10-Q/A 1 v346558_10qa.htm FORM 10-Q/A

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 

FORM 10-Q/A

Amendment No. 1 to Form 10-Q

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2012

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from             to            

 

Commission file number: 0-26886

 

MGT CAPITAL INVESTMENTS, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware   13-4148725
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

500 Mamaroneck Avenue, Suite 204,
Harrison, NY 10528

(Address of principal executive offices)

 

914-630-7431

(Registrant’s telephone number, including area code)

 

Indicate by check whether the Registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

  

Large Accelerated Filer o   Accelerated filer o
Non-accelerated Filer o   Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

As of November 14, 2012 the registrant had outstanding 3,037,187 shares of common stock, $0.001 par value.

 

 
 

  

EXPLANATORY NOTE

 

This Amendment No. 1 hereby amends our Quarterly Report on Form 10-Q (“Form 10-Q/A”) for the period ended September 30, 2012, which was originally filed with the Securities and Exchange Commission on November 14, 2012 (the “Original 10-Q”). This Amendment is being filed mainly to include restated financial statements as described in Note 1, Restatement, of the Notes to the Condensed Consolidated Financial Statements. The condensed consolidated financial statements are being restated to correct accounting errors as follows:

 

On May 15, 2013, after consulting with the Company’s Audit Committee, management concluded that certain of the Company’s warrants (“J&S Warrants”) received improper accounting treatment. The warrants should have been reflected as liabilities on the balance sheet included in the Company’s previously filed Quarterly Report on Form 10-Q for the period ended September 30, 2012 (the “Quarterly Report”), as opposed to a component of equity.

 

Specifically, due to certain anti-dilution provisions contained in the J&S Warrants, they are being reclassified to liabilities and will be marked-to-market each reporting period. The change in treatment of the warrants will result in a change to the equity and liability portions of the balance sheet at the aforementioned reporting date and will result in a loss on the revaluation of the warrants which impacts results of operations and loss per share as reported in our statement of operations for the period. In addition, the Company previously determined the fair value using the Black Scholes Model; however, due to the anti-dilution provisions, the Company determined the Binomial Lattice Practice Model was more appropriate. The use of the Binomial Lattice Practice Model caused an increase in the fair value of the J&S Warrants issued as consideration for the acquisition of the Patent which increased the amount recorded for the intangible asset and non-controlling interest. Such restatements for the correction of an error, however, will not impact cash flow or cash balances. In addition, as a result of Waiver Agreements obtained on May 20, 2013 from warrant holders, which removed the anti-dilution provision, the affected warrants will be treated as equity at June 30, 2013. Investors should be aware that the classification of the warrants as a liability will revert back to the originally reported equity treatment during the quarter ending June 30, 2013.

 

In addition, the Company has concluded that these accounting and reporting errors constituted an additional deficiency in the Company’s internal control over financial reporting as of June 30, 2012 and that its disclosure controls and procedures were not effective at September 30, 2012.

 

The following sections of this Form 10-Q/A have been amended to reflect the restatement:

 

·Part I – Item 1 – Financial Statements and Notes to the Condensed Consolidated Financial Statements

 

·Part I – Item 2 – Management’s Discussion and Analysis of Financial Condition and Result of Operations

 

·Part I – Item 4 – Controls and Procedures

 

For the convenience of the reader, this Form 10-Q/A sets forth the Company’s Original 10-Q in its entirety, as amended by, and to reflect the restatements, as described above. Except as discussed above, the Company has not modified or updated disclosures presented in this Amendment. Accordingly, this Amendment does not reflect events occurring after the Original 10-Q or modify or update those disclosures affected by subsequent events, except as specifically referenced herein. Information not affected by the restatements is unchanged and reflects the disclosures made at the time of the Original Filing.

 

This Form 10-Q/A has been signed as of a current date and all certifications of the Company’s Chief Executive Officer/Principal Executive Officer and Chief Financial Officer/Chief Accounting Officer and Principal Financial Officer are given as of a current date. Accordingly, this Form 10-Q/A should be read in conjunction with the Company’s filings with the Securities and Exchange Commission subsequent to the filing of the Original 10-Q, including any amendments to those filings.

 

 
 

 

INDEX

 

    Page
PART I FINANCIAL INFORMATION  
Item 1. Condensed Consolidated Balance Sheets - September 30, 2012 (Restated) (unaudited) and December 31, 2011 3
  Condensed Consolidated Statements of Operations and Comprehensive Loss - for the three months ended September 30, 2012 (Restated) (unaudited) and 2011 (unaudited) 4
  Condensed Consolidated Statements of Operations and Comprehensive Loss -  for the nine months ended September 30, 2012 (Restated) (unaudited) and 2011 (unaudited) 5
  Condensed Consolidated Statement of Stockholders’ Equity - for the nine months ended September 30, 2012  (Restated) (unaudited) 6
  Condensed Consolidated Statements of Cash Flows - for the nine months ended September 30, 2012 (Restated) (unaudited) and 2011 (unaudited) 7-8
  Notes to Condensed Consolidated Financial Statements 9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 25
Item 3. Quantitative and Qualitative Disclosure About Market Risk 32
Item 4. Controls & Procedures 32
PART II OTHER INFORMATION  
Item 1. Legal Proceedings 34
Item 1-A. Risk Factors 34
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds 36
Item 3. Defaults Upon Senior Securities 37
Item 4. Mine Safety and Disclosures 37
Item 5. Other Information 37
Item 6. Exhibits 37
  Signatures 38

 

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

 

 
 

 

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

   September 30,   December 31, 
  

2012

(Unaudited)

(Restated)

   2011* 
Assets          
Current assets:          
Cash and cash equivalents  $4,864   $3,704 
Accounts receivable   9    84 
Prepaid expenses and other current assets   79    327 
Inventories   56    89 
Total current assets   5,008    4,204 
           
Non-current assets:          
Property and equipment, at cost, net   24    28 
Deferred financing costs, net   472     
Intangible assets, net of accumulated amortization of $68   1,845     
Security deposits       201 
Total assets  $7,349   $4,433 
           
Liabilities          
Current liabilities:          
Accounts payable  $260   $213 
Accrued expenses   219    502 
Other payables   26    71 
Total current liabilities   505    786 
           
Non-current liabilities          
Derivative liability - warrants   935     
Convertible note, net of discount $817   2,683     
Total liabilities   4,123    786 
           
Stockholders' equity /(deficit):          
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding at September 30, 2012.        
Common stock, $0.001 par value; 75,000,000 shares authorized; 2,484,187 and 2,108,187 shares issued and outstanding at September 30, 2012 and December 31, 2011 respectively.   2    2 
Additional paid in capital   289,249    283,240 
Accumulated other comprehensive loss   (6,703)   (4,861)
Accumulated deficit   (282,498)   (280,027)
Total stockholders' equity / (deficit)   50    (1,646)
Non-controlling interests   3,176    5,293 
Total equity   3,226    3,647 
           
Total stockholders' equity, liabilities and non-controlling interest  $7,349   $4,433 

 

*Derived from audited financial information

 

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

 

3
 

 

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share amounts)
(Unaudited)

  

   Three months ended September 30, 
   2012
(Restated)
   2011 
Revenues          
Software and devices  $9   $167 
Services – consulting   58     
    67    167 
Cost of revenues          
Software and devices       5 
Services – consulting   53     
    53    5 
           
Gross profit   14    162 
           
Operating expenses          
Selling, general and administrative   815    1,807 
Research and development   10    303 
    825    2,110 
           
Operating loss   (811)   (1,948)
           
Other non-operating income/ (expense)          
Interest and other (expense) / income   (70)    
Accretion of debt discount and amortization deferred financing costs   (222)    
Revaluation of warrant liability   623     
    331     
           
Net loss before income taxes and non-controlling interest   (480)   (1,948)
           
Income tax benefit   1     
           
Net loss before non-controlling interest   (479)   (1,948)
           
Net loss attributable to non-controlling interest   114    746 
           
Net loss attributable to MGT Capital Investments, Inc.  $(365)  $(1,202)
           
Net loss as reported  $(479)  $(1,948)
Other comprehensive loss          
Unrealized foreign exchange gain / (loss)   5    (66)
Comprehensive loss   (474)   (2,014)
Comprehensive loss attributable to non-controlling interest   113    775 
Comprehensive loss attributable to MGT Capital Investments, Inc.  $(361)  $(1,239)
           
Per share data:          
Basic and diluted loss per share  $(0.17)  $(1.03)
           
Weighted average number of common shares outstanding   2,173,740    1,171,518 

 

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

 

4
 

 

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share amounts)
(Unaudited)

 

   Nine months ended September 30, 
   2012
(Restated)
   2011 
Revenues:          
Software and devices  $215   $431 
Services – consulting   121     
    336    431 
Cost of revenues:          
Software and devices   36    105 
Services – consulting   116     
    152    105 
           
Gross profit   184    326 
           
Operating expenses:          
Selling, general and administrative   2,719    6,219 
Research and development   83    1,067 
    2,802    7,286 
           
Operating loss   (2,618)   (6,960)
           
Other non-operating (expense) / income          
Interest and other (expense) / income   (95)   32 
Accretion of debt discount and amortization deferred financing costs   (298)    
Revaluation of warrant liability   13     
Gain on sale of Moneygate       81 
    (380)   113 
           
Net loss before income taxes and non-controlling interest   (2,998)   (6,847)
           
Income tax benefit   1    51 
           
Net loss before non-controlling interest   (2,997)   (6,796)
           
Net loss attributable to non-controlling interest   526    2,652 
           
Net loss attributable to MGT Capital Investments, Inc.  $(2,471)  $(4,144)
           
Net loss as reported  $(2,997)  $(6,796)
Other comprehensive loss:          
Unrealized foreign exchange gains   73    338 
Comprehensive loss   (2,924)   (6,458)
Comprehensive loss attributable to non-controlling interest   493    2,517 
Comprehensive loss attributable to MGT Capital Investments, Inc.  $(2,431)  $3,941)
           
Per-share data:          
Basic and diluted loss per share  $(1.16)  $(3.54)
           
Weighted average number of common shares outstanding   2,128,891    1,171,518 

 

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

 

5
 

 

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT)/EQUITY

(In thousands)

(Unaudited)

(Restated)

 

   Preferred stock   Common stock   Additional
paid-in
   Accumulated
comprehensive
   Accumulated   Total
shareholders'
   Non-controlling   Total 
   Shares   Amounts   Shares   Amounts   capital   income / (loss)   deficit   equity   Interests   equity 
Balance, December 31, 2011      $    2,109   $2   $283,240   $(4,861)  $(280,027)  $(1,646)  $5,293   $3,647 
Cash in lieu of fractional shares for MGT reverse/ forward split             (4)        (5)             (5)        (5)
Acquisition of subsidiary shares from non-controlling interest             33         4,365    (1,882)        2,483    (2,501)   (18)
Non-controlling share of MGT Gaming, Inc.                                          862    862 
Stock issued for services                       315              315         315 
Stock-based compensation (Stock awards)             346         417              417         417 
Stock-based compensation (Stock options)                       17              17    15    32 
Warrants issued in connection with issuance of convertible note, net of issuance costs                       400              400         400 
Beneficial conversion on convertible note                       500              500         500 
Net loss for the period                                 (2,471)   (2,471)   (526)   (2,997)
Translation adjustment                            40         40    33    73 
Balance, September 30, 2012 (Restated)      $    2,484   $2   $289,249   $(6,703)  $(282,498)  $50   $3,176   $3,226 

  

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

  

6
 

 

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)

 

