our effective tax rate
for years 2014, and 2013, was 0% and 0%, respectively. The difference in the Company’s effective tax rate from
the Federal statutory rate is primarily due to a 100% valuation allowance provided for all deferred tax assets.
Loss per share
Basic loss per share
is calculated by dividing net loss applicable to Common stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is calculated by dividing the net earnings attributable to Common stockholders by the sum
of the weighted average number of common shares outstanding plus potential dilutive common shares outstanding during the period.
Potential dilutive securities, comprised of the convertible Preferred stock, unvested restricted shares and warrants, are
not reflected in diluted net loss per share because such shares are anti–dilutive.
The computation of diluted
loss per share for the year ended December 31, 2014, excludes 9,993 (2013: 9,413) shares in connection to the convertible Preferred
stock, 1,020,825 (2013: 920,825) warrants and 110,000 (2013:52,677) unvested restricted shares, as they are anti–dilutive
due to the Company’s net loss.
Segment reporting
Operating segments are
defined as components of an enterprise about which separate financial information is available that is evaluated regularly by
the chief operating decision maker, or decision–making group in deciding how to allocate resources and in assessing performance.
Our chief operating decision–making group is composed of the chief executive officer and chief financial officer. We operate
in four operational segments, Medicsight Software/Devices, Medicsight Services, Gaming and Intellectual Property. MGT Gaming is
now referred to as Intellectual Property. Gaming is a new segment, created in fiscal 2013. Certain corporate expenses are not
allocated to segments.
Recent accounting pronouncements
In April 2014, the
U.S. Financial Accounting Standards Board issued Accounting Standards Update 2014–08, Reporting Discontinued Operations
and Disclosures of Disposals of Components of an Entity (ASU 2014–08). This new standard (i) raises the threshold
for disposals to qualify as discontinued operations (ii) allows companies to have significant continuing involvement
and continuing cash flows with the discontinued operation, and (iii) provides for new and additional disclosures of
discontinued operations and individually material disposal transactions. The Company anticipates adopting the new standard when
it becomes effective in the first quarter of 2015.
In May 2014, the Financial
Accounting Standards Board issued Accounting Standards Update 2014–09, Revenue from Contracts with Customers. Amendments
in this Update create Topic 606, Revenue from Contracts with Customers, and supersede the revenue recognition requirements
in Topic 605, Revenue Recognition, including most industry–specific revenue recognition guidance throughout the
Industry Topics of the Codification. In addition, the amendments supersede the cost guidance in Subtopic 605–35, Revenue
Recognition—Construction–Type and Production–Type Contracts, and create new Subtopic 340–40, Other
Assets and Deferred Costs—Contracts with Customers. In summary, the core principle of Topic 606 is that an entity recognizes
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services. This Accounting Standards Update is the final version
of Proposed Accounting Standards Update 2011–230—Revenue Recognition (Topic 605) and Proposed Accounting Standards
Update 2011–250—Revenue Recognition (Topic 605): Codification Amendments, both of which have been deleted. Accounting
Standards Update 2014–09. The amendments in this Update are effective for the Company for annual reporting periods beginning
after December 15, 2016, including interim periods within that reporting period. The Company is currently evaluating the effects
of ASU 2014–09 on the consolidated financial statements.
In June 2014, FASB issued
Accounting Standards Update 2014–12, Compensation – Stock Compensation (Topic 718), which clarifies accounting
for share–based payments for which the terms of an award provide that a performance target could be achieved after the requisite
service period. That is the case when an employee is eligible to retire or otherwise terminate employment before the end of the
period in which a performance target could be achieved and still be eligible to vest in the award if and when the performance
target is achieved. The updated guidance clarifies that such a term should be treated as a performance condition that affects
vesting. As such, the performance target should not be reflected in estimating the grant–date fair value of the award. Compensation
cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent
the compensation cost attributable to the periods for which the requisite service has already been rendered. The guidance will
be effective for the annual periods (and interim periods therein) ending after December 15, 2015. Early application is permitted.
The Company is currently evaluating the effects of ASU 2014–12 on the consolidated financial statements.
In
August 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-15, Presentation of Financial
Statements- Going Concern. The Update provides U.S. GAAP guidance on management’s responsibility in evaluating
whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures.
For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial
doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are
issued. This Accounting Standards Update is the final version of Proposed Accounting Standards Update 2013-300—Presentation
of Financial Statements (Topic 205): Disclosure of Uncertainties about an Entity’s Going Concern Presumption, which has
been deleted. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual
periods and interim periods thereafter. The Company is currently evaluating the effects of ASU 2014-15 on the consolidated financial
statements.
In November 2014, the
Financial Accounting Standards Board issued Accounting Standards Update 2014–16, Derivatives and Hedging. For
hybrid financial instruments issued in the form of a share, Topic 815 requires an entity to determine the nature of the host contract
by considering all stated and implied substantive terms and features of the hybrid financial instrument, weighing each term and
feature on the basis of relevant facts and circumstances. Certain classes of shares include features that entitle the holders
to preferences and rights (such as conversion rights, redemption rights, voting powers, and liquidation and dividend payment preferences)
over the other stockholders. Shares that include embedded derivative features are referred to as hybrid financial instruments,
which must be separated from the host contract and accounted for as a derivative if certain criteria are met under Subtopic 815–10.
One criterion requires evaluating whether the nature of the host contract is more akin to debt or to equity and whether the economic
characteristics and risks of the embedded derivative feature are “clearly and closely related” to the host contract.
In making that evaluation, an issuer or investor may consider all terms and features in a hybrid financial instrument including
the embedded derivative feature that is being evaluated for separate accounting or may consider all terms and features in the
hybrid financial instrument except for the embedded derivative feature that is being evaluated for separate accounting. The use
of different methods can result in different accounting outcomes for economically similar hybrid financial instruments. Additionally,
there is diversity in practice with respect to the consideration of redemption features in relation to other features when determining
whether the nature of a host contract is more akin to debt or to equity. The amendments apply to all reporting entities that are
issuers of, or investors in, hybrid financial instruments that are issued in the form of a share. This Accounting Standards Update
is the final version of Proposed Accounting Standards Update EITF–13G—Derivatives and Hedging—Determining Whether
the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity (Topic 815),
which has been deleted. This update is effective for public business entities for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2015. Early application is permitted. The Company is currently evaluating the effects
of ASU 2014–16 on the consolidated financial statements.
In November 2014, the
Financial Accounting Standards Board issued Accounting Standards Update 2014–Business Combinations (Topic 805): Pushdown
Accounting. The amendments in ASU 2014-17 provide an acquired entity with an option to apply pushdown accounting in its separate
financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. An acquired entity
may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs. An acquired
entity should determine whether to elect to apply pushdown accounting for each individual change-in-control event in which an
acquirer obtains control of the acquired entity. If pushdown accounting is not applied in the reporting period in which the change-in-control
event occurs, an acquired entity will have the option to elect to apply pushdown accounting in a subsequent reporting period to
the acquired entity’s most recent change-in-control event. An election to apply pushdown accounting in a reporting period
after the reporting period in which the change-in-control event occurred should be considered a change in accounting principle
in accordance with Topic 250, Accounting Changes and Error Corrections. If pushdown accounting is applied to an individual change-in-control
event, that election is irrevocable. The amendments in ASU 2014-17 are effective on November 18, 2014. After the effective date,
an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control
event. However, if the financial statements for the period in which the most recent change-in-control event occurred already have
been issued or made available to be issued, the application of this guidance would be a change in accounting principle. The Company
is currently evaluating the effects of ASU 2014–17 on the consolidated financial statements.
