PART
I
Item
1. Business
MGT
Capital Investments, Inc. (“MGT,” “the Company,” “we,” “us”) is a Delaware corporation,
incorporated in 2000. The Company was originally incorporated in Utah in 1977. MGT is comprised of the parent company, wholly–owned
subsidiaries Medicsight, Inc. (“Medicsight”), MGT Sports, Inc. (“MGT Sports”), MGT Studios, Inc. (“MGT
Studios”), and majority–owned subsidiary MGT Gaming, Inc. MGT Studios also owns a controlling minority interest in
the subsidiary M2P Americas, Inc. Our corporate office is located in Harrison, New York.
MGT
and its subsidiaries are principally engaged in the business of acquiring, developing and monetizing assets in the online and
mobile gaming space as well as the social casino industry. MGT’s portfolio includes a social casino platform Slot Champ
and minority stakes in the skill–based gaming platform MGT Play and fantasy sports operator DraftDay Gaming Group, Inc.
(“DDGG”) (see September 8, 2015 development below).
In
addition, MGT Gaming owns three patents covering certain features of casino slot machines. Two of the patents were asserted against
alleged infringers in various actions in federal court in Mississippi. In July 2014, MGT Gaming dismissed its lawsuits against
WMS Gaming Inc., and in August 2015, the Company and defendants Aruze America and Penn National Gaming agreed to settle all pending
litigation and all proceedings at the U. S. Patent and Trademark Office. The Company received a payment of $90, which was recorded
as licensing revenue. In an effort to monetize its gaming patent portfolio, the Company has engaged Munich Innovations GmbH, the
patent monetization firm that sold MGT’s medical patent portfolio to Samsung in 2013 for $1.5 million.
On September 8,
2015, the Company and MGT Sports entered into an Asset Purchase Agreement with Viggle, Inc. (“Viggle”) and Viggle’s
subsidiary DDGG, pursuant to which Viggle acquired all of the assets of the DraftDay.com business (“DraftDay.com”)
from the Company and MGT Sports. In exchange for the acquisition of DraftDay.com, Viggle paid MGT Sports the following: (a) 1,269,342
shares of Viggle’s common stock, since renamed Draftday Fantasy Sports, Inc. (NASDAQ: DDAY), (b) a promissory note in the
amount of $234 paid on September 29, 2015, (c) a promissory note in the amount of $1,875 due March 8, 2016, and (d) 2,550,000 shares
of common stock of DDGG (private entity). In addition, in exchange for providing certain transitional services, DDGG issued to
MGT Sports a warrant to purchase 1,500,000 shares of DDGG common stock. Following consummation of the transaction, MGT Sports owns
an 11% equity interest in DDGG, Viggle (since renamed Draftday Fantasy Sports, Inc.) owns 49%, and Sportech, Inc. owns 39%. As
a result of the transaction, the Company has presented DraftDay.com as a discontinued operation. There can be no assurance that
the Company will be able to realize full value of the above consideration, the Company has taken a reserve of $300 against the
March 8, 2016 promissory note and continues to monitor for further possible impairment.
Medicsight
owns U.S. Food and Drug Administration approved medical imaging software and has designed an automated carbon dioxide insufflation
device on which it receives royalties from an international manufacturer.
Strategy
MGT
and its subsidiaries are principally engaged in the business of acquiring, developing and monetizing assets in the online and
mobile gaming space, as well as the casino industry. The Company’s acquisition strategy is designed to obtain control of
assets with a focus on risk mitigation coupled with large potential upside. We plan to build our portfolio by seeking out large
social and real money gaming opportunities via extensive research and analysis. Next, we will attempt to secure controlling interests
for modest cash and/or stock outlays. MGT then budgets and funds operating costs to develop business operations and tries to motivate
sellers with equity upside. While the ultimate objective is to operate businesses for free cash flow, there may be opportunities
where we sell or otherwise monetize certain assets.
There
can be no assurance that any acquisitions will occur at all, or that any such acquisitions will be accretive to earnings, book
value and other financial metrics, or that any such acquisitions will generate positive returns for Company stockholders. Furthermore,
it is contemplated that any acquisitions may require the Company to raise capital; such capital may not be available on terms
acceptable to the Company, if at all.
Following
the sale of DraftDay.com, the Company has been considering all methods to create value for shareholders, including potential mergers,
spin–offs, distributions and other strategic actions.
Competition
MGT
encounters intense competition in all its businesses, in most cases from larger companies with greater financial resources such
as the daily fantasy sports operators FanDuel, Inc. and DraftKings, Inc. or Zynga, Inc. (NASDAQ: ZNGA) and Caesars Acquisition
Company (NASDAQ: CACQ) which focus on social and real money online gaming.
Employees
Currently,
the Company and its subsidiaries have 2 full–time employees. None of our employees is represented by a union and we
believe our relationships with our employees are good.
Available
information
MGT
maintains a website at www.mgtci.com. The Company makes available free of charge our annual report on Form 10–K, Quarterly
Reports on Form 10–Q and current reports on Form 8–K, including any amendments to the foregoing reports,
as soon as is reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange
Commission or the SEC. These materials along with our Code of Business Conduct and Ethics are also available through our corporate
website at www.mgtci.com. A copy of this Annual Report on Form 10–K (“Annual report”) is located at
the Securities and Exchange Commission’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information
on the operation of the Public Reference Room can be obtained by calling the SEC at 1–800–SEC–0330.
The public may also download these materials from the Securities and Exchange Commission’s website at http://www.sec.gov.
Any amendments to, and waivers of, our Code of Business Conduct and Ethics will be posted on our corporate website. The Company
is not including the information contained at
mgtci.com
as a part of this Annual Report.
Item
1A. Risk factors
Discussion
of our business and operations included in this Annual Report on Form 10–K should be read together with the risk factors
set forth below. They describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties,
together with other factors described elsewhere in this report, have the potential to affect our business, financial condition,
results of operations, cash flows, strategies or prospects in a material and adverse manner. New risks may emerge at
any time, and we cannot predict those risks or estimate the extent to which they may affect our financial performance. Each of
the risks described below could adversely impact the value of our securities. These statements, like all statements
in this report, speak only as of the date of this Annual Report (unless another date is indicated), and we undertake no obligation
to update or revise the statements in light of future developments.
We
cannot assure you that we will be successful in commercializing any of the Company’s products or if any of our products
are commercialized, that they will be profitable for the Company.
The
Company generates limited revenue from operations upon which an evaluation of our prospects can be made. The Company’s
prospects must be considered keeping in mind the risks, expenses and difficulties frequently encountered in the establishment
of a new business in a constantly changing industry. There can be no assurance that the Company will be able to achieve
profitable operations in the foreseeable future, if at all.
Company
specific risks
Our
financial results are highly concentrated in the online mobile and gaming business; if we are unable to grow online mobile and
gaming revenues and find alternative sources of revenue, our financial results will suffer.
Licensing
accounted for substantially all of our revenues from continuing operations for the year ended December 31, 2015. Our success depends
upon customers choosing to use, and search advertising partners choosing to advertise, on, our online, mobile and casino gaming
products. Decisions by customers and our search advertising partners not to adopt our products at projected rates, or changes
in market conditions, may adversely affect the use or distribution of our products. Because of our revenue concentration in the
online, mobile and casino gaming business, such shortfalls or changes could have a negative impact on our financial results, or
with regard to some of our larger advertising partners specifically, our results of operations, financial condition and/or liquidity
will suffer.
Our
acquisition activities may disrupt our ongoing business, may involve increased expenses and may present risks not contemplated
at the time of the transactions.
We
have acquired, and may continue to acquire, companies, products and technologies that complement our strategic direction. Acquisitions
involve significant risks and uncertainties, including:
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diversion
of management time and a shift of focus from operating the businesses to issues related to integration and administration;
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inability
to successfully integrate the acquired technology and operations into our business and maintain uniform standards, controls,
policies and procedures;
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challenges
retaining the key employees, customers and other business partners of the acquired business; inability to realize synergies
expected to result from an acquisition;
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in
the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address
the particular economic, currency, political and regulatory risks associated with specific countries;
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liability
for activities of the acquired companies before the acquisition, including violations of laws, rules and regulations, commercial
disputes, tax liabilities and other known and unknown liabilities; and
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that
any acquisitions will occur at all, or that any such acquisitions will be accretive to earnings, book value and other financial
metrics, or that any such acquisitions will generate positive returns for Company stockholders. Furthermore, it is contemplated
that any acquisitions may require the Company to raise capital; such capital may not be available on terms acceptable to the
Company, if at all.
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Because
acquisitions are inherently risky, our transactions may not be successful and may, in some cases, harm our operating results or
financial condition.
The
mobile game application business is still developing, and our efforts to develop mobile games may prove unsuccessful, or even
if successful, it may take more time than we anticipate to achieve significant revenues from this activity because, among other
reasons:
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we
may have difficulty optimizing the monetization of our mobile games due to our relatively limited experience creating games
that include micro–transaction capabilities, advertising and offers;
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we
intend to continue to develop substantially all of our games based upon our own intellectual property, rather than well–known
licensed brands, and we may encounter difficulties in generating sufficient consumer interest in and downloads of our games,
particularly since we have had relatively limited success generating significant revenues from games based on our own intellectual
property;
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many
well–funded public and private companies have released, or plan to release, mobile games, and this competition will
make it more difficult for us to differentiate our games and derive significant revenues from them;
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mobile
games have a relatively limited history, and it is unclear how popular this style of game will become or remain or its revenue
potential;
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our
mobile strategy assumes that a large number of players will download our games because they are free and that we will subsequently
be able to effectively monetize the games; however, players may not widely download our games for a variety of reasons, including
poor consumer reviews or other negative publicity, ineffective or insufficient marketing efforts, lack of sufficient community
features, lack of prominent storefront featuring and the relatively large file size of some of our “thin–client
games,” which often utilize a significant amount of the available memory on a user’s device. Due to
the inherent limitations of the most commonly–used smartphone platforms and telecommunications networks, which only
allow applications that are less than 50 megabytes to be downloaded over a carrier’s wireless network, players must
download one of our thick–client games either via a wireless Internet (Wi–Fi) connection, or initially to their
computer and then side–load the thick–client game to their device;
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even
if our games are widely downloaded, we may fail to retain users or optimize the monetization of these games for a variety
of reasons, including poor game design or quality, lack of community features, gameplay issues such as game unavailability,
long load times or an unexpected termination of the game due to data server or other technical issues, or our failure to effectively
respond and adapt to changing user preferences through game updates;
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the
billing and provisioning capabilities of some smartphones and tablets are currently not optimized to enable users to purchase
games or make in–app purchases, which make it difficult for users of these smartphones and tablets to purchase our games
or make in–app purchases and could reduce our addressable market, at least in the short term; and megabytes to be downloaded
over a carrier’s wireless network, players must download one of our thick–client games either via a wireless Internet
(Wi–Fi) connection, or initially to their computer and then side–load the thick–client game to their device;
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the
Federal Trade Commission has indicated that it intends to review issues related to in–app purchases, particularly with
respect to games that are marketed primarily to minors, and the commission might issue rules significantly restricting or
even prohibiting in–app purchases or name us as a defendant in a future class–action lawsuit.
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If
we do not achieve a sufficient return on our investment with respect to this business model, it will negatively affect our operating
results and may require us to make change to our business strategy.
The
markets in which we operate are highly competitive, and many of our competitors have significantly greater resources than we do.
Developing,
distributing and selling mobile games is a highly competitive business, characterized by frequent product introductions and rapidly
emerging new platforms, technologies and storefronts. For end users, we compete primarily on the basis of game quality, brand
and customer reviews. We compete for promotional and storefront placement based on these factors, as well as our relationship
with the digital storefront owner, historical performance, perception of sales potential and relationships with licensors of brands
and other intellectual property. For content and brand licensors, we compete based on royalty and other economic terms, perceptions
of development quality, porting abilities, speed of execution, distribution breadth and relationships with storefront owners or
carriers. We also compete for experienced and talented employees.
We
compete with a continually increasing number of companies, including Zynga, King Digital, Soul & Vibe Interactive, DeNA, Gree,
Nexon, and Glu. In addition, given the open nature of the development and distribution for smartphones and tablets, we also compete
or will compete with a vast number of small companies and individuals who are able to create and launch games and other content
for these devices using relatively limited resources and with relatively limited start–up time or expertise.
Some
of our competitors and our potential competitors have one or more advantages over us, either globally or in particular geographic
markets, which include:
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significantly
greater financial resources;
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greater
experience with the mobile games business model and more effective game monetization;
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stronger
brand and consumer recognition regionally or worldwide;
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stronger
strategy which may reach our target audience better than our current strategy;
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greater
experience integrating community features into their games and increasing the revenues derived from their users;
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the
capacity to leverage their marketing expenditures across a broader portfolio of mobile and non–mobile products;
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larger
installed customer bases from related platforms, such as console gaming or social networking websites, to which they can market
and sell mobile games;
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more
substantial intellectual property of their own from which they can develop games without having to pay royalties;
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lower
labor and development costs and better overall economies of scale;
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greater
platform–specific focus, experience and expertise; and
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broader
global distribution and presence.
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If
we are unable to compete effectively or we are not as successful as our competitors in our target markets, our sales could decline,
our margins could decline and we could lose market share, any of which would materially harm our business, operating results and
financial condition.
Inflation
and future expectations of inflation influence consumer spending on entertainment such as online gaming and gambling.
As
a result, our profitability and capital levels may be impacted by inflation and inflationary expectations. Additionally, inflation’s
impact on our operating expenses may affect profitability to the extent that additional costs are not recoverable through increased
cost of consumer acquisition for our portfolio of online, mobile gaming and casino gaming offerings.
Consumer
tastes are continually changing and are often unpredictable, and we compete for consumer discretionary spending against other
forms of entertainment; if we fail to develop and publish new mobile games that achieve market acceptance, our sales would suffer.
Our
mobile game business depends on developing and publishing mobile games that consumers will want to download and spend time and
money playing. We must continue to invest significant resources in research and development, analytics and marketing to introduce
new games and continue to update our successful mobile games, and we often must make decisions about these matters well in advance
of product release to timely implement them. Our success depends, in part, on unpredictable and volatile factors beyond our control,
including consumer preferences, competing games, new mobile platforms and the availability of other entertainment activities.
If our games and related applications do not meet consumer expectations, or they are not brought to market in a timely and effective
manner, our business, operating results and financial condition would be harmed. Even if our games are successfully introduced
and initially adopted, a failure to continue to update them with compelling content or a subsequent shift in the entertainment
preferences of consumers could cause a decline in our games’ popularity that could materially reduce our revenues and harm
our business, operating results and financial condition. Furthermore, we compete for the discretionary spending of consumers,
who face a vast array of entertainment choices, including games played on personal computers and consoles, television, movies,
sports and the Internet. If we are unable to sustain sufficient interest in our games compared to other forms of entertainment,
our business and financial results would be seriously harmed.
If
we do not successfully establish and maintain awareness of our brand and games, if we incur excessive expenses promoting and maintaining
our brand or our games or if our games contains defects or objectionable content, our operating results and financial condition
could be harmed.
We
believe that establishing and maintaining our brand is critical to establishing a direct relationship with end users who purchase
our products from direct–to–consumer channels and to maintaining our existing relationships with distributors and
content licensors, as well as potentially developing new such relationships. Increasing awareness of our brand and recognition
of our games is particularly important in connection with our strategic focus of developing games based on our own intellectual
property. Our ability to promote our brand and increase recognition of our games depends on our ability to develop high–quality,
engaging games. If consumers, digital storefront owners and branded content owners do not perceive our existing games as high–quality
or if we introduce new games that are not favorably received by them, then we may not succeed in building brand recognition and
brand loyalty in the marketplace. In addition, globalizing and extending our brand and recognition of our games is costly and
involves extensive management time to execute successfully, particularly as we expand our efforts to increase awareness of our
brand and games among international consumers. Although we have significantly increased our sales and marketing expenditures in
connection with the launch of our games, these efforts may not succeed in increasing awareness of our brand or the new games.
If we fail to increase and maintain brand awareness and consumer recognition of our games, our potential revenues could be limited,
our costs could increase and our business, operating results and financial condition could suffer.
If
we fail to deliver our games at the same time as new mobile devices are commercially introduced, our sales may suffer.
Our
business depends, in part, on the commercial introduction of new mobile devices with enhanced features, including larger, higher
resolution color screens, improved audio quality, and greater processing power, memory, battery life and storage. For example,
the introduction of new and more powerful versions of Apple’s iPhone and iPad and devices based on Google’s Android
operating system, have helped drive the growth of the mobile games market. In addition, consumers generally purchase the majority
of content, such as our games, for a new device within a few months of purchasing it. We do not control the timing of these device
launches. Some manufacturers give us access to their mobile devices prior to commercial release. If one or more major manufacturers
were to stop providing us access to new device models prior to commercial release, we might be unable to introduce games that
are compatible with the new device when the device is first commercially released, and we might be unable to make compatible games
for a substantial period following the device release. If we do not adequately build into our title plan the demand for games
for a particular mobile device or experience game launch delays, we miss the opportunity to sell games when new mobile devices
are shipped or our end users upgrade to a new mobile device, our revenues would likely decline and our business, operating results
and financial condition would likely suffer.
We
will need additional capital to continue our operation.
We
may need to obtain additional financing for advertising, promotion and acquisition of additional products. The Company is constantly
looking for new sources of revenue that will help fund our business. There can be no assurances that this will be achieved.
If
we successfully raise additional funds through the issuance of debt, we will be required to service that debt and are likely to
become subject to restrictive covenants and other restrictions contained in the instruments governing that debt, which may limit
our operational flexibility. If we raise additional funds through the issuance of equity securities, then those securities may
have rights, preferences or privileges senior to the rights of holders of our Common stock, and holders of our Common stock will
experience dilution.
We
cannot be certain that such additional debt or equity financing will be available to us on favorable terms when required, or at
all. If we cannot raise funds in a timely manner, or on acceptable terms, we may not be able to promote our brand, develop or
enhance our products and services, take advantage of future opportunities or respond to competitive pressures or unexpected requirements,
and we may be required to reduce or limit operations.
The
effect of the proposed "Unlawful Internet Gambling Funding Prohibition Act."
During
the 2003 fiscal year, the House Judiciary Committee of the US Government approved HR21 "Unlawful Internet Gambling Funding
Prohibition Act". This bill creates a new crime of accepting financial instruments, such as credit cards or electronic fund
transfers, for debts incurred in illegal internet gambling. The bill enables state and federal Attorneys General to request that
injunctions be issued to any party, such as financial institutions and internet service providers, to assist in the prevention
or restraint of illegal internet gambling. This bill still needs to be ratified by the Senate before it becomes passed as law.
We may be affected by this bill and therefore the Company's revenue stream may be affected.
Compliance
with state rules and regulations.
Various
states have laws restricting gambling. The Company believes that we are in compliance with the rules and regulations in the states
we operate. However, there can be no assurance that the state officials will have the same view. In the event that we are accused
of violating such gambling laws and restrictions, our gaming business may be disallowed or prohibited in these states. Furthermore,
there can be no assurance that no new rules and regulations restricting our business will be adopted in the states we operate.
If such restrictive rules and regulations are adopted, we may incur additional costs in complying with the rules and regulations
or we may have to cease operation in these state(s).
We
have capacity constraints and system development risks that could damage our customer relations or inhibit our possible growth,
and we may need to expand our management systems and controls quickly, which may increase our cost of operations.
Our
success and our ability to provide high quality customer service largely depends on the efficient and uninterrupted operation
of our computer and communications systems and the computers and communication systems of our third party vendors in order to
accommodate any significant numbers or increases in the numbers of consumers using our service. Our success also depends upon
our and our vendors' abilities to rapidly expand transaction–processing systems and network infrastructure without any systems
interruptions in order to accommodate any significant increases in use of our service.
We
and our service providers may experience periodic systems interruptions and infrastructure failures, which we believe will cause
customer dissatisfaction and may adversely affect our results of operations. Limitations of technology infrastructure may prevent
us from maximizing our business opportunities.
We
cannot assure you that our and our vendors' data repositories, financial systems and other technology resources will be secure
from security breaches or sabotage, especially as technology changes and becomes more sophisticated. In addition, many of our
and our vendors' software systems are custom–developed and we and our vendors rely on employees and certain third–party
contractors to develop and maintain these systems. If certain of these employees or contractors become unavailable, we and our
vendors may experience difficulty in improving and maintaining these systems. Furthermore, we expect that we and our vendors may
continue to be required to manage multiple relationships with various software and equipment vendors whose technologies may not
be compatible, as well as relationships with other third parties to maintain and enhance their technology infrastructures. Failure
to achieve or maintain high capacity data transmission and security without system downtime and to achieve improvements in their
transaction processing systems and network infrastructure could have a materially adverse effect on our business and results of
operations.
Increased
security risks of online commerce may deter future use of our website, which may adversely affect our ability to generate revenue.
Concerns
over the security of transactions conducted on the internet and the privacy of consumers may also inhibit the growth of the internet
and other online services generally, and online commerce in particular. Failure to prevent security breaches could significantly
harm our business and results of operations. We cannot be certain that advances in computer capabilities, new discoveries in the
field of cryptography, or other developments will not result in a compromise or breach of the algorithms used to protect our transaction
data. Anyone who is able to circumvent our or our vendors' security measures could misappropriate proprietary information, cause
interruptions in our operations or damage our brand and reputation. We may be required to incur significant costs to protect against
security breaches or to alleviate problems caused by breaches. Any well–publicized compromise of security could deter people
from using the internet to conduct transactions that involve transmitting confidential information or downloading sensitive materials,
which would have a material adverse effect on our business.
We
face the risk of system failures, which would disrupt our operations.
A
disaster could severely damage our business and results of operations because our services could be interrupted for an indeterminate
length of time. Our operations depend upon
our
ability to maintain and protect our computer systems.
Our
systems and operations are vulnerable to damage or interruption from fire, floods, earthquakes, hurricanes, power loss, telecommunications
failures, break–ins, sabotage and similar events. The occurrence of a natural disaster or unanticipated problems at our
principal business headquarters or at a third–party facility could cause interruptions or delays in our business, loss of
data or render us unable to provide our services. In addition, failure of a third–party facility to provide the data communications
capacity required by us, as a result of human error, natural disaster or other operational disruptions, could cause interruptions
in our service. The occurrence of any or all of these events could adversely affect our reputation, brand and business.
We
face risks of claims from third parties for intellectual property infringement that could adversely affect our business.
Our
services operate in part by making internet services and content available to our users. This creates the potential for claims
to be made against us, either directly or through contractual indemnification provisions with third parties. These claims might,
for example, be made for defamation, negligence, copyright, trademark or patent infringement, personal injury, invasion of privacy
or other legal theories. Any claims could result in costly litigation and be time consuming to defend, divert management's attention
and resources, cause delays in releasing new or upgrading existing services or require us to enter into royalty or licensing agreements.
Litigation
regarding intellectual property rights is common in the internet and software industries. We expect that internet technologies
and software products and services may be increasingly subject to third–party infringement claims as the number of competitors
in our industry segment grows and the functionality of products in different industry segments overlaps. There can be no assurance
that our services do not or will not in the future infringe the intellectual property rights of third parties. Royalty or licensing
agreements, if required, may not be available on acceptable terms, if at all. A successful claim of infringement against us and
our failure or inability to license the infringed or similar technology could adversely affect our business.
Our
success and ability to compete are substantially dependent upon our technology and data resources, which we intend to protect
through a combination of patent, copyright, trade secret and/or trademark law. We currently have no patents or trademarks issued
to date on our technology and there can be no assurances that we will be successful in securing them when necessary.
Our
financial position and results of operations will vary depending on a number of factors, most of which are out of our control.
We
anticipate that our operating results will vary widely depending on a number of factors, some of which are beyond our control.
These factors are likely to include:
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demand
for our online services by consumers;
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costs
of attracting consumers to our website, including costs of receiving exposure on third–party websites;
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costs
related to forming strategic relationships;
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our
ability to significantly increase our distribution channels;
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competition
from companies offering same or similar products and services and from companies with much deeper financial, technical, marketing
and human resources;
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the
amount and timing of operating costs and capital expenditures relating to expansion of our operations;
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costs
and delays in introducing new services and improvements to existing services;
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changes
in the growth rate of internet usage and acceptance by consumers of electronic commerce; and
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changes
and introduction of new software e.g. pop up blockers.
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Because
we have a limited operating history, it is difficult to accurately forecast the revenues that will be generated from our current
and proposed future product offerings.
If
we are unable to meet the changing needs of our industry, our ability to compete will be adversely affected.
We
operate in an intensely competitive industry. To remain competitive, we must be capable of enhancing and improving the functionality
and features of our online services. The internet gaming industry is rapidly changing. If competitors introduce new products and
services embodying new technologies, or if new industry standards and practices emerge, our existing services, technology and
systems may become obsolete. There can be no assurances that we will be successful in responding quickly, cost effectively and
adequately to new developments or that funds will be available to respond at all. Any failure by us to respond effectively would
significantly harm our business, operating results and financial condition.
Our
future success will depend on our ability to accomplish the following:
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license
and develop leading technologies useful in our business;
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develop
and enhance our existing products and services;
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develop
new services and technologies that address the increasingly sophisticated and varied needs of prospective consumers; and
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respond
to technological advances and emerging industry standards and practices on a cost–effective and timely basis.
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Developing
internet services and other proprietary technology entails significant technical and business risks, as well as substantial costs.
We may use new technologies ineffectively, or we may fail to adapt our services, transaction processing systems and network infrastructure
to user requirements or emerging industry standards. If our operations face material delays in introducing new services, products
and enhancements, our users may forego the use of our services and use those of our competitors. These factors could have a material
adverse effect on our financial position and results of operations.
Our
business may be subject to government regulation and legal uncertainties that may increase the costs of operating our web portal,
limit our ability to attract users, or interfere with future operations of the Company.
There
are currently few laws or regulations directly applicable to access to, or commerce on, the internet. Due to the increasing popularity
and use of the internet, it is possible that laws and regulations may be adopted, covering issues such as user privacy, defamation,
pricing, taxation, content regulation, quality of products and services, and intellectual property ownership and infringement.
Such legislation could expose the Company to substantial liability as well as dampen the growth in use of the internet, decrease
the acceptance of the internet as a communications and commercial medium, or require the Company to incur significant expenses
in complying with any new regulations.
The
applicability to the internet of existing laws governing issues such as gambling, property ownership, copyright, defamation, obscenity
and personal privacy is uncertain. The Company may be subject to claims that our services violate such laws. Any new legislation
or regulation in the United States or abroad or the application of existing laws and regulations to the internet could damage
our business. In addition, because legislation and other regulations relating to online games vary by jurisdiction, from state
to state and from country to country, it is difficult for us to ensure that our players are accessing our portal from a jurisdiction
where it is legal to play our games. We therefore, cannot ensure that we will not be subject to enforcement actions as a result
of this uncertainty and difficulty in controlling access.
In
addition, our business may be indirectly affected by our suppliers or customers who may be subject to such legislation. Increased
regulation of the internet may decrease the growth in the use of the internet or hamper the development of internet commerce and
online entertainment, which could decrease the demand for our services, increase our cost of doing business or otherwise have
a material adverse effect on our business, results of operations and financial condition.
The
protection of our intellectual property may be uncertain and we may face claims of others
.
Although
we have received patents and have filed patent applications with respect to certain aspects of our technology, we generally do
not rely on patent protection with respect to our products and technologies. Instead, we rely primarily on a combination of trade
secret and copyright law, employee and third party non–disclosure agreements and other protective measures to protect intellectual
property rights pertaining to our products and technologies. Such measures may not provide meaningful protection of our trade
secrets, know how or other intellectual property in the event of any unauthorized use, misappropriation or disclosure. Others
may independently develop similar technologies or duplicate our technologies. In addition, to the extent that we apply for any
patents, such applications may not result in issued patents or, if issued, such patents may not be valid or of value. Third parties
could, in the future, assert infringement or misappropriation claims against us with respect to our current or future products
and technologies, or we may need to assert claims of infringement against third parties. Any infringement or misappropriation
claim by us or against us could place significant strain on our financial resources, divert management’s attention from
our business and harm our reputation. The costs of prosecuting or defending an intellectual property claim could be substantial
and could adversely affect our business, even if we are ultimately successful in prosecuting or defending any such claims. If
our products or technologies are found to infringe the rights of a third party, we could be required to pay significant damages
or license fees or cease production, any of which could have material adverse effect on our business. If a claim is brought against
us, or we ultimately prove unsuccessful on the claims on our merits, this could have a material adverse effect on our business,
financial condition, results of operations and future prospects.
Any
failure to maintain or protect our patent assets or other intellectual property rights could significantly impair our return on
investment from such assets and harm our brand, our business and our operating results.
Our
ability to compete in the intellectual property market largely depends on the superiority, uniqueness and value of our acquired
patent assets and other intellectual property. To protect our proprietary rights, we will rely on a combination of patent, trademark,
copyright and trade secret laws, confidentiality agreements with our employees and third parties, and protective contractual provisions.
No assurances can be given that any of the measures we undertake to protect and maintain our intellectual property assets will
have any measure of success.
Following
the acquisition of patent assets, we will likely be required to spend significant time and resources to maintain the effectiveness
of those assets by paying maintenance fees and making filings with the USPTO. We may acquire patent assets, including patent applications,
which require us to spend resources to prosecute the applications with the USPTO. Further, there is a material risk that patent
related claims (such as, for example, infringement claims (and/or claims for indemnification resulting therefrom), unenforceability
claims, or invalidity claims) will be asserted or prosecuted against us, and such assertions or prosecutions could materially
and adversely affect our business. Regardless of whether any such claims are valid or can be successfully asserted, defending
such claims could cause us to incur significant costs and could divert resources away from our other activities.
Despite
our efforts to protect our intellectual property rights, any of the following or similar occurrences may reduce the value of our
intellectual property:
|
●
|
our
applications for patents, trademarks and copyrights may not be granted and, if granted, may be challenged or invalidated;
|
|
●
|
issued
trademarks, copyrights, or patents may not provide us with any competitive advantages versus potentially infringing parties;
|
|
●
|
our
efforts to protect our intellectual property rights may not be effective in preventing misappropriation of our technology;
or
|
|
●
|
our
efforts may not prevent the development and design by others of products or technologies similar to or competitive with, or
superior to those we acquire and/or prosecute.
|
Moreover,
we may not be able to effectively protect our intellectual property rights in certain foreign countries where we may do business
in the future or from which competitors may operate. If we fail to maintain, defend or prosecute our patent assets properly, the
value of those assets would be reduced or eliminated, and our business would be harmed.
We
are in a developing industry with limited revenues from operations.
We
have incurred significant operating losses since inception and generate limited revenues from operations. As a result, we have
generated negative cash flows from operations and have an accumulated deficit of $303,944 as of December 31, 2015. We are operating
in a developing industry based on a new technology and our primary source of funds to date has been through the issuance of securities
and borrowing funds. There can be no assurance that management’s efforts will be successful or that the products we develop
and market will be accepted by consumers. If our products are ultimately unsuccessful in the market, this could have a material
adverse effect on our business, financial condition, results of operations and future prospects.
We
face financial risks as we are a developing company.
We
have incurred significant operating losses since inception and have limited revenue from operations. As a result, we have generated
negative cash flows from operations and our cash balances continue to reduce. While we are optimistic and believe appropriate
actions are being taken to mitigate this, there can be no assurance that attempts to reduce cash outflows will be successful and
this could have a material adverse effect on our business, financial condition, results of operations.
We
may fail to attract and retain qualified personnel.
There
is intense competition from other companies, research and academic institutions, government entities and other organizations for
qualified personnel in the areas of our activities. If we fail to identify, attract, retain and motivate these highly
skilled personnel, we may be unable to continue our marketing and development activities, and this could have a material adverse
effect on our business, financial condition, results of operations and future prospects.
If
we do not effectively manage growth or changes in our business, these changes could place a significant strain on our management
and operations.
To
manage our growth successfully, we must continue to improve and expand our systems and infrastructure in a timely and efficient
manner. Our controls, systems, procedures and resources may not be adequate to support a changing and growing company. If
our management fails to respond effectively to changes and growth in our business, including acquisitions, this could have a material
adverse effect on our business, financial condition, results of operations and future prospects.