   Nine months ended September 30, 
   2012
(Restated)
   2011 
Cash flows from operating activities:          
Net loss before non-controlling interest  $(2,997)  $(6,796)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation   23    52 
Amortization of intangible assets   68     
Amortization of convertible note discount   183     
Amortization of deferred financing costs   115     
Stock-based compensation expense   449    144 
Warrant expense   97     
Revaluation of warrant liability   (13)    
Loss on disposal of property and equipment   2    118 
Assignment of Medicsight's stock       (4)
Gain on sale of loan receivable – related party       (81)
(Increase)/decrease in assets:          
Accounts receivable   77    (280)
Other receivables – related party       47 
Proceeds from release of security deposits   180     
Prepaid expenses and other current assets   260    (212)
Inventory   36     
Increase / (decrease) in liabilities:          
Accounts payable   41    11 
Accrued expenses   (299)   (315)
Other payables   (40)   14 
Net cash used in operating activities   (1,818)   (7,302)
           
Cash flows from investing activities:          
Purchase of property and equipment   (12)   (4)
Repurchase of Medicsight's shares   (14)    
Purchase of intangible asset   (200)    
Repayment of Dunamis loan       1,100 
Receipts from sale of Moneygate       401 
Receipts of deferred consideration for sale of assets       370 
Receipts from sale of Medicsight's stock       110 
Net cash (used in) / provided by investing activities   (226)   1,977 
           
Cash flows from financing activities:          
Cash paid in lieu of fractional shares in reverse/forward split   (5)    
Proceeds from issuance of convertible note   3,500     
Payments for convertible note issuance costs   (372)    
Net cash provided by financing activities   3,123     
           
Effects of exchange rates on cash and cash equivalents   81    427 
Net change in cash and cash equivalents   1,160    (4,898)
Cash and cash equivalents, beginning of period   3,704    8,434 
Cash and cash equivalents, end of period  $4,864   $3,536 

 

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

 

7
 

 

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)

 

   Nine months ended September 30, 
   2012
(Restated)
   2011 
Supplemental cash disclosures:          
Cash paid for interest  $23   $ 
Supplemental non-cash disclosures (investing and financing activities):          
Stock issued for services in connection with issuance of convertible note  $315   $ 
Warrants issued in connection with issuance of convertible note   500     
Beneficial conversion on convertible note   500     
Intangible asset contributed by non-controlling interest   862     
Warrants issued in connection with acquisition of intangible assets   851     
Stock issued for purchase of Medicsight ordinary shares   141     

 

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

 

8
 

 

MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

 

Note 1: Restatement of previously issued financial statements

 

On May 15, 2013, after consulting with the Company’s Audit Committee, management concluded that certain of the Company’s warrants (“J&S Warrants”) received improper accounting treatment. The warrants should have been reflected as liabilities on the balance sheet included in the Company’s previously filed Quarterly Report on Form 10-Q for the period ended September 30, 2012 (the “Quarterly Report”), as opposed to a component of equity.

 

Specifically, due to certain anti-dilution provisions contained in the J&S Warrants, they are being reclassified to liabilities and will be marked-to-market each reporting period. The change in treatment of the warrants will result in a change to the equity and liability portions of the balance sheet at the aforementioned reporting date and will result in a loss on the revaluation of the warrants which impacts results of operations and loss per share as reported in our statement of operations for the period. In addition, the Company previously determined the fair value using the Black Scholes Model; however, due to the anti-dilution provisions, the Company determined the Binomial Lattice Practice Model was more appropriate. The use of the Binomial Lattice Practice Model caused an increase in the fair value of the J&S Warrants issued as consideration for the acquisition of the Patent which increased the amount recorded for the intangible asset and non-controlling interest. Such restatements for the correction of an error, however, will not impact cash flow or cash balances. In addition, as a result of Waiver Agreements obtained on May 20, 2013 from warrant holders, which removed the anti-dilution provision, the affected warrants will be treated as equity at June 30, 2013. Investors should be aware that the classification of the warrants as a liability will revert back to the originally reported equity treatment during the quarter ending June 30, 2013.

 

The following tables summarize the effects of the restatements on the specific items presented in the Company’s historical condensed consolidated financial statements previously included in the Quarterly Report:

 

Condensed Consolidated Balance Sheets

 

   September 30, 2012 
   As previously
reported
   As restated 
Intangible assets, net of accumulated amortization of $68  $1,753   $1,845 
Total assets  $7,257   $7,349 
           
Derivative liability - warrants  $   $935 
Total liabilities  $3,188   $4,123 
           
Additional paid in capital  $290,049   $289,249 
Accumulated deficit   (282,413)   (282,498)
Total stockholders' equity  $935   $50 
Non-controlling interests  $3,134   $3,176 
Total equity  $4,069   $3,226 
Total stockholders' equity, liabilities and non-controlling interest  $7,257   $7,349 

 

Condensed Consolidated Statements of Operations

 

   Three months ended
September 30 2012
   Nine months ended
September 30, 2012
 
   As previously
reported
   As restated   As previously
reported
   As restated 
Selling, general and administrative  $716   $815   $2,620   $2,719 
Operating loss   (712)   (811)   (2,519)   (2,618)
Revaluation of warrant liability       623        13 
Net loss before non-controlling interest   (1,003)   (479)   (2,911)   (2,998)
Net loss attributable to non-controlling interest   113    114    525    526 
Net loss attributable to MGT Capital Investments, Inc.   (890)   (365)   (2,386)   (2,471)
Comprehensive loss attributable to non-controlling interest   112    113    492    493 
Comprehensive loss attributable to MGT Capital Investments, Inc.   (886)   (361)   (2,346)   (2,431)
Basic and diluted loss per share  $(0.41)  $(0.17)  $(1.12)  $(1.16)

  

9
 

  

Note 2: Organization, basis of presentation and liquidity

 

MGT Capital Investments, Inc. (“MGT”, “the Company”, “the Group”, “we”, “us”) is a holding company comprised of MGT, the parent company and majority-owned subsidiary MGT Gaming, Inc. (“MGT Gaming”), a company in which we acquired a majority interest on June 1, 2012. In addition, we also have a controlling interest in our operating subsidiary, Medicsight Ltd, including its wholly-owned subsidiaries (“Medicsight”). The Company closed the following non-essential subsidiaries during the nine months ended, September 30, 2012, as part of its expense reduction plan: Medicsight Nominees Limited, Medicsight UK Limited, MGT Investments (Gibraltar) Limited, MGT Capital Investments Limited and its wholly-owned subsidiary MGT Capital Investments (UK) Limited.

 

MGT Gaming holds certain intellectual property patents focused in the casino gaming sector. The Company holds 55% of the issued share capital of MGT Gaming. MGT Gaming is privately held by MGT and J&S Gaming, Inc.

 

Medicsight is a medical technology company focusing on medical imaging software development and medical hardware devices. Medicsight develops and commercializes Computer-Aided Detection (“CAD”) applications that analyze Computer Tomography (“CT”) scans to assist radiologists in the early detection and measurement of colorectal polyps. The Company has also developed an automated carbon dioxide insufflation device (MedicCO2LON) which it commercializes through a global distributor. As of September 30, 2012, the Company holds 369 shares (77%) of the 478 issued share capital of Medicsight. The Company continues to explore all strategic alternatives with respect to its majority interest in Medicsight, including the sale or licensing of its global patent portfolio.

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, have been included. Operating results for the nine months ended September 30, 2012, are not necessarily indicative of the results that may be expected for any subsequent quarter or for the year ending December 31, 2012. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011. The condensed consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All intercompany accounts and transactions have been eliminated. U.S. Dollars are denoted herein by “USD” and the UK Pound Sterling is denoted herein by “£” or “GBP.”

 

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 $282,498 at September 30, 2012. The Company is operating in a developing industry based on new technology and its primary source of funds to date has been through the issuance of securities. While the Company is optimistic and believes appropriate actions are being taken, there can be no assurance that management’s efforts will be successful or that the products the Company develops and markets will be accepted by consumers.

 

At September 30, 2012, MGT’s and Medicsight’s cash and cash equivalents were $2,492 and $2,372, respectively. Management believes that the current level of working capital will be sufficient to allow the Company to maintain its operations into December 2013. On November 2, 2012, the Company closed two separate financing agreements with various institutional investors providing $5.9 million of funding (Note 18).

 

Note 3: Summary of significant accounting policies

 

Principles of consolidation

 

The condensed consolidated financial statements include the accounts of our Company plus majority-owned subsidiaries, MGT Gaming and Medicsight. All intercompany transactions and balances have been eliminated. Prior to the change in functional currency, all foreign currency translation gains and losses arising on consolidation were recorded in stockholders’ equity as a component of accumulated other comprehensive income / (loss). Non-controlling interest represents the minority equity investment in any of the MGT subsidiaries, plus the minorities’ share of the net operating result and other components of equity relating to the non-controlling interest.

 

Use of estimates

 

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

  

10
 

 

Cash and cash equivalents

 

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

 

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.

 

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.

 

The Company licenses software and sells maintenance contracts through visualization solution partners and original equipment manufacturers. The Company receives regular sales reporting detailing the number of licenses sold by original equipment manufacturers, value-added resellers and independent distributors (collectively, “Resellers”) to end users. The Company generally offers terms that require payment 30 – 45 days from invoicing. Provided the Reseller: (i) assumes all risk of the purchase, (ii) has the ability and obligation to pay regardless of receiving payment from the end user, and (iii) all other revenue recognition criteria are met, license revenue from Resellers is recognized upon shipment of its product to vendors (“sell-in basis”).

 

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

 

Maintenance — Revenue from maintenance and support arrangements is deferred and recognized ratably over the term of the maintenance and support arrangements.

 

Multiple-element arrangements — the Company enters into arrangements with resellers that include a combination of software products, maintenance and support. For such arrangements, the Company recognizes revenue using the Multiple-Deliverable Revenue Arrangements. The Company allocates the total arrangement fee among the various elements of the arrangement based on the fair value of each of the undelivered elements. The fair value of maintenance and support services is established based on renewal rates.

 

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

 

MedicCO2LON is sold exclusively through our distribution partner Medrad, Inc. Revenue is recognized as orders are satisfied and goods are delivered to our distribution partner. The Company generally offers terms which require payments within 30 – 45 days from invoicing.

 

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.

 

Equity-based compensation

 

The Company recognizes compensation expense for all equity-based payments. 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.

 

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. The Black-Scholes option valuation model requires the development of assumptions that are input into the model. These assumptions are the expected stock volatility, the risk-free interest rate, the option’s expected life and the dividend yield on the underlying stock. Expected volatility is calculated based on the historical volatility of our common stock over the expected option life and other appropriate factors. Risk-free interest rates are calculated based on continuously compounded risk-free rates for the appropriate term. The dividend yield is assumed to be zero as 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 expense 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 expense could be significantly different from what the Company has recorded in the current period.

  

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Inventory

 

We account for inventory at the lower of cost (first-in, first-out) or market. Cost is determined to be purchased cost for the finished MedicCO2LON product from the third party supplier. We perform full physical inventory counts to maintain controls and obtain accurate data. The MedicCO2LON product is either (i) sold to our exclusive distributor or (ii) placed in an external third party secure warehouse facility and remains our property. Once the units are shipped to the distributor it is deemed that the ownership is transferred to the distributor and the goods are delivered. Reserves for slow-moving and obsolete inventories are provided based on historical experience and product demand. Management evaluates the adequacy of these reserves periodically based on forecasted sales and market trends.

 

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 on 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 the Medicsight products.

 

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. Leasehold improvements are depreciated over the term of the lease.

 

Foreign currency translation

 

Prior to June 30, 2012, the accounts of the Company were maintained using GBP as the functional currency. Assets and liabilities were translated into U.S. dollars at period-end exchange rates, and income and expense accounts were translated at average monthly exchange rates. Net gains and losses from foreign currency translations were excluded from operating results and were accumulated as a separate component of stockholders’ equity. Gains and losses on foreign currency transactions are reflected in selling, general and administrative expenses in the income statement.

 

Effective June 30, 2012, in connection with the closing of the Medicsight UK office at quarter end June 2012 and the final transfer of all operations to the U.S., along with MGT’s proceeds from the sale of $3.5 million of convertible notes on June 1, 2012, the Company reassessed the functional currency designation and as a result of the aforementioned activities, determined to prospectively change the functional currency from the previous local currency, GBP to the U.S. dollar ($). Under Accounting Standard Codification (“ASC”) 830-10 “Foreign Currency Matters” when the functional currency changes from a foreign currency to the reporting currency translation adjustments for prior periods shall remain in accumulated other comprehensive income/(loss) and the translated amounts for non-monetary assets at the end of the prior period become the accounting basis for those assets in the period of the change and the subsequent periods.

 

Convertible instruments

 

The Company evaluates and accounts for conversion options embedded in convertible instruments in accordance with ASC 815 “Derivatives and Hedging Activities”. Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for them as freestanding derivative financial instruments according to certain criteria. The criteria includes circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. An exception to this rule, when the host instrument is deemed to be conventional as that term is described under applicable GAAP.

 

When the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized using the effective interest method over the term of the related debt to their stated date of redemption.

  

12
 

 

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 September 30, 2012 and December 31, 2011, 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 nine months ended September 30, 2012 and 2011. Tax years beginning in 2009 are generally subject to examination by taxing authorities, although net operating losses from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used.

 

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

 

Loss per share

 

Basic loss per share is calculated by dividing net loss attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted loss per share is calculated by dividing the net loss attributable to common shareholders by the sum of the weighted average number of common shares outstanding plus potential dilutive common shares outstanding during the period. Potential dilutive securities, comprised of the convertible note, restricted shares and stock options, are not reflected in diluted net loss per share because such shares are anti-dilutive.

 

The computation of diluted loss per share for the three and nine months ended September 30, 2012 excludes 6 stock options, 346,000 restricted shares and 1,166,667 of common shares in connection to the convertible note, as they are anti-dilutive. The computation of diluted loss per share for the three and nine months ended September 30, 2011, excludes 25 stock options as they are anti-dilutive.

 

Comprehensive income / (loss)

 

Comprehensive income / (loss) includes net income / (loss) and items defined as other comprehensive income / (loss). Items defined as other comprehensive income / (loss), include foreign currency translation adjustments and are separately classified in the consolidated financial statements. Such items are reported in the Condensed Consolidated Statement of Operations and Comprehensive 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, chief financial officer and members of senior management. We operate in three operational segments, Medicsight Software/Devices, Medicsight Services and MGT Gaming. Certain corporate expenses are not allocated to segments. Medicsight Services and MGT Gaming are new segments for the current year.

 

Deferred financing costs

 

In conjunction with the issuance of Senior Secured Convertible Notes on June 1, 2012, (Note 10), the Company incurred certain financing costs, including the issuance of Common Stock. The Company accounts for deferred financing costs in accordance with ASC 470-10 “Debt”. Deferred financing costs are amortized through periodic charges to other non-operating expenses over the 18 months term of the related financial instrument using the effective interest method.

 

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.

 

Beneficial conversion features

 

From time to time, the Company may issue convertible notes that may have conversion prices that create an embedded beneficial conversion feature. A beneficial conversion feature exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the remaining unallocated proceeds of the note after first considering the allocation of a portion of the note proceeds to the fair value of any attached equity instruments, if any related equity instruments were granted with the debt. The intrinsic value of the beneficial conversion feature is recorded as a debt discount with a corresponding amount to additional paid-in-capital. The debt discount is accreted to interest expense over the life of the note using the effective interest method.

 

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Note 4: Divestment of investments

 

On March 31, 2010, the Company sold its stock in Medicexchange and various non-core investments for consideration of £750 ($1,136). This consideration was deferred and was paid in instalments, with the final instalment of £244 ($370) paid in March 2011.

 

In Fiscal 2009, we purchased 49% of the share capital of Moneygate Group Limited (“Moneygate”), which was accounted for under the equity method. In March 2011, we sold our entire interest in Moneygate for total consideration of £250 ($401), resulting in a gain on sale of £51 ($81).

 

Note 5: Cash and cash equivalents

 

We invest our cash in short-term deposits with major banks. As of September 30, 2012, we held $4,864 of cash and cash equivalents. Cash and cash equivalents consist of cash and temporary investments with original maturities of 90 days or less when purchased.

 

Concentrations

 

We maintain cash and cash equivalents with certain major financial institutions, in the US and the UK. As of September 30, 2012, our cash balance was $4,864. Of the total cash balance, $2,543 is covered under the US federal depository insurance limit and $2,241 is uninsured in foreign institutions.

 

Note 6: Inventory

 

At September 30, 2012 and December 31, 2011, MedicCO2LON Limited, a subsidiary of Medicsight held finished goods inventory comprised of insufflation devices and administration kits totaling $56 and $89, respectively.

 

Note 7: Intangible asset – intellectual property (restated)

 

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”). The Patent acquired was recorded at its estimated fair value of $1,913 at the date of closing. 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.

 

The intellectual property is subject to amortization and will be expensed using the straight-line method, over the nine year remaining life of the patent. Based on the Company’s amortizable intangible assets as of September 2012, amortization expense is expected to be approximately $50 for the remainder of 2012 and be approximately $204 for each of the next five fiscal years.

 

Amortization expense on intangible assets for the three months and nine month ended September 30, 2012 was $51 and $68

 

The warrants were fair-valued as of the issuance date of June 1, 2012 at $851 based upon the following Binomial Lattice Pricing Model (“BLPM”) to value its warrants containing anti-dilution provision: risk free rate 0.340%; expected term four (4) years; annual volatility 75.0%; exercise price $4.00.

 

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 BLPM.

 

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 was valued at $862.

 

The fair value was determined as follows:

 

Cash  $200 
Fair value of warrants   851 
Fair value of intangible asset contributed by non-controlling interest   862 
Total  $1,913 

  

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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 expired 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.

 

Note 8: Derivative liability – warrants (restated)

 

The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:

 

Level IQuoted market prices available in active markets for identical assets or liabilities as of the reporting date.

 

Level IIPricing 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 IIIPricing 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 fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

 

The carrying amount of the Company’s financial assets and liabilities, such as cash, accounts receivable, prepaid expenses, accounts payable and accrued expenses approximate their fair value because of the short maturity of those instruments.

 

The Company uses Level 3 of the fair value hierarchy to measure 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.

 

Fair value of financial assets and liabilities measured on a recurring basis

 Level 3 Financial Liabilities – Derivative conversion features and warrant liabilities

 

Financial assets and liabilities measured at fair value on a recurring basis are summarized below and disclosed on the consolidated balance sheets as of September 30, 2012:

 

   Fair value measurement using 
   Carrying value   Level I   Level II   Level III   Total 
Derivative warrant - liability  $935   $   $   $935   $935 

 

The warrants were re-measured at fair-value as of September 30, 2012 based upon the following BLPM to value its warrants containing anti-dilution provision: risk free rate 0.310%; expected term four (4) years; annual volatility 75.0%; exercise price $4.00, stock price $4.28.

 

  Fair value measurement
Using Level III inputs
 
  Derivatives   Total 
Balance, July 1, 2012  $1,461   $1,461 
Change in fair value of warrant liability   (623)   (623)
Issuance of additional warrants due to anti-dilution provision   97    97 
Transfers in and/or out of Level III        
Balance, September 30, 2012  $935   $935 

 

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Note 9: Line of credit facility

 

On April 12, 2011, the Company entered into an Agreement with Laddcap for up to $500 for a fifteen-month term. The Agreement encompasses a standby commitment fee of two (2%) percent of the maximum loan amount along with an eight (8%) percent interest charge on any funds drawn. The Company has expensed $10 associated to the commitment fee for the nine months ended September 30, 2012. Laddcap is a related party as the Managing Partner and beneficial owner of Laddcap is a 10% plus shareholder and President and Chief Executive Officer of MGT. The Agreement expired in July 2012, and has not been renewed. No amounts were drawn down against the facility as of and subsequent to the date of expiration.

 

Note 10: Convertible note and warrants

 

On May 24, 2012, the Company entered into a securities purchase agreement (the “SPA”) with Hudson Bay Fund Ltd. (the “Investor”). The SPA provided for the purchase of an 18 month promissory note with an interest rate of 8% (the “Senior Secured Convertible Note” or the “Note”) convertible into up to 1,166,667 shares of Company Common Stock at a conversion price of $3.00 per share and a warrant (the “Hudson Bay Warrant” or the “HB Warrant”) to purchase up to 875,000 shares of Common Stock at an exercise price of $3.00 per share for proceeds of $3,500 (the “Hudson Bay Transaction”). The Note is convertible at the option of the holder at a conversion price of $3.00 per share and the Company can require conversion into Company Common Stock if the Weighted Average Price of the Common Stock equals or exceeds 200% of the conversion price for no less than twenty (20) Trading Days during any thirty (30) consecutive Trading Day period occurring following the issuance date, subject to a 9.99% beneficial ownership ceiling for Investor’s ownership of Company Common Stock at any one time. The Note is also redeemable by the Company from and after the seven (7) month anniversary of the issuance date, subject to certain equity conditions, in cash at a price equal to the greater of (i) 125% of the Conversion Amount to be redeemed and (ii) the product of (A) the Conversion Amount being redeemed multiplied by (B) the quotient determined by dividing (x) the greatest Closing Sale Price of the shares of Common Stock during the period beginning on the date immediately preceding the date of notice of redemption and ending on the date the redemption date, by (y) the lowest Conversion Price in effect during such period, as such terms are defined in the Note. The Conversion Price of the Note is subject to adjustment in case of a combination or subdivision of stock or in the event of the grant of rights with equity features. The HB Warrant is exercisable at the option of the holder at a $3.00 per share exercise price and the Company can require exercise if the Weighted Average Price of the Company’s Common Stock equals or exceeds 250% of the exercise price for no less than twenty (20) Trading Days during any thirty (30) consecutive Trading Day period occurring following the issuance date, as such terms are defined in the HB Warrant. The HB Warrant exercise price is subject to adjustment in the case of combination or subdivision of stock or in the event of the granting of any stock appreciation rights, phantom stock rights or other rights with equity features. The Note allows for payment of Common Stock in lieu of cash interest payments due pursuant to the Note. The Company obtained stockholder approval at a special meeting of the stockholders to issue up to 140,000 shares of Common Stock in satisfaction of interest due pursuant to the Note as well as 2,041,667 shares of Common Stock issuable pursuant to the Note and HB Warrant.

 

In connection with the Hudson Bay Transaction, MGT issued 75,000 shares of Restricted Common Stock to Chardan Capital Markets, LLC (“Chardan”) and certain affiliates of Chardan in consideration of investment banking services rendered. Stockholder approval was obtained for the issuance of 75,000 shares of Restricted Common Stock to Chardan. The restricted common stock was recorded at fair market value of $315 at the date of closing and was issued on August 9, 2012. The Hudson Bay Transaction required MGT and certain of its subsidiaries to provide all of its assets as collateral, to pledge the stock of its subsidiaries and certain of MGT’s affiliates to execute voting and lockup agreements. The proceeds of the Hudson Bay Transaction will be used by the Company for general working capital purposes.

 

The proceeds of the Note were allocated between the HB Warrant and the Note based on their relative fair values.

 

Senior Secured Convertible Note consists of the following as of:

 

   September 30,
2012
   December 31,
2011
 
Senior secured convertible note  $3,500   $ 
Less: unamortized debt discount   (817)    
Total  $2,683   $ 

 

Financing and issuance costs totaling $688 were incurred in connection with the issuance of the Note and HB Warrants. These costs include legal and placement fees, including the issuance of the 75,000 shares of restricted common stock. The total costs were allocated based on relative fair values to deferred financing costs in the amount of $588 and HB Warrant issuance costs of $100. Deferred financing costs are amortized through periodic charges to non-operating expense over the 18 month period from the date of issuance to the date the Note is due using the effective interest method. Amortization expense for the three months ended September 30, 2012 and 2011 were $83 and $nil, respectively and for the nine months ended September 30, 2012 and 2011 were $115 and $nil, respectively. The monthly effective interest rate is 2.69%.

 

The debt to equity conversion feature embedded in the Note was evaluated to determine if such conversion feature should be bifurcated from its host instrument and accounted for as a free standing derivative. The Company determined that the conversion feature did not need to be bifurcated. The fair value of the beneficial conversion feature was calculated to be $500 after adjusting the effective conversion price for the fair value of the HB Warrants issued, recognized as an increase of additional paid-in capital and a discount to the convertible note. The discount to the convertible note payable is accreted through periodic charges to other non-operating expense over the 18 month period from the date of issuance to the date the Note is due using the effective interest method.

 

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The fair value of the HB Warrant was estimated on the date of issuance, June 1, 2012, using a closed-formula option pricing method for barrier-type options that took into account the terms of the option rights of the holder and also the Company’s mandatory exercise option, which is consistent with using a Monte Carlo option pricing method. The options pricing methods used the following input assumptions: expected stock price volatility 75.0%; warrant term five (5) years; risk-free rate of 0.80%; dividend yield 0.0%. As the trading volume of the Company’s publicly traded shares was approximately 30,000 per day and the issuable shares under the Note and HB warrant were over 2.0 million, and further because these issuable shares had not yet been registered for public sale at the issuance date, the price of the underlying shares was discounted approximately 30% for options pricing purposes. The fair value of the total HB warrants issued, given the terms of the HB Warrant agreement, was determined to be $500. The HB warrant fair value was recognized as an increase of additional paid-in capital and a discount to the convertible note. The discount to the convertible note payable is accreted through periodic charges to other non-operating expense over the 18 month period from the date of issuance to the date the Note is due using the effective interest method.

 

The beneficial conversion feature and the HB warrant discount accretion expense for the three months ended September 30, 2012 and 2011 were $139 and $nil, respectively and for the nine months ended September 30, 2012 and 2011 were $183 and $nil, respectively. The monthly effective interest rate is 1.76%.

 

The estimates discussed above require us to make assumptions based on historical results, observance of trends in our stock price, future expectations and other relevant risk factors. If other assumptions had been used, the HB Warrant valuation as calculated and recorded under the accounting guidance could have been affected.

 

Volatility is a key factor in option pricing models. For purposes of determining expected volatility, the Company used significant judgment to identify a peer group. The historical volatility of the Company’s own common stock was not deemed pertinent to the estimate, because of the recent change in the Company’s operations and business plan. The risk-free rate for the period coincides with the expected life of the HB Warrants and is based on the U.S. Treasury Department yield curve in effect at time of closing.

 

For the three and nine months ended September 30, 2012, interest expense on the outstanding convertible note is $70 and $93, respectively. The monthly effective interest rate during the quarter was 2.69%.

 

Note repayment

 

On October 9, 2012, the Company repaid the full value of the convertible note as described in Note 17.

 

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Note 11: Non-controlling interest (restated)

 

The Company has the following non-controlling interests:

 

   MGT Gaming
(Restated)
   Medicsight   Total
(Restated)
 
Non-controlling interest at January 1, 2011  $   $5,293   $5,293 
Non-controlling share of losses   (65)   (461)   (526)
Non-controlling share of capital   862        862 
Non-controlling share of stock-based expense       15    15 
Non-controlling share of other comprehensive loss       33    33 
Purchases of Medicsight’s stock       (1,115)   (1,115)
Share consolidation of Medicsight’s stock       (1,386)   (1,386)
Non-controlling interest at September 30, 2012  $797   $2,379   $3,176 

 

The following schedule presents the effects of changes in MGT’s ownership interest in Medicsight on the equity attributable to MGT:

 

   Nine months ended September 30, 
    2012   2011 
Net loss attributable to MGT Capital Investments, Inc.  $(2,471)  $(4,144)
Transfers (to) from the non-controlling interest:          
Increase in MGT’s paid-in capital from sale and assignment of Medicsight Stock       21 
Increase in MGT’s paid-in capital from Medicsight Share Consolidation   2,392     
Increase in MGT’s paid-in capital from repurchase of Medicsight Shares   1,973     
Changes from the net loss attributable to MGT Capital Investments, Inc. and transfers to the  non-controlling interest  $1,894   $(4,123)

 

In January 2012, the Company purchased 1 share of Medicsight ordinary shares from a shareholder for consideration of $0.01.

 

During the three months ending September 30, 2012, the Company purchased 51 shares of Medicsight ordinary shares from a group of shareholders for cash and 33,000 shares of the Company’s common stock for consideration of $18 and $141, respectively. As of September 30, 2012, $4 of the $18 cash consideration remained accrued and unpaid.

 

On June 1, 2012 the Company purchased 550 shares in MGT Gaming (Note 7).

 

Note 12: Net loss per share (restated)

 

On March 21, 2012, MGT affected a reverse split, immediately followed by a forward split. At our March 20, 2012 Special Meeting of Stockholders, the Company’s stockholders approved the proposal to amend the Company’s Certificate of Incorporation to effect a Reverse/Forward Split of the Company’s Common Stock, $0.001 par value per share at an exchange ratio of 1 for 500 shares of the Company’s outstanding Common Stock, immediately followed by a forward split of the Company’s outstanding Common Stock, at an exchange ratio of 15 for 1 shares of the Company’s outstanding Common Stock. The amendment did not change the par value per share or the number of authorized shares of Common Stock. As a result of the Reverse Split, stockholders holding fewer than 500 shares of Common Stock, at the time of the reversal, received a cash payment instead of fractional shares and no longer had an interest in the Company. All Share and per share amounts have been retrospectively adjusted for all periods presented to give effect to the Reverse/Forward Split.

 

On March 26, 2012, at Medicsight’s General Meeting, stockholders approved a resolution to Reverse Split the Company’s existing ordinary shares of £0.05 par value per share into 1 new ordinary share of £16,250 par value per share and for MGT to acquire all New Ordinary Shares representing the fractions of shares left over following the Reverse Split. The exchange ratio for the Reverse Split was 1 for 325,000. As a result of the Reverse Split, stockholders holding fewer than 325,000 shares were cancelled and not entitled to a cash payment for fractional shares.

 

On November 2, 2012 the Company closed two separate financing agreements comprised of the sale of $4.5 million of 1,380,362 Series A Convertible Preferred Shares (which include 2,760,724 Warrants to purchase MGT common stock), plus a separate sale of $1.4 million of 453,000 MGT Common Stock (Note 18).

 

18
 

 

   Three months ended September 30,   Nine months ended September 30, 
   2012   2011   2012   2011 
Numerator:  $(365)  $(1,202)  $(2,471)  $(4,144)
Net loss attributable to common stock shares (basic and diluted)                    
Denominator:                    
Weighted average number of common stock shares outstanding during the period (basic and diluted)   2,173,740    1,171,518    2,128,891    1,171,518 
Basic and diluted net losses per common stock share  $(0.17)  $(1.03)  $(1.16)  $(3.54)

 

Note 13: Stock incentive plan and share-based compensation

 

Stock incentive plan

 

The Company’s board of directors established the 2012 Stock Incentive Plan (the “Plan”) on April 15, 2012, and the Company’s shareholders ratified the Plan at the annual meeting of the Company’s stockholders on May 30, 2012. 415,000 shares of Common Stock were 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.

 

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 (7) 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 (5) years from the date of grant. No option grants were issued during the nine months ended September 30, 2012.

 

Issuance of restricted shares

 

At the June 25, 2012, board meeting, the members of the Compensation and Nominations Committee approved the grant of 232,000 restricted shares of MGT common stock under the Plan, with each current independent director of the board receiving 21,000 restricted shares and 190,000 shares awarded to officers and certain employees. These shares were subsequently issued on August 9, 2012. On August 20, 2012, 6,000 shares were granted and issued to a certain employee. The restricted shares vest one-third each six months from date of issue. 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. The restricted shares were valued at their fair market value on date of grant, of which the share-based compensation expense will be recognized over their vesting period. For the three and nine months ended September 30, 2012, stock based compensation were $220 and $232, respectively.

 

Issuance of shares to former directors

 

At the June 25, 2012, board meeting, the members of the Compensation and Nominations Committee approved the issuance of 33,000 shares of common stock to certain of our former directors for past service on the Company’s board of directors. These shares were issued and vested on August 10, 2012. The stock was valued at $185, using the closing market price on the date of grant. For the three and nine months ended September 30, 2012, stock based compensation were $0 and $185, respectively.

 

Unrecognized compensation cost

 

As of September 30, 2012 there was $1,100 of total unrecognized compensation costs related to non-vested share-based compensation arrangements. That cost is expected to be recognized over a weighted average period of 1.2 years.

 

Medicsight equity plan

 

Following Medicsight’s general meeting on March 26, 2012 (Note 12), a shareholder resolution approving the Reverse Split of 1-for-325,000 of the Company’s existing ordinary shares of £0.05 par value into one new ordinary share was duly passed. As a result of the reverse split, option holders under certain existing share option plans are no longer entitled to options under those plans as option holders’ share entitlement is now less than one as a result of the Reverse Split. Following the share reversal, the Company cancelled with immediate effect all redundant option plans with the exception of Plan J. All previously unrecognized stock based compensation expense was accelerated.

 

Medicsight has the following Stock Option Plan:

 

Plan J — on May 14, 2009, we approved and subsequently granted options for 24 shares under stock option plan “J”. Options under this plan vest in equal one-sixths for each six months that employees have been employed for 6, 12, 18, 24, 30 and 36 months from the grant date. At September 30, 2012, there were 6 options outstanding and exercisable with the remaining contractual life of 6.6 years.

 

No grants were issued in the nine months ended September 30, 2012.

 

19
 

 

 

The following table summarizes stock option activity for the nine months ended September 30, 2012, under all option plans:

 

   Outstanding   Exercisable 
   Number of shares   Weighted-average
exercise price
   Number of shares   Weighted-average
exercise price
 
Outstanding at December 31, 2011   11   £35,700 ($58,500)    10   £35,700 ($58,500) 
Granted                  
Exercised                  
Forfeited/Cancelled   (5)  £19,500 ($30,917)           
Outstanding at September 30, 2012   6   £29,250 ($46,326)    6   £29,250 ($46,326) 

 

On November 30, 2010, David Sumner, Chairman of Medicsight Limited, resigned from his position within the group. Immediately after his resignation, a two-year consultancy agreement was signed whereby Mr. Sumner would continue to assist the group in its commercial needs. As part of this agreement, Mr. Sumner was to continue to vest in his existing Medicsight Plan J options throughout the consultancy period. A modification of the 6 existing options has been accounted for, and is not considered to be material to the overall financial statements. The Company is no longer receiving services under this consulting agreement. As such, all expenses and related stock-based compensation were accelerated at December 31, 2011.

 

The Company has recorded the following amounts related to its share-based compensation expense in the accompanying Condensed Consolidated Statements of Operations:

 

   Three months ended
September 30,
   Nine months ended
September 30,
 
   2012   2011   2012   2011 
Selling, general and administrative  $220   $(75)  $442   $122 
Research and development       (2)   7    22 
   $220   $(77)  $449   $144 

 

Of the Stock-based expense for the nine months ended September 30, 2012 and 2011, $15 and $39 was allocated to non-controlling interest.

 

The aggregate intrinsic value for options outstanding and exercisable at September 30, 2012 and 2011, was $nil.

 

Note 14: Interest and other income / (expense)

 

The Company’s interest and other (expense)/income were as follows:

 

   Three months ended
September 30,
   Nine months ended
September 30,,
 
   2012   2011   2012   2011 
Interest (expense) / income   (70)       (93)   42 
Other (expense) / income           (2)   (10)
Total   (70)       (95)   32 

 

All of the 2012 interest expense is associated with the convertible Note issued on June 1, 2012.

 

20
 

 

Note 15: Related party transactions

 

Moneygate Group

 

In Fiscal 2009, we purchased 49% of the share capital of Moneygate. On acquisition we provided loan facilities of £250 ($387) for working capital and £2,000 ($3,094) for acquisitions and subsequently entered into various transactions with Moneygate and other non-related parties.

 

Through its disposal in March 2011, Moneygate was a related party as the Company had significant influence over its operations as a result of representation on Moneygate’s board of directors. Due to this significant influence, we accounted for it under the equity method. In March 2011, we sold our entire interest in Moneygate to Committed for total consideration of £250 ($401), resulting in a gain on sale of £51 ($81).

 

Dunamis

 

Allan Rowley, former Chief Executive Officer and former Chief Financial Officer of MGT and former Chief Executive Officer of Medicsight, along with David Sumner, former Chairman of Medicsight, are both directors of Dunamis. Dunamis is a United Arab Emirates (“UAE”) registered company regulated by the Dubai Financial Services Authority (“DFSA”). Dunamis is 100% owned by David Sumner and was set up by Mr. Sumner with Allan Rowley’s financial consulting assistance, as a corporate financing and advisory firm. On September 6, 2010, Medicsight made a short-term loan of $1,100 (£711) to Dunamis. Dunamis paid back the principal of $1,100 (£711) and interest of $48 (£30) on February 6, 2011 and February 10, 2011, respectively.

 

In February 2011, the Company, following consultation with its nominated advisor noted that as a result of Mr. Sumner’s relationships with both Dunamis and Medicsight, the Loan constituted a related party transaction under Rule 13 of AIM Rules for Companies. Rule 13 requires that an AIM company must issue notification without delay as soon as the terms of a transaction with a related party are agreed. The independent directors, having consulted with the Company’s nominated adviser, considered the terms of the transaction fair and reasonable insofar as shareholders were concerned. In February 2011, the Company issued a notice detailing the terms of the transaction with the related party.

 

Laddcap Value Partners III LLC (“Laddcap”)

 

On April 12, 2011, the Company entered into a Revolving Line of Credit and Security Agreement with Laddcap for up to $500 for a fifteen-month term. The Agreement encompasses a standby commitment fee of two (2%) percent of the maximum loan amount along with an eight (8%) percent interest charge on any funds drawn. Laddcap is a related party as the Managing Partner and beneficial owner of Laddcap is a 10% plus shareholder and CEO of MGT. No amounts have been drawn down against the facility as of the date of the filing of the Company’s Form 10-Q for the quarterly period ended September 30, 2012. The Agreement expired in July 2012 and was not renewed by management (Note 7).

 

D4D Limited

 

Effective July 2010, the Company entered into a service agreement with D4D Limited (“D4D”), a company that offers Executive Services for small and mid-cap companies. D4D is owned by Tim Paterson-Brown and Allan Rowley, and pursuant to the agreement, provided the services of Chairman, Chief Executive Officer and Chief Financial Officer of the Company at such time.

 

In April 2011, the agreement with D4D was terminated and a settlement agreement between MGT and D4D, Messrs. Paterson-Brown and Rowley was executed and delivered. During the nine months ended September 30, 2011, MGT and Medicsight made payments to D4D, totaling $304 and $315, respectively.

 

Note 16: Operating leases, commitments and security deposit

 

Operating leases

 

The Company exercised its right to terminate its London, UK lease, upon completion of the fifth year (August 2011) and had found an alternative UK office location with no long-term lease commitment. This commitment was on a month-to-month basis and began on August 1, 2011 with total monthly rental payments of £8 ($13) along with a rental deposit of £16 ($25). In February 2012, the Company moved to a smaller office in the same location with month-to-month rental payments of £2 ($4) and a rental deposit of £4 ($6). On April 30, 2012, we terminated our UK lease effective June 30, 2012.

 

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.

 

A satellite office in Tokyo, Japan, was closed in January 2012, and the rental deposit of $128 was refunded to us.

 

The following is a schedule of the future minimum payments required under operating leases and commitments that have initial or remaining non-cancellable terms in excess of one year:

 

21
 

 

 

Year ending    
2012  $17 
2013   63 
2014   58 
Total  $138 

 

The total lease rental expense was $88 and $445 for the nine months ended September 30, 2012 and 2011, respectively.

 

Commitments

 

In January 2012, the Company entered into a two-year employment agreement with an employee at a base salary of $10 per month, with potential bonus payments as outlined in the agreement. This agreement provides for a maximum severance period of 12 months in the event of termination without cause as defined in the agreement.

 

On March 12, 2012, the Company entered into a one-year financial advisory and consulting agreement with a national investment-banking firm. The Agreement was cancelled in May 2012 in accordance with its terms. For the three and nine months ended September 30, 2012, $nil and $10, were recorded respectively.

 

On May 11, 2012, MGT Gaming entered into a one-year consulting agreement with the president of J&S for service to MGT Gaming, for a fee of $5 per month. The agreement can be cancelled with 60 days prior written notice.

 

Note 17: Segment reporting (restated)

 

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, chief financial officer and members of senior management. We operate in three operational segments, Medicsight Software/Devices, Medicsight Services and MGT Gaming. Certain corporate expenses are not allocated to segments.

 

The accounting policies of the segments are the same as those described in the summary of significant accounting policies (Note 3). We evaluate performance of our operating segments based on revenue and operating (loss). Segment information as of September 30, 2012 and December 31, 2011 and for the three and nine months ended September 30, 2012 and September 30, 2011 are as follows:

 

22
 

 

   Medicsight   MGT Gaming   Unallocated
corporate/other
     
   Software/Devices   Services   (Restated)   (Restated)   Total 
Three months ended September 30, 2012                         
Revenue from external customers  $9   $58   $   $   $67 
Cost of revenue       53            53 
Gross margin   9    5            14 
Operating loss   (240)       (77)   (494)   (811)
                          
Three months ended September 30, 2011                         
Revenue from external customers  $167   $   $   $   $167 
Cost of revenue   5                5 
Gross margin   162                162 
Operating loss   (1,614)           (334)   (1,948)
                          
Nine months ended September 30, 2012                         
Revenue from external customers  $215   $121   $   $   $336 
Cost of revenue   36    116             152 
Gross margin   179    5            184 
Operating loss   (1,196)   (14)   (146)   (1,262)   (2,618)
                          
Nine months ended September 30, 2011                         
Revenue from external customers  $431   $   $   $   $431 
Cost of revenue   105                105 
Gross margin   326                326 
Operating loss   (6,202)           (758)   (6,960)
                          
June 30, 2012                         
Cash and cash equivalents  $2,372   $   $72   $2,420   $4,864 
Intangible assets (Restated)           1,845        1,845 
                          
December 31, 2011                         
Cash and cash equivalents  $3,123   $   $   $581   $3,704 
Intangible assets                    

 

23
 

 

Note 18: Subsequent events

 

Extinguishment of Senior Secured Convertible Note

 

On October 9, 2012, the Company executed two identical exchange agreements (collectively, the “Agreements”) settling the outstanding Senior Secured Convertible Note for a cash payment of $3.5 million and 100,000 shares of the Company’s common stock. The stock was valued at $318, using the closing price on October 9, 2012. These shares were issued on November 6, 2012. The Company expensed the following relating to the extinguishment of the Senior Secured Convertible Note: deferred financing cost, $472; HB Warrant discount, $409; and Beneficial Conversion Feature, $409.

 

Issuance of Series A Convertible Preferred Shares

 

On November 2, 2012 the Company closed two separate financing agreements with various institutional investors providing $5.9 million of capital. The capital raise is comprised of the sale of $4.5 million of 1,380,362 Series A Convertible Preferred Shares (which include 2,760,724 Warrants to purchase MGT common stock), plus a separate sale of $1.4 million of 453,000 MGT Common Stock. On October 26, 2012, this transaction was approved by NYSE-MKT LLC. The Preferred Shares will be convertible into the Company's common stock at a fixed price of $3.26 per share and carry a 6% dividend. The Warrants have a five-year life and are exercisable at $3.85 per MGT share; the Company issued a total of 2.8 million Warrants in the deal. The Common Stock was sold at $3.01 per share with a total of 453,000 shares sold, under its S-3 Registration Statement, which was declared effective on September 25, 2012.

 

24
 

 

Item 2:  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained herein that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “estimates,” “should,” “expect,” “guidance,” “project,” “intend,” “plan,” “believe” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" included in our Annual Report on Form 10-K filed on March 1, 2012, our Quarterly Reports on Form 10-Q filed on May 14, 2012 and August 14, 2012, in addition to other public reports we filed with the Securities and Exchange Commissions (“SEC”). The forward-looking statements set forth herein speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

 

Restatement of previously issued financial statements

 

On May 15, 2013, after consulting with the Company’s Audit Committee, management concluded that certain of the Company’s warrants (“J&S Warrants”) received improper accounting treatment. The warrants should have been reflected as liabilities on the balance sheet included in the Company’s previously filed Quarterly Report on Form 10-Q for the period ended September 30, 2012 (the “Quarterly Report”), as opposed to a component of equity.

 

Specifically, due to certain anti-dilution provisions contained in the J&S Warrants, they are being reclassified to liabilities and will be marked-to-market each reporting period. The change in treatment of the warrants will result in a change to the equity and liability portions of the balance sheet at the aforementioned reporting date and will result in a loss on the revaluation of the warrants which impacts results of operations and loss per share as reported in our statement of operations for the period. In addition, the Company previously determined the fair value using the Black Scholes Model; however, due to the anti-dilution provisions, the Company determined the Binomial Lattice Practice Model was more appropriate. The use of the Binomial Lattice Practice Model caused an increase in the fair value of the J&S Warrants issued as consideration for the acquisition of the Patent which increased the amount recorded for the intangible asset and non-controlling interest. Such restatements for the correction of an error, however, will not impact cash flow or cash balances. In addition, as a result of Waiver Agreements obtained on May 20, 2013 from warrant holders, which removed the anti-dilution provision, the affected warrants will be treated as equity at June 30, 2013. Investors should be aware that the classification of the warrants as a liability will revert back to the originally reported equity treatment during the quarter ending June 30, 2013.

 

In addition, the Company has concluded that these accounting and reporting errors constituted an additional deficiency in the Company’s internal control over financial reporting as of June 30, 2012 and that its disclosure controls and procedures were not effective at September 30, 2012.

 

Executive summary

 

MGT Capital Investments, Inc. (“MGT”, the “Company”, the “Group”, “we”, “us”) is a holding company comprised of MGT, the parent company, and a majority-owned operating subsidiary, Medicsight Ltd, including its wholly-owned subsidiaries (“Medicsight”), and a majority-owned subsidiary MGT Gaming, Inc. (“MGT Gaming”). MGT and its subsidiaries are engaged in the business of monetizing intellectual property. The Company is also analyzing potential acquisition opportunities in healthcare marketing and technology, as well as various intellectual property assets. Medicsight is a medical technology company focusing on medical imaging software development and medical hardware devices. The Company develops and commercializes Computer-Aided Detection (“CAD”) applications that analyze Computer Tomography (“CT”) scans to assist radiologists in the early detection and measurement of colorectal polyps. The Company has also developed an automated carbon dioxide insufflation device (MedicCO2LON) which it commercializes through a global distributor. The Company continues to explore all strategic alternatives with respect to its majority interest in Medicsight Ltd, including the sale or licensing of its global patent portfolio. Revenue is presently limited as Medicsight attempts to commercialize its U.S. approval.

 

MGT Gaming is a majority owned subsidiary which holds certain intellectual property and patents focused in the casino gaming sector in which we acquired a majority interest on June 1, 2012. As part of the Company’s strategy, on June 1, 2012, the Company announced the completion of the acquisition of U.S. Patent #7,892,088, entitled “Gaming Device Having a Second Separate Bonusing Event.” This invention relates to gaming systems linked to an interactive sign, and includes all filed continuation patents.

 

Recent developments

 

On March 21, 2012, MGT affected a reverse split, immediately followed by a forward split of our Common Stock. At our March 20, 2012, Special Meeting of Stockholders, the Company’s stockholders approved the proposal to amend the Company’s Certificate of Incorporation to effect a Reverse/Forward Split of the Company’s Common Stock, $0.001 par value per share at an exchange ratio of 1-for-500 shares of the Company’s outstanding Common Stock, immediately followed by a forward split of the Company’s outstanding Common Stock, at an exchange ratio of 15-for-1 shares of the Company’s outstanding Common Stock. The amendment did not change the par value per share or the number of authorized shares of Common Stock. As a result of the Reverse Split, stockholders holding fewer than 500 shares of Common Stock, at the time of the reversal, received a cash payment instead of fractional shares and no longer had an interest in the Company. All share and per share amounts have been retrospectively adjusted for all periods presented to give effect to the Reverse/Forward Split.

 

On March 26, 2012, at Medicsight’s General Meeting, stockholders approved a resolution to Reverse Split the Company’s existing ordinary shares of £0.05 par value per share into 1 new ordinary share of £16,250 par value per share and for MGT to acquire all New Ordinary Shares representing the fractions of shares left over following the Reverse Split. The exchange ratio for the Reverse Split was 1 for 325,000. As a result of the Reverse Split, stockholders holding fewer than 325,000 shares were cancelled and not entitled to a cash payment for fractional shares.

 

25
 

 

The Company closed the following non-essential subsidiaries during the nine months ended, September 30, 2012, as part of its expense reduction plan: Medicsight Nominees Limited, Medicsight UK Limited, MGT Investments (Gibraltar) Limited, MGT Capital Investments Limited and its wholly-owned subsidiary MGT Capital Investments (UK) Limited.

 

Medicsight closed its Tokyo office as part of an overall program of expense reduction and corporate simplification. In addition to closing the Tokyo office, management of Medicsight has closed several non-essential subsidiaries; Medicsight KK and Medicsight PTY Limited were closed during the quarter-ended March 31, 2012, due to the unjustifiably high legal, regulatory and accounting costs of maintaining such entities. However, in order to better exploit the FDA approval of ColonCAD, Medicsight opened a U.S. subsidiary (Medicsight, Inc.) in New York in September 2011.

 

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.” Pursuant to the Sale Agreement and certain ancillary agreements executed simultaneous thereto, (i) J&S sold a patent to MGT Gaming in exchange for 1,000 shares (constituting 100% ownership) of MGT Gaming Common Stock, par value $0.001 (the “MGT Gaming Shares”); (ii) the Company purchased from J&S 550 MGT Gaming Shares constituting 55% ownership in exchange for $200,000 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 (the “J&S Warrant”): (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; and (iv) President of J&S, agreed to provide consulting services to MGT Gaming in exchange for a fee of $5 per month, for a period of one year. Pursuant to the Sale Agreement, 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 day prior to the exercise (the “J&S Option”). The Sale Agreement closed on May 24, 2012. The Company obtained stockholder approval to issue up to 600,000 shares of Common Stock issuable upon exercise of the warrants.

 

On May 24, 2012, the Company entered into a securities purchase agreement (the “SPA”) with Hudson Bay Fund Ltd. (the “Investor”). The SPA provided for the purchase of an 18 month promissory note (the “Senior Secured Convertible Note” or the “Note”) convertible into up to 1,166,667 shares of Company Common Stock at a conversion price of $3.00 per share and a warrant (the “Hudson Bay Warrant” or the “HB Warrant”) to purchase up to 875,000 shares of Common Stock at an exercise price of $3.00 per share for proceeds of $3,500 (the “Hudson Bay Transaction”). The Note is convertible at the option of the holder at a conversion price of $3.00 per share and the Company can require conversion into Company Common Stock if the Weighted Average Price of the Common Stock equals or exceeds 200% of the conversion price for no less than twenty (20) Trading Days during any thirty (30) consecutive Trading Day period occurring following the issuance date, subject to a 9.99% beneficial ownership ceiling for Investor’s ownership of Company Common Stock at any one time. The Note is also redeemable by the Company from and after the seven (7) month anniversary of the issuance date, subject to certain equity conditions, in cash at a price equal to the greater of (i) 125% of the Conversion Amount to be redeemed and (ii) the product of (A) the Conversion Amount being redeemed multiplied by (B) the quotient determined by dividing (x) the greatest Closing Sale Price of the shares of Common Stock during the period beginning on the date immediately preceding the date of notice of redemption and ending on the date the redemption date, by (y) the lowest Conversion Price in effect during such period, as such terms are defined in the Note. The Conversion Price of the Note is subject to adjustment in case of a combination or subdivision of stock or in the event of the grant of rights with equity features. The HB Warrant is exercisable at the option of the holder at a $3.00 per share exercise price and the Company can require exercise if the Weighted Average Price of the Company’s Common Stock equals or exceeds 250% of the exercise price for no less than twenty (20) Trading Days during any thirty (30) consecutive Trading Day period occurring following the issuance date, as such terms are defined in the HB Warrant. The HB Warrant exercise price is subject to adjustment in the case of combination or subdivision of stock or in the event of the granting of any stock appreciation rights, phantom stock rights or other rights with equity features. The Note allows for payment of Common Stock in lieu of cash interest payments due pursuant to the Note. The Company obtained stockholder approval to issue up to 140,000 shares of Common Stock in satisfaction of interest due pursuant to the Note as well as 2,041,667 shares of Common Stock issuable pursuant to the Note and HB Warrant. In connection with the Hudson Bay Transaction, MGT agreed to issue 75,000 shares of Common Stock to Chardan Capital Markets, LLC (“Chardan”) and certain affiliates of Chardan in consideration of investment banking services rendered. Stockholder approval was also obtained for the issuance of 75,000 shares of Common Stock to Chardan. The Hudson Bay Transaction required MGT and certain of its subsidiaries to provide all of its assets as collateral, to pledge the stock of its subsidiaries and certain of MGT’s affiliates to execute voting and lockup agreements. The proceeds of the Hudson Bay Transaction will be used by the Company for general working capital purposes.

 

On October 9, 2012, the Company executed two identical exchange agreements (collectively, the “Agreements”) settling the outstanding Senior Secured Convertible Note for a cash payment of $3.5 million and 100,000 shares of the Company’s common stock. The stock was valued at $318, using the closing price on October 9, 2012. These shares were issued on November 6, 2012. The Company expensed the following relating to the extinguishment of the Senior Secured Convertible Note: deferred financing cost, $472; HB Warrant discount, $409; and Beneficial Conversion Feature, $409.

 

On November 2, 2012 the Company closed two separate financing agreements with various institutional investors providing $5.9 million of capital. The capital raise is comprised of the sale of $4.5 million of 1,380,362 Series A Convertible Preferred Shares (which include 2,760,724 Warrants to purchase MGT common stock), plus a separate sale of $1.4 million of 453,000 MGT Common Stock. On October 26, 2012, this transaction was approved by NYSE-MKT LLC (“The Exchange”). The Preferred Shares will be convertible into the Company's common stock at a fixed price of $3.26 per share and carry a 6% dividend. The Warrants have a five-year life and are exercisable at $3.85 per MGT share; the Company issued a total of 2.8 million Warrants in the deal. The Common Stock was sold at $3.01 per share with a total of 453,000 shares sold, under its S-3 Registration Statement, which was declared effective on September 25, 2012.

 

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There can be no assurance that any future 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 shareholders. 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.

 

Patent enforcement

 

On November 2, 2012, MGT Gaming filed a lawsuit claiming patent infringement against multiple companies believed to be violating MGT Gaming's patent No. 7,892,088 ("the ‘088 Patent") entitled "Gaming Device Having a Second Separate Bonusing Event." The 088 patent is directed to a gaming system in which a second game played on an interactive sign is triggered once specific events occur in a first game. The lawsuit, which was filed in the United States District Court for the Southern District of Mississippi (Jackson Division), alleges the defendants Caesars Entertainment, MGM Resorts International, Inc., WMS Gaming, Inc. - a subsidiary of WMS Industries, Inc., Penn National Gaming, Inc., and Aruze Gaming America, Inc. 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 patent rights. The allegedly infringing products manufactured, distributed, used, sold and/or offered for sale by defendants include at least those identified under the trade names: "Pirate Battle," "Reel'em In Compete to Win," "Great and Powerful Oz," "Battleship," "Clue," and "Paradise Fishing."

 

MGT Gaming is seeking preliminary and permanent injunctions against all defendants enjoining them from any continued acts of patent infringement, as well as to recover damages adequate to compensate for the infringement in an amount to be proven at trial, and to recover, in any event, a reasonable royalty from each defendant for its infringement, trebled, plus interest and costs as fixed by the court.

 

MGT Gaming has entered into a contingent fee arrangement with Nixon & Vanderhye P.C. (“the law firm”) representing MGT Gaming as plaintiff in the lawsuit. MGT Gaming will pay out-of-pocket expenses (as that term is defined in the retainer agreement) until such time, if ever, the lawsuit produces revenue. At that time, the law firm is entitled to a percentage of such revenue, after out-of-pocket expenses are deducted. This contingent fee arrangement reduces the potential value of any legal settlements or judgments, but also reduces the possibility of unpredictable and uncontrollable legal expenses.

 

NYSE-MKT LLC

 

On June 8, 2011, the Company received notice from the NYSE-MKT LLC notifying that it is not in compliance with the following Exchange continued listing standards: Section 1003(a)(i) of the Company Guide, resulting from stockholders' equity on March 31, 2011, of less than $2.0 million and losses from continuing operations and/or net losses in two of its three most recent fiscal years; Section 1003(a)(ii) of the Company Guide with stockholders' equity of less than $4.0 million and losses from continuing operations and/or net losses in three of its four most recent fiscal years; and Section 1003(a)(iii) with stockholders' equity of less than $6.0 million and losses from continuing operations and/or net losses in its five most recent fiscal years.

 

On August 23, 2011, the Exchange accepted the Company’s plan of compliance submitted to the Exchange in response to the deficiency letter. The Exchange granted the Company an extension until December 8, 2012 (“extension period”), to regain compliance with Sections 1003(a) (i) – (iii) of the Exchange’s Company Guide.

 

The Company was subsequently notified by the Exchange of its noncompliance with Section 1003(f)(v) of the Company Guide (low trading price) and Section 704 (failure to hold an annual meeting). The Company resolved these deficiencies as of April 13, 2012 and June 1, 2012, respectively.

 

The Company will be subject to periodic review by Exchange staff during the extension period and prior to compliance with 1003(a)(i), (ii), (iii) of the Exchange’s Company Guide. Failure to make progress consistent with the plans of compliance or to regain compliance with the continued listing standards by the end of the extension period could result in the Company being delisted from the Exchange.

 

The Company's stock trading symbol is currently “MGT.BC” to denote its noncompliance. The trading symbol will continue to bear this additional indicator until the Company regains its compliance with the Exchange continued listing requirements.

 

On October 12, 2012, the Company announced in a Current Report filed on Form 8-K, that MGT has been operating under a Plan of Compliance approved by the Exchange on August 23, 2011 that allowed the Company until December 8, 2012 to regain compliance with the deficiencies noted above. During this period, the Company has been subject to periodic review by Exchange Staff, and was informed of the requirement to make progress consistent with the Plan or to regain compliance with the continued listing standards by the end of the extension period. On October 5, 2012, the Company was informed that the Exchange staff concluded the Company has not made a reasonable demonstration of its ability to complete the initiatives and meet the equity standards by the end of the 18-month Equity Plan Period, and has therefore begun the delisting process.

 

The Company informed the Exchange of its intention to pursue the right of appeal and requested a hearing pursuant to Sections 1203 and 1009(d) of the Company Guide. The hearing is set on December 12, 2012. The Company has taken certain steps to improve its balance sheet including the transactions of November 2, 2012, described in the Liquidity and capital resources section. There can be no assurance that the Company’s request for continued listing will be granted at this hearing. In the event that the Company’s appeal is unsuccessful, the Company expects that its common stock will trade on OTC-QB no later than any official delisting from the Exchange.

 

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Other discussions

 

In July 2011, the Company announced in a Current Report on Form 8-K that it had initiated an internal investigation through a Special Committee regarding the potential misappropriation and/or misdirection of Company funds. In August 2011, the Company issued a press release based upon the substantially completed results of the investigation. The Company had concluded that no adjustments or restatements of prior issued financial statements were required. Although the investigation remains on-going, management is confident that the Company’s financial statements will not require a material restatement as a result of any additional irregularities that may be uncovered in the future.

 

In the event the investigation results in any finding of wrongdoing, the Company plans, consistent with the best interests of the Company and its stockholders, to pursue recovery and/or restitution to the fullest extent provided by law. However, in such an event, there can be no assurance of any recovery, or that any recovery will exceed the costs of collection, the costs of any litigation (including settlements as well as legal fees) relating to this matter, or any other costs associated with this matter, including but not limited to payment of taxes or fines, and the findings of unreported claims on the Company’s assets.

 

Critical accounting policies and estimates

 

The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). Certain accounting policies have a significant impact on amounts reported in the financial statements. A summary of those significant accounting policies can be found in Note 2 to the Company’s financial statements contained in the 2011 Annual Report on Form 10-K and Part I (Note 3) contained in the 2012 Quarterly Reports on Form 10-Q.

 

Results of operations

 

The Company achieved the following results in the three and nine months ended September 30, 2012:

 

·Revenue from software licenses/devices and services totaled $67 (2011: $167) and $336 (2011: $431).

 

·Operating expenses were $825 (2011: $2,110) and $2,802 (2011: $7,286).

 

·Net loss attributable to MGT Capital Investments, Inc. $365 (2011: $1,202) and $2,471 (2011: $4,144) and resulted in a loss per share of $.17 (2011: $1.03) and $1.16 (2011: $3.54).

 

Revenue declined due to slow market adoption of ColonCAD software. Operating expenses declined due to an overall program of expense reduction and corporate simplification.

 

Three months ended September 30, 2012 and September 30, 2011

 

Medicsight software/devices

 

In the three months ended September 30, 2012, ColonCAD sales decreased to $9 from $151 for the same period last year. There were no new sales of ColonCAD; revenue is attributed to recurring license maintenance fees. MedicCO2LON had no revenue compared to $16 for the same period last year. The decline is due to a delay in launching the next generation of the insufflator.

 

Cost of revenue was $nil (2011: $5) attributable to MedicCO2LON devices.

 

Selling, general and administrative expenses decreased to $239 in 2012, compared to $1,149 for the same period last year. Management substantially reduced headcount and streamlined operations in the first half of 2012. Several satellite offices and subsidiaries were closed and our London office relocated to a significantly smaller space. The majority of the impact of these decisions were reflected in the statement of operations during 2012.

 

Research and development expenses decreased to $10 compared to $303 for the same period last year, primarily due to the reduction of headcount and associated overhead recognized in the first half of 2012.

 

Medicsight services

 

In the three months ended September 30, 2012, revenue of $58 was recognized through consulting services. There is no comparable revenue for the same period last year as this is a new segment for 2012. Cost of revenue for the three months ended September 30, 2012, was $53 (2011: $nil).

 

Selling, general and administrative expenses were $5 (2011: $nil).

 

MGT Gaming

 

No revenue was generated in the three months ended September 30, 2012, management continues to explore options on monetizing its patent portfolio.

 

Selling, general and administrative expenses were $77 (2011: $nil), attributed to consulting and legal fees associated with the patent. There are no comparable expenses for the same period last year as this is a new segment for 2012.

 

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Unallocated corporate/other

 

In the three months ended September 30, 2012, selling, general and administrative expenses decreased to $494 from $658 for the same period last year. A significant portion of this expense relates to the recognition of stock based compensation awards issued in the current year.

 

The Company recorded a gain of $613 due to the revaluation of the warrant liability on September 30, 2012. Interest and other income / (expense) was $(70) for the three months ended September 30, 2012 (2011: $nil), which is attributed to interest payments on the Convertible Note.

 

Nine months ended September 30, 2012 and September 30, 2011

 

Medicsight software/devices

 

In the nine months ended September 30, 2012, revenue from ColonCAD licenses decreased to $145 compared to $212 for the same period last year. Revenue remains limited as management is exploring ways to commercialize the product in the U.S. In the nine months ended September 30, 2012, MedicCO2LON sales decreased to $70 from $219 for the same period last year. The decline is due to a delay in launching the next generation of the insufflator. Cost of revenue of $36 as compared to $105 for the same period last year which was attributable to the decline of sales of MedicCO2LON devices.

 

Selling, general and administrative expenses were reduced to $1,292 in 2012, compared to $5,461 for the nine months ending September 30, 2011. Management substantially reduced headcount and streamlined operations in 2011. Several satellite offices and subsidiaries were closed and our London office relocated to a significantly smaller space. The majority of the impact of these decisions was reflected in the statement of operations for the nine months ended 2012.

 

Research and development is made up of staff, staff related consultancy, stock options and product development software costs expensed on the research and development of Medicsight’s products. In the nine months ended September 30, 2012, the research and development expenses decreased to $83 compare to $1,067 for the same period last year, as the Company implemented an expense and headcount reduction program within Medicsight.

 

Medicsight services

 

In the nine months ended September 30, 2012, revenue of $121 was recognized through consulting services in this new segment versus $nil for the same period last year. Cost of revenue of $116 (2011: $nil) is attributed to compensation and business development costs.

 

Selling, general and administrative expenses were $19 (2011: $nil) attributed to overhead costs.

 

MGT Gaming

 

No revenue was generated in the nine months ended September 30, 2012, management continues to explore options on monetizing its patent portfolio.

 

Selling, general and administrative expenses were $146 (2011: $nil), attributed to retaining legal counsel related to acquiring the gaming patent and the amortization expense of the gaming patent.

 

Unallocated corporate/other

 

In the nine months ended September 30, 2012, selling, general and administrative expenses increased to $1,262 as compared to $758 for the same period last year. The Company is continuing its progress in transitioning from software to monetization of intellectual property. The increase in the Company’s SG&A expense is commensurate with our recent intellectual property acquisition of MGT Gaming and its related patent. As MGT continues to execute on its patent acquisition strategy it expects that SG&A costs will increase modestly for the remainder of 2012, primarily due to executive compensation and higher professional fees.

 

The amortization of deferred financing costs and accretion of debt discount incurred as a result of the June 2012 issuance of the convertible note for the nine months ended September 30, 2012 were $115 and $183, respectively.

 

Interest and other income/(expense) were $(95) for the nine months ended September 30, 2012 as compared to $32 for the same period last year. The increase of expense is associated with the convertible note issued on June 2012.

 

Functional currency

 

Effective July 1, 2012, in connection with the closing of the Medicsight UK office at quarter end June 2012, and final transfer of all operations to the U.S., along with MGT’s proceeds from the sale of $3.5 million Note on June 1, 2012, the Company reassessed the operational currency designation of each of its subsidiaries and as a result of the aforementioned activities, determined to prospectively change operational currency from the previous local currency, U.K. Sterling (£) (“GBP”) to U.S. dollar ($). Under ASC 830-10 when the functional currency changes from a foreign currency to the reporting currency translation adjustments for prior periods shall remain in accumulated other comprehensive income/(loss) and the translated amounts for non-monetary assets at the end of the prior period become the accounting basis for those assets in the period of the change and the subsequent periods.

 

Medicsight’s results of operations are affected by changes in the $: £ rates used to translate the operational results. For the nine months ended September 30, 2012 and September 30, 2011, the average rates were $1.5859: £1.00 and $1.6176: £1.00, respectively, an increase of 2% in the value of the dollar against sterling.

 

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Liquidity and capital resources

 

   September 30, 
2012
   December 31,
2011
 
Working capital summary:          
Cash and cash equivalents  $4,864   $3,704 
Current assets   5,008    4,204 
Current liabilities   (505)   (786)
Working capital surplus  $4,503   $3,418 

 

   Nine months ended September 30, 
   2012   2011 
Cash flow summary:          
Cash (used in) provided by :          
Operating activities   (1,818)   (7,302)
Investing activities   (226)   1,977 
Financing activities   3,123     
Effects of exchange rates on cash and cash equivalents   81    427 
Net increase / (decrease) in cash and cash equivalents  $1,160   $(2,730)

 

On September 30, 2012, MGT’s and Medicsight’s cash and cash equivalents were $2,492 and $2,372, respectively. The Company continues to exercise discipline with respect to current expense levels, as revenues remain limited. Our cash and cash equivalents have increased during 2012, predominantly because of the $3,123, provided by financing activities.

 

On April 12, 2011, the Company entered into an Agreement with Laddcap, a related party, for up to $500 for a fifteen-month term. The Agreement encompasses a standby commitment fee of two (2%) percent of the maximum loan amount along with an eight (8%) percent interest charge on any funds drawn. No amounts have been drawn down against the facility through its expiration date. The Agreement expired in July 2012 and has not been renewed.

 

On June 1, 2012, MGT entered into an agreement with an institutional investor providing for $3.5 million in proceeds to the Company, net of deferred financing costs of $688, of which $100 were allocated to HB warrants, in support of the Company’s strategy to monetize intellectual property. The capital raise comprised the sale of $3.5 million Note plus HB Warrants to purchase MGT common stock (Note 8). On October 9, 2012, the Company executed two identical exchange agreements (collectively, the “Agreements”) settling the outstanding Senior Secured Convertible Note for a cash payment of $3.5 million and 100,000 shares of the Company’s common stock, The stock was valued at $318, using the closing price on October 9, 2012. These shares were issued on November 6, 2012. The Company expensed the following relating to the extinguishment of the Senior Secured Convertible Note: deferred financing cost, $472; HB Warrant discount, $409; and Beneficial Conversion Feature, $409.

 

On November 2, 2012 the Company closed two separate financing agreements with various institutional investors providing $5.9 million of capital. The capital raise is comprised of the sale of $4.5 million of 1,380,362 Series A Convertible Preferred Shares (which include 2,760,724 Warrants to purchase MGT common stock), plus a separate sale of $1.4 million of 453,000 MGT Common Stock. On October 26, 2012, this transaction was approved by NYSE-MKT LLC. The Preferred Shares will be convertible into the Company's common stock at a fixed price of $3.26 per share and carry a 6% dividend. The Warrants have a five-year life and are exercisable at $3.85 per MGT share; the Company issued a total of 2.8 million Warrants in the deal. The Common Stock was sold at $3.01 per share with a total of 453,000 shares sold, under its S-3 Registration Statement, which was declared effective on September 25, 2012.

 

Operating activities

 

Our net cash used in operating activities differs from net loss predominantly because of various non-cash adjustments such as depreciation, stock-based compensation and movements in working capital.

 

Investing activities

 

In September 2012, we repurchased 51 shares of Medicsight Limited for cash and stock consideration of $14 and $141, respectively.

 

In June 1, 2012, pursuant to the Sale Agreement between MGT, MGT Gaming and J&S, the Company issued 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 and cash consideration of $200 to J&S in connection with the purchase of certain intellectual property (Note 7).

 

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In Fiscal 2009, we purchased 49% of the share capital of Moneygate Group Limited (“Moneygate”), which was accounted for under the equity method. In March 2011, we sold our entire interest in Moneygate to Committed Capital Nominees Limited (“Committed”) for total consideration of £250 ($401), resulting in a gain on sale of £51 ($81).

 

On March 31, 2010, the Company sold its stock in Medicexchange and various non-core investments for consideration of £750 ($1,136). This consideration was deferred and was paid in instalments, with the final instalment of £244 ($370) paid in March 2011.

 

On September 6, 2010, Medicsight made a short-term loan of $1,100 (£711) to Dunamis Capital (“Dunamis”) repayable by December 31, 2010, along with $36 (£23) of interest. Dunamis paid back the principal of $1,100 (£711) and interest of $48 (£31) on February 6, 2011 and February 10, 2011, respectively. Dunamis had provided the assets of the business as collateral against the loan made by Medicsight. Dunamis was considered a related party, as two former directors of Medicsight were also directors of Dunamis Capital.

 

Financing activities

 

On May 29, 2012, MGT entered into an agreement with an investor providing $3.5 million of capital in support of the Company’s strategy to monetize intellectual property. The capital raise comprised the sale of $3.5 million of Notes plus HB Warrants to purchase MGT common stock. The Company paid $372 of financings costs associated to this Note issuance (Note 10).

 

Risks and uncertainties related to our future capital requirements

 

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 to continue operations at least through December 2013, at which point the Company may need to seek additional sources of financing. There is no guarantee that additional sources of financing will be available or on terms acceptable to the Company, if at all.

 

The Company continues to explore all strategic alternatives with respect to its majority interest in Medicsight. 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 shareholders. 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.

 

At the Company’s Annual Meeting of the Stockholders on May 30, 2012, a proposal to Amend MGT’s Certificate of Incorporation to provide for the authorization of “Blank Check” preferred stock (the “Amendment”) was duly passed. The Amendment was filed with the Secretary of State of Delaware on May 31, 2012. The Amendment allows the Company to offer and sell, from time to time in one or more offerings up to 10,000,000 million shares of Preferred Stock. Consequently, Blank Check Preferred would be available for issuance without further actions by the Company’s stockholders, unless the stockholder approval is required by the Delaware law, the rules of any exchange or other market on which the Company’s securities may then be listed or traded, the Company’s Certificate of Incorporation or Bylaws then in effect, or any other applicable rules and regulations. The meeting was held pursuant to a definitive proxy statement filed with the SEC on June 11, 2012.

 

On June 22, 2012, the Company filed a registration statement on Form S-3 with the SEC (the “Registration Statement”) (Registration No. 333-182298), which allows the Company to offer and sell, from time to time in one or more offerings up to $10,000,000 of common stock, preferred stock, debt securities, warrants, rights or a combination of these securities or units as it deems prudent or necessary to raise capital at a later date and pursuant to an effective “shelf registration statement”. The Company also registered for resale Common Stock issuable upon conversion of the Hudson Bay Note and upon exercise of the Hudson Bay Warrant, the J&S Warrant and the J&S Option. The Company also registered for resale shares of Common Stock issued to Chardan and certain affiliates of Chardan in consideration of investment banking services rendered in connection with the Hudson Bay Transaction. The Form S-3 filing, as amended, was declared effective as of September 25, 2012.

 

On November 2, 2012 the Company closed two separate financing agreements with various institutional investors providing $5.9 million of capital. The capital raise is comprised of the sale of $4.5 million of Series A Convertible Preferred Shares (which include Warrants to purchase MGT common stock), plus a separate sale of $1.4 million of MGT Common Stock. On October 26, 2012, this transaction was approved by NYSE-MKT LLC. The Preferred Shares will be convertible into the Company's common stock at a fixed price of $3.26 per share and carry a 6% dividend. The Warrants have a five-year life and are exercisable at $3.85 per MGT share; the Company issued a total of 2.8 million Warrants in the deal. The Common Stock was sold at $3.01 per share with a total of 453,000 shares sold, under its S-3 Registration Statement, which was declared effective on September 25, 2012.

 

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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.

 

Commitments

 

Beginning August 1, 2011, the Company’s UK office lease was on a month-to-month basis, with total monthly rental payments of £8 ($13) along with a rental deposit of £16 ($25). In February 2012, the Company moved to a smaller office in the same location with month-to-month rental payments of £2 ($4) and a rental deposit of £4 ($6). We terminated this lease effective June 30, 2012 to streamline operations. The Company no longer maintains a UK office.

 

In September 2011, the Company entered into a 39-month lease agreement for office space located in Harrison, New York, United States 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.

 

A satellite office in Tokyo, Japan was closed in January 2012, and the rental deposit of $128 was returned.

 

In January 2012, the Company entered into a two-year employment agreement with an employee at a base salary of $10 per month, with potential bonus payments as outlined in the agreement. This agreement provides for a maximum severance period of 12 months in the event of termination without cause as defined in the agreement.

 

On March 12, 2012, the Company entered into a one-year financial advisory and consulting agreement with a national investment banking firm. The Agreement was cancelled in May 2012 in accordance with its terms.

 

On May 11, 2012, the Company entered into a one-year consulting agreement with the president of J&S for services to MGT Gaming, for a fee of $5 per month. The agreement can be cancelled with 60 days prior written notice.

 

Recent accounting pronouncements

 

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05 which provides new guidance on the presentation of comprehensive income. ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders’ equity and instead requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. This guidance is effective for fiscal years, and interim period within those years, beginning after December 15, 2011, with early adoption permitted. The adoption of this ASU only requires a change in the format of the current presentation. The Company adopted this guidance on January 1, 2012, and its adoption did not significantly impact the Company’s condensed consolidated financial statements.

 

Off-balance sheet arrangements

 

We have no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.

 

Item 3:  Quantitative and qualitative disclosures about market risk

 

Not applicable.

 

Item 4:  Controls and procedures

 

(a) Evaluation of disclosure controls and procedures.   Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q/A. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

Our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were not effective.

 

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Restatement of Previously Issued Financial Statements. On May 15, 2013, after consulting with the Company’s Audit Committee, management concluded that certain of the Company’s J&S Warrants received improper accounting treatment. The J&S warrants should have been reflected as liabilities on the balance sheets included in the Company’s previously filed Quarterly Report on Form 10-Q for the quarterly periods ending June 30, 2012 and September 30, 2012 (the “Quarterly Reports”), as opposed to a component of equity. As a result of a deficiency in our internal control over financial reporting relating to the insufficient evaluation of certain terms within the complex warrant agreement, as of the end of the period covered by this report our management has reassessed the effectiveness of our disclosure controls and procedures and has determined that our disclosure controls and procedures were not effective on September 30, 2012.

 

Remediation plan. Since the determination regarding this deficiency, we have devoted significant effort and resources to remediation and improvement of our internal control over financial reporting.  While we had processes in place to identify and apply developments in accounting standards, we enhanced these processes to better evaluate our research of the nuances of complex accounting standards and engaged a third party financial reporting consulting firm to assist the Company in its financial reporting compliance. Our enhancements included retaining a third party consultant, who is a technical accounting professional, to assist us in the interpretation and application of new and complex accounting guidance.  The firm has been engaged to assist in the analysis of complex financial instruments. Management will continue to review and make necessary changes to the overall design of our internal control environment.

 

(b) Changes in internal control over financial reporting.  There have been no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2012, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1:  Legal proceedings

 

None.

 

Item 1-A:  Risk factors

 

The reader should carefully consider, in connection with the other information in this report, the factors discussed in Part I, “Item 1A: Risk Factors” on pages 8 through 12 of the Company’s Annual Report on Form 10-K filed with the SEC on March 1, 2012, as supplemented by “Item 1A: Risk Factors” of the Company’s Form 10-Q for the quarterly period ended March 31, 2012 and filed with the SEC on May 14, 2012. These factors could cause our actual results to differ materially from those stated in forward-looking statements contained in this document and elsewhere.

 

Risks Related to our Intellectual Property Monetization Strategy

 

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 U.S. Patent #7,892,088, entitled “Gaming Device Having a Second Separate Bonusing Event” (the “J&S Patent”) that we plan to license or otherwise monetize. If our efforts to generate revenue from the 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 and may adversely affect our financial condition and ability to operate our business.

 

To license or otherwise monetize the Patent, we have commenced legal proceedings against the owners of gaming devices pursuant to which we will 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 more 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 the 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 Patent is infringed upon by certain companies, there is a risk that a court will find the patents invalid, not infringed or unenforceable and/or that the U.S. Patent and Trademark Office (“USPTO”) will either invalidate the patents or materially narrow the scope of their claims during the course of a re-examination. In addition, even with a positive trial court verdict, the 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 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 our patents 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 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 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 request 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 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.

 

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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 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 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.

 

New legislation, regulations or court rulings related to enforcing patents could harm our business and operating results.

 

If Congress, the USPTO or the 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 our 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 our 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 conducts our business and negatively impact our business, prospects, financial condition and results of operations.

 

Our acquisitions of additional patent assets may be time consuming, complex and costly, which could adversely affect our operating results.

 

Acquisitions of patent or other intellectual property assets, which are and will be critical to our business plan, are often time consuming, complex and costly to consummate. We may utilize many different transaction structures in such acquisitions and the terms of such acquisition agreements tend to be heavily negotiated. As a result, we expect to incur significant operating expenses and will likely be required to raise capital during the negotiations even if the acquisition is ultimately not consummated. Even if we are able to acquire particular patent assets, there is no guarantee that we will generate sufficient revenue related to those patent assets to offset the acquisition costs. While we will seek to conduct confirmatory due diligence on the patent assets we are considering for acquisition, we may acquire patent assets from a seller who does not have proper title to those assets. In those cases, we may be required to spend significant resources to defend our interest in the patent assets and, if we are not successful, our acquisition may be invalid, in which case we could lose part or all of our investment in the assets.

 

We may also identify patent or other intellectual property assets that cost more than we are prepared to spend with our own capital resources. We may incur significant costs to organize and negotiate a structured acquisition that does not ultimately result in an acquisition of any patent assets or, if consummated, proves to be unprofitable for us. These higher costs could adversely affect our operating results.

 

In addition, we may acquire patents and technologies that are in the early stages of adoption in the commercial, industrial and consumer markets. Demand for some of these technologies will likely be untested and may be subject to fluctuation based upon the rate at which our licensees will adopt our patents and technologies in their products and services. As a result, there can be no assurance as to whether technologies we acquire or develop will have value that we can monetize.

 

In certain acquisitions of patent assets, we may seek to defer payment or finance a portion of the acquisition price. This approach may put us at a competitive disadvantage and could result in harm to our business.

 

We have limited capital and may seek to negotiate acquisitions of patent or other intellectual property assets where we can defer payments or finance a portion of the acquisition price. These types of debt financing or deferred payment arrangements may not be as attractive to sellers of patent assets as receiving the full purchase price for those assets in cash at the closing of the acquisition. As a result, we might not compete effectively against other companies in the market for acquiring patent assets, many of whom have greater cash resources than we have. In addition, any failure to satisfy our debt repayment obligations may result in adverse consequences to our operating results.

 

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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.

 

Weak global economic conditions may cause infringing parties to delay entering into licensing agreements, which could prolong our litigation and adversely affect our financial condition and operating results.

 

Our business plan depends significantly on worldwide economic conditions, and the United States and world economies have recently experienced weak economic conditions. Uncertainty about global economic conditions poses a risk as businesses may postpone spending in response to tighter credit, negative financial news and declines in income or asset values. This response could have a material negative effect on the willingness of parties infringing on our assets to enter into licensing or other revenue generating agreements voluntarily. Entering into such agreements is critical to our business plan, and our failure to do so could cause material harm to our business.

 

Item 2:  Unregistered sales of equity securities and use of proceeds

 

On August 9, 2012, the Company issued 75,000 restricted shares of common stock to Chardan Capital Markets, LLC (“Chardan”) and certain affiliates of Chardan in consideration of investment banking services rendered.

 

On August 9, 2012 and August 20, 2012, the Company issued 232,000 and 6,000 restricted shares of common stock, respectively, to board members, officers and certain employees under the 2012 Stock Incentive Plan.

 

On August 10, 2012, the Company issued 33,000 restricted shares of common stock to certain former directors for past service on the Company’s board of directors. 

 

In the three months ending September 30, 2012 the Company issued 51,000 restricted shares of common stock to a group of Medicsight shareholders in connection to the Company’s purchase of 51 shares of Medicsight ordinary shares. 

 

The above issuances were made in reliance on an exemption from registration set forth in Section 4(2) of the Securities Act. The issuances did not result in any proceeds to the Company.

 

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Item 3:  Defaults upon senior securities

 

None.

 

Item 4:  Mine safety disclosures

 

Not Applicable.

 

Item 5:  Other information

 

None

 

Item 6:  Exhibits

 

31.1   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1   Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2   Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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SIGNATURES

 

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

MGT CAPITAL INVESTMENTS, INC

 

May 31, 2013   By: /s/ ROBERT B. LADD
    Robert B. Ladd
    President and Chief Executive Officer
    (Principal Executive Officer)
       
May 31, 2013   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.

 

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