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** **

 

** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 
| **     ****x**                | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
|                                                   |
| **For the quarterly period ended June 30, 2009.** |
|                                                   |
| **OR**                                                 |
| ** **                                             |
| **     ****o**                | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transitionperiod from           to         **

 

**Commissionfile number: 0-26886**

 

**MGT CAPITALINVESTMENTS, INC.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**              | ** ** | **13-4148725**                        |
|---------------------------|------------|---------------------------------------|
| (State  of Incorporation) |       | (I.R.S.  Employer Identification No.) |

 

**KensingtonCentre, 66 Hammersmith Road, London W14 8UD, UNITED KINGDOM**

(Address of principal executive offices,including zip code)

 

Registrant’s telephone number, including areacode: **011-44-20-7605-1151**

 

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

 

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

 

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

 

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the ExchangeAct).  Yes o  No x

 

As of August 14, 2009 the registrant hadoutstanding 32,550,590 shares of common stock, $0.001 par value, (excludes6,349,793 common shares held as treasury stock).

 

 

 

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NOTE REGARDING FORWARD LOOKING STATEMENTS

 

This Form 10-Q, including “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inItem 2, contains forward-looking statements that involve risks anduncertainties, as well as assumptions that, if they never materialize or proveincorrect, could cause the results of MGT Capital Investments, Inc. andits consolidated subsidiaries (the “Company”) to differ materially from thoseexpressed or implied by such forward-looking statements.  All statements other than statements ofhistorical fact are statements that could be deemed forward-looking statements,including any projections of revenue, gross profit, expenses, earnings orlosses from operations, synergies or other financial items; any statements ofthe plans, strategies and objectives of management for future operations,including the rate of market development and acceptance of medical imagingtechnology; the execution of restructuring plans; any statement concerningdevelopments, performance or industry rankings relating to products orservices; any statements regarding future economic conditions or performance;any statements of expectation or belief; and any statements of assumptionsunderlying any of the foregoing.  Therisks, uncertainties and assumptions referred to above include the performanceof contracts by suppliers, customers and partners; employee management issues;the difficulty of aligning expense levels with revenue changes; and other risksthat are described herein, including but not limited to the specific risksareas discussed in “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” in Item 2 of this report, and that areotherwise described from time to time in the Company’s Securities and ExchangeCommission reports filed after this report. The Company assumes no obligation and does not intend to update theseforward-looking statements.

 

The Company’s main operating currency is UK sterling(£).

 

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**INDEX**

 
| **PART I — FINANCIAL INFORMATION** |                                                                                                                                   |
|----------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                   | ** **                                                                                                                             | ** ** |
| Item 1                                       | Condensed  Consolidated Balance Sheets — June 30, 2009 (unaudited) and  December 31, 2008                               | 4 |
|                                         |                                                                                                                                   |   |
|                                         | Condensed Consolidated Statements of Operations — for  the three months ended June 30, 2009 (unaudited) and 2008 (unaudited) | 5 |
|                                         |                                                                                                                                   |   |
|                                         | Condensed Consolidated Statements of Operations — for  the six months ended June 30, 2009 (unaudited) and 2008 (unaudited)   | 6 |
|                                         |                                                                                                                                   |   |
|                                         | Condensed  Consolidated Statement of Stockholders’ Equity and Comprehensive Loss —  June 30, 2009 (unaudited)           | 7 |
|                                         |                                                                                                                                   |   |
|                                         | Condensed Consolidated Statements of Cash Flows — for  the six months ended June 30, 2009 (unaudited) and 2008 (unaudited)   | 8 |
|                                         |                                                                                                                                   |   |
|                                         | Notes to Condensed Consolidated Financial Statements                                                                                   | 9 |
|                                         |                                                                                                                                   |   |
| Item 2                                       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                            | 26 |
|                                         |                                                                                                                                   |   |
| Item 3                                       | Quantitative  and Qualitative Disclosure About Market Risk                                                                             | 38 |
|                                         |                                                                                                                                   |   |
| Item 4T                                      | Controls &  Procedures                                                                                                        | 39 |
|                                         |                                                                                                                                   |   |
| **PART II  — OTHER INFORMATION**   |                                                                                                                                   |
| ** **                                   | ** **                                                                                                                             | ** ** |
| Item 1                                       | Legal Proceedings                                                                                                                      | 39 |
|                                         |                                                                                                                                   |   |
| Item 1A                                      | Risk Factors                                                                                                                           | 39 |
|                                         |                                                                                                                                   |   |
| Item 2                                       | Unregistered  Sale of Equity Securities and Use of Proceeds                                                                            | 43 |
|                                         |                                                                                                                                   |   |
| Item 3                                       | Defaults  Upon Senior Securities                                                                                                       | 43 |
|                                         |                                                                                                                                   |   |
| Item 4                                       | Submission  of Matters to a Vote of Security Holders                                                                                   | 43 |
|                                         |                                                                                                                                   |   |
| Item 5                                       | Other Information                                                                                                                      | 43 |
|                                         |                                                                                                                                   |   |
| Item 6                                       | Exhibits                                                                                                                               | 44 |
|                                         |                                                                                                                                   |   |
| SIGNATURES                                   | 45                                                                                                                                     |