We
need to manage growth in operations to maximize our potential growth and achieve our expected revenues. Our failure to manage
growth can cause a disruption of our operations that may result in the failure to generate revenues at levels we expect.
In
order to maximize potential growth in our current markets, we may have to expand our operations. Such expansion will place a significant
strain on our management and our operational, accounting, and information systems. We expect that we will need to continue to
improve our financial controls, operating procedures and management information systems. We will also need to effectively train,
motivate, and manage our employees. Our failure to manage our growth could disrupt our operations and ultimately prevent us from
generating the revenues we expect.
General
market risks
We
may not be able to access credit.
We
face the risk that we may not be able to access credit, either from lenders or suppliers. Failure to access credit
from any of these sources could have a material adverse effect on our business, financial condition, results of operations and
future prospects.
We
may not be able to maintain effective internal controls.
If
we continue to fail to maintain the adequacy of our internal accounting controls, as such standards are modified, supplemented
or amended from time to time, we may not be able to ensure that we can conclude on an on–going basis that we have effective
internal controls over financial reporting in accordance with Section 404 of the Sarbanes–Oxley Act of 2002. Failure
to achieve and maintain an effective internal control environment could cause us to face regulatory action and also cause investors
to lose confidence in our reported financial information, either of which could have a material adverse effect on our business,
financial condition, results of operations and future prospects.
Securities
market risks
Our
stock price and trading volume may be volatile, which could result in losses for our stockholders.
The
equity markets may experience periods of volatility, which could result in highly variable and unpredictable pricing of equity
securities. The market price of our Common stock could change in ways that may or may not be related to our business, our industry
or our operating performance and financial condition and could negatively affect our share price or result in fluctuations in
the price or trading volume of our Common stock. We cannot predict the potential impact of these periods of volatility
on the price of our Common stock. The Company cannot assure you that the market price of our Common stock will not fluctuate or
decline significantly in the future.
If
our Common stock is delisted from the NYSE MKT LLC, the Company would be subject to the risks relating to penny stocks.
If
our Common stock were to be delisted from trading on the NYSE MKT LLC and the trading price of the Common stock were below $5.00
per share on the date the Common stock were delisted, trading in our Common stock would also be subject to the requirements of
certain rules promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These rules require
additional disclosure by broker–dealers in connection with any trades involving a stock defined as a "penny stock"
and impose various sales practice requirements on broker–dealers who sell penny stocks to persons other than established
customers and accredited investors, generally institutions. These additional requirements may discourage broker–dealers
from effecting transactions in securities that are classified as penny stocks, which could severely limit the market price and
liquidity of such securities and the ability of purchasers to sell such securities in the secondary market. A penny stock is defined
generally as any non–exchange listed equity security that has a market price of less than $5.00 per share, subject to certain
exceptions.
If
we need additional capital to fund the growth of our operations, and cannot obtain sufficient capital, we may be forced to limit
the scope of our operations.
As
we implement our growth strategies, we may experience increased capital needs. We may not, however, have sufficient capital to
fund our future operations without additional capital investments. If adequate additional financing is not available on reasonable
terms or at all, we may not be able to carry out our corporate strategy and we would be forced to modify our business plans (e.g.,
limit our expansion, limit our marketing efforts and/or decrease or eliminate capital expenditures), any of which may adversely
affect our financial condition, results of operations and cash flow. Such reduction could materially adversely affect our business
and our ability to compete.
Our
capital needs will depend on numerous factors, including, without limitation, (i) our profitability or lack thereof, (ii) our
ability to respond to a release of competitive products by our competitors, and (iii) the amount of our capital expenditures,
including acquisitions. Moreover, the costs involved may exceed those originally contemplated. Cost savings and other economic
benefits expected may not materialize as a result of any cost overruns or changes in market circumstances. Failure to obtain intended
economic benefits could adversely affect our business, financial condition and operating performances.
We
do not anticipate paying any cash dividends on our Common stock in the foreseeable future and our stock may not appreciate in
value.
We
have not declared or paid cash dividends on our Common stock to date. We currently intend to retain our future earnings, if any,
to fund the development and growth of our business. In addition, the terms of any existing or future debt agreements may preclude
us from paying dividends. There is no guarantee that shares of our Common stock will appreciate in value or that the price at
which our stockholders have purchased their shares will be able to be maintained.
If
securities or industry analysts do not publish research or reports about our business, or publish inaccurate or unfavorable research
reports about our business, our share price and trading volume could decline.
The
trading market for our Common stock will, to some extent, depend on the research and reports that securities or industry analysts
publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us
should downgrade our shares or change their opinion of our business prospects, our share price would likely decline. If one or
more of these analysts ceases coverage of our company or fails to regularly publish reports on us, we could lose visibility in
the financial markets, which could cause our share price and volume to decline.
Item
1B. Unresolved staff comments
Not
applicable.
Item
2. Properties
Our
principal corporate office is located at 500 Mamaroneck Avenue, Suite 320, Harrison, New York 10528, under a lease that expires
on November 30, 2016. The Company believes our office is in good condition and is sufficient to conduct our operations.
Item
3. Legal proceedings
On
April 21, 2015, Gioia Systems, LLC (“Gioia”) filed a complaint against the Company, the Company’s majority owned
subsidiary, MGT Interactive, LLC and Interactive directors with the United States District Court for the Southern District of
New York. MGT Interactive, LLC was also included as a derivative plaintiff in the action. Gioia Systems, LLC’s
complaint asserts claims for breach of contract and breach of fiduciary duty relating to the September 3, 2013 Contribution Agreement
and related agreements between Gioia, the Company and MGT Interactive, LLC. This litigation was settled on August 28, 2015
with the Company receiving cash consideration of $35.
On
November 2, 2012, MGT Gaming filed a lawsuit (No. 3:12–cv–741) in the United States District Court for the Southern
District of Mississippi alleging patent infringement against certain companies which either manufacture, sell or lease gaming
systems alleged to be in violation of MGT Gaming’s patent rights, or operate casinos that offer gaming systems that are
alleged to be in violation of MGT Gaming’s ’088 patent, including Penn National Gaming, Inc. (“Penn”),
and Aruze Gaming America, Inc. (“Aruze America”). An amended complaint added the ’554 patent, a continuation
of the ’088 patent. In May 2014, Aruze America successfully sought a stay of the Mississippi action pending resolution of
a Petition filed by a co–defendant for Inter Parties Review (“IPR”) with the Patent Trial and Appeal Board
(“PTAB”) of the United States Patent and Trademark Office (“PTO”), challenging the’088 Patent.
Aruze America and a related company, Aruze Macau, subsequently filed additional IPR Petitions seeking review of the ’088
and ‘554 patents. Aruze America also filed a Request that was subsequently denied for Ex Parte Re–examination of the
’088 patent. On July 29, 2015, MGT, Aruze America, Aruze Macau, and Penn agreed, through their respective counsel,
to settle all pending disputes, including the Mississippi litigation and all proceedings at the PTO. The parties subsequently
jointly terminated the Mississippi litigation and the PTO proceedings. The Company received a payment of $90, which was recorded
as licensing revenue.
Item
4. Mine safety disclosures
None.
PART II
Item
5. Market for registrant’s common equity, related stockholder matters and issuer’s purchases of equity securities
Market
information
Our
Common stock is traded on the NYSE MKT LLC (“NYSE MKT”) under the symbol “MGT.”
The
following table sets forth the high and low last reported sales prices of our Common stock for each quarterly period during 2015
and 2014.
|
|
High
|
|
|
Low
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|
2015
|
|
|
|
|
|
|
|
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Fourth quarter
|
|
$
|
0.41
|
|
|
$
|
0.22
|
|
Third quarter
|
|
|
0.43
|
|
|
|
0.18
|
|
Second quarter
|
|
|
0.62
|
|
|
|
0.35
|
|
First quarter
|
|
|
0.79
|
|
|
|
0.36
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
Fourth quarter
|
|
$
|
1.08
|
|
|
$
|
0.57
|
|
Third quarter
|
|
|
1.90
|
|
|
|
0.64
|
|
Second quarter
|
|
|
2.00
|
|
|
|
1.05
|
|
First quarter
|
|
|
2.73
|
|
|
|
1.78
|
|
On
April 11, 2016, the Company’s Common stock closed on NYSE MKT at $0.24 per share and there were 371 stockholders of record.
Dividends
The
Company has never declared or paid cash dividends on its Common stock and has no intention to do so in the foreseeable future.
For
the years ending December 31, 2015, and 2014, the Company issued an aggregate of 615 and 580 shares of Convertible Preferred Series
A stock respectively, as dividend shares. These issuances did not result in any proceeds to the Company.
Securities
authorized for issuance under equity compensation plans
No
option grants were issued during the year ended December 31, 2015. Further reference is made to the information contained in the
Equity Compensation Plan table contained in Item 12 of this Annual Report.
Issuer
purchases of equity securities
There
were no repurchases of the Company’s Common stock during the year ended December 31, 2015.
Item
6. Selected financial data.
Not
applicable.
Item
7. Management’s discussion and analysis of financial condition and results of operations
Executive
summary
MGT Capital Investments,
Inc., a Delaware corporation (“MGT,” “the Company,” “we,” “us”), was incorporated
on November 27, 2000 as HTTP Technology, Inc. The Company was originally incorporated in Utah in 1977. MGT is comprised of the
parent company, its wholly–owned subsidiaries Medicsight, Inc. (“Medicsight”), MGT Sports, Inc. (“MGT
Sports”), MGT Studios, Inc. (“MGT Studios”), and its majority–owned subsidiary MGT Gaming, Inc. (“MGT
Gaming”). MGT Studios also owns a controlling minority interest in the subsidiary M2P Americas, Inc. Our corporate office
is located in Harrison, New York.
MGT and its subsidiaries are principally engaged in the business of acquiring, developing and
monetizing assets in the online and mobile gaming space as well as the social casino industry. MGT’s portfolio includes
a social casino platform Slot Champ and minority stakes in the skill–based gaming platform MGT Play and fantasy sports operator
DraftDay Gaming Group, Inc. (“DDGG”) (see Recent Development below).
MGT Sports
MGT Sports owns
a minority equity stake in DDGG, which operates a leading global business–to–business operator of daily fantasy sports.
DDGG supplies a full white–label solution that allows businesses to participate in the fast growing skill–based game
market. By using DDGG's white label solution, a business can offer a fantasy sports product to its customers without incurring
the ongoing technology costs and other capital expenditures. DDGG also owns and operates the DraftDay.com platform in the U. S.
On May 20, 2013,
MGT Sports completed the acquisition of 63% of the outstanding membership interests of FanTD LLC, a startup daily fantasy sports
website. During the year ended December 31, 2014 the Company acquired the remaining 37% interest in FanTD.
On April 7, 2014,
the Company completed the acquisition from Card Runners, Inc. of all business assets and intellectual property related to DraftDay.com.
During it ownership, MGT transformed DraftDay with a series of improvements to the platform technology and player experience. In
addition, the Company was able to significantly reduce operating expenses and improve gross margin. MGT Sports also became one
of the first companies to introduce an enterprise quality B2B solution and signed several white label agreements. The Company also
introduced transparent financial reporting and strong internal controls, employing highly reliable and scalable technology. To
ensure security and regulatory compliance of the platform, MGT Sports instituted industry leading KYC (know–your–customer)
controls approved by major credit card processors and gaming attorneys. At the same time, DraftDay and its white label partners
maintained a user interface that is highly rated by players.
On September 8,
2015, the Company and MGT Sports entered into an Asset Purchase Agreement with Viggle, Inc. (“Viggle”) and Viggle’s
subsidiary DDGG, pursuant to which Viggle acquired all of the assets of the DraftDay.com business (“DraftDay.com”)
from the Company and MGT Sports. In exchange for the acquisition of DraftDay.com, Viggle paid MGT Sports the following: (a) 1,269,342
shares of Viggle’s common stock, since renamed Draftday Fantasy Sports, Inc. (NASDAQ: DDAY), (b) a promissory note in the
amount of $234 paid on September 29, 2015, (c) a promissory note in the amount of $1,875 due March 8, 2016, and (d) 2,550,000 shares
of common stock of DDGG. In addition, in exchange for providing certain transitional services, DDGG issued to MGT Sports a warrant
to purchase 1,500,000 shares of DDGG common stock. Following consummation of the transaction, MGT Sports owns an 11% equity interest
in DDGG, Viggle (since renamed Draftday Fantasy Sports, Inc.) owns 49%, and Sportech, Inc. owns 39%. As a result of the transaction,
the Company has presented DraftDay.com as a discontinued operation. There can be no assurance that the Company will be able to
realize full value of the above consideration, the Company has taken a reserve of $300 against the March 8, 2016 promissory note
and continues to monitor for further possible impairment.
On March 24, 2016
(the “Effective Date”), the Company entered into an Exchange Agreement (the “Agreement”) with DraftDay
Fantasy Sports, Inc. (“DraftDay”). The purpose of the Agreement was to exchange that certain outstanding promissory
note (the “Note”) in the principal amount of $1,875 issued on September 8, 2015, for other equity and debt securities
of DraftDay, after the Note went into default on March 8, 2016. On the Effective Date, the Note had an outstanding principal balance
of $1,875 and accrued interest in the amount of $51 (the “Interest”). Pursuant to the Agreement, a portion consisting
of $825 of the outstanding principal of the Note was exchanged for 2,748,353 shares of DraftDay’s common stock, and an additional
portion of $110 of the outstanding principal was exchanged for 110 shares (the “Preferred Shares”) of a newly created
class of preferred stock, the Series D Convertible Preferred Stock. The Preferred Shares are convertible into an aggregate of 366,630
shares of DraftDay’s common stock, except that conversions shall not be effected to the extent that, after issuance of the
conversion shares, MGT’s aggregate beneficial ownership (together with that of its affiliates) would exceed 9.99%. Finally,
DraftDay agreed to make a cash payment to MGT Sports for the total amount of Interest. In exchange for the forgoing, MGT Sports
and the Company agreed to waive all Events of Default under the Note prior to the Effective Date and to release DraftDay from any
rights, remedies and claims related thereto. After giving effect to the forgoing, the remaining outstanding principal balance of
the Note is $940 (the “Remaining Balance”). The Remaining Balance of the Note shall continue to accrue interest a rate
of 5% per annum, and all terms of the Note shall remain unchanged except that the maturity date is changed to July 31, 2016.
MGT Gaming
MGT Gaming owns
U.S. Patents 7,892,088 and 8,550,554 (the “‘088 and ‘554 patents,” respectively), both entitled "Gaming
Device Having a Second Separate Bonusing Event” and both relating to casino gaming systems in which a second game played
on an interactive sign is triggered once specific events occur in a first game. On November 2, 2012, MGT Gaming filed a lawsuit
(No. 3:12–cv–741) in the United States District Court for the Southern District of Mississippi alleging patent infringement
against certain companies which either manufacture, sell or lease gaming systems in violation of MGT Gaming's patent rights, or
operate casinos that offer gaming systems in violation of MGT Gaming's ‘088 patent, including WMS Gaming, Inc. – a
subsidiary of Scientific Games, Inc. (“WMS”)(NASDAQ: SGMS), Penn National Gaming, Inc. (“Penn”) (NASDAQ
GS: PENN), and Aruze Gaming America, Inc. (“Aruze America”). An amended complaint added the '554 patent, a continuation
of the ‘088 patent. The allegedly infringing products include at least those identified under the trade names: "Amazon
Fishing" and "Paradise Fishing."
On October 23,
2013 the U.S. District Court severed the originally filed action into three separate actions: The Defendants in all three actions
filed counterclaims denying infringement and asserting invalidity of both patents–in–suit. MGT Gaming filed appropriate
responses, reasserting the validity and infringement of the ‘088 and ‘554 patents.
13
On November 4,
2013, WMS filed a Petition for Inter Parties Review ("IPR") with the United States Patent and Trademark Office ("PTO"),
challenging the’088 patent–in–suit. On April 30, 2014 the Patent Trial and Appeal Board (“PTAB”)
instituted the IPR, allowing the IPR to proceed on all claims in suit. The IPR proceeding has subsequently been dismissed by agreement
between WMS and MGT Gaming as part of a settlement of all claims between WMS and MGT, including a dismissal of MGT’s court
action against WMS.
