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Intellectual property

6 Months Ended

Jun. 30, 2012

Note 7: Intellectual property

On May 11, 2012, the Company entered into a Contribution and Sale Agreement (the “Sale Agreement”) with J&S Gaming, Inc. (“J&S”), and MGT Gaming, Inc. (“MGT Gaming”) for the acquisition of U.S. Patent #7,892,088, entitled “Gaming Device Having a Second Separate Bonusing Event” (“The Patent”). All terms of the Sale Agreement were filed in an 8-K on May 16, 2012. The patent acquired was recorded at its estimated fair value of $1,819 at the date of acquisition.

The intellectual property is subject to amortization and will be expensed using the straight-line method, over nine years, the remaining life of the patent. Amortization expense was $17 for both the three and six months ended June 30, 2012. The Company’s future amortization expense for this intangible asset is expected to be approximately $102 for the remainder of 2012 and be approximately $204 for each of the next five fiscal years.

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”); (iii) the Company and J&S agreed to grant rights of first refusal, “tag-along” and “drag-along” rights to one another with respect to their respective MGT Gaming Shares. As a result of an anti-dilution provision in the warrants, with respect to future stock or option grants to officers, the Company anticipates issuing 50,000 additional Warrants to J&S over the next 12 months. These additional warrants were included in the calculation of purchase price for the intellectual property acquisition. The fair value of the 400,000 warrants was determined to be $800 as of June 1, 2012, the warrant issuance date.

The warrants were fair-valued as of the issuance date of June 1, 2012 at $800 based upon the following Black-Scholes pricing model (“BSM”) assumptions; risk free rate 0.80%; expected term four (4) years; annual volatility 75.0%; exercise price $4.00; as the underlying shares had not yet been registered at the issuance date, the market price at June 1, 2012 was discounted by approximately 11% for options pricing purposes.

For purposes of determining expected volatility, since the Company does not have representative historical data to determine volatility based upon its own information, the Company used significant judgment to identify a peer group and determine the appropriate weighting in order to estimate the volatility rate for use in the BSM. The risk-free rate for the period coincides with the expected life of the warrants and is based on the U.S. Treasury Department yield curve in effect at time of closing.

ASC 350 “Intangible Assets ”, establishes Accounting and Measurement guidance for the acquisition of the intellectual property asset from J&S. The Company determined that the consideration given for 55% of the patent was the best indication of the fair value of the patent, as such, the 45% of the patent contributed by the non-controlling shareholders is valued at $819.

The fair value was determined as follows:

Cash	$	200
Fair value of warrants issued		800
Fair value of intangible asset contributed by non-controlling interest		819
Total	$	1,819

Additionally, the Company has the right to purchase an additional 250 MGT Gaming Shares from J&S in exchange for a cash payment of $1,000 and a four (4) year warrant to purchase 250,000 shares of the Company’s common stock for an exercise price of the lower of (i) $6.00 per share and (ii) 110% of the closing price of the common stock on the date of issuance. This option expires on August 31, 2012 due to the qualified financing, as defined in the Agreement that the Company entered into with Hudson Bay Fund Ltd. Due to the high exercise price of this option and its very short term nature its fair value was determined to be de minimis.