Note 4. Asset purchases and acquisitions
of businesses
DraftDay
On April 7, 2014, the
Company closed on an Asset Purchase Agreement (“Agreement”) with CardRunners Gaming, Inc. to acquire business assets
and intellectual property related to DraftDay.com for cash consideration of $600 and stock consideration of $190, consisting of
95,166 shares of Company’s Common stock at $2.00 per share (valued on the date of close). The Company determined the acquisition
constitutes a business in accordance with the guidance of ASC 805 “Business Combinations.”
The following table summarizes
the fair values of the net assets/liabilities assumed and the allocation of the aggregate fair value of the purchase consideration
to assumed identifiable intangible assets:
Cash | |
$ | 600 | |
Common stock – 95,166 shares at $2.00 per share | |
| 190 | |
Total purchase price | |
$ | 790 | |
Cash | |
$ | 547 | |
Customer list | |
| 51 | |
Domains | |
| 64 | |
Website | |
| 675 | |
Player deposit liability | |
| (547 | ) |
Total purchase price allocation | |
$ | 790 | |
Digital Angel
On May 2, 2013, the Company
purchased certain mobile game application assets from Digital Angel Corporation. The purchase price consisted of a cash payment
in the amount of $136 and 50,000 restricted shares of the Company’s Common stock with an aggregate fair value of $203 as
of the date this transaction was completed. The Company determined the acquisition constitutes a purchase of assets in accordance
with the guidance of ASC 805 “Business Combinations.”
The following table summarizes
the Company’s allocation of the purchase price to the separable components of the mobile applications based on their relative
fair values at the date the purchase was completed:
Purchase price allocation: | |
| | |
Software and hardware | |
$ | 28 | |
Trademark | |
| 6 | |
Intangible assets – mobile gaming application | |
| 305 | |
Net assets acquired | |
$ | 339 | |
FanTD
On May 20, 2013, the
Company acquired 63% of the outstanding membership interests of FanTD in exchange for an aggregate purchase of $3,220 consisting
of 600,000 shares of MGT Common stock at a fair value of $5.03 per share for a total of $3,018 and a cash payment of $202. The
fair value of the 37% non–controlling interest retained by the sellers in this transaction amounted to $1,882. The Company
determined the acquisition constitutes a business acquisition in accordance with the guidance of ASC 805 “Business Combinations.”
The following tables
summarizes the fair values of the net assets/liabilities assumed and the allocation of the aggregate fair value of the purchase
consideration, non–controlling interest and net liabilities to assumed identifiable and unidentifiable intangible assets:
Purchase consideration: | |
| | |
Common stock (600,000 shares at the transaction date fair value of $5.03 per share) | |
$ | 3,018 | |
Cash | |
| 202 | |
Aggregate purchase consideration | |
| 3,220 | |
Fair value of non–controlling interest | |
| 1,882 | |
Aggregate fair value of enterprise | |
| 5,102 | |
| |
| | |
Purchase price allocation: | |
| | |
Net liabilities assumed | |
| (69 | ) |
Property and equipment | |
| 4 | |
| |
| (65 | ) |
Aggregate fair value of purchase consideration, non–controlling interest
and net liabilities assumed allocated to intangible assets as follows: | |
| | |
Developed software | |
| 186 | |
Customer list | |
| 33 | |
Goodwill; the excess consideration over the fair value of allocated assets is recorded as
goodwill | |
| 4,948 | |
Total purchase price allocation | |
$ | 5,102 | |
Revenue and net loss from the acquisition date through
December 31, 2013, was $217 and $1,224, respectively.
Fantasy Sports Live
On June 25, 2013, MGT
Sports acquired Fantasy Sports Live, which was effectively a customer list associated with a specific gaming application for $30
in cash and the assumption of a $46 customer deposit liability. The Company determined the acquisition constitutes a purchase
of assets in accordance with the guidance of ASC 805 “Business Combinations.”
Daily Joust
On July 23, 2013, MGT
Sports acquired certain assets from Daily Joust, Inc. The purchase price consisted of a cash payment of $50 for $136 in customer
deposits and assumption of a $136 customer liability. The Company determined the acquisition constitutes a purchase of assets
in accordance with the guidance of ASC 805 “Business Combinations.”
Real Deal Poker
On September 3, 2013,
the Company entered into a Contribution and Sale Agreement (the “Contribution Agreement”) by and among the Company,
Gioia Systems, and LLC (“Gioia”) and MGT Interactive, LLC whereby MGT Interactive acquired certain assets from Gioia
which was the inventor and owner of a proprietary method of card shuffling for the online poker market. Trademarked under the
name Real Deal Poker, the technology uses patented shuffling machines, along with permutation re–sequencing, allowing for
the creation of up to 16,000 decks per minute in real time. The acquisition includes seven (7) U.S. Patents and several Internet
URL addresses, including www.RealDealPoker.com. Pursuant to the Contribution Agreement, Gioia contributed the assets to MGT Interactive
in exchange for a 49% interest in MGT Interactive and MGT contributed $200 to MGT Interactive in exchange for a 51% interest in
MGT Interactive. The $200 contributed by the Company has been utilized as working capital to cover the direct and associated costs
relating to the achievement of a certification from Gaming Laboratories International (“GLI”). The Company has the
right to acquire an additional 14% ownership interest in MGT Interactive from Gioia in exchange for a purchase price of $300 after
GLI certification is obtained. Gioia, in turn, will have the right to re–acquire the 14% interest for a period of three
years at a purchase price of $500. Gioia shall have the right to certain royalty payments from the gross rake payments, and any
licensing or royalty income received by MGT Interactive after certain revenue targets are exceeded.
Simultaneously with the
entry into the Contribution Agreement, the Company and Gioia entered into a Limited Liability Company Agreement which served as
the operating agreement for MGT Interactive, and a consulting agreement (the “Gioia Agreement”) with Gioia to provide
services to the Company primarily related to obtaining GLI Certification. The Gioia Agreement terminated on January 31, 2014 or
the date on which GLI Certification is obtained. In the event that GLI Certification is obtained prior to January 31, 2013, the
Consulting Agreement shall be extended for an additional year. Pursuant to the Consulting Agreement, Gioia will receive a monthly
consulting fee of $10 of which $5 is paid in cash per month and $5 is deferred until GLI certification is obtained. The Company
expensed $179 for Fiscal 2013. Testing concluded on January 29, 2014, and GLI reported random behavior suitable for the applications
that were analyzed. The Company is discussing with GLI the final steps to certification MGT filed for an application for a New
Jersey Casino Services Industry Enterprise License with the New Jersey Department of Gaming, as required, to offer internet gambling
services. Although obtaining the license is beyond the Company’s control, the Company hopes to obtain the license sometime
in 2015.
Avcom
On November 26, 2013,
the Company closed on an Agreement and Plan of Reorganization (the “Agreement”) with MGT Capital Solutions, Inc.,
a wholly owned subsidiary of the Company, Avcom, Inc. and the stockholders and option holders of Avcom, Inc. (“Avcom”).