Aruze Macau, a
sister company of Aruze, Aruze America, subsequently filed its own IPR Petition seeking review of the ‘088 patent based on
the same prior art cited by WMS in its IPR. Aruze America also filed a Request for Ex Parte Reexamination of that patent and a
Petition for IPR of the ‘554 patent, both based on different prior art. Aruze America’s Reexamination Request has been
denied by the PTO. Its Petition for IPR remains pending, with MGT’s Preliminary Response due on March 16, 2015.
MGT sought dismissal
of Aruze Macau’s IPR Petition based on the grounds that Aruze America, not Aruze Macau, was the real party in interest and/or
was in privity with Aruze Macau, and that the Aruze entities delayed more than 12 months after the filing of MGT’s infringement
action against Aruze America based on the ‘088 patent and are therefore barred from filing an IPR against that patent. On
February 20, 2015, the PTAB denied MGT’s request for dismissal of the Aruze Macau IPR Petition, but granted MGT the right
to conduct further discovery on the real party in interest, privity and one–year bar issues that it had raised in its dismissal
request. MGT is pursuing such discovery and will reassert the one–year bar as well as addressing Aruze Macau’s arguments
on the merits. The PTAB held an initial conference call in that proceeding on March 16, 2015, the same day that MGT’s Preliminary
Response to Aruze America’s concurrent IPR Petition directed to the ‘554 patent was filed. MGT is seeking denial of
that latter Petition on the grounds that Aruze America has not made out a
prima facie
case of either anticipation or obviousness
based on the prior art asserted in that proceeding.
By motions filed
on May 12, 2014, Aruze sought a transfer of the Mississippi infringement action to Nevada as well as a stay pending resolution
of IPR proceedings before the PTAB. Only the latter motion has been granted and the Mississippi action remains stayed at present.
In addition, MGT
Gaming owns two U.S. patents covering certain features of casino slot machines. Both patents were asserted against alleged infringers
in various actions in federal court in Mississippi. On July 29, 2015, MGT, Aruze America, Aruze Macau, and Penn agreed, through
their respective counsel, to settle all pending disputes, including the Mississippi litigation and all proceedings at the PTO.
The parties have subsequently jointly terminated the Mississippi litigation and the PTO proceedings. The Company received a payment
of $90, which was recorded as licensing revenue.
MGT Studios
MGT Studios is
publisher of social games and real money games of skill.
On November 11,
2013, the Company entered into an Agreement and Plan of Reorganization (the “Avcom Agreement”) with MGT Capital Solutions,
Inc., a wholly owned subsidiary of the Company, Avcom, Inc. and the stockholders and option holders of Avcom, Inc. (“Avcom”).
Pursuant to the Avcom Agreement, the Company acquired 100% of the capital stock of Avcom. In consideration, the Preferred stockholders
of Avcom received $550 in value of the Company’s Common stock and the Common stockholders and option holders of Avcom will
receive an aggregate of $1,000 in value of the Company’s Common stock. The value of the Company’s Common stock is based
on the volume weighted average closing price for the 20 trading days prior to signing the Avcom Agreement. The acquisition contemplated
by the Avcom Agreement closed on November 26, 2013.
On December 4, 2013,
the Company entered into a Strategic Alliance Agreement with M2P Entertainment GmbH, a German corporation (“M2P”),
the newly formed Delaware corporation, M2P Americas, Inc. (“M2P Americas”) and the Company’s existing subsidiary
MGT Studios. The purpose of the transaction is to allow M2P Americas to market and exploit MP2’s gaming technology in North
and South America through M2P Americas. As part of the transaction, the Company acquired 50.1% of M2P Americas and M2P acquired
49.9%. The Strategic Alliance Agreement provides that the Company and M2P will jointly cooperate to launch M2P’s gaming technology
in North and South America. It further provides M2P Americas with an exclusive royalty free license to M2P’s gaming technology
for North and South America.
Pursuant to the
terms of the Strategic Alliance Agreement, the Company will advance certain expenses to M2P Americas and the Company and M2P will
provide network and human resources support to M2P Americas. The parties also entered into a Stockholders Agreement dated the same
date which, among other things, grants M2P an option to purchase 10% of the Company’s ownership in M2P Americas at book value
if the Company does not purchase equity in M2P prior to April 2, 2014. This agreement was subsequently amended to extend
the purchase date to May 31, 2014.
14
On May 31, 2014,
M2P exercised its option to purchase 10% of the outstanding equity interests of M2P Americas from the Company. As a result,
the Company’s ownership of M2P Americas is now 40.1%, and M2P’s ownership is 59.9%.
MGT filed a completed application
for a New Jersey Casino Service Industry Enterprise License (“CSIE”). According to regulations promulgated by the
New Jersey Division of Gaming Enforcement (NJDGE), companies providing Internet gaming software or systems, and vendors who manage,
control, or administer games and associated wagers conducted through the Internet, must obtain a CSIE. The Company expects a determination
from NJDGE after it reviews the Personal History Disclosure forms to be provided by a significant minority stockholder of
the Company. Completion of this paperwork is beyond the control of MGT; therefore, the Company is unable to predict when or if
a CSIE License will be granted.
MGT
Interactive
On
September 3, 2013, the Company entered into a Contribution and Sale Agreement (the “Contribution Agreement”) by and
among the Company, Gioia Systems, and LLC (“Gioia”) and MGT Interactive, LLC whereby MGT Interactive acquired certain
assets from Gioia which was the inventor and owner of a proprietary method of card shuffling for the online poker market. Trademarked
under the name Real Deal Poker, the technology uses patented shuffling machines, along with permutation re–sequencing, allowing
for the creation of up to 16,000 decks per minute in real time. The acquisition includes seven (7) U.S. Patents and several Internet
URL addresses, including www.RealDealPoker.com. Pursuant to the Contribution Agreement, Gioia contributed the assets to MGT Interactive
in exchange for a 49% interest in MGT Interactive and MGT contributed $200 to MGT Interactive in exchange for a 51% interest in
MGT Interactive. The $200 contributed by the Company has been utilized as working capital to cover the direct and associated costs
relating to the achievement of a certification from Gaming Laboratories International (“GLI”). The Company has the
right to acquire an additional 14% ownership interest in MGT Interactive from Gioia in exchange for a purchase price of $300 after
GLI certification is obtained. Gioia, in turn, will have the right to re–acquire the 14% interest for a period of three
years at a purchase price of $500. Gioia shall have the right to certain royalty payments from the gross rake payments, and any
licensing or royalty income received by MGT Interactive after certain revenue targets are exceeded.
On August 28, 2015,
the Company and MGT Interactive along with Gioia entered into an Assignment and Sale Agreement (the “Agreement”). MGT
Interactive sold certain tangible and intellectual property assets in exchange for Gioia’s 49% membership interest in Interactive
along with a cash payment of $35. The Agreement also required Gioia to cause the Court to dismiss its complaint against the Company.
As a result of the Agreement, the Company recognized a $144 loss on sale of assets.
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.
15
Results
of operations
The
Company currently has two operational segments, Gaming and Intellectual Property. Software, Devices, and Services are no longer
considered separate business segments and have been merged into the Intellectual Property segment. Certain corporate expenses
are not allocated to a particular segment.
Years
ended December 31, 2015 and 2014
The
Company achieved the following results for the years ended December 31, 2015, and 2014, respectively:
|
●
|
Revenues
from continuing operations totaled $104 (2014: $94);
|
|
●
|
Operating
expenses were $2,821 (2014: $4,114);
|
|
●
|
Losses
of $1,068 from discontinued operations (2014: $1,609);
|
|
●
|
Net
loss attributable to Common shareholders was $4,781 (2014: $5,330) and resulted in a basic and diluted loss per share of $0.35
(2014: $0.56). Net loss from continuing operations before non–controlling interest was $3,917 (2014: $4,156).
|
Our
operating expenses decreased approximately 31% during the year ended December 31, 2015 compared to year ended December 31, 2014.
The decrease is primarily attributed to reductions in headcount, professional fees, corporate governance and stock–based
compensation expense.
Intellectual
property
In
the year ended December 31, 2015, the Company recognized $102 in revenue, primarily related to the non–recurring gaming
patent licensing fee, compared to $86 for the same period last year, which was mostly attributed to the royalties on medical devices.
Selling,
general and administrative expenses for the year ended December 31, 2015 were $365 (2014: $487), in both years consisting of legal
and consulting costs and the amortization of intellectual property assets.
In
the year ended December 31, 2015 the company recognized an impairment of $474 related to the gaming patent (2014: $nil).
Gaming
– Continuing operations
During
the year ended December 31, 2015, our selling, general and administrative expenses for this segment were $34 (2014: $1,199). In
the prior year the expenses consisted of employee compensation, information technology and office related expenses of MGT Studios.
The company did not incur any research and development costs for the year ended December 31, 2015, (2014: $188). The decreases
are due to the headcount and overhead expense reductions in 2015 as the Company focused on monetizing DraftDay.com.
Gaming
– Discontinued operations (DraftDay.com)
During
the year ended December 31, 2015, the Company recognized $640 in revenues for this segment as compared to $963 for the same period
last year. The revenues were lower in the current year as the Company sold the business in September 2015.
Our
cost of revenue for the year ended December 31, 2015 was $225 (2014: $610), which primarily consisted of overlay incurred on the
DraftDay.com website. Overlay is a promotional incentive for user activity with some contests paying out higher prize money than
entry fees. The decrease in 2015 is attributed to lower promotional activity as well as the sale of the business in September
2015.
During
the year ended December 31, 2015, our selling, general and administrative expenses were $1,483 (2014: $1,962), mainly consisting
of marketing expenses, employee compensation, information technology and office related costs. The decrease is attributable to
selling and discontinuing the operation during the year ended December 31, 2015.
Unallocated
corporate / other
Selling,
general and administrative expenses during the year ended December 31, 2015 were $2,422 (2014: $2,240).
For
the year ended December 31, 2015, non–operating expenses mainly consisted of a loss of $144 on the sale of assets, and an
impairment charge of $556 on notes receivable. During the comparable period ended December 31, 2014, the Company’s main
non–operating expense was an impairment of $135 on intangible assets.
Liquidity
and capital resources
|
|
Year
ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Working capital summary
|
|
|
|
|
|
|
Cash and cash equivalents (excluding $39 and $138 of restricted cash as of December 31, 2015 and December 31, 2014 respectively)
|
|
$
|
359
|
|
|
$
|
648
|
|
Other current assets
|
|
|
61
|
|
|
|
146
|
|
Investments – current
|
|
|
444
|
|
|
|
–
|
|
Notes receivable
|
|
|
1,575
|
|
|
|
–
|
|
Current assets – Discontinued operations
|
|
|
–
|
|
|
|
838
|
|
Current liabilities
|
|
|
(79
|
)
|
|
|
(391
|
)
|
Current liabilities – Discontinued operations
|
|
|
–
|
|
|
|
(988
|
)
|
Working capital surplus
|
|
$
|
2,360
|
|
|
$
|
253
|
|
|
|
Year ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Cash (used in) / provided by
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(2,424
|
)
|
|
$
|
(3,076
|
)
|
Investing activities
|
|
|
(152
|
)
|
|
|
2
|
|
Financing activities
|
|
|
2,499
|
|
|
|
1,466
|
|
Discontinued operations
|
|
|
(212
|
)
|
|
|
(2,116
|
)
|
Net decrease in cash and cash equivalents
|
|
$
|
(289
|
)
|
|
$
|
(3,724
|
)
|
On
December 31, 2015, MGT’s cash and cash equivalents were $359 excluding $39 of restricted cash. The Company continues to
exercise discipline with respect to current expense levels, as revenues remain limited. Our cash and cash equivalents decreased
during the year ended December 31, 2015, primarily due to $2,424 used in operating activities, the purchase of a $250 note receivable
and $38 for the purchase of property and equipment. The decrease was mostly offset by the release of restricted cash and security
deposit of $101, the sale of intangible assets of $35 and the receipt of net proceeds $1,644 and $855 from the At–The–Market
sales of common stock and a private placement sale of common stock, respectively.
Operating
activities
Our
net cash used in operating activities differs from the net loss predominantly because of various non–cash adjustments such
as depreciation, amortization and impairment of intangibles, stock–based compensation, reserve for notes receivable, loss
on sale of assets, and the movement in working capital.
Investing
activities
On
September 8, 2015, the Company and MGT Sports entered into an Asset Purchase Agreement with Viggle, Inc. (“Viggle”)
and Viggle’s subsidiary DDGG, pursuant to which Viggle acquired all of the assets of the DraftDay.com business (“DraftDay.com”)
from the Company and MGT Sports. In exchange for the acquisition of DraftDay.com, Viggle paid MGT Sports the following: (a) 1,269,342
shares of Viggle’s common stock, since renamed Draftday Fantasy Sports, Inc. (NASDAQ: DDAY), (b) a promissory note in the
amount of $234 paid on September 29, 2015, (c) a promissory note in the amount of $1,875 due March 8, 2016, and (d) 2,550,000
shares of common stock of DDGG. In addition, in exchange for providing certain transitional services, DDGG issued to MGT Sports
a warrant to purchase 1,500,000 shares of DDGG common stock. Following consummation of the transaction, MGT Sports owns an 11%
equity interest in DDGG, Viggle (since renamed Draftday Fantasy Sports, Inc.) owns 49%, and Sportech, Inc. owns 39%. As a result
of the transaction, the Company has presented DraftDay.com as a discontinued operation. There can be no assurance that the Company
will be able to realize full value of the above consideration, the Company has taken a reserve of $300 against the March 8, 2016
promissory note and continues to monitor for further possible impairment.
Financing
activities
During
the year ended December 31, 2015, the Company sold approximately 3,155,000 shares of Common stock under the At–The–Market
agreement for gross proceeds of approximately $1,644, net of related fees.
On
October 8, 2015, the Company entered into separate subscription agreements (the “Subscription Agreement”) with accredited
investors (the “Investors”) relating to the issuance and sale of $700 of units (the “Units”) at a purchase
price of $0.25 per Unit, with each Unit consisting of one share (the “Shares”) of the Company’s common stock,
par value $0.001 per share (the “Common Stock”) and a three year warrant (the “Warrants”) to purchase
two shares of Common Stock at an initial exercise price of $0.25 per share (such sale and issuance, the “Private Placement”).
The
Warrants are exercisable at a price of $0.25 on the earlier of (i) one year from the date of issue or (ii) the occurrence of certain
corporate events, including a private or public financing, subject to approval of the lead investor, in which the Company receives
gross proceeds of at least $7,500; a spinoff; one or more acquisitions or sales by the Company of certain assets approved by the
stockholders of the Company; or a merger, consolidation, recapitalization, or reorganization approved by the stockholders of the
Company (each, a “Qualifying Transaction”). The Warrants may be exercised by means of a “cashless exercise”
following the four–month anniversary of the date of issue, provided that the Company has consummated a Qualifying Transaction
and there is no effective registration statement registering the resale of the shares of Common Stock underlying the Warrants
(the “Warrant Shares”). The Company is prohibited from effecting an exercise of any Warrant to the extent that, as
a result of any such exercise, the holder would beneficially own more than 4.99% of the number of shares of Common Stock outstanding
immediately after giving effect to the issuance of shares of Common Stock upon exercise of such Warrant, which beneficial ownership
limitation may be increased by the holder up to, but not exceeding, 9.99%. The Warrants are also subject to certain adjustments
upon certain actions by the Company as outlined in the Warrants.
On
December 22, 2015 the Company sold $172 of common stock at a price of $0.25 per share in a Registered Direct offering.
Risks
and uncertainties related to our future capital requirements
The
accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. As of December 31, 2015, the Company had incurred
significant operating losses since inception and continues to generate losses from operations and has an accumulated deficit of
$303,944. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated
financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the
classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Commercial
results have been limited and the Company has not generated significant revenues. The Company cannot assure its stockholders that
the Company’s revenues will be sufficient to fund its operations. If adequate funds are not available, the Company may be
required to curtail its operations significantly or to obtain funds through entering into arrangements with collaborative partners
or others that may require the Company to relinquish rights to certain of our technologies or products that the Company would
not otherwise relinquish.
The
Company's primary source of operating funds since inception has been debt and equity financings. On December 30, 2013, and as
amended on March 27, 2014, the Company entered into an At–The–Market Offering Agreement (the “ATM Agreement”)
with Ascendiant Capital Markets, LLC (the “Manager”). Pursuant to the ATM Agreement, the Company may offer and sell
shares of its Common Stock (the “Shares”) having an aggregate offering price of up to $8.5 million from time to time
through the Manager. The Company can use the net proceeds from any sales of Shares in the offering for working capital, capital
expenditures, and general business purposes. For the year ended December 31, 2015, the Company sold approximately 3,155,000 Shares
under the ATM Agreement for gross proceeds of approximately $1,695 before related expenses. The ATM Agreement expired by its terms
in August 2015.
At
December 31, 2015, MGT’s cash, cash equivalents and restricted cash were $398. The Company intends to raise additional capital,
either through debt or equity financings or through the continued sale of the Company’s assets in order to achieve its business
plan objectives. Management believes that it can be successful in obtaining additional capital; however, no assurance can be provided
that the Company will be able to do so. There is no assurance that any funds raised will be sufficient to enable the Company to
attain profitable operations or continue as a going concern. To the extent that the Company is unsuccessful, the Company may need
to curtail or cease its operations and implement a plan to extend payables or reduce overhead until sufficient additional capital
is raised to support further operations. There can be no assurance that such a plan will be successful.
Off–balance
sheet arrangements
None.
Critical
accounting policies and estimates
Our
discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
The notes to the consolidated financial statements contained in this Annual Report describe our significant accounting policies
used in the preparation of the consolidated financial statements. The preparation of these financial statements requires us to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates. We continually evaluate our critical accounting policies and estimates.
We
believe the critical accounting policies listed below reflect significant judgments, estimates and assumptions used in the preparation
of our consolidated financial statements.
Intangible
assets
Intangible
assets consist of patents, trademarks, domain names, software and customer lists. Estimates of future cash flows and timing of
events for evaluating long–lived assets for impairment are based upon management’s judgment. If any of our intangible
or long–lived assets are considered to be impaired, the amount of impairment to be recognized is the excess of the carrying
amount of the assets over its fair value. Applicable long–lived assets are amortized or depreciated over the shorter of
their estimated useful lives, the estimated period that the assets will generate revenue, or the statutory or contractual term
in the case of patents. Estimates of useful lives and periods of expected revenue generation are reviewed periodically for appropriateness
and are based upon management’s judgment.
Goodwill
Goodwill
represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. The Company is
required to perform impairment reviews at each of its reporting units annually and more frequently in certain circumstances. The
Company performs the annual assessment on December 31.
In
accordance with
ASC 350–20 “Goodwill”
, the Company is able to make a qualitative assessment of whether
it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two–step
goodwill impairment test. If the Company concludes that it is more likely than not that the fair value of a reporting unit is
not less than its carrying amount it is not required to perform the two–step impairment test for that reporting unit.
Revenue
recognition
The
Company recognizes revenue when it is realized or realizable and earned. We consider revenue realized or realizable and earned
when there is persuasive evidence of an arrangement and that the product has been shipped or the services have been provided to
the customer, the sales price is fixed or determinable and collectability is probable. Our material revenue streams are related
to the delivery of intellectual property license fees and gaming fees:
|
●
|
Licensing
– License fee revenue is derived from the licensing of intellectual property. 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.
|
|
●
|
Gaming
– Gaming revenue is derived from entry fees charged in contests minus prizes paid out in contests.
|
Stock–based
compensation
The
Company recognizes compensation expense for all equity–based payments in accordance with
ASC 718
“Compensation
– Stock Compensation".
Under fair value recognition provisions, the Company recognizes equity–based compensation
net of an estimated forfeiture rate and recognizes compensation cost only for those shares expected to vest over the requisite
service period of the award.
Restricted
stock awards are granted at the discretion of the Company. These awards are restricted as to the transfer of ownership and generally
vest over the requisite service periods, typically over an eighteen–month period (vesting on a straight–line basis).
The fair value of a stock award is equal to the fair market value of a share of Company stock on the grant date.
The
fair value of option award is estimated on the date of grant using the Black–Scholes option valuation model. The Black–Scholes
option valuation model requires the development of assumptions that are input into the model. These assumptions are the expected
stock volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock
and the expected forfeiture rate. Expected volatility is calculated based on the historical volatility of our Common stock over
the expected option life and other appropriate factors. Risk–free interest rates are calculated based on continuously compounded
risk–free rates for the appropriate term. The dividend yield is assumed to be zero as the Company has never paid or declared
any cash dividends on our Common stock and does not intend to pay dividends on our Common stock in the foreseeable future. The
expected forfeiture rate is estimated based on historical experience.
Determining
the appropriate fair value model and calculating the fair value of equity–based payment awards requires the input of the
subjective assumptions described above. The assumptions used in calculating the fair value of equity–based payment awards
represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment.
As a result, if factors change and the Company uses different assumptions, our equity–based compensation could be materially
different in the future. In addition, the Company is required to estimate the expected forfeiture rate and recognize expense only
for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the equity–based
compensation could be significantly different from what the Company has recorded in the current period.
The
Company accounts for share–based payments granted to non–employees in accordance with
ASC 505–40, “Equity
Based Payments to Non–Employees”
. The Company determines the fair value of the stock–based payment as either
the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If
the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions
as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments
is reached, or (2) the date at which the counterparty’s performance is complete. The fair value of the equity instruments
is re–measured each reporting period over the requisite service period.
Segment
reporting
Operating
segments are defined as components of an enterprise about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision–making group in deciding how to allocate resources and in assessing
performance. Our chief operating decision–making group is composed of the chief executive officer and chief financial officer.
We operate in two operational segments, Gaming and Intellectual Property. Certain corporate expenses are not allocated to segments.
Loss
per share
Basic
loss per share is calculated by dividing net loss applicable to Common stockholders by the weighted average number of Common shares
outstanding during the period. Diluted earnings per share is calculated by dividing the net earnings attributable to Common stockholders
by the sum of the weighted average number of Common shares outstanding plus potential dilutive Common shares outstanding during
the period. Potential dilutive securities, comprised of the convertible Preferred stock, unvested restricted shares and warrants,
are not reflected in diluted net loss per share because such shares are anti–dilutive.
The
computation of diluted loss per share for the year ended December 31, 2015, excludes 10,608 shares in connection to the Convertible
Preferred stock and 3,820,825 warrants, as they are anti–dilutive due to the Company’s net loss. For the year ended
December 31, 2014, the computation excludes 9,993 shares in connection to the Convertible Preferred stock, 1,020,825 warrants
and 110,000 unvested restricted shares, as they are anti–dilutive due to the Company’s net loss.
Recent
accounting pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02,
“Leases” (topic 842). The FASB issued this update to increase transparency and comparability among organizations
by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.
The updated guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those
fiscal years. Early adoption of the update is permitted. The Company is currently evaluating the impact of the new standard.
In
September 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2015–16
,
simplifying the
Accounting for Measurement – Period Adjustments
that eliminates the requirement to restate prior
period financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of a measurement
period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified.
The new guidance does not change what constitutes a measurement period adjustment. The Company does not expect the adoption of
this ASU to significantly impact the consolidated financial statements.
In
August 2015, the FASB issued
ASU 2015–15
“Interest – Imputation of Interest”
,
final guidance that requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as
a direct deduction from the debt liability rather than as an asset. This publication has been updated to reflect an SEC staff
member’s comment in June 2015 that the staff will not object to an entity presenting the cost of securing a revolving line
of credit as an asset, regardless of whether a balance is outstanding. The Company does not expect the adoption of this ASU to
significantly impact the consolidated financial statements.
In
April 2015, the FASB issued
ASU 2015–05
,
“Intangibles – Goodwill and Other – Internal–Use
Software”
(Subtopic 350–40)
. This ASU provides guidance about whether a cloud computing arrangement includes
a software license. If a cloud computing arrangement includes a software license, then the software license element of the arrangement
should be accounted for consistent with the acquisition of other software licenses. If a cloud computing arrangement does not
include a software license, the arrangement should be accounted for as a service contract. For public business entities, the amendments
will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015.
Early adoption is permitted. The Company is currently evaluating the impact of the adoption of
ASU 2015–05
on
our financial statements and disclosures.
Item
7A. Quantitative and qualitative disclosure about market risk
We
are a smaller reporting company and therefore, we are not required to provide information required by this Item on Form 10–K.
Item
8. Financial statements and supplementary data
See
Financial Statements and Schedules attached hereto.
Item
9. Changes in and disagreements with accountants on accounting and financial disclosure
None.
Item
9A. Controls and procedures
(a)
Evaluation of disclosure controls and procedures.
Pursuant
to Rule 13a–15(b) under the Exchange Act, the Company carried out an evaluation, with the participation of the Company's
management, including the Company's Board of Directors and the Chief Executive Officer, of the effectiveness of the Company's
disclosure controls and procedures (as defined under Rule 13a–15(e) under the Exchange Act) as of the end of the period
covered by this Report. Based upon that evaluation, the Company's management concluded that the Company's disclosure controls
and procedures were not effective to ensure that information required to be disclosed by the Company in the reports that the Company
files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in
the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management to allow timely
decisions regarding required disclosure.
(b)
Management’s annual report on internal control over financial reporting.
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting as required under
applicable United States securities regulatory requirements. Internal control over financial reporting is defined in Rule 13a–15(f)
or 15d–15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the company’s
chief executive and chief financial officers and effected by the company’s board of directors, management and other personnel,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
|
●
|
pertain
to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of
the assets of the company;
|
|
●
|
provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and
|
|
●
|
provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use of disposition of the company’s
assets that could have a material effect on the financial statements.
|
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. A system of
internal controls can provide only reasonable, not absolute, assurance that the objectives of the control system are met, no matter
how well the system is conceived or operated. Projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
Our
management assessed the effectiveness of our internal control over financial reporting as of December 31, 2015. In making this
assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) in 2013 in Internal Control Integrated Framework. Based on that evaluation under this framework, our
management concluded that our internal control over financial reporting was not effective because of the following significant
deficiencies in our internal control over financial reporting:
|
●
|
Due
to our small number of employees and resources, we have limited segregation of duties, as a result of which there is insufficient
independent review of duties performed;
|
|
●
|
As
a result of the limited number of accounting personnel, we rely on outside consultants for the preparation of our financial
reports, including financial statements and management discussion and analysis, which could lead to overlooking items requiring
disclosure.
|
This
annual report does not include an attestation report by our independent registered public accounting firm regarding internal control
over financial reporting. As we are neither a large accelerated filer nor an accelerated filer, our management’s report
was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission
that permit us to provide only management’s report in this annual report.
(c)
Changes in internal control over financial reporting.
On
November 30, 2015, our Chief Financial Officer left the Company following expiration of his employment agreement. At that time,
our Chief Executive Officer was named Interim Chief Financial Officer.
Item
9B. Other information.
None.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
1. Organization
MGT
Capital Investments, Inc. (“MGT,” “the Company,” “we,” “us”) is a Delaware corporation,
incorporated in 2000. The Company was originally incorporated in Utah in 1977. MGT is comprised of the parent company, wholly–owned
subsidiaries Medicsight, Inc. (“Medicsight”), MGT Sports, Inc. (“MGT Sports”), MGT Studios, Inc. (“MGT
Studios”), and majority–owned subsidiary MGT Gaming, Inc. MGT Studios also owns a controlling minority interest in
the subsidiary M2P Americas, Inc. Our corporate office is located in Harrison, New York.
MGT
and its subsidiaries are principally engaged in the business of acquiring, developing and monetizing assets in the online and
mobile gaming space as well as the social casino industry.
Gaming
MGT’s
gaming portfolio includes a social casino platform Slot Champ and minority stakes in the skill–based gaming platform MGT
Play and fantasy sports operator DraftDay Gaming Group, Inc. (“DDGG”).
Sale
of DraftDay.com
Effective
September 3, 2015, the Company terminated the Asset Purchase Agreement with Random Outcome (“RO”) (“RO Agreement”)
originally entered into on June 11, 2015, as amended to date. According to its terms, the RO Agreement could be terminated by
the Company or RO if a closing had not occurred by August 31, 2015. The RO Agreement provided for the sale of the DraftDay.com
Business to RO for a purchase price of (i) cash equal to the sum of (a) $4,000 and (b) $10 per day for the period starting July
15, 2015 and ending on the closing date and (ii) a three–year warrant to purchase 500,000 shares of RO Common stock at an
exercise price of $1.00, a three–year warrant to purchase 500,000 shares of RO Common stock at an exercise price of $1.33,
and a three–year warrant to purchase 500,000 shares of RO Common stock at an exercise price of $1.66. The non–refundable
deposit of $250 was recorded as gain on termination of Asset Purchase Agreement in the income statement.
On
September 8, 2015, the Company and MGT Sports entered into an Asset Purchase Agreement with Viggle, Inc. (“Viggle”)
and Viggle’s subsidiary DDGG, pursuant to which Viggle acquired all of the assets of the DraftDay.com business (“DraftDay.com”)
from the Company and MGT Sports. In exchange for the acquisition of DraftDay.com, Viggle paid MGT Sports the following: (a) 1,269,342
shares of Viggle’s common stock, since renamed Draftday Fantasy Sports, Inc. (NASDAQ: DDAY), (b) a promissory note in the
amount of $234 paid on September 29, 2015, (c) a promissory note in the amount of $1,875 due March 8, 2016, and (d) 2,550,000
shares of common stock of DDGG. In addition, in exchange for providing certain transitional services, DDGG issued to MGT Sports
a warrant to purchase 1,500,000 shares of DDGG common stock. Following consummation of the transaction, MGT Sports owns an 11%
equity interest in DDGG, Viggle (since renamed Draftday Fantasy Sports, Inc.) owns 49%, and Sportech, Inc. owns 39%. As a result
of the transaction, the Company has presented DraftDay.com as a discontinued operation. There can be no assurance that the Company
will be able to realize full value of the above consideration, the Company has taken a reserve of $300 against the March 8, 2016
promissory note and continues to monitor for further possible impairment. The Company has presented the MGT Sports segment as
a discontinued operation.
The
following table summarizes fair values of the net assets assumed in consideration for the sale of the DraftDay.com Business assets:
Viggle Common shares received at closing share price of $1.30
|
|
$
|
1,650
|
|
Viggle promissory notes
|
|
|
2,109
|
|
DDGG Common shares received at fair market value of $0.40 per share
(1)
|
|
|
1,020
|
|
DDGG stock purchase warrants received
(2)
|
|
|
360
|
|
Total consideration
|
|
$
|
5,139
|
|
The
transaction resulted in a loss on the sale of $387.
|
(1)
|
DDGG
Common shares were valued based on recent equity sales by DDGG to Viggle. Viggle purchased
shares of DDGG at a price of $0.40 per share.
|
|
(2)
|
The
Company determined fair value of the warrants received utilizing a Black–Scholes
option pricing model. The Company utilized the following assumptions: fair value of Common
share of DDGG stock – $0.40 per share, exercise price of $0.40, risk free rate
of 0.65%, expected volatility of 98% which is the 3–year historical volatility
of the Company’s Common stock.
|
|
(3)
|
DraftDay.com
assets consist of the following:
|
IT equipment
|
|
$
|
17
|
|
Domain
|
|
|
39
|
|
Player deposit liability
|
|
|
(786
|
)
|
Cash – Player deposits
|
|
|
786
|
|
Customer list
|
|
|
101
|
|
Source Code
|
|
|
420
|
|
Goodwill
|
|
|
4,948
|
|
Total
|
|
$
|
5,525
|
|
Note:
Viggle subsequently changed their name to DraftDay.com Fantasy Sports, Inc. and its ticker symbol changed from VGGL to DDAY.
Intellectual
property
MGT
Gaming owns two U. S. patents covering certain features of casino slot machines. MGT’s wholly owned subsidiary Medicsight
owns U.S. Food and Drug Administration (“FDA”) approved medical imaging software and has designed an automated carbon
dioxide insufflation device on which the Company receives royalties from an international distributor.
MGT
Gaming owns U.S. Patents 7,892,088 and 8,550,554 (the “’088 and ’554 patents,” respectively), both entitled
“Gaming Device Having a Second Separate Bonusing Event” and both relating to casino gaming systems in which a second
game played on an interactive sign is triggered once specific events occur in a first game. On November 2, 2012, MGT Gaming filed
a lawsuit (No. 3:12–cv–741) in the United States District Court for the Southern District of Mississippi alleging
patent infringement against certain companies which either manufacture, sell or lease gaming systems alleged to be in violation
of MGT Gaming’s patent rights, or operate casinos that offer gaming systems that are alleged to be in violation of MGT Gaming’s
’088 patent, including Penn National Gaming, Inc. (“Penn”) (NASDAQ GS: PENN), and Aruze Gaming America, Inc.
(“Aruze America”). An amended complaint added the ’554 patent, a continuation of the ’088 patent. The
allegedly infringing products include “Amazon Fishing” and “Paradise Fishing.”
By
motion filed on May 12, 2014, Aruze America sought a stay pending resolution of a Petition filed by a co–defendant for Inter
Parties Review (“IPR”) with the Patent Trial and Appeal Board (“PTAB”) of the United States Patent and
Trademark Office (“PTO”), challenging the’088 patent. As a result, the Mississippi action was stayed.
Aruze
America and its sister company, Aruze Macau, subsequently filed additional IPR Petitions seeking review of the ’088 and
‘554 patents. Aruze America also filed a Request for Ex Parte Re–examination of the ’088 patent. Aruze America’s
Re–examination Request has been denied.
On
July 29, 2015, MGT, Aruze America, Aruze Macau, and Penn agreed, through their respective counsel, to settle all pending disputes,
including the Mississippi litigation and all proceedings at the PTO. The parties have subsequently jointly terminated the Mississippi
litigation and the PTO proceedings. The Company received a payment of $90, which was recorded as licensing revenue.
Sale
of assets – MGT Interactive
On
April 21, 2015, Gioia Systems, LLC (“Gioia”) filed a complaint against the Company, the Company’s majority owned
subsidiary, MGT Interactive, LLC, Robert Ladd and Robert Traversa with the United States District Court for the Southern District
of New York. MGT Interactive, LLC was also included as a derivative plaintiff in the action. Gioia’s complaint asserts claims
for breach of contract and breach of fiduciary duty relating to the Contribution Agreement and related agreements. On July 19,
2015, the Company and the other defendants filed an answer, in which they denied the allegations, raised affirmative defenses,
and introduced several counterclaims against Gioia.
On
August 28, 2015, the Company and MGT Interactive along with Gioia entered into an Assignment and Sale Agreement (the “Agreement”).
MGT Interactive purchased the 49% membership interest that Gioia owned of MGT Interactive and sold the certain tangible and intellectual
property assets that MGT Interactive previously acquired from Gioia. Effective as of August 28, 2015, MGT Interactive irrevocably
sold all assets and Gioia accepts all assets free and clear of all liens etc. In exchange for such assets, Gioia is to transfer
the 49% membership interest to Interactive along with a cash payment of $35. As a result of the Agreement, the Company recognized
a $144 loss on sale of assets.
The
following summarizes the recognition of the Agreement:
Cash
|
|
$
|
35
|
|
Intangible assets
|
|
|
(179
|
)
|
Loss on sale
|
|
$
|
144
|
|
Note
2. Going Concern and Management plans
The
accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. As of December 31, 2015, the Company had incurred
significant operating losses since inception and continues to generate losses from operations and has an accumulated deficit of
$303,944. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated
financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the
classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Commercial
results have been limited and the Company has not generated significant revenues. The Company cannot assure its stockholders that
the Company’s revenues will be sufficient to fund its operations. If adequate funds are not available, the Company may be
required to curtail its operations significantly or to obtain funds through entering into arrangements with collaborative partners
or others that may require the Company to relinquish rights to certain of our technologies or products that the Company would
not otherwise relinquish.
The
Company's primary source of operating funds since inception has been debt and equity financings. On December 30, 2013, and as
amended on March 27, 2014, the Company entered into an At–The–Market Offering Agreement (the “ATM Agreement”)
with Ascendiant Capital Markets, LLC (the “Manager”). Pursuant to the ATM Agreement, the Company may offer and sell
shares of its Common Stock (the “Shares”) having an aggregate offering price of up to $8.5 million from time to time
through the Manager. The Company can use the net proceeds from any sales of Shares in the offering for working capital, capital
expenditures, and general business purposes. For the year ended December 31, 2015, the Company sold approximately 3,155,000 Shares
under the ATM Agreement for gross proceeds of approximately $1,695 before related expenses. The ATM Agreement expired by its terms
in August 2015.
At
December 31, 2015, MGT’s cash, cash equivalents and restricted cash were $398. The Company intends to raise additional capital,
either through debt or equity financings or through the continued sale of the Company’s assets in order to achieve its business
plan objectives. Management believes that it can be successful in obtaining additional capital; however, no assurance can be provided
that the Company will be able to do so. There is no assurance that any funds raised will be sufficient to enable the Company to
attain profitable operations or continue as a going concern. To the extent that the Company is unsuccessful, the Company may need
to curtail or cease its operations and implement a plan to extend payables or reduce overhead until sufficient additional capital
is raised to support further operations. There can be no assurance that such a plan will be successful.
Note
3. Summary of significant accounting policies
Basis
of presentation
The
Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America (“US GAAP”) and the rules and regulations of the SEC.
Use
of estimates and assumptions and critical accounting estimates and assumptions
The
preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date(s) of the financial
statements and the reported amounts of revenues and expenses during the reporting period(s).
Critical
accounting estimates are estimates for which (a) the nature of the estimate is material due to the levels of subjectivity and
judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact
of the estimate on financial condition or operating performance is material. The Company’s critical accounting estimates
and assumptions affecting the financial statements were:
|
(1)
|
Allowance
for doubtful accounts:
Management’s estimate of the allowance for doubtful accounts is based on historical sales,
historical loss levels, and an analysis of the collectability of individual accounts; and general economic conditions that
may affect a client’s ability to pay. The Company evaluated the key factors and assumptions used to develop the allowance
in determining that it is reasonable in relation to the financial statements taken as a whole.
|
|
(2)
|
Fair
value of long–lived assets:
Fair value is generally determined using the asset’s expected future discounted
cash flows or market value, if readily determinable. If long–lived assets are determined to be recoverable, but the
newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long–lived
assets are depreciated over the newly determined remaining estimated useful lives. The Company considers the following to
be some examples of important indicators that may trigger an impairment review: (i) significant under–performance or
losses of assets relative to expected historical or projected future operating results; (ii) significant changes in the manner
or use of assets or in the Company’s overall strategy with respect to the manner or use of the acquired assets or changes
in the Company’s overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive
pressures; (v) a significant decline in the Company’s stock price for a sustained period of time; and (vi) regulatory
changes. The Company evaluates acquired assets for potential impairment indicators at least annually and more frequently upon
the occurrence of such events.
|
|
(3)
|
Valuation
allowance for deferred tax assets:
Management assumes that the realization of the Company’s net deferred tax assets
resulting from its net operating loss (“NOL”) carry–forwards for Federal income tax purposes that may be
offset against future taxable income was not considered more likely than not and accordingly, the potential tax benefits of
the net loss carry–forwards are offset by a full valuation allowance. Management made this assumption based on (a) the
Company has incurred recurring losses, (b) general economic conditions, and (c) its ability to raise additional funds to support
its daily operations by way of a public or private offering, among other factors.
|
|
(4)
|
Estimates
and assumptions used in valuation of equity instruments:
Management estimates expected term of share options and similar
instruments, expected volatility of the Company’s Common shares and the method used to estimate it, expected annual
rate of quarterly dividends, and risk free rate(s) to value share options and similar instruments.
|
These
significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached
to these estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.
Management
bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the
financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources.
Management
regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes
in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those
estimates are adjusted accordingly. Actual results could differ from those estimates.
Principles
of consolidation
All
intercompany transactions and balances have been eliminated. Non–controlling interest represents the minority equity investment
in MGT subsidiaries, plus the minority investors’ share of the net operating results and other components of equity relating
to the non–controlling interest.
Reclassification
of discontinued operations
In
accordance with
ASC 205–20
regarding the presentation of discontinued operations the assets, liabilities and activity
of the DraftDay.com business have been reclassified as a discontinued operation for all periods presented.
Assets
and liabilities related to the discontinued operations of DraftDay.com are as follows:
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Cash and cash equivalents
|
|
$
|
–
|
|
|
$
|
806
|
|
Other current assets
|
|
|
–
|
|
|
|
30
|
|
Property and equipment
|
|
|
–
|
|
|
|
32
|
|
Intangible assets
|
|
|
–
|
|
|
|
809
|
|
Goodwill
|
|
|
–
|
|
|
|
4,948
|
|
Total assets
|
|
$
|
–
|
|
|
$
|
6,625
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
–
|
|
|
$
|
46
|
|
Player deposits
|
|
|
–
|
|
|
|
942
|
|
Total liabilities
|
|
$
|
–
|
|
|
$
|
988
|
|
DraftDay.com’s
losses for the years ended December 31, 2015 and 2014 are included in “Loss from discontinued operations” in the Company’s
Consolidated Statements of Operations and Comprehensive Loss.
Summarized
financial information for DraftDay.com’s operations for the years ended December 31, 2015 and 2014 are presented below:
|
|
Year ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Revenue
|
|
$
|
640
|
|
|
$
|
963
|
|
Cost of revenue
|
|
|
(225
|
)
|
|
|
(610
|
)
|
Gross margin
|
|
|
415
|
|
|
|
353
|
|
Operating expenses
|
|
|
(1,483
|
)
|
|
|
(1,962
|
)
|
Net loss
|
|
$
|
(1,068
|
)
|
|
$
|
(1,609
|
)
|
Business
combinations
As
specified in
ASC 805 “Business Combinations.”
the Company adheres to the following guidelines: (i) record purchase
consideration issued to sellers in a business combination at fair value on the date control is obtained, (ii) determine the fair
value of any non–controlling interest, and (iii) allocate the purchase consideration to all tangible and intangible assets
acquired and liabilities assumed based on their acquisition date fair values. The Company commences reporting the results from
operations on a consolidated basis effective upon the date of acquisition.
Cash,
cash equivalents and restricted cash
The
Company considers investments with original maturities of three months or less to be cash equivalents. Restricted cash primarily
represents cash not available for immediate and general use by the Company.
As
of December 31, 2015, our cash balance was $359 (2014: $648). Of the total cash balance, $263 is covered under the US Federal
Depository Insurance Corporation. We invest our cash in short–term deposits with major banks. Cash and cash equivalents
consist of cash and temporary investments with original maturities of 90 days or less when purchased.
As
of December 31, 2015 restricted cash was $39 (2014: $138), which included $nil (2014: $99) held in escrow relating to the sale
of the Company’s portfolio of medical imaging patents pending reclaim of foreign withholding tax. Proceeds from the patent
sale were placed into escrow prior to receipt by the Company pursuant to an escrow agreement between the Company and Munich Innovations
GmbH (Note5). The escrow agent distributed the escrow deposit in accordance with and subject to any deductions specified in the
patent sale agreement. The remaining $39 of restricted cash supports a letter of credit, in lieu of a rental deposit, for our
Harrison, NY office lease.
Investments
Equity
security investments available for sale, at market value, reflect unrealized appreciation and depreciation, as a result of temporary
changes in market value during the period, in shareholders’ equity, net of income taxes in “accumulated other comprehensive
income (loss)” in the consolidated balance sheets. For non–publicly traded securities, market prices are determined
through the use of pricing models that evaluate securities. For publicly traded securities, market value is based on quoted market
prices or valuation models that use observable market inputs.
Investments
available for sale
Viggle Common shares valued at $0.35 per share
|
|
$
|
444
|
|
For
non–public, non–controlled investments in equity securities, the Company uses the cost–method of accounting.
Investments
at cost
DDGG Common shares received at fair market value of $0.40 per share
|
|
|
1,020
|
|
DDGG stock purchase warrants received
|
|
|
360
|
|
Total
|
|
$
|
1,380
|
|
Property
and equipment
Property
and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight–line method
on the various asset classes over their estimated useful lives, which range from two to five years.
Intangible
assets
Intangible
assets consist of patents, trademarks, domain names, software and customer lists. Estimates of future cash flows and timing of
events for evaluating long–lived assets for impairment are based upon management’s judgment. If any of our intangible
or long–lived assets are considered to be impaired, the amount of impairment to be recognized is the excess of the carrying
amount of the assets over its fair value. Applicable long–lived assets are amortized or depreciated over the shorter of
their estimated useful lives, the estimated period that the assets will generate revenue, or the statutory or contractual term
in the case of patents. Estimates of useful lives and periods of expected revenue generation are reviewed periodically for appropriateness
and are based upon management’s judgment.
Goodwill
Goodwill
represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. The Company is
required to perform impairment reviews at each of its reporting units annually and more frequently in certain circumstances. The
Company performs the annual assessment on December 31.
In
accordance with
ASC 350–20 “Goodwill”
, the Company is able to make a qualitative assessment of whether
it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two–step
goodwill impairment test. If the Company concludes that it is more likely than not that the fair value of a reporting unit is
not less than its carrying amount it is not required to perform the two–step impairment test for that reporting unit.
Virtual
currency accrual
Users
of the Company’s website maintain virtual currency balances which are accumulated as users participate in the Company’s
online games. The amounts may become payable in cash by the Company once the user’s virtual currency balance exceeds a certain
minimum threshold; a virtual currency balance of $0.01 or $0.02 based upon initial date of enrollment on the site. User accounts
expire after six months of inactivity. The Company records an accrual for potential virtual currency payouts at the end of each
reporting period based on historical payout experience and current virtual currency balances. At December 31, 2015, and 2014,
the Company recorded a liability of $nil and $10, respectively, relating to potential future virtual currency payouts.
Revenue
recognition
The
Company recognizes revenue when it is realized or realizable and earned. We consider revenue realized or realizable and earned
when there is persuasive evidence of an arrangement and that the product has been shipped or the services have been provided to
the customer, the sales price is fixed or determinable and collectability is probable. Our material revenue streams are related
to the delivery of intellectual property license fees and gaming fees:
|
●
|
Licensing
– License fee revenue is derived from the licensing of intellectual property. 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.
|
|
●
|
Gaming
– Gaming revenue is derived from entry fees charged in contests minus prizes paid out in contests.
|
Advertising
costs
The
Company expenses advertising costs as incurred. During the years ended December 31, 2015 and 2014, respectively, the Company expensed
$nil and $199 in advertising costs related to continuing operations.
Stock–based
compensation
The
Company recognizes compensation expense for all equity–based payments in accordance with
ASC 718
“Compensation
– Stock Compensation".
Under fair value recognition provisions, the Company recognizes equity–based compensation
net of an estimated forfeiture rate and recognizes compensation cost only for those shares expected to vest over the requisite
service period of the award.
Restricted
stock awards are granted at the discretion of the Company. These awards are restricted as to the transfer of ownership and generally
vest over the requisite service periods, typically over an eighteen–month period (vesting on a straight–line basis).
The fair value of a stock award is equal to the fair market value of a share of Company stock on the grant date.
The
Company accounts for share–based payments granted to non–employees in accordance with
ASC 505–40, “Equity
Based Payments to Non–Employees”
. The Company determines the fair value of the stock–based payment as either
the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If
the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions
as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments
is reached, or (2) the date at which the counterparty’s performance is complete. The fair value of the equity instruments
is re–measured each reporting period over the requisite service period.
Income
taxes
The
Company applies the elements of
ASC 740–10 “Income Taxes — Overall”
regarding accounting for uncertainty
in income taxes. This clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires
the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained
by the taxing authority. As of December 31, 2015, the Company did not have any unrecognized tax benefits. The Company does not
expect that the amount of unrecognized tax benefits will significantly increase or decrease within the next twelve months. The
Company’s policy is to recognize interest and penalties related to tax matters in the income tax provision in the Consolidated
Statements of Operations. There was no interest and penalties for the years ended December 31, 2015 and 2014. Tax years beginning
in 2012 are generally subject to examination by taxing authorities, although net operating losses from all years are subject to
examinations and adjustments for at least three years following the year in which the attributes are used.
Deferred
taxes are computed based on the tax liability or benefit in future years of the reversal of temporary differences in the recognition
of income or deduction of expenses between financial and tax reporting purposes. The net difference, if any, between the provision
for taxes and taxes currently payable is reflected in the balance sheet as deferred taxes. Deferred tax assets and/or liabilities,
if any, are classified as current and non–current based on the classification of the related asset or liability for financial
reporting purposes, or based on the expected reversal date for deferred taxes that are not related to an asset or liability. Valuation
allowances are recorded to reduce deferred tax assets to that amount which is more likely than not to be realized.
Our
effective tax rate for years 2015 and 2014, was 0% and 0%, respectively. The difference in the Company’s effective tax rate
from the Federal statutory rate is primarily due to a 100% valuation allowance provided for all deferred tax assets.
Loss
per share
Basic
loss per share is calculated by dividing net loss applicable to Common stockholders by the weighted average number of Common shares
outstanding during the period. Diluted earnings per share is calculated by dividing the net earnings attributable to Common stockholders
by the sum of the weighted average number of Common shares outstanding plus potential dilutive Common shares outstanding during
the period. Potential dilutive securities, comprised of the convertible Preferred stock, unvested restricted shares and warrants,
are not reflected in diluted net loss per share because such shares are anti–dilutive.
The
computation of diluted loss per share for the year ended December 31, 2015, excludes 10,608 shares in connection to the Convertible
Preferred stock and 3,820,825 warrants, as they are anti–dilutive due to the Company’s net loss. For the year ended
December 31, 2014, the computation excludes 9,993 shares in connection to the Convertible Preferred stock, 1,020,825 warrants
and 110,000 unvested restricted shares, as they are anti–dilutive due to the Company’s net loss.
Segment
reporting
Operating
segments are defined as components of an enterprise about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision–making group in deciding how to allocate resources and in assessing
performance. Our chief operating decision–making group is composed of the chief executive officer and chief financial officer.
We operate in two operational segments, Gaming and Intellectual Property. Certain corporate expenses are not allocated to segments.
Recent
accounting pronouncements
In
February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, “Leases”
(topic 842). The FASB issued this update to increase transparency and comparability among organizations by recognizing lease assets
and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The updated guidance is
effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption
of the update is permitted. The Company is currently evaluating the impact of the new standard.
In
September 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2015–16
,
simplifying the
Accounting for Measurement–Period Adjustments
that eliminates the requirement to restate prior period
financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of a measurement
period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified.
The new guidance does not change what constitutes a measurement period adjustment. The Company does not expect the adoption of
this ASU to significantly impact the consolidated financial statements.
In
August 2015, the FASB issued
ASU 2015–15
“Interest– Imputation of Interest”
, final
guidance that requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct
deduction from the debt liability rather than as an asset. This publication has been updated to reflect an SEC staff member’s
comment in June 2015 that the staff will not object to an entity presenting the cost of securing a revolving line of credit as
an asset, regardless of whether a balance is outstanding. The Company does not expect the adoption of this ASU to significantly
impact the consolidated financial statements.
In
April 2015, the FASB issued
ASU 2015–05
,
“Intangibles – Goodwill and Other – Internal–Use
Software”
(Subtopic 350–40)
. This ASU provides guidance about whether a cloud computing arrangement includes
a software license. If a cloud computing arrangement includes a software license, then the software license element of the arrangement
should be accounted for consistent with the acquisition of other software licenses. If a cloud computing arrangement does not
include a software license, the arrangement should be accounted for as a service contract. For public business entities, the amendments
will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015.
Early adoption is permitted. The Company is currently evaluating the impact of the adoption of
ASU 2015–05
on
our financial statements and disclosures.
Note 4. Asset purchases and acquisitions of businesses
DraftDay.com
On April 7, 2014,
the Company closed on an Asset Purchase Agreement (“Agreement”) with CardRunners Gaming, Inc. to acquire business
assets and intellectual property related to DraftDay.com for cash consideration of $600 and stock consideration of $190, consisting
of 95,166 shares of Company’s Common stock at $2.00 per share (valued on the date of close). The Company determined the
acquisition constitutes a business in accordance with the guidance of
ASC 805 “Business Combinations.”
The following
table summarizes the fair values of the net assets/liabilities assumed and the allocation of the aggregate fair value of the purchase
consideration to assumed identifiable intangible assets:
Cash
|
|
$
|
600
|
|
Common stock – 95,166 shares at $2.00 per share
|
|
|
190
|
|
Total purchase price
|
|
$
|
790
|
|
Cash
|
|
$
|
547
|
|
Customer list
|
|
|
51
|
|
Domains
|
|
|
64
|
|
Website
|
|
|
675
|
|
Player deposit liability
|
|
|
(547
|
)
|
Total purchase price allocation
|
|
$
|
790
|
|
Pro–forma results
The following
tables summarize, on an unaudited pro–forma basis, the results of operations of the Company as though the acquisition of
DraftDay.com had occurred as of January 1, 2014. The pro–forma amounts give effect to appropriate adjustments of amortization
of intangible assets and interest expense associated with the financing of the acquisition. The pro–forma amounts presented
are not necessarily indicative of the actual results of operations had the acquisition transaction occurred as of January 1, 2014.
Year ended December 31, 2014
|
|
MGT
|
|
|
DraftDay
|
|
|
Pro–forma
total
|
|
Revenues
|
|
$
|
1,056
|
|
|
$
|
192
|
|
|
$
|
1,248
|
|
Net loss
|
|
|
(5,330
|
)
|
|
|
(240
|
)
|
|
|
5,570
|
|
Loss per share of Common stock
|
|
|
(0.56
|
)
|
|
|
–
|
|
|
|
(0.56
|
)
|
Basic and diluted
|
|
|
9,493,057
|
|
|
|
–
|
|
|
|
9,493,057
|
|
Refer to Note
1 for sale of DraftDay.com.
Note 5. Goodwill and intangible assets
Goodwill represents
the difference between purchase cost and the fair value of net assets acquired in business acquisitions. Indefinite lived intangible
assets, representing trademarks and trade names, are not amortized unless their useful life is determined to be finite. Long–lived
intangible assets are subject to amortization using the straight–line method. Goodwill and indefinite lived intangible assets
are tested for impairment annually as of December 31, and more often if a triggering event occurs, by comparing the fair value
of each reporting unit to its carrying value. As of December 31, 2015 and 2014, the Company assessed its intangibles for impairment
and recognized a charge of $472 and $135, respectively. The Company concluded that a triggering event had occurred based on the
overall deterioration of the market capitalization of the Company and evaluated the goodwill for possible impairment. After the
evaluation, management concluded that no impairment existed based on the Company’s current efforts to capitalize and execute
its business plan relating to the asset.
The Company’s
intangible assets for continuing operations consisted of the following:
|
|
Goodwill
|
|
Balance, December 31, 2013
|
|
$
|
1,496
|
|
Additions (disposals)
|
|
|
–
|
|
Balance, December 31, 2014
|
|
|
1,496
|
|
Additions (disposals)
|
|
|
–
|
|
Balance, December 31, 2015
|
|
$
|
1,496
|
|
|
|
Intangible
assets
|
|
Balance, December
31, 2013
|
|
$
|
1,714
|
|
Disposals
|
|
|
–
|
|
Additions
|
|
|
354
|
|
Impairment
|
|
|
(135
|
)
|
Amortization
|
|
|
(325
|
)
|
Balance, December 31, 2014
|
|
|
1,608
|
|
Disposals
|
|
|
(179
|
)
|
Impairment
|
|
|
(472
|
)
|
Amortization
|
|
|
(227
|
)
|
Balance, December 31, 2015
|
|
$
|
730
|
|
|
|
Estimated remaining
|
|
As of December 31,
|
|
|
|
useful life
|
|
2015
|
|
|
2014
|
|
Intellectual property
|
|
6 years
|
|
$
|
1,440
|
|
|
$
|
2,105
|
|
Software and website development
|
|
1 year
|
|
|
65
|
|
|
|
65
|
|
Less: Accumulated amortization
|
|
|
|
|
(775
|
)
|
|
|
(562
|
)
|
Intangible assets, net
|
|
|
|
$
|
730
|
|
|
$
|
1,608
|
|
For the years
ended December 31, 2015 and 2014, the Company recorded amortization expense of $227 and $325, respectively.
The following
table outlines estimated future annual amortization expense for the next five years and thereafter:
|
|
Intellectual property
|
|
|
Software and website development
|
|
|
Total
|
|
2016
|
|
$
|
155
|
|
|
$
|
18
|
|
|
$
|
173
|
|
2017
|
|
|
153
|
|
|
|
–
|
|
|
|
153
|
|
2018
|
|
|
153
|
|
|
|
–
|
|
|
|
153
|
|
2019
|
|
|
153
|
|
|
|
–
|
|
|
|
153
|
|
2020
|
|
|
98
|
|
|
|
–
|
|
|
|
98
|
|
Balance, December 31, 2015
|
|
$
|
712
|
|
|
$
|
18
|
|
|
$
|
730
|
|
Note 6. Notes receivable
On February 26, 2015,
the Company signed a letter of intent with Tera Group, Inc., owner of TeraExchange, LLC, a Swap Execution Facility regulated by
the U.S. Commodity Futures Trading Commission, to negotiate a merger agreement. Since the merger agreement was not executed by
the execution date, the merger was aborted. Simultaneous with the letter of intent, on February 26, 2015, the Company purchased
a promissory note in the principal amount of $250 bearing interest at the rate of 5% per annum from the aggregate unpaid principal
balance and all accrued and unpaid interest are due and payable upon demand at any time after August 15, 2015. As of December
31, 2015, the Company has fully reserved against the collectability of this note and the corresponding accrued interest.
On December
31, 2015, the Company carried a Note from Viggle in the amount of $1,875. Due to the credit worthiness of Viggle, the Company
recognized an allowance of $300 (See “Note 17. Subsequent events” for restructured terms of the note receivable).
Note 7. Property and equipment
Property and equipment
related to continuing operations consisted of the following:
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Computer hardware and software
|
|
$
|
38
|
|
|
$
|
125
|
|
Furniture and fixtures
|
|
|
–
|
|
|
|
12
|
|
|
|
|
38
|
|
|
|
137
|
|
Less: Accumulated depreciation
|
|
|
(3
|
)
|
|
|
(126
|
)
|
Property and equipment, net
|
|
$
|
35
|
|
|
$
|
11
|
|
The Company recorded
depreciation expense of $14 and $29 for the years ended December 31, 2015 and 2014, respectively.
Note 8. Accrued expenses
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Professional fees
|
|
$
|
–
|
|
|
$
|
100
|
|
Independent director fees
|
|
|
15
|
|
|
|
56
|
|
Other
|
|
|
–
|
|
|
|
24
|
|
Total
|
|
$
|
15
|
|
|
$
|
180
|
|
Note 9. Series A Convertible Preferred
stock
On November 2,
2012, the Company closed a private placement sale of 1,380,362 shares of Series A Convertible Preferred Stock (“Preferred
Stock”), (including 2,760,724 warrants to purchase MGT Common Stock at a purchase price of $3.85 per share) for an aggregate
of $4.5 million. This transaction was approved by the NYSE MKT on October 26, 2012. The Preferred Stock is convertible into the
Company's Common Stock at a fixed price of $3.26 per share and carries a 6% dividend, payable in cash or additional
Preferred Stock, at the election of the Company. As of December 31, 2015, no warrants from this transaction remain outstanding.
For the years
ended December 31, 2015 and 2014, respectively, the Company issued 615 and 580 of Dividend Shares to the Preferred Stock holders.
Significant terms of the Preferred
stock, as specified in the Certificate of Designation
Conversion option
At any time, the
Preferred Stock shall be convertible (in whole or in part), at the option of the Holder, into such number of fully paid and non–assessable
shares of Common stock as is determined by dividing (x) the aggregate Stated Value of $3.26 per shares (“Stated Value”)
of Preferred stock that are being converted plus any accrued but unpaid dividends thereon as of such date that the Holder elects
to convert by (y) the Conversion Price ($3.26) then in effect on the date (the “Conversion Date”).
For the years
ending December 31, 2015 and 2014, no Preferred shares were converted into shares of the Company’s Common stock.
Liquidation preference
Upon the liquidation,
dissolution or winding up of the business of the Corporation, whether voluntary or involuntary, each holder of Preferred Stock
shall be entitled to receive, for each share thereof, a preferential amount in cash equal to (and not more than) the Stated Value
(the “Liquidation Amount”) plus all accrued and unpaid dividends. As of December 31, 2015 and 2014, the liquidation
preference value of the outstanding redeemable series A preferred stock is not material.
The Preferred
Stock Certificate of Designation contains a fundamental transactions clause that provides for the conditional redemption of this
security under certain circumstances that are not within the Company’s sole control. Management has therefore concluded
that the Preferred Stock requires temporary equity classification in accordance with ASC 480–10–S99 “Accounting
for Redeemable Equity Instruments” at its allocated value. The carrying amount of the Preferred Shares requires no adjustment
unless and until the conditional redemption events are probable. The Company does not consider the conditional redemption events
to be probable, as these events refer to fundamental change of control situations that do not currently exist, in the opinion
of management. Accordingly, management concluded that the conversion option embedded in the preferred shares does not require
bifurcation from the host contract, as the Preferred Stock has the characteristics of a residual interest and therefore are clearly
and closely related to the Common stock issuable upon the exercise of the conversion option.
Note 10. Sale of Common stock
On December 30,
2013, and as amended on March 27, 2014, the Company entered into an At–The–Market Offering Agreement (the “ATM
Agreement”) with Ascendiant Capital Markets, LLC (the “Manager”). Pursuant to the ATM Agreement, the Company
may offer and sell shares of its Common Stock (the “Shares”) having an aggregate offering price of up to $8.5 million
from time to time through the Manager. The Company can use the net proceeds from any sales of Shares in the offering for working
capital, capital expenditures, and general business purposes. For the year ended December 31, 2015, the Company sold approximately
3,155,000 Shares under the ATM Agreement for gross proceeds of approximately $1,695 before related expenses. The ATM Agreement
expired by its terms in August 2015.
On October 8,
2015, the Company entered into separate subscription agreements (the “Subscription Agreement”) with accredited investors
(the “Investors”) relating to the issuance and sale of $700 of units (the “Units”) at a purchase price
of $0.25 per Unit, with each Unit consisting of one share (the “Shares”) of the Company’s common stock, par
value $0.001 per share (the “Common Stock”) and a three year warrant (the “Warrants”) to purchase two
shares of Common Stock at an initial exercise price of $0.25 per share (such sale and issuance, the “Private Placement”).
The Warrants are
exercisable at a price of $0.25 on the earlier of (i) one year from the date of issue or (ii) the occurrence of certain corporate
events, including a private or public financing, subject to approval of the lead investor, in which the Company receives gross
proceeds of at least $7,500; a spinoff; one or more acquisitions or sales by the Company of certain assets approved by the stockholders
of the Company; or a merger, consolidation, recapitalization, or reorganization approved by the stockholders of the Company (each,
a “Qualifying Transaction”). The Warrants may be exercised by means of a “cashless exercise” following
the four–month anniversary of the date of issue, provided that the Company has consummated a Qualifying Transaction and
there is no effective registration statement registering the resale of the shares of Common Stock underlying the Warrants (the
“Warrant Shares”). The Company is prohibited from effecting an exercise of any Warrant to the extent that, as a result
of any such exercise, the holder would beneficially own more than 4.99% of the number of shares of Common Stock outstanding immediately
after giving effect to the issuance of shares of Common Stock upon exercise of such Warrant, which beneficial ownership limitation
may be increased by the holder up to, but not exceeding, 9.99%. The Warrants are also subject to certain adjustments upon certain
actions by the Company as outlined in the Warrants. Prior to receipt of shareholder approval, the warrants, when aggregated with
the shares of common stock issued in the offering, shall not be exercisable into more than 19.99% of the number of shares of Common
Stock outstanding as of the closing date.
On December 22,
2015 the Company sold $172 of common stock at a price of $0.25 per share in a Registered Direct offering.
Note 11. Stock incentive plan and
stock–based compensation
Stock incentive plan
The Company’s
board of directors established the 2012 Stock Incentive Plan (the “Plan”) on April 15, 2012, and the Company’s
shareholders ratified the Plan at the annual meeting of the Company’s stockholders on May 30, 2012. The Company has 415,000
shares of Common Stock that are reserved to grant Options, Stock Awards and Performance Shares (collectively the “Awards”)
to “Participants” under the Plan. The Plan is administered by the board of directors or the Compensation Committee
of the board of directors, which determines the individuals to whom awards shall be granted as well as the type, terms and conditions
of each award, the option price and the duration of each award.
At the annual meeting of the stockholders
of MGT held on September 27, 2013, stockholders approved an amendment to the Plan (the “Amended and Restated Plan”)
to increase the amount of shares of Common Stock that may be issued under the Amended and Restated Plan to 1,335,000 shares from
415,000 shares, an increase of 920,000 shares and to add a reload feature.
At the annual meeting of the stockholders
of MGT held on December 31, 2015, stockholders approved an amendment to the Plan (the “Amended and Restated Plan”)
to increase the amount of shares of Common Stock that may be issued under the Amended and Restated Plan to 3,000,000 shares from
1,335,000 shares, an increase of 1,665,000 shares.
Common Stock and
options granted under the Plan vest as determined by the Company’s Compensation and Nominations Committee and expire over
varying terms, but not more than seven years from date of grant. In the case of an Incentive Stock Option that is granted to a
10% shareholder on the date of grant, such Option shall not be exercisable after the expiration of five years from the date of
grant. No option grants were issued during the years ended December 31, 2015, and 2014.
Issuance of restricted shares – directors, officers
and employees
A summary of the
Company’s employee’s restricted stock as of December 31, 2015, is presented below:
|
|
Number
of shares
|
|
|
Weighted
average grant
date fair value
|
|
Non–vested at January 1, 2014
|
|
|
52,667
|
|
|
$
|
4.56
|
|
Granted
|
|
|
147,000
|
|
|
|
1.72
|
|
Vested
|
|
|
(77,000
|
)
|
|
|
3.77
|
|
Forfeited
|
|
|
(12,667
|
)
|
|
|
3.68
|
|
Non–vested at December 31, 2014
|
|
|
110,000
|
|
|
|
1.42
|
|
Granted
|
|
|
255,000
|
|
|
|
0.31
|
|
Vested
|
|
|
(309,500
|
)
|
|
|
0.53
|
|
Forfeited
|
|
|
(55,500
|
)
|
|
|
1.28
|
|
Non–vested at December 31, 2015
|
|
|
–
|
|
|
$
|
–
|
|
For the years ended December
31, 2015 and 2014, the Company has recorded $130 and $290, respectively, in employee and director stock–based compensation
expense, which is a component of selling, general and administrative expense in the Consolidated Statement of Operations.
In
the years ended December 31, 2015 and 2014, the Company did not allocate any stock–based compensation expense to non–controlling
interest.
Unrecognized compensation cost
As of December
31, 2015, unrecognized compensation costs related to non–vested stock–based compensation arrangements, was $0 and
(2014: $101) and is expected to be recognized over a weighted average period of 0 (2014: 0.66) years.
Stock–based compensation
– non–employees
For the year ended December
31, 2015 the Company granted and issued a total of 366,624 shares to non–employees for services rendered. The shares were
recorded at $161 using the closing market value on respective dates of issuance.
Subsequent to December 31, 2015, and through
the date of filing the Annual Report on Form 10–K, the Company granted and issued a total of 170,000 shares to non–employees
for services rendered. The shares were recorded at $51 using the closing market value on respective dates of issuance.
Warrants
As of December
31, 2015 the Company had 3,820,825 warrants outstanding at weighted average exercise price of $1.11 and an intrinsic value of
$nil. As of December 31, 2015, all issued warrants are exercisable and expire through 2018.
The following
table summarizes information about warrants outstanding at December 31, 2015:
|
|
Warrants outstanding
|
|
|
Weighted
average
exercise price
|
|
At January 1, 2014
|
|
|
920,825
|
|
|
$
|
3.44
|
|
Issued
|
|
|
100,000
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
3.75
|
|
Expired
|
|
|
–
|
|
|
|
–
|
|
At December 31, 2014
|
|
|
1,020,825
|
|
|
$
|
3.47
|
|
Issued
|
|
|
2,800,000
|
|
|
|
0.25
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Expired
|
|
|
–
|
|
|
|
–
|
|
At December 31, 2015
|
|
|
3,820,825
|
|
|
$
|
1.11
|
|
Note 12. Non–controlling interest
At December 31,
2015 the Company’s non–controlling interest was as follows:
|
|
MGT Gaming
|
|
|
FanTD
|
|
|
MGT Interactive
|
|
|
M2P Americas
|
|
|
Total
|
|
Non–controlling interest at January 1, 2014
|
|
$
|
585
|
|
|
$
|
1,431
|
|
|
$
|
96
|
|
|
$
|
(5
|
)
|
|
$
|
2,107
|
|
Acquisition of non–controlling interest in FanTD
|
|
|
–
|
|
|
|
(1,230
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
(1,230
|
)
|
Non–controlling share of losses
|
|
|
(215
|
)
|
|
|
(201
|
)
|
|
|
(4
|
)
|
|
|
(15
|
)
|
|
|
(435
|
)
|
Non–controlling interest at December 31, 2014
|
|
$
|
370
|
|
|
$
|
–
|
|
|
$
|
92
|
|
|
$
|
(20
|
)
|
|
$
|
442
|
|
Non–controlling share of losses
|
|
|
(342
|
)
|
|
|
–
|
|
|
|
4
|
|
|
|
(3
|
)
|
|
|
(341
|
)
|
Transfers from non–controlling interest
|
|
|
–
|
|
|
|
–
|
|
|
|
(96
|
)
|
|
|
–
|
|
|
|
(96
|
)
|
Non–controlling interest at December 31, 2015
|
|
$
|
28
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
(23
|
)
|
|
$
|
5
|
|
Note 13. Operating leases, commitments
and security deposit
Operating leases
In August 2014,
the Company entered into a lease modification agreement, extending its existing office lease in Harrison, NY for a period of one
year. Total rent payments over the 12–month period were $73 and the lease expired on November 30, 2015. A refundable rental
deposit of $39 was held in a restricted cash account as of December 31, 2015.
On October 26,
2015, the Company entered into an Office License Agreement commencing December 1, 2015. The term expires on November 30, 2016
and carries a monthly fee of $4, with one month (January) rent free. The Company paid a refundable service retainer of $6 and
a non–refundable set up fee of $1.
Total lease rental
expense for the years ended December 31, 2015 and 2014, was $77 and $113, respectively.
Commitments
On October 7,
2015, the Company entered into an amended and restated employment agreement with Robert Ladd, its Chief Executive Officer and
President, effective October 1, 2015. The agreement amends and restates in its entirety the employment agreement entered into
between the Company and Mr. Ladd in November 2012, as amended January 28, 2014. The term of the agreement expires on November
30, 2016, subject to automatic renewals of one year. The agreement provides for a base salary of $199 per year. Pursuant to the
agreement, the Company also granted Mr. Ladd 200,000 shares of unregistered Common Stock. Mr. Ladd is eligible for bonus compensation
and equity awards as may be approved in the discretion of the Compensation Committee and the Board of Directors. Upon
termination of his employment for reasons other than death, disability, or cause or upon resignation for good reason, Mr. Ladd
will be entitled to a severance payment equal to the higher of the aggregate amount of his base salary for the then remaining
term of the agreement or twelve times the average monthly base salary paid or accrued during the three full calendar months immediately
preceding such termination. All unvested stock options shall immediately vest and the exercise period of such options shall be
extended to the later of the longest period permitted by the Company’s stock option plans or ten years following the termination
date. The agreement also contains non–compete and change of control provisions.
Note 14. Income taxes
Significant components
of deferred tax assets were as follows as of December 31:
|
|
2015
|
|
|
2014
|
|
U.S. federal tax loss carry–forward
|
|
$
|
14,229
|
|
|
$
|
10,779
|
|
U.S. State tax loss carry–forward
|
|
|
1,137
|
|
|
|
1,498
|
|
U.S. federal capital loss carry–forward
|
|
|
188
|
|
|
|
188
|
|
U.S. foreign tax credit carry–forward
|
|
|
–
|
|
|
|
–
|
|
Equity–based compensation, fixed assets and other
|
|
|
–
|
|
|
|
1,598
|
|
Total deferred tax assets
|
|
|
15,554
|
|
|
|
14,063
|
|
Less: valuation allowance
|
|
|
(15,554
|
)
|
|
|
(14,063
|
)
|
Net deferred tax asset
|
|
$
|
–
|
|
|
$
|
–
|
|
As of December
31, 2015, the Company had the following tax attributes:
|
|
Amount
|
|
|
Begins to
expire
|
|
U.S. federal net operating loss carry–forwards
|
|
$
|
36,306
|
|
|
|
Fiscal 2023
|
|
U.S. State net operating loss carry–forwards
|
|
|
20,739
|
|
|
|
Fiscal 2031
|
|
U.S. federal capital loss carry–forwards
|
|
|
553
|
|
|
|
Fiscal 2015
|
|
As it is not more
likely than not that the resulting deferred tax benefits will be realized, a full valuation allowance has been recognized for
such deferred tax assets. For the year ended December 31, 2015, the valuation allowance increased by $1,491. Federal and state
laws impose substantial restrictions on the utilization of tax attributes in the event of an “ownership change,” as
defined in Section 382 of the Internal Revenue Code. Currently, the Company does not expect the utilization of tax attributes
in the near term to be materially affected as no significant limitations are expected to be placed on these tax attributes as
a result of previous ownership changes. If an ownership change is deemed to have occurred as a result of equity ownership changes
or offerings, potential near term utilization of these assets could be reduced.
The provision
for/(benefit from) income tax differs from the amount computed by applying the statutory federal income tax rate to income before
the provision for/(benefit from) income taxes. The sources and tax effects of the differences are as follows for the years ended
December 31:
|
|
2015
|
|
|
2014
|
|
Expected Federal Tax
|
|
|
(34.00
|
)%
|
|
|
(34.00
|
)%
|
State Tax (Net of Federal Benefit)
|
|
|
(5.48
|
)
|
|
|
(5.48
|
)
|
Permanent differences
|
|
|
—
|
|
|
|
0.12
|
|
Loss of NOL benefit of closed foreign entity
|
|
|
—
|
|
|
|
—
|
|
Write–off of deferred tax asset
|
|
|
—
|
|
|
|
4.29
|
|
Adjustments to deferred tax balances
|
|
|
—
|
|
|
|
(8.34
|
)
|
Foreign tax credit
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
0.05
|
|
Change in valuation allowance
|
|
|
39.48
|
|
|
|
43.36
|
|
Effective rate of income tax
|
|
|
0
|
%
|
|
|
0
|
%
|
The Company files
income tax returns in the U.S. federal jurisdiction, New York State and New Jersey jurisdictions. With few exceptions, the Company
is no longer subject to U.S. federal, state and local, or non–U.S. income tax examinations by tax authorities for years
before 2012.
Note 15. 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.
The Company’s chief operating decision–making group is composed of the Chief Executive Officer. The Company operates
in two segments, Gaming and Intellectual Property. Medicsight’s Software and Devices and Services are no longer considered
separate business segments and have been merged into the Intellectual Property segment. Certain corporate expenses are not allocated
to segments.
The Company evaluates
performance of its operating segments based on revenue and operating loss. Segment information as of December 31, 2015 and 2014,
are as follows:
|
|
Intellectual property
|
|
|
Gaming – Continuing Operations
|
|
|
Unallocated corporate/other
|
|
|
Total
|
|
|
Discontinued Operations
|
|
Year ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
102
|
|
|
$
|
2
|
|
|
$
|
–
|
|
|
$
|
104
|
|
|
$
|
640
|
|
Cost of revenue
|
|
|
(5
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
(5
|
)
|
|
|
(225
|
)
|
Gross margin
|
|
|
97
|
|
|
|
2
|
|
|
|
–
|
|
|
|
99
|
|
|
|
415
|
|
Operating loss
|
|
|
(268
|
)
|
|
|
(32
|
)
|
|
|
(2,422
|
)
|
|
|
(2,722
|
)
|
|
|
(1,068
|
)
|
Year ended December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
86
|
|
|
$
|
8
|
|
|
$
|
–
|
|
|
$
|
94
|
|
|
$
|
963
|
|
Cost of revenue
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(610
|
)
|
Gross margin
|
|
|
86
|
|
|
|
8
|
|
|
|
–
|
|
|
|
94
|
|
|
|
353
|
|
Operating loss
|
|
|
(401
|
)
|
|
|
(1,379
|
)
|
|
|
(2,240
|
)
|
|
|
(4,020
|
)
|
|
|
(1,609
|
)
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (excludes $39 of restricted cash)
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
359
|
|
|
$
|
359
|
|
|
$
|
–
|
|
Property and equipment
|
|
|
–
|
|
|
|
–
|
|
|
|
35
|
|
|
|
35
|
|
|
|
–
|
|
Intangible assets
|
|
|
710
|
|
|
|
20
|
|
|
|
–
|
|
|
|
730
|
|
|
|
–
|
|
Goodwill
|
|
|
–
|
|
|
|
1,496
|
|
|
|
–
|
|
|
|
1,496
|
|
|
|
–
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
–
|
|
|
|
–
|
|
|
|
35
|
|
|
|
35
|
|
|
|
–
|
|
Intangible assets
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Goodwill
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (excludes $138 of restricted cash)
|
|
$
|
11
|
|
|
$
|
12
|
|
|
$
|
625
|
|
|
$
|
648
|
|
|
$
|
806
|
|
Property and equipment
|
|
|
–
|
|
|
|
6
|
|
|
|
5
|
|
|
|
11
|
|
|
|
32
|
|
Intangible assets
|
|
|
1,577
|
|
|
|
31
|
|
|
|
–
|
|
|
|
1,608
|
|
|
|
809
|
|
Goodwill
|
|
|
–
|
|
|
|
1,496
|
|
|
|
–
|
|
|
|
1,496
|
|
|
|
4,948
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
41
|
|
Intangible assets
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
790
|
|
Goodwill
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Note 16. Investments and Fair Value
The authoritative guidance
for fair value measurements defines fair val
ue as the exchange price that would be received
for an asset or paid to transfer a liability (an exit price) in the principal or the most advantageous market for the asset or
liability in an orderly transaction between market participants on the measurement date. Market participants are buyers and sellers
in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact. The
guidance describes a fair value hierarchy based on the levels of inputs, of which the first two are considered observable and
the last unobservable, that may be used to measure fair value which are the following:
|
●
|
Level
1
– Quoted prices in active markets for identical assets or liabilities
|
|
●
|
Level
2
– Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or corroborated by
observable market data or substantially the full term of the assets or liabilities
|
|
●
|
Level
3
– Unobservable inputs that are supported by little or no market activity and that are significant to the value
of the assets or liabilities
|
The
following table provides the liabilities carried at fair value measured on a recurring basis as of December 31, 2015 and 2014:
December 31, 2015
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Investments – Viggle Common shares
|
|
$
|
444
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
444
|
|
Note 17. Subsequent events
On March 24, 2016
(the “Effective Date”), the Company entered into an Exchange Agreement (the “Agreement”) with DraftDay
Fantasy Sports, Inc. (“DraftDay”). The purpose of the Agreement was to exchange that certain outstanding promissory
note (the “Note”) in the principal amount of $1,875 issued on September 8, 2015, for other equity and debt securities
of DraftDay, after the Note went into default on March 8, 2016.
On the Effective Date,
the Note had an outstanding principal balance of $1,875 and accrued interest in the amount of $51 (the “Interest”).
Pursuant to the Agreement, a portion consisting of $825 of the outstanding principal of the Note was exchanged for 2,748,353 shares
of DraftDay’s common stock, and an additional portion of $110 of the outstanding principal was exchanged for 110 shares
(the “Preferred Shares”) of a newly created class of preferred stock, the Series D Convertible Preferred Stock. The
Preferred Shares are convertible into an aggregate of 366,630 shares of DraftDay’s common stock, except that conversions
shall not be effected to the extent that, after issuance of the conversion shares, MGT’s aggregate beneficial ownership
(together with that of its affiliates) would exceed 9.99%. Finally, DraftDay agreed to make a cash payment to MGT Sports for the
total amount of Interest. In exchange for the forgoing, MGT Sports and the Company agreed to waive all Events of Default under
the Note prior to the Effective Date and to release DraftDay from any rights, remedies and claims related thereto. After giving
effect to the forgoing, the remaining outstanding principal balance of the Note is $940 (the “Remaining Balance”).
The Remaining Balance of the Note shall continue to accrue interest a rate of 5% per annum, and all terms of the Note shall remain
unchanged except that the maturity date is changed to July 31, 2016.
F-23