 

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

 

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**MGT CAPITALINVESTMENTS, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(inthousands, except share and per share amounts)**

 
|                                                                                                                       |   | **June 30,  2009** |   | **December 31,  2008** |   |
|----------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|-----------------------------|--------|
|                                                                                                                       |   | **(unaudited)**         |   | **Revised note 3**          |   |
| **Assets**                                                                                                                 |   |                    |   |                        |   |
| Current  assets:                                                                                                           |   |                    |   |                        |   |
| Cash and  cash equivalents                                                                                                 |   | $                       | 30,777 |                        | $      | 38,294 |   |
| Restricted  cash                                                                                                           |   | 1,000                   |   | —                      |   |
| Marketable  securities                                                                                                     |   | 224                     |   | 1,884                       |   |
| Accounts  receivable                                                                                                       |   | 35                      |   | 134                         |   |
| Other  receivables — related party                                                                                    |   | 59                      |   | 49                          |   |
| Prepaid  expenses and other current assets                                                                                 |   | 950                     |   | 851                         |   |
| Convertible  note                                                                                                          |   | 1,060                   |   | —                      |   |
| Total  current assets                                                                                                      |   | 34,105                  |   | 41,212                      |   |
|                                                                                                                       |   |                    |   |                        |   |
| Property and  equipment, at cost, net                                                                                      |   | 580                     |   | 706                         |   |
| Intangible  assets, net of accumulated amortization of $167 (2008: $100)                                                   |   | 232                     |   | 299                         |   |
| Investments,  at cost                                                                                                      |   | 370                     |   | 776                         |   |
| Security  deposits                                                                                                         |   | 296                     |   | 301                         |   |
| Goodwill                                                                                                                   |   | —                  |   | 12,157                      |   |
| Total assets                                                                                                               |   | $                       | 35,583 |                        | $      | 55,451 |   |
|                                                                                                                       |   |                    |   |                        |   |
| **Liabilities**                                                                                                            |   |                    |   |                        |   |
| Current  liabilities:                                                                                                      |   |                    |   |                        |   |
| Accounts  payable                                                                                                          |   | $                       | 1,964  |                        | $      | 2,877 |   |
| Accrued  expenses                                                                                                          |   | 1,616                   |   | 1,386                       |   |
| Deferred  revenue                                                                                                          |   | 71                      |   | 77                          |   |
| Total  current liabilities                                                                                                 |   | 3,651                   |   | 4,340                       |   |
|                                                                                                                       |   |                    |   |                        |   |
| Commitments  and contingencies                                                                                             |   |                    |   |                        |   |
|                                                                                                                       |   |                    |   |                        |   |
| **Stockholders’ equity**                                                                                              |   |                    |   |                        |   |
| Common  stock, $0.001 par value: 75,000,000 shares authorized; 38,900,383 shares  issued and 32,550,590 shares outstanding |   | 39                      |   | 39                          |   |
| Additional  paid in capital                                                                                                |   | 299,130                 |   | 298,376                     |   |
| Accumulated  other comprehensive loss                                                                                      |   | (3,941                  | )      | (4,959                      | )      |
| Accumulated  deficit                                                                                                       |   | (258,625                | )      | (239,450                    | )      |
|                                                                                                                       |   | 36,603                  |   | 54,006                      |   |
| Treasury  stock, at cost, 6,349,793 shares of common stock                                                                 |   | (18,912                 | )      | (18,912                     | )      |
| Total  stockholders’ equity                                                                                           |   | 17,691                  |   | 35,094                      |   |
| Non-controlling  interest                                                                                                  |   | 14,241                  |   | 16,017                      |   |
| Total equity                                                                                                               |   | 31,932                  |   | 51,111                      |   |
|                                                                                                                       |   |                    |   |                        |   |
| Total  stockholders’ equity, liabilities and non-controlling interest                                                 |   | $                       | 35,583 |                        | $      | 55,451 |   |

 

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

 

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** **

**MGT CAPITALINVESTMENTS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(inthousands, except share and per share amounts)**

**(unaudited)**

 
|                                                         |   | **Three months ended June 30,** |   |
|--------------------------------------------------------------|--------|-----------------------------------------------------|--------|
|                                                         |   | **2009**                                            |   | **2008** |   |
|                                                         |   |                                                |   | **Revised note 3** |   |
|                                                         |   |                                                |   |   |   |
| Revenues                                                     |   | $                                                   | 47     |   | $ | 85 |   |
| Cost of  revenue                                             |   | —                                              |   | (18 | ) |
| Gross profit                                                 |   | 47                                                  |   | 67 |   |
|                                                         |   |                                                |   |   |   |
| Operating  expenses                                          |   |                                                |   |   |   |
| Selling,  general and administrative expenses                |   | 4,375                                               |   | 7,965 |   |
| Research and  development cost                               |   | 871                                                 |   | 632 |   |
|                                                         |   | 5,246                                               |   | 8,597 |   |
|                                                         |   |                                                |   |   |   |
| Operating  loss                                              |   | (5,199                                              | )      | (8,530 | ) |
|                                                         |   |                                                |   |   |   |
| Interest and  other (expense)/income                         |   | (298                                                | )      | 637 |   |
|                                                         |   |                                                |   |   |   |
| Net loss  before non-controlling interest                    |   | (5,497                                              | )      | (7,893 | ) |
|                                                         |   |                                                |   |   |   |
| Net loss  attributable to non-controlling interest           |   | 1,652                                               |   | 2,757 |   |
|                                                         |   |                                                |   |   |   |
| Net loss  attributable to MGT Capital Investments, Inc. |   | $                                                   | (3,845 | ) | $ | (5,136 | ) |
|                                                         |   |                                                |   |   |   |
| Per share  data:                                             |   |                                                |   |   |   |
|                                                         |   |                                                |   |   |   |
| Basic and  diluted loss per share                            |   | $                                                   | (0.12  | ) | $ | (0.14 | ) |
|                                                         |   |                                                |   |   |   |
| Weighted  average number of common shares outstanding        |   | 32,550,590                                          |   | 35,539,746 |   |

 

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

 

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**MGT CAPITALINVESTMENTS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(inthousands, except share and per share amounts)**

**(unaudited)**

 
|                                                         |   | **Six   months ended June 30,** |    |
|--------------------------------------------------------------|--------|-----------------------------------------------------|---------|
|                                                         |   | **2009**                                            |    | **2008** |   |
|                                                         |   |                                                |    | **Revised note 3** |   |
|                                                         |   |                                                |    |   |   |
| Revenues                                                     |   | $                                                   | 121     |   | $ | 137 |   |
| Cost of  revenue                                             |   | (2                                                  | )       | (30 | ) |
| Gross profit                                                 |   | 119                                                 |    | 107 |   |
|                                                         |   |                                                |    |   |   |
| Operating  expenses                                          |   |                                                |    |   |   |
| Selling,  general and administrative expenses                |   | 8,062                                               |    | 13,470 |   |
| Research and  development cost                               |   | 1,330                                               |    | 1,227 |   |
| Impairment  of goodwill                                      |   | 12,157                                              |    | — |   |
|                                                         |   | 21,549                                              |    | 14,697 |   |
|                                                         |   |                                                |    |   |   |
| Operating  loss                                              |   | (21,430                                             | )       | (14,590 | ) |
|                                                         |   |                                                |    |   |   |
| Interest and  other (expense)/income                         |   | (993                                                | )       | 1,145 |   |
|                                                         |   |                                                |    |   |   |
| Net loss  before non-controlling interest                    |   | (22,423                                             | )       | (13,445 | ) |
|                                                         |   |                                                |    |   |   |
| Net loss  attributable to non-controlling interest           |   | 3,248                                               |    | 4,530 |   |
|                                                         |   |                                                |    |   |   |
| Net loss attributable to MGT Capital  Investments, Inc. |   | $                                                   | (19,175 | ) | $ | (8,915 | ) |
|                                                         |   |                                                |    |   |   |
| Per share  data:                                             |   |                                                |    |   |   |
|                                                         |   |                                                |    |   |   |
| Basic and  diluted loss per share                            |   | $                                                   | (0.59   | ) | $ | (0.23 | ) |
|                                                         |   |                                                |    |   |   |
| Weighted  average number of common shares outstanding        |   | 32,550,590                                          |    | 37,956,351 |   |

 

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

 

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**MGT CAPITALINVESTMENTS, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVELOSS**

**Revised note3**

**(inthousands)**

 
| ** **                      | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**    | ** ** | **Accumulated**   | ** ** | ** **   | ** ** | ** **             | ** ** | **Total**       | ** ** | **Non-**     | ** ** | ** ** | ** ** |
|---------------------------------|------------|-----------------------|------------|-------------|------------|-------------------|------------|-------------------|------------|--------------|------------|------------------------|------------|-----------------|------------|--------------|------------|------------|------------|
| ** **                      | ** ** | **Common stock** | ** ** | **paid-in** | ** ** | **comprehensive** | ** ** | **Accumulated**   | ** ** | **Treasury** | ** ** | **stockholders’** | ** ** | **controlling** | ** ** | **Total**    | ** ** |
| ** **                      | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **capital**       | ** ** | **income/(loss)** | ** ** | **deficit**  | ** ** | **stock**              | ** ** | **equity**      | ** ** | **interest** | ** ** | **equity** | ** ** |
|                            |       |                  |       |        |       |              |       |              |       |         |       |                   |       |            |       |         |       |       |       |
| BALANCE, DECEMBER 31, 2008      |       | 38,900                |       | $           | 39         |              | $          | 298,376           |       | $            | (4,959     | )                      | $          | (239,450        | )          | $            | (18,912    | )          | $          | 35,094 |   | $ | 16,017 |   | $ | 51,111 |   |
|                            |       |                  |       |        |       |              |       |              |       |         |       |                   |       |            |       |         |       |       |       |
| Stock-based compensation        |       | —                |       | —      |       | 754               |       | —            |       | —       |       | —                 |       | 754             |       | 275          |       | 1,029      |       |
| COMPREHENSIVE INCOME/(LOSS)     |       |                  |       |        |       |              |       |              |       |         |       |                   |       |            |       |         |       |       |       |
|                            |       |                  |       |        |       |              |       |              |       |         |       |                   |       |            |       |         |       |       |       |
| Net  loss for the period        |       | —                |       | —      |       | —            |       | —            |       | (19,175      | )          | —                 |       | (19,175         | )          | (3,248       | )          | (22,423    | )          |
|                            |       |                  |       |        |       |              |       |              |       |         |       |                   |       |            |       |         |       |       |       |
| Unrealized gains on investments |       | —                |       | —      |       | —            |       | 38                |       | —       |       | —                 |       | 38              |       | —       |       | 38         |       |
| Translation adjustment          |       | —                |       | —      |       | —            |       | 980               |       | —       |       | —                 |       | 980             |       | 1,197        |       | 2,177      |       |
| Total comprehensive loss        |       |                  |       |        |       |              |       |              |       |         |       |                   |       | (18,157         | )          | (2,051       | )          | (20,208    | )          |
|                            |       |                  |       |        |       |              |       |              |       |         |       |                   |       |            |       |         |       |       |       |
| BALANCE, JUNE 30, 2009     |       | 38,900                |       | $           | 39         |              | $          | 299,130           |       | $            | (3,941     | )                      | $          | (258,625        | )          | $            | (18,912    | )          | $          | 17,691 |   | $ | 14,241 |   | $ | 31,932 |   |

 

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

 

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**MGT CAPITALINVESTMENTS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands,except share and per share amounts)**

**(unaudited)**

 
|                                                                         |   | **Six  months ended June 30,** |    |
|------------------------------------------------------------------------------|--------|-----------------------------------------------|---------|
|                                                                         |   | **2009**                                      |    | **2008** |   |
|                                                                         |   |                                          |    | **Revised note 3** |   |
| Cash flows  from operating activities                                        |   |                                          |    |   |   |
| Net loss  attributable to MGT Capital Investments, Inc.                 |   | $                                             | (19,175 | ) | $ | (8,915 | ) |
|                                                                         |   |                                          |    |   |   |
| Adjustments  to reconcile net loss to net cash used in operating activities: |   |                                          |    |   |   |
| Loss  attributable to non-controlling interest                               |   | (3,248                                        | )       | (4,530 | ) |
| Stock-based  compensation expense                                            |   | 1,029                                         |    | 1,880 |   |
| Depreciation                                                                 |   | 171                                           |    | 235 |   |
| Amortization                                                                 |   | 67                                            |    | — |   |
| Loss on  impairment of goodwill                                              |   | 12,157                                        |    | — |   |
| Loss on  impairment of marketable securities deemed other than temporary     |   | 764                                           |    | — |   |
| Realized  loss on marketable securities                                      |   | 12                                            |    | — |   |
| Loss on  impairment of investments at cost                                   |   | 406                                           |    | — |   |
| (Increase)/decrease  in assets                                               |   |                                          |    |   |   |
| Accounts  receivable                                                         |   | 107                                           |    | (57 | ) |
| Accounts  receivable — related party                                    |   | (4                                            | )       | — |   |
| Prepaid  expenses and other current assets                                   |   | (107                                          | )       | (644 | ) |
| Increase/(decrease)  in liabilities                                          |   |                                          |    |   |   |
| Accounts  payable                                                            |   | (1,108                                        | )       | (713 | ) |
| Accrued  expenses                                                            |   | 115                                           |    | 1,549 |   |
| Deferred  revenue                                                            |   | (16                                           | )       | 99 |   |
| Net cash  used in operating activities                                       |   | (8,830                                        | )       | (11,096 | ) |
|                                                                         |   |                                          |    |   |   |
| Cash flows  from investing activities:                                       |   |                                          |    |   |   |
| Sale of  marketable securities                                               |   | 947                                           |    | 921 |   |
| Purchase of  marketable securities                                           |   | —                                        |    | (3,688 | ) |
| Purchase of  cash short-term deposits                                        |   | —                                        |    | (1,000 | ) |
| Purchase of  fixed assets                                                    |   | (16                                           | )       | (361 | ) |
| Purchase of  investments                                                     |   | —                                        |    | (960 | ) |
| Acquisition  of Maydeal.com                                                  |   | —                                        |    | (220 | ) |
| Deposit of  restricted cash                                                  |   | (1,000                                        | )       | — |   |
| Investment  in convertible note                                              |   | (1,000                                        | )       | — |   |
| Net cash  used in investing activities                                       |   | (1,069                                        | )       | (5,308 | ) |
|                                                                         |   |                                          |    |   |   |
| Cash flows  from financing activities:                                       |   |                                          |    |   |   |
| Purchase of  treasury stock (net of commissions)                             |   | —                                        |    | (18,899 | ) |
| Purchase of  subsidiary company stock                                        |   | —                                        |    | (1,251 | ) |
| Net cash  used in financing activities                                       |   | —                                        |    | (20,150 | ) |
|                                                                         |   |                                          |    |   |   |
| Effects of  exchange rates on cash                                           |   | 2,382                                         |    | (73 | ) |
| Net change  in cash and cash equivalents                                     |   | (7,517                                        | )       | (36,627 | ) |
| Cash and  cash equivalents, beginning of period                              |   | 38,294                                        |    | 92,373 |   |
| Cash and  cash equivalents, end of period                                    |   | $                                             | 30,777  |   | $ | 55,746 |   |

 

The accompanying notes are an integral part ofthese condensed consolidated financial statements

 

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**MGT CAPITALINVESTMENTS, INC.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(inthousands, except share and per share amounts)**

**(unaudited)**

 

**1. Organization, basis of presentation and liquidity**

 

The accompanying unaudited condensed consolidatedfinancial statements of MGT Capital Investments, Inc. have been preparedin accordance with generally accepted accounting principles for interimfinancial information and with the instructions to Form 10-Q and Rule 8-03of Regulation S-X.  Accordingly, they donot include all of the information and notes required by accounting principlesgenerally accepted in the United States of America. In the opinion ofmanagement, all adjustments, consisting only of normal recurring adjustments,have been included.  Operating resultsfor the six months ended June 30, 2009 are not necessarily indicative ofthe results that may be expected for any subsequent quarter or for theyear ending December 31, 2009. These condensed consolidated financial statements should be read inconjunction with the consolidated financial statements and notes theretoincluded in the Company’s Annual Report on Form 10-K for the year ended December 31,2008.  The condensed consolidated financial statements include theaccounts of the Company and its majority owned subsidiaries.  All intercompany accounts and transactionshave been eliminated.

 

MGT Capital Investments, Inc. (“MGT”, “theCompany”, “the Group”, “we”, “us”) is a holding company.  We currentlyhave controlling interests in our two main operating subsidiaries: