Note 1. Organization

MGT Capital Investments, Inc. (“MGT,” “the Company,” “we,” “us”) is a Delaware corporation, incorporated in 2000. The Company was originally incorporated in Utah in 1977. MGT is comprised of the parent company, majority–owned subsidiary MGT Gaming, Inc. (“MGT Gaming”) and wholly–owned subsidiaries MGT Interactive LLC (“MGT Interactive”), Medicsight, Inc. (“Medicsight”), MGT Studios, Inc. (f/k/a MGT Capital Solutions, Inc.) (“MGT Studios”) including its wholly–owned subsidiary Avcom, Inc. and its majority owned subsidiary M2P Americas, Inc., and MGT Sports, Inc. (“MGT Sports”) including its majority owned subsidiary FanTD LLC, (“FanTD”). Our Corporate office is located in Harrison, New York.

MGT and its subsidiaries are primarily engaged in the business of acquiring, developing and monetizing assets in the online and mobile gaming space, as well as the casino industry.

MGT Gaming

MGT Gaming owns U.S. Patents 7,892,088 and 8,550,554 (the “‘088 and ‘554 patents,” respectively), both entitled "Gaming Device Having a Second Separate Bonusing Event” and both relating to casino gaming systems in which a second game played on an interactive sign is triggered once specific events occur in a first game. On November 2, 2012, MGT Gaming filed a lawsuit (No. 3:12–cv–741) in the United States District Court for the Southern District of Mississippi (“S. D. Miss.”) alleging patent infringement against Caesars Entertainment Corporation (“Caesar’s”)(NASDAQ GS: CZR), MGM Resorts International, Inc. (“MGM”) (NYSE: MGM), WMS Gaming, Inc. – a subsidiary of Scientific Games, Inc. (“WMS”)(NASDAQ: SGMS), Penn National Gaming, Inc. (“Penn”)(NASDAQ GS: PENN), and Aruze Gaming America, Inc. (“Aruze”) which either manufacture, sell or lease gaming systems in violation of MGT Gaming's patent rights, or operate casinos that offer gaming systems in violation of MGT Gaming's ‘088 patent. An amended complaint added the '554 patent, a continuation of the ‘088 patent. The allegedly infringing products include at least those identified under the trade names: "Pirate Battle," "Battleship," "Clue, "Amazon Fishing," “Star Trek Battle Stations," "Castle King," "Monopoly Bigger Event," and "Paradise Fishing."

On October 23, 2013 the U.S. District Court severed the originally filed action into three separate actions: MGT Gaming v. WMS and Caesars (No. 3:13–cv–691, MGT Gaming v. WMS and MGM (No. 3:13–cv–692), and MGT Gaming v. Aruze and Penn (No. 3:13–cv–693). On November 4, 2013 the District Court consolidated the three severed cases for discovery. The Defendants in all three actions filed counterclaims denying infringement and asserting invalidity of both patents–in–suit. MGT Gaming filed appropriate responses, reasserting the validity and infringement of the ‘088 and ‘554 patents. On January 27, 2014, the District Court issued a Docket Order setting a Markman Hearing (also known as a claims construction hearing) for September 25, 2014 for all three cases. This order in no longer in effect in the WMS cases.

On November 4, 2013, WMS filed a Petition for Inter Parties Review ("IPR") with the United States Patent and Trademark Office ("PTO"), challenging the patent–in–suit. On April 30, 2014 the Patent Trial and Appeal Board (“PTAB”) instituted the IPR, allowing the IPR to proceed on all claims in suit. A conference call with the PTAB to address any motions the parties wish to file has been set for April 29, 2014. MGT’s Patent Owner’s Response brief is due on July 29, 2014. .

On April 23, 2014, the Court of Appeals for the Federal Circuit granted a Petition for Writ of Mandamus, sought by WMS, vacating the decision of the S.D. Miss. denying WMS’ motion to transfer the case to the Northern District of Illinois. As a consequence, this case will be moved to Chicago, Illinois and the previously issued S.D. Miss. Docket Order is no longer in effect with respect to WMS, Caesars and MGM. By motions filed on May 12, 2014, Aruze will be seeking a similar transfer order to Nevada as well as a stay pending resolution of WMS’ IPR. The success of such motions by Aruze, if any, cannot be determined.

MGT Studios

MGT Studios is publisher of social games and real money games of skill. In May 2014, the Company expects to launch www.MGTplay.com and social casino games with SlotChamp.

On November 11, 2013, the Company entered into an Agreement and Plan of Reorganization (the “Agreement”) with MGT Capital Solutions, Inc., a wholly owned subsidiary of the Company, Avcom, Inc. and the shareholders and option holders of Avcom, Inc. (“Avcom”). Pursuant to the Agreement, the Company acquired 100% of the capital stock of Avcom. In consideration, the Preferred Stockholders of Avcom received $550 in value of the Company’s Common Stock and the Common Stockholders and option holders of Avcom will receive an aggregate of $1,000 in value of the Company’s Common Stock. The value of the Company’s Common Stock is based on the volume weighted average closing price for the 20 trading days prior to signing the Agreement. The Avcom acquisition closed on November 26, 2013.

One half of the issuance to the Avcom Common Stockholders and option holders was placed in escrow and will be released upon the later of (i) the commercial release of an agreed upon game or (ii) six (6) months after closing. In addition, the Common Stockholders may be awarded contingent consideration of $1.0 million through the issuance of up to 333,000 of the Company’s Common Stock in the event that the game reaches $3.0 million in gross revenues within 18 months of signing the Agreement.

Avcom is a game development studio producing free to play mobile and social casino–style games. Avcom’s assets include physical and intellectual property associated with Mobileveg.as and freeawesome.com, as well as a game under development titled “SlotChamp”. Prior to entering into the Agreement, Avcom had performed certain game development consulting services for the Company for which Avcom received an aggregate of $146 as consideration for such services.

On December 4, 2013, the Company entered into a Strategic Alliance Agreement with M2P Entertainment GmbH, a German corporation (“M2P”), the newly formed Delaware corporation, M2P Americas, Inc. (“M2P Americas”) and the Company’s existing subsidiary MGT Studios, Inc. The purpose of the transaction is to allow M2P Americas to market and exploit MP2’s gaming technology in North and South America through M2P Americas. As part of the transaction, the Company acquired 50.1% of M2P Americas and M2P Entertainment acquired 49.9%. The Strategic Alliance Agreement provides that the Company and M2P will jointly cooperate to launch M2P’s gaming technology in North and South America. It further provides M2P Americas with an exclusive royalty free license to M2P’s gaming technology for North and South America.

MGT filed a completed application for a New Jersey Casino Service Industry Enterprise License (“CSIE”). According to regulations promulgated by the New Jersey Division of Gaming Enforcement (NJDGE), companies providing Internet gaming software or systems, and vendors who manage, control, or administer games and associated wagers conducted through the Internet, must obtain a CSIE. The Company expects a determination from NJDGE after it reviews the Personal History Disclosure forms to be provided by a significant minority stockholder of the Company. Completion of this paperwork is beyond the control of MGT; therefore the Company is unable to predict when or if a CSIE License will be granted.

MGT Sports

MGT Sports operates DraftDay.com which is one of the industry's largest and most respected Daily Fantasy Sports wagering sites, ranking fourth highest among competitors in the most recent Alexa reports. The website offers players the opportunity to participate in real money Daily Fantasy gameplay for the NFL, MLB, NCAA (basketball & football), NHL, NBA and professional golf. Players select a roster of athletes across most popular sports, and winnings are determined by the same–day performance of these rosters. Daily Fantasy Sports compress the timeframe of traditional fantasy sports from multi–month seasons into 24–hour periods. DraftDay is also a leader in the popular quick–pick style of skill–based fantasy sports gaming. The Company also has a majority interest in FanTD LLC, the operator of FanThrowdown.com. The Company is also building an online portal for fantasy sports news and commentary, www.FantasySportsLive.com.

On May 20, 2013, MGT Sports completed the acquisition of 63% of the outstanding membership interests of FanTD LLC.

On September 30, 2006, the United States Congress passed the Unlawful Internet Gambling Enforcement Act of 2006 (“UIGEA”). The criminal provisions of UIGEA provide that no person engaged in the business of betting or wagering may knowingly accept directly or indirectly virtually any type of payment from a player in unlawful internet gambling (i.e. bets that are unlawful under other state or Federal laws). Fantasy sports are exempt from the definition of unlawful internet gambling provided that:

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They are not based on the current membership of an actual sports team or on the score, point spread or performance of teams;

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All prizes and awards are established and made known before the start of the contest;

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Winning outcomes are based on the skill of the participants and predominately by accumulated statistics of individual performances of athletes, but not solely on a single performance of an athlete.

On April 7, 2014, the Company closed on the Asset Purchase Agreement (the “Agreement”) with CardRunners Gaming, Inc. (“CRG”), and certain key shareholders of CRG. The Agreement provided for the Company’s purchase of all of the business assets and intellectual property related to DraftDay.com.

MGT Interactive

On September 3, 2013, the Company entered into a Contribution and Sale Agreement (the “Contribution Agreement”) by and among the Company, Gioia Systems, and LLC (“Gioia”) and MGT Interactive, LLC (“MGT Interactive”) whereby MGT Interactive acquired certain assets from Gioia which was the inventor and owner of a proprietary method of card shuffling for the online poker market. Trademarked under the name Real Deal Poker, the technology uses patented shuffling machines, along with permutation re–sequencing, allowing for the creation of up to 16,000 decks per minute in real time. The acquisition includes seven (7) U.S. Patents and several Internet URL addresses, including www.RealDealPoker.com. The information contained in such website is not part of this quarterly report. Pursuant to the Contribution Agreement, Gioia contributed the assets to MGT Interactive in exchange for a 49% interest in MGT Interactive and MGT contributed $200 to MGT Interactive in exchange for a 51% interest in MGT Interactive. The $200 contributed by the Company shall be utilized as working capital, which shall be used to cover the direct and associated costs relating to the achievement of a certification from Gaming Laboratories International (“GLI”). The Company has the right to acquire an additional 14% ownership interest in MGT Interactive from Gioia in exchange for a purchase price of $300 after GLI certification is obtained. Gioia, in turn, will have the right to re–acquire the 14% interest for a period of three years at a purchase price of $500. Gioia shall have the right to certain royalty payments from the gross rake payments, and any licensing or royalty income received by MGT Interactive after certain revenue targets are exceeded.

Medicsight

Medicsight owns medical imaging software that has received U.S. FDA approval and European CE Mark. The software is designed to detect colorectal polyps during a virtual colonoscopy performed using CT Tomography. Software sales have been very limited in the past two years. The Company also has developed an automated carbon dioxide insufflation device and receives royalties on a per–unit basis from an international manufacturer. On June 30, 2013, the Company completed the sale of Medicsight’s global patent portfolio to Samsung Electronics Co., Ltd. for gross proceeds of $1.5 million.

Warrant modification

On December 10, 2013, the Company entered into a Warrant Modification Agreement (the “Agreement”) with Iroquois Master Fund Ltd. (“Iroquois”). Pursuant to the Agreement, Iroquois agreed to immediately exercise its warrant to purchase 613,496 shares of Common Stock, par value $0.001 of the Company, at an exercise price of $1.50 per share, for aggregate gross proceeds to the Company of approximately $920 and (ii) agreed to terminate its right of participation in future equity offerings of the Company. In exchange, the Company agreed to reduce the warrant exercise price from $3.85 per share to $1.50 per share, and agreed not to issue any securities at a price below $2.50 per share for a period of 90 days after the date of the Agreement (other than securities granted pursuant to a stock plan or issued in connection with an acquisition or issued pursuant to an agency agreement with a registered broker–dealer provided that we agree with the broker–dealer and publicly announce that we will not sell shares for a price below $2.50 per share); this 90 day period has expired. Iroquois acquired the warrant in connection with the Company's November 2012 financing. In connection with the Agreement, the Company paid to Chardan Capital Markets, LLC (“Chardan”) a placement fee for the solicitation of the exercise of the warrants equal to 8% of the gross proceeds raised, or approximately $73 and reimbursed Chardan for $8 of its legal fees incurred.