Pursuant to the Agreement, the Company acquired 100% of the capital stock of Avcom. In consideration, the Preferred stockholders
of Avcom received $550 in value of the Company’s Common stock and the Common stockholders and option holders of Avcom will
receive an aggregate of $1,000 in value of the Company’s Common stock. The value of the Company’s Common stock is
based on the volume weighted average closing price for the 20 trading days prior to signing the Avcom Agreement. The acquisition
contemplated by the Avcom Agreement closed on November 26, 2013. The Company determined the acquisition constitutes a business
acquisition in accordance with the guidance of ASC 805 “Business Combinations.”
One half of the issuance
to the Avcom Common stockholders and option holders was placed in escrow and will be released upon the later of (i) the commercial
release of an agreed upon game or (ii) six (6) months after closing. In addition, the Common stockholders may be awarded contingent
consideration of $1.0 million through the issuance of up to 333,000 of the Company’s Common stock in the event that the
game reaches $3.0 million in gross revenues within 18 months of signing the Agreement.
Prior to entering into
the Agreement, Avcom had performed certain game development consulting services for the Company for which Avcom received an aggregate
of $146 as consideration for such services.
The following tables
summarizes the fair values of the net liabilities assumed and the allocation of the aggregate fair value of the purchase consideration
to assumed identifiable and unidentifiable intangible assets:
Purchase consideration: | |
| | |
Cash consideration | |
$ | 10 | |
Stock consideration (491,035 shares at $3.16 closing price) | |
| 1,552 | |
Total purchase consideration | |
$ | 1,562 | |
| |
| | |
Purchase price allocation: | |
| | |
Current assets and liabilities | |
$ | (6 | ) |
Equipment | |
| 7 | |
Intangible assets – Patent applications | |
| 15 | |
Intangible assets – Website | |
| 50 | |
Goodwill; the excess consideration over the fair value of allocated assets is recorded as
goodwill | |
| 1,496 | |
Total purchase price allocation | |
$ | 1,562 | |
In connection with the
Agreement, the Company entered into two executive employments agreements. Each executive agreement has a term of two years. Each
executive will receive a deferred signing bonus equal to $75 and a base salary of $190 per year. The deferred signing bonus is
payable once the Company generates cash revenues in excess of $200 from its product, SlotChamp, net of app store fees. As of December
31, 2014, the Company has not recognized any expense related the deferred signing bonuses as the SlotChamp game has not launched.
Revenue and net loss from the acquisition
date through December 31, 2013, was $3 and $22, respectively.
Pro–forma results
The following
tables summarize, on an unaudited pro–forma basis, the results of operations of the Company as though the acquisitions
of Avcom, FanTD and DraftDay had occurred as of January 1, 2013. The pro–forma amounts give effect to appropriate
adjustments of amortization of intangible assets and interest expense associated with the financing of the acquisition.
The pro–forma amounts presented are not necessarily indicative of the actual results of operations had the
acquisition transaction occurred as of January 1, 2013.
Year ended December 31, 2014 | |
MGT | | |
DraftDay | | |
Pro–forma total | |
Revenues | |
$ | 1,056 | | |
$ | 192 | | |
$ | 1,248 | |
Net loss | |
| (5,330 | ) | |
| (240 | ) | |
| 5,570 | |
Loss per share of Common stock | |
| (0.56 | ) | |
| – | | |
| (0.56 | ) |
Basic and diluted | |
| 9,493,057 | | |
| – | | |
| 9,493,057 | |
Year ended December 31, 2013 | |
MGT | | |
FanTD | | |
Avcom | | |
DraftDay | | |
Pro–forma total | |
Revenues | |
$ | 396 | | |
$ | 62 | | |
$ | 110 | | |
$ | 1,190 | | |
$ | 1,758 | |
Net loss | |
| (10,202 | ) | |
| (336 | ) | |
| 125 | | |
| (1,007 | ) | |
| (11,420 | ) |
Loss per share of Common stock | |
| (1.84 | ) | |
| – | | |
| – | | |
| – | | |
| (1.84 | ) |
Basic and diluted | |
| 5,590,620 | | |
| – | | |
| – | | |
| – | | |
| 5,590,620 | |
Note 5. Goodwill and intangible assets
Goodwill represents the
difference between purchase cost and the fair value of net assets acquired in business acquisitions. Indefinite lived intangible
assets, representing trademarks and trade names, are not amortized unless their useful life is determined to be finite. Long–lived
intangible assets are subject to amortization using the straight–line method. Goodwill and indefinite lived intangible assets
are tested for impairment annually as of December 31, 2014, and more often if a triggering event occurs, by comparing the fair
value of each reporting unit to its carrying value. The Company performed this impairment test and concluded that impairment did
not exist as of December 31, 2014 and 2013.
| |
Goodwill | |
Balance, December 31, 2012 | |
$ | – | |
Additions (Note 4) | |
| 6,444 | |
Balance, December 31, 2013 | |
| 6,444 | |
Additions | |
| – | |
Balance, December 31, 2014 | |
$ | 6,444 | |
The Company’s intangibles
assets consisted of the following:
| |
Estimated remaining useful | |
As of December 31, | |
| |
life | |
2014 | | |
2013 | |
Intellectual property | |
6 years | |
$ | 2,230 | | |
$ | 2,468 | |
Software and website development | |
2 years | |
| 951 | | |
| 275 | |
Customer lists | |
3 years | |
| 210 | | |
| 159 | |
Trademarks | |
2 years | |
| 5 | | |
| 7 | |
Less: Accumulated amortization | |
| |
| (979 | ) | |
| (486 | ) |
Intangible assets, net | |
| |
$ | 2,417 | | |
$ | 2,423 | |
For the year ended December
31, 2014, the Company recorded amortization expense of $661 (2013: $368). In addition the Company impaired $135 related to the
Digital Angel intangible assets in 2014.
The following table outlines
estimated future annual amortization expense for the next five years and thereafter:
| |
Intellectual property | | |
Software and
website development | | |
Customer lists | | |
Trademarks | | |
Total | |
2015 | |
$ | 283 | | |
$ | 316 | | |
$ | 42 | | |
$ | 3 | | |
$ | 644 | |
2016 | |
| 283 | | |
| 317 | | |
| 42 | | |
| 2 | | |
| 644 | |
2017 | |
| 283 | | |
| – | | |
| 42 | | |
| – | | |
| 325 | |
2018 | |
| 283 | | |
| – | | |
| 2 | | |
| – | | |
| 285 | |
2019 | |
| 283 | | |
| – | | |
| – | | |
| – | | |
| 283 | |
Thereafter | |
| 236 | | |
| – | | |
| – | | |
| – | | |
| 236 | |
Balance, December 31, 2014 | |
$ | 1,651 | | |
$ | 633 | | |
$ | 128 | | |
$ | 5 | | |
$ | 2,417 | |
MGT Gaming
On May 11, 2012, the
Company entered into a Contribution and Sale Agreement (the “Sale Agreement”) with J&S Gaming, Inc. (“J&S”),
and MGT Gaming for the acquisition of U.S. Patent #7,892,088, entitled “Gaming Device Having a Second Separate Bonusing
Event” (“the Patent”). Pursuant to the Sale Agreement, (i) J&S sold certain patents to MGT Gaming in exchange
for 1,000 shares (constituting 100% ownership) of MGT Gaming Common stock, par value $0.001; (ii) the Company purchased from J&S
550 MGT Gaming Shares constituting 55% ownership in exchange for $200 cash and a four (4) year warrant to purchase 350,000 shares
of the Company’s Common stock at an exercise price of $4.00 per share, subject to certain anti–dilution provisions
(the “Warrants”). The Patent was recorded at its estimated fair value of $1,913 at the date of closing. Due to certain
anti–dilution provisions, the J&S Warrants was recorded as a liability, and consequently “marked–to–market”
to the fair value at the end of each reporting period. On May 20, 2013, the Company modified the J&S Warrant granted to eliminate
the anti–dilution provision therein. The Company paid J&S Gaming $25 in cash as consideration for the modification.
On May 20, 2013, the
Company had 403,029 warrants outstanding with a fair value of $1,164 carried as a derivative liability. The modification agreement
allowed the Company to reclassify the $1,164 from a derivative liability into stockholders’ equity. In Fiscal 2013, the
Company recognized $363 of mark–to–market loss associated with this agreement.
Medicsight
On June 30, 2013, MGT
closed the sale of its portfolio of medical imaging patents to Samsung Electronics Co, Ltd. (“Samsung”). The Company
had no prior relationship with Samsung. Gross proceeds of $1,500 was reduced by a broker commission of $501 paid to Munich Innovation
Group GmbH, foreign withholding tax of $248 and an escrow agent fee of $1 . The seller deposited $750 of proceeds into a restricted
cash account upon the completion of the sale of which $651 was released to the Company on July 3, 2013. The remaining $99 is retained
escrow pending reclaim of the foreign withholding tax.
Note 6. Property and equipment
Property and equipment
consisted of the following:
| |
December 31, | |
| |
2014 | | |
2013 | |
Computer hardware and software | |
$ | 193 | | |
$ | 152 | |
Furniture and fixtures | |
| 12 | | |
| 12 | |
| |
| 205 | | |
| 164 | |
Less: Accumulated depreciation | |
| (162 | ) | |
| (119 | ) |
Total | |
$ | 43 | | |
$ | 45 | |
The Company recorded
depreciation expense of $43 and $31 for the years ended December 31, 2014 and 2013, respectively.
Note 7. Accrued expenses
| |
December 31, | |
| |
2014 | | |
2013 | |
Professional fees | |
$ | 100 | | |
$ | 66 | |
Non–executive directors’ fees | |
| 56 | | |
| 23 | |
Other | |
| 24 | | |
| 5 | |
Total | |
$ | 180 | | |
$ | 94 | |
Note 8. Series A Convertible Preferred
stock
On November 2, 2012,
the Company closed a private placement sale of 1,380,362 shares of Series A Convertible Preferred stock (“Preferred stock”),
(including 2,760,724 warrants to purchase MGT Common stock) for an aggregate of $4.5 million. The Preferred stock is convertible
into the Company's Common stock at a fixed price of $3.26 per share and carries a 6% dividend. The warrants have a five–year
life and are exercisable at $3.85 per share.
Significant terms of the Preferred stock,
as specified in the Certificate of Designation
Conversion option
At any time and from
time to time on or after the Effective Date, the Preferred stock shall be convertible (in whole or in part), at the option of
the Holder, into such number of fully paid and non–assessable shares of Common stock as is determined by dividing (x) the
aggregate Stated Value of $3.26 per shares (“Stated Value”) of Preferred stock that are being converted plus any accrued
but unpaid dividends thereon as of such date that the Holder elects to convert by (y) the Conversion Price ($3.26) then in effect
on the date (the “Conversion Date”).
For the year ending December
31, 2014, no Preferred shares were converted into shares of the Company’s Common stock. During the year ending December
31, 2013, 1,406,747 of Preferred stock were converted into 1,406,747 shares of Common stock.
Dividends
The Preferred stock shall
pay a six percent (6%) annual dividend on the outstanding Preferred stock, payable quarterly on March 31, June 30, September 30
and December 31 of each year (the “Dividend Date”), with the first dividend payable for the period commencing on the
Issuance Date. The Company has the option to pay each quarterly dividend in cash or additional shares of Preferred stock (the
"Dividend Shares").
For the years ended December
31, 2014, and 2013, respectively, the Company issued 580 and 21,394 Dividend Shares, in connection with the Preferred stock dividend.
The Dividend shares are valued at the $0.001 Preferred stock par value.
Liquidation preference
Upon the
liquidation, dissolution or winding up of the business of the Corporation, whether voluntary or involuntary, each holder of
Preferred stock shall be entitled to receive, for each share thereof, a preferential amount in cash equal to (and not more
than) the Stated Value (the “Liquidation Amount”) plus all accrued and unpaid dividends. As of December 31, 2014
and 2013, the liquidation preference value of the outstanding redeemable series A preferred stock is not material.
The Preferred stock Certificate
of Designation and Warrant agreement (“Warrants”) each contain a fundamental transactions clause that provides for
the conditional redemption of these instruments under certain circumstances that are not within the Company’s sole control.
Management has therefore concluded that the Preferred stock requires temporary equity classification in accordance with ASC
480–10–S99 “Accounting for Redeemable Equity Instruments” at its allocated value and the warrants
require classification at fair value. When the Preferred stock and Warrants were issued, the fair value of the Warrants exceeded
the proceeds received from the sale and issuance of the Preferred stock and Warrants. The Warrants were recorded at their fair
value and the excess over the proceeds received was recorded as a deemed dividend. Changes in the fair value of the Warrants at
each reporting date are included in the statement of operations. The carrying amount of the Preferred Shares requires no further
adjustment unless and until the conditional redemption events are probable. The Company does not consider the conditional redemption
events to be probable, as these events refer to fundamental change of control situations that do not currently exist, in the opinion
of management. Accordingly, management concluded that the conversion option embedded in the preferred shares does not require
bifurcation from the host contract, as the Preferred stocks have the characteristics of a residual interest and therefore are
clearly and closely related to the Common stocks issuable upon the exercise of the conversion option. Further, since the issuance
date fair value of the warrants exceeded the proceeds received from the sale and issuance of the Preferred stock, accounting recognition
of the beneficial conversion feature was not required.
On April 26, 2013, the
Company made an offer to the holders of the Company’s $3.85 Common stock Purchase Warrants issued on October 29, 2012 (the
“Warrants”), providing if such holders exercised one Warrant, they would have the right to exchange up to two
additional Warrants for 5/8ths per share of Common stock per Warrant exchanged. The results of the offer were that holders
of 715,742 Warrants elected to exercise their Warrants. The Warrants had a fair value of $1,680 carried as a derivative liability
on the exercise date. The Warrants were fair valued based upon the following Black Scholes Model (“BSM”): risk free
rate 0.68 % – 0.85 %; expected term five (4.44) years; annual volatility 75%; exercise price $3.85, market value of $3.90
– $4.27 per share. The exercise of the Warrants allowed the Company to reclassify $1,680 from derivative liability
into stockholders’ equity. During the year ended December 31, 2013, the Company recognized $30 mark–to–market
loss associated to this agreement.
On May 20, 2013, the
Company entered into Warrant Waiver Agreements with four holders of Warrants who collectively held more than 60% of the Warrants,
which per the original Warrants, triggers the modification of all Warrants in the series. The modification addresses
the ability of warrant holders to redeem the Warrants for cash in a “Fundamental Transaction” as defined in the Warrant
to provide that the Warrant holders do not have the right to redeem the Warrants for cash in any Fundamental Transaction that
is not approved by the Company’s Board of Directors or that occurs in a transaction or as a result of an event that was
not in the Company’s sole control. The modification changes the accounting treatment of the Warrants. The Company committed
to issue an aggregate of 162,460 shares of its Common stock in consideration for the modification. On September 27, 2013, at MGT’s
Annual Meeting of Stockholders, stockholders approved a resolution for the issuance of up to 162,460 shares of Common stock (the
“Modification Shares”) in consideration for the modification of certain provisions contained in an aggregate of 2,044,982
warrants which modifications allowed the Company to treat such warrants as equity rather than as a derivative liability. The
shares were subsequently issued on October 8, 2013. The stock was valued at $598 using the closing market price on September 27,
2013. On May 20, 2013, the Company had 2,044,982 warrants outstanding with a fair value of $6,525 carried as a derivative liability.
The warrants were fair valued based upon the following Black Scholes Model (“BSM”): risk free rate 0.850 %; expected
term five (4.44) years; annual volatility 75 %; exercise price $3.85, market value of $5.03 per share. The modification agreement
allowed the Company to reclassify the $6,525 from derivative liability into stockholders’ equity. For the year ended December
31, 2013, the Company recognized $1,811 mark–to–market loss, respectively, associated with this agreement.
Cash maintenance
Under the cash maintenance
provision the Company had to maintain a cash balance of at least $2,000 as long as at least 345,092 shares of Preferred stock
remains outstanding. With fewer than 345,012 shares of Preferred stock outstanding, the Company is no longer subject to the Cash
Maintenance provision of the Purchase Agreement under which the Preferred stock was originally sold in October 2012.
Note 9. Stock incentive plan and stock–based compensation
Stock incentive plan
The Company’s board
of directors established the 2012 Stock Incentive Plan (the “Plan”) on April 15, 2012, and the Company’s stockholders
ratified the Plan at the annual meeting of the Company’s stockholders on May 30, 2012. The Company has 415,000 shares of
Common stock that are reserved to grant Options, Stock Awards and Performance Shares (collectively the “Awards”) to
“Participants” under the Plan. The Plan is administered by the board of directors or the Compensation Committee of
the board of directors, which determines the individuals to whom awards shall be granted as well as the type, terms and conditions
of each award, the option price and the duration of each award.
At the annual meeting
of the stockholders of MGT held on September 27, 2013, stockholders approved an amendment to the Plan (the “Amended and
Restated Plan”) to increase the amount of shares of Common stock that may be issued under the Amended and Restated Plan
to 1,335,000 shares from 415,000 shares, an increase of 920,000 shares and to add a reload feature.
Options granted under
the Plan vest as determined by the Company’s Compensation and Nominations Committee and expire over varying terms, but not
more than seven years from date of grant. In the case of an Incentive Stock Option that is granted to a 10% shareholder on the
date of grant, such Option shall not be exercisable after the expiration of five years from the date of grant. No option grants
were issued during the years ended December 31, 2014 and 2013.
Issuance of restricted shares – directors, officers
and employees
The restricted shares
are valued using the closing market price on the date of grant, of which the share–based compensation expense is recognized
over their vesting period. The unvested shares are subject to forfeiture if the applicable recipient is not a director, officer
and/or employee of the Company at the time the restricted shares are to vest.
On September 30, 2013,
6,000 restricted shares were granted and issued to a certain employee. The restricted shares vest one–third each six months
from the date of issue.
On January 8, 2014, January
16, 2014, and March 26, 2014, a total of 46,000 restricted shares were granted and issued to certain employees with an aggregate
fair value of $91. The restricted shares vest one–third each six months from the date of issue.
On April 15, 2014, 39,000
restricted shares were granted and issued to certain employees, with an aggregate fair value of $77. The restricted shares vest
one–third each six months from the date of issue.
On July 1, 2014, and
August 15, 2014, a total of 62,000 restricted shares were granted and issued to certain employees, with an aggregate fair value
of $57. The restricted shares vest one–half each six months from the date of issue.
For the year ended December
31, 2014 the Company has recorded $290 (2013: $1,357) in employee and director stock–based compensation expense, which is
a component of selling, general and administrative expense in the Consolidation Statement of Operations
For the years ended December
31, 2014 and 2013, no stock–based compensation expense was allocated to non–controlling interest.
A summary of the Company’s
employee’s restricted stock as of December 31, 2014 and 2013 is presented below:
| |
Number of shares | | |
Weighted average grant
date fair value | |
Non–vested at January 1, 2013 | |
| 314,667 | | |
$ | 5.20 | |
Granted | |
| 6,000 | | |
| 3.68 | |
Vested | |
| (264,000 | ) | |
| 4.56 | |
Forfeited | |
| (4,000 | ) | |
| 4.62 | |
Non–vested at December 31, 2013 | |
| 52,667 | | |
| 4.56 | |
Granted | |
| 147,000 | | |
| 1.72 | |
Vested | |
| (77,000 | ) | |
| 3.77 | |
Forfeited | |
| (12,667 | ) | |
| 3.68 | |
Non–vested at December 31, 2014 | |
| 110,000 | | |
$ | 1.42 | |
On January 28, 2015,
30,000 restricted shares were granted and issued to a certain employee with an aggregated fair value of $16. The shares vest one–third
every six month from the date of issue.
On January 28, 2015,
25,000 restricted shares were granted and issued to a certain employee with an aggregated fair value of $13. 10,000 vested on
January 30, 2015, the remaining shares vest one–half on April 16 and October 16, 2015, respectively.
Unrecognized compensation cost
As of December 31, 2014
and 2013, unrecognized compensation costs related to non–vested share–based compensation arrangements was $101 and
$187, respectively. That cost is expected to be recognized over a weighted average period of 0.66 years.
Share–based compensation –
non–employees
As a result of MGT’s
acquisition of 63.12 % of FanTD LLC on May 20, 2013, the Company incurred $503 associated to the issuance of 100,000 shares of
the Company’s Common stock for a consulting and marketing agreement. These shares were issued on June 29, 2013. The stock
was valued using the closing market price on the closing date of the acquisition.
On September 4, 2013,
the Company issued 16,611 shares of the Company’s Common stock for legal services rendered. The stock was valued at
$72 using the closing market price on the date of issuance.
On August 16, 2013, the
Company entered into a consulting agreement for investor relation services for a period of six months. In consideration for the
services, the Company was paying $6 per month and 30,000 shares of the Company’s Common stock. The Common stock vested over
a six month period. In accordance with ASC 505–50–S99 “Equity – Based Payments to Non–Employees”,
the Company recognized the issuance over the vesting period. On November 27, 2013, the Company cancelled the agreement. For the
year ended December 31, 2013, the Company issued 20,000 shares with a fair market value of $66 based on the closing market price
for each of the vesting dates.
On November 12, 2013,
the Company entered into a consulting agreement for investor relations media services for a period of three months. In consideration
for the services, the Company was scheduled to pay $20 upon execution of the agreement and $25, each 30 and 60 days subsequent
to the date of the agreement; and 10,000 shares each of the Company’s Common stock upon execution of the agreement and 10,000
shares each of the Company’s Common stock on 30 and 60 days from the date of the agreement, respectively. The Company expensed
$57 associated to the issuance of 20,000 shares based on the closing market price on November 12, 2013 and December 12, 2013.
The agreement was cancelled January 3, 2014.
In addition to the above,
the Company also issued 270,000 shares of the Company’s Common stock to non–employees. The shares were valued at $1,011,
the Company recorded $911 of expense and $100 of cash proceeds related to the issuance.
On June 16, 2014 the
Company entered into a Settlement Agreement with J&S Gaming, Inc. (“J&S”) which provides for the issuance
by the Company of 75,000 shares to J&S and the release by J&S of the Company’s obligation to consummate a previously
contemplated transaction. The stock was recorded at the fair market value of $49 on July 29, 2014, date of approval from NYSE,
and was subsequently issued on August 8, 2014.
For the year ending December
31, 2014 a total of 72,699 shares were granted and issued to certain consultants for services rendered. The stock was recorded
using the closing market value of $54 on respective dates of issuance.
For the year ended December
31, 2014 the Company has recorded $159 (2013: $1,709) in non–employee stock–based compensation expense, which is a
component of selling, general and administrative expense in the Consolidation Statement of Operations.
For the years ended December
31, 2014 and 2013, no non-employee stock-based compensation expense was allocated to non–controlling interest.
Subsequent to
December 31, 2014 and through the date of filing the Annual Report on Form 10–K, the Company granted and issued a total
of 103,607 shares to non-employees for services rendered. The shares were recorded at $62 using the closing market value on
respective dates of issuance.
Warrants
The following table summarizes
information about warrants outstanding at December 31, 2014:
| |
Number of warrants | | |
Weighted average
exercise price | |
Warrants outstanding at January 1, 2013 | |
| 4,038,753 | | |
$ | 3.68 | |
Issued | |
| – | | |
| – | |
Exercised | |
| (3,117,928 | ) | |
| 3.75 | |
Expired | |
| – | | |
| – | |
Warrants outstanding at December 31, 2013 | |
| 920,825 | | |
$ | 3.44 | |
Issued | |
| 100,000 | | |
| 3.75 | |
Exercised | |
| – | | |
| – | |
Expired | |
| – | | |
| – | |
Warrants outstanding at December 31, 2014 | |
| 1,020,825 | | |
$ | 3.47 | |
For the years ended December
31, 2014 and 2013, all issued warrants are exercisable and expire through 2018.
During the year ended
December 31, 2013, 357,204 of the Company’s $3.00 Common stock Purchase Warrants were exercised. Of the warrant conversions,
210,529 were cashless and 146,675 were exercised for total proceeds of $440. As a result the Company issued an aggregate of 236,730
shares.
On April 26, 2013, the
Company made an offer to the holders of the Company’s $3.85 Common stock Purchase Warrants (the “Warrants”),
providing if such holders exercised one Warrant, they would have the right to exchange up to two additional Warrants for
5/8ths per share of Common stock per Warrant exchanged. The results of the offer were that holders of 715,742 Warrants elected
to exercise their Warrants. Total proceeds received from the exercise of 715,742 Warrants were $2,757.
In addition, the allowed
maximum of 1,431,486 Warrants were exchanged for 894,683 shares of the Company’s Common stock, issuable upon shareholder
and NYSE MKT exchange approval. On September 27, 2013, at MGT’s annual meeting of stockholders, stockholders approved the
issuance of up to 894,683 shares of Common stock in exchange for the cancellation of 1,431,486 warrants to purchase shares of
Common stock at $3.85 per share. The shares were subsequently issued on October 8, 2013.
On December 10, 2013,
the Company entered into a Warrant Modification Agreement (the “Agreement”) with Iroquois Master Fund Ltd. (“Iroquois”).
Pursuant to the Agreement, Iroquois agreed to immediately exercise its warrant to purchase 613,496 shares of Common stock, par
value $0.001 of the Company, at an exercise price of $1.50 per share, for aggregate gross proceeds to the Company of $920 and
(ii) agreed to terminate its right of participation in future equity offerings of the Company. In exchange, the Company agreed
to reduce the warrant exercise price from $3.85 per share to $1.50 per share, and agreed not to issue any securities at a price
below $2.50 per share for a period of 90 days after the date of the Agreement (other than securities granted pursuant to a stock
plan or issued in connection with an acquisition or issued pursuant to an agency agreement with a registered broker–dealer
provided that we agree with the broker–dealer and publicly announce that we will not sell shares for a price below $2.50
per share). Iroquois acquired the warrant in connection with the Company's November 2012 financing. In connection with the Agreement,
the Company paid to Chardan Capital Markets, LLC a placement fee for the solicitation of the exercise of the warrants equal to
8% of the gross proceeds raised, or approximately $73 and reimbursed Chardan for $9 of its legal fees, resulting in net proceeds
of $838.
Note 10. Non–controlling interest
The Company has the following
non–controlling interest:
| |
MGT Gaming | | |
FanTD | | |
MGT Interactive | | |
M2P Americas | | |
Total | |
Non–controlling interest at January 1, 2013 | |
| 768 | | |
| – | | |
| – | | |
| – | | |
| 768 | |
Fair value of non-controlling interest of FanTD (Note 4) | |
| | | |
| 1,882 | | |
| | | |
| | | |
| 1,882 | |
Investment in MGT Interactive | |
| | | |
| | | |
| 191 | | |
| | | |
| 191 | |
Non–controlling share of net losses | |
| (183 | ) | |
| (451 | ) | |
| (95 | ) | |
| (5 | ) | |
| (734 | ) |
Non–controlling interest at December 31, 2013 | |
$ | 585 | | |
$ | 1,431 | | |
$ | 96 | | |
$ | (5 | ) | |
$ | 2,107 | |
Acquisition of non–controlling interest in FanTD | |
| | | |
| (1,230 | ) | |
| | | |
| | | |
| (1,230 | ) |
Non–controlling share of losses | |
| (215 | ) | |
| (201 | ) | |
| (4 | ) | |
| (15 | ) | |
| (435 | ) |
Non–controlling interest at December 31, 2014 | |
$ | 370 | | |
$ | – | | |
$ | 92 | | |
$ | (20 | ) | |
$ | 442 | |
FanTD
On February 10, 2014,
the Company and MGT Sports entered into a Separation Agreement and Release (“Separation Agreement”) with an employee
and original founder of FanTD (the “Founder”). As part of the agreement the Company entered into an Exchange Agreement
which provided for the transfer of approximately 5% interest in FanTD, in exchange for 52,500 shares of the Company’s Common
stock. The exchange was subject to the NYSE MKT’s approval of the listing of the additional shares, which was obtained on
April 4, 2014. At the date of approval, the stock was valued at $103 or $1.96 per share. As a result of this transaction $266
was transferred out of the non–controlling interest into stockholders’ equity.
On September 9, 2014
the Company acquired approximately 16% interest in FanTD for cash consideration of $7, as a result $885 was transferred out of
the non–controlling interest into stockholders’ equity.
On December 31, 2014
the Company acquired approximately 16% interest in FanTD, which represented the remaining non–controlling interest, for
cash consideration of $4, resulting in a transfer of $79 out of the non–controlling interest into stockholders’ equity.
Note 11. Operating leases and commitments
Operating leases
In September 2011, the
Company entered into a 39–month lease agreement for office space located in Harrison, New York, terminating on November
30, 2014. Under the agreement our total rental payments over the 39–month lease period are $240, inclusive of three months
of free rent and a refundable rental deposit of $39, held in a restricted cash account.
On August 20, 2014 the
Company entered into a First Lease Modification and Extension Agreement, extending for a period of one year the current lease
on the Harrison office. Under the agreement the total rental payments over the next twelve months are $71.
The total lease rental
expense was $113 and $145 for the years ended December 31, 2014 and 2013, respectively.
Total future minimum
payments required under operating leases in both 2015 and the aggregate are $60.
Commitments
STATS licensing agreement
On May 1, 2014, the Company
entered into a licensing agreement with STATS LLC (“STATS”) effective February 1, 2014. In exchange for the right
and license to both use certain of STATS’ proprietary information for use with daily and seasonal games and to power the
scoring with the Company’s fantasy sports games on the Company’s websites, the Company has agreed to pay the following
monthly license fees of $11 per month for February–March 2014, $26 per month for April-June 2014 and $20 per month July-October
2014 and $18 per–month thereafter through expiration of the agreement on December 31, 2015. The Company expensed $186 for
the year ended December 31, 2014.
Note 12. Income taxes
Significant components
of deferred tax assets were as follows as of December 31:
| |
2014 | | |
2013 | |
U.S. federal tax loss carry–forward | |
$ | 10,779 | | |
$ | 8,511 | |
U.S. State tax loss carry–forward | |
| 1,498 | | |
| 653 | |
U.S. federal capital loss carry–forward | |
| 188 | | |
| 706 | |
U.S. foreign tax credit carry–forward | |
| - | | |
| 248 | |
Equity–based compensation, fixed assets and other | |
| 1,598 | | |
| 1,446 | |
Total deferred tax assets | |
| 14,063 | | |
| 11,564 | |
Less: valuation allowance | |
| (14,063 | ) | |
| (11,564 | ) |
Net deferred tax asset | |
$ | – | | |
$ | – | |
As of December 31, 2014,
the Company had the following tax attributes:
| |
Amount | | |
Begins to expire | |
U.S. federal net operating loss carry–forwards | |
$ | 34,572 | | |
| Fiscal
2023 | |
U.S. State net operating loss carry–forwards | |
| 18,052 | | |
| Fiscal
2031 | |
U.S. federal capital loss carry–forwards | |
| 553 | | |
| Fiscal
2015 | |
As it is not
more likely than not that the resulting deferred tax benefits will be realized, a full valuation allowance has been
recognized for such deferred tax assets. For the year ended December 31, 2014, the valuation allowance increased by
$2,501. Federal and state laws impose substantial restrictions on the utilization of tax attributes in the event of an
“ownership change,” as defined in Section 382 of the Internal Revenue Code. Currently, the Company does not
expect the utilization of tax attributes in the near term to be materially affected as no significant limitations are
expected to be placed on these tax attributes as a result of previous ownership changes. If an ownership change is deemed to
have occurred as a result of equity ownership changes or offerings, potential near term utilization of these assets could be
reduced.
The provision
for/(benefit from) income tax differs from the amount computed by applying the statutory federal income tax rate to income
before the provision for/(benefit from) income taxes. The sources and tax effects of the differences are as follows for the
years ended December 31:
| |
2014 | | |
2013 | |
Expected Federal Tax | |
| (34.00 | )% | |
| (34.00 | )% |
State Tax (Net of Federal Benefit) | |
| (5.48 | ) | |
| (6.63 | ) |
Permanent differences | |
| 0.12 | | |
| 1.98 | |
Loss of NOL benefit of closed foreign entity | |
| — | | |
| 142.44 | |
Write-off of deferred tax asset | |
| 4.29 | | |
| — | |
Adjustments to deferred tax balances | |
| (8.34 | ) | |
| — | |
Foreign tax credit | |
| — | | |
| (1.60 | ) |
Other | |
| 0.05 | | |
| 1.78 | |
Change in valuation allowance | |
| 43.36 | | |
| 103.98 | |
Effective rate of income tax | |
| 0 | % | |
| 0 | % |
The Company files income
tax returns in the U.S. federal jurisdiction, New York State, New Jersey and California jurisdictions. With few
exceptions, the Company is no longer subject to U.S. federal, state and local, or non–U.S. income tax examinations by tax
authorities for years before 2011.
Note 13. Segment reporting
The accounting policies
of the segments are the same as those described in the summary of significant accounting policies (Note 2). We evaluate performance
of our operating segments based on revenue and operating (loss). Segment information as of December 31, 2014, and December 31,
2013, are as follows:
| |
Medicsight | | |
| | |
| | |
| | |
| |
| |
Software/Devices | | |
Services | | |
Intellectual property | | |
Gaming | | |
Unallocated corporate/other | | |
Total | |
Year ended December 31, 2014 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Revenue from external customers | |
$ | 85 | | |
$ | – | | |
$ | – | | |
$ | 971 | | |
$ | – | | |
$ | 1,056 | |
Cost of revenue | |
| – | | |
| – | | |
| – | | |
| (610 | ) | |
| – | | |
| (610 | ) |
Gross margin | |
| 85 | | |
| – | | |
| – | | |
| 361 | | |
| – | | |
| 446 | |
Operating profit/(loss) | |
| 85 | | |
| – | | |
| (487 | ) | |
| (2,988 | ) | |
| (2,239 | ) | |
| (5,629 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Year ended December 31, 2013 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Revenue from external customers | |
$ | 78 | | |
$ | 97 | | |
$ | – | | |
$ | 221 | | |
$ | – | | |
$ | 396 | |
Cost of revenue | |
| – | | |
| (63 | ) | |
| – | | |
| (496 | ) | |
| – | | |
| (559 | ) |
Gross margin | |
| 78 | | |
| 34 | | |
| – | | |
| (275 | ) | |
| – | | |
| (163 | ) |
Operating profit/(loss) | |
| 63 | | |
| 27 | | |
| (1,195 | ) | |
| (1,440 | ) | |
| (6,967 | ) | |
| (9,512 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
December 31, 2014 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cash and cash equivalents (excludes $138 of restricted cash) | |
$ | – | | |
$ | – | | |
$ | 11 | | |
$ | 820 | | |
$ | 624 | | |
$ | 1,455 | |
Property and equipment | |
| – | | |
| – | | |
| – | | |
| 38 | | |
| 5 | | |
| 43 | |
Intangible assets | |
| – | | |
| – | | |
| 1,386 | | |
| 1,030 | | |
| 1 | | |
| 2,417 | |
Goodwill | |
| – | | |
| – | | |
| – | | |
| 6,444 | | |
| – | | |
| 6,444 | |
Additions: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Property and equipment | |
| – | | |
| – | | |
| – | | |
| 41 | | |
| – | | |
| 41 | |
Intangible assets | |
| – | | |
| – | | |
| – | | |
| 790 | | |
| – | | |
| 790 | |
Goodwill | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | |
December 31, 2013 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cash and cash equivalents (excludes $140 of restricted cash) | |
$ | – | | |
$ | – | | |
$ | 6 | | |
$ | 338 | | |
$ | 4,298 | | |
$ | 4,642 | |
Property and equipment | |
| – | | |
| – | | |
| – | | |
| 28 | | |
| 17 | | |
| 45 | |
Intangible assets | |
| – | | |
| – | | |
| 2,007 | | |
| 416 | | |
| – | | |
| 2,423 | |
Goodwill | |
| – | | |
| – | | |
| – | | |
| 6,444 | | |
| – | | |
| 6,444 | |
Additions: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Property and equipment | |
| – | | |
| – | | |
| – | | |
| 42 | | |
| 9 | | |
| 51 | |
Intangible assets | |
| – | | |
| – | | |
| – | | |
| 1,002 | | |
| – | | |
| 1,002 | |
Goodwill | |
| – | | |
| – | | |
| – | | |
| 6,444 | | |
| – | | |
| 6,444 | |
Note 14. Related party transactions
The Company had a loan
payable to certain founding members of FanTD. The loan served to temporarily assist with FanTD’s operating expenditures.
The loan was interest–free and payable on demand no later than December 31, 2013. On October 29, 2013 and November 18, 2013,
the Company paid $50 and $50, respectively towards the outstanding balance. The outstanding balance as of December 31, 2013 was
$nil.
Note 15. Fair value of financial instruments
U.S GAAP
establishes a three-tier hierarchy which prioritizes the inputs used in the valuation methodologies in measuring fair
value:
Level 1 |
Quoted market prices available in active markets
for identical assets or liabilities as of the reporting date. |
|
|
Level 2 |
Pricing inputs other than quoted prices in active markets included
in Level 1, which are either directly or indirectly observable as of the reporting date. |
|
|
Level 3 |
Pricing inputs that are generally observable inputs and not corroborated
by market data. |
Financial assets are
considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques
and at least one significant model assumption or input is unobservable.
The carrying amount of
the Company’s financial assets and liabilities, such as cash, accounts receivable, prepaid expenses, accounts payable and
accrued expenses, accrued dividends and unearned convention revenue approximate their fair value because of the short maturity
of those instruments. The Company’s convertible Preferred stock and warrants approximate the fair value of such instruments
based upon management’s best estimate of interest rates that would be available to the Company for similar financial arrangements
at December 31, 2014, and 2013.
The Company measures
the fair value of the derivative liabilities and revalues its derivative warrant liability at every reporting period and recognizes
gains or losses in the consolidated statements of operations and comprehensive income (loss) that are attributable to the change
in the fair value of the derivative warrant liability.
At December 31, 2014, and 2013, the
Company has no derivative conversion feature and warrant liabilities.
The table below provides
a summary of the changes in fair value, including net transfers in and/or out, of all financial assets and liabilities measured
at fair value on a recurring basis using significant unobservable inputs (Level 3) during the year ending December 31, 2013:
| |
Fair value measurement
using level 3 inputs | |
| |
Derivatives | | |
Total | |
Balance January 1, 2013 | |
$ | 7,166 | | |
$ | 7,166 | |
Total (gains) or losses (realized/unrealized) included in consolidated statements of operations | |
| 2,204 | | |
| 2,204 | |
Purchases, issuances and settlements | |
| – | | |
| – | |
Reclassification of derivative liabilities to equity upon modification of
terms (Note 8) | |
| (9,370 | ) | |
| (9,370 | |
Balance, December 31, 2013 | |
$ | – | | |
$ | – | |
Note 15. Subsequent Events
The Company
has evaluated events that occurred subsequent to December 31, 2014, and through the date of the consolidated financial
statements were issued.
On February 26, 2015,
MGT purchased a promissory note (the "Promissory Note") in the principal amount of $250 bearing interest at the rate
of five percent (5%) per annum from Tera Group, Inc. ("Tera"), owner of TeraExchange, LLC, a Swap Execution Facility
regulated by the U.S. Commodity Futures Trading Commission. The aggregate unpaid principal balance and all accrued and unpaid
interest are due and payable upon demand at any time after August 15, 2015.
Exhibit 21.1
SUBSIDIARIES OF MGT CAPITAL INVESTMENTS,
INC.
Name of subsidiary |
|
Jurisdiction of organization |
|
|
|
MGT Gaming, Inc. |
|
Delaware, USA |
|
|
|
Medicsight, Inc. |
|
Delaware, USA |
|
|
|
MGT Studios, Inc. (f/k/a MGT Capital Solutions, Inc.) and subsidiary: |
|
Delaware, USA |
– M2P Americas, Inc. |
|
Delaware, USA |
|
|
|
MGT Interactive, LLC |
|
Delaware, USA |
|
|
|
MGT Sports, Inc. and subsidiary: |
|
Delaware, USA |
– FanTD LLC |
|
New York, USA |
Exhibit 23.1
INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM’S CONSENT
We consent to the
incorporation by reference in the Registration Statements of MGT Capital Investments, Inc. on Form S–3 (No.
33–185214 and No. 33–182298) of our report dated April 15, 2015, with respect to our audit of the consolidated
financial statements of MGT Capital Investments, Inc. and Subsidiaries as of December 31, 2014, and 2013 and for the years
then ended which report is included in this Annual Report on Form 10–K of MGT Capital Investments, Inc. for the year
ended December 31, 2014.
/s/ Marcum LLP
New York, NY
April 15, 2015
Exhibit 31.1
CERTIFICATION PURSUANT TO SARBANES–OXLEY
ACT OF 2002
I, Robert B. Ladd, certify
that:
1. I have reviewed this annual
report on Form 10–K of MGT Capital Investments, Inc.;
2. Based on my knowledge, this
report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial
statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other
certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a–15(f) and 15d–15(f)) for the registrant and have:
(a) Designed such disclosure controls
and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control
over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness
of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any
change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other
certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies
and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material,
that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
|
By: |
/s/ ROBERT B. LADD |
|
Robert B. Ladd |
|
President and Chief Executive Officer
(Principal Executive Officer) |
|
|
April 15, 2015 |
|
Exhibit 31.2
CERTIFICATION PURSUANT TO SARBANES–OXLEY
ACT OF 2002
I, Robert P. Traversa,
certify that:
1. I have reviewed this annual
report on Form 10–K of MGT Capital Investments, Inc.;
2. Based on my knowledge, this
report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial
statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other
certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a–15(f) and 15d–15(f)) for the registrant and have:
(a) Designed such disclosure controls
and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control
over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness
of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any
change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other
certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies
and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material,
that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
|
By: |
/s/ ROBERT P. TRAVERSA |
|
Robert P. Traversa |
|
Chief Financial Officer
(Principal Financial Officer) |
|
|
April 15, 2015 |
|
Exhibit 32.1
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES–OXLEY ACT OF 2002
I, Robert B. Ladd, President
and Chief Executive Officer of MGT Capital Investments, Inc. (the “Company”), certify, pursuant to Section 906 of the
Sarbanes–Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge:
(1) the
Annual Report on Form 10–K of the Company for the year ended December 31, 2014, (the “Report”) fully complies
with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) the
information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
|
By: |
/s/ ROBERT B. LADD |
|
Robert B. Ladd |
|
President and Chief Executive Officer
(Principal Executive Officer) |
|
|
April 15, 2015 |
|
Exhibit 32.2
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES–OXLEY ACT OF 2002
I, Robert P. Traversa,
Chief Financial Officer of MGT Capital Investments, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes–Oxley
Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge:
(1) the
Annual Report on Form 10–K of the Company for the year ended December 31, 2014, (the “Report”) fully complies
with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) the
information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
|
By: |
/s/ ROBERT P. TRAVERSA |
|
Robert P. Traversa |
|
Treasurer and Chief Financial Officer
(Principal Financial Officer) |
|
|
April 15, 2015 |
|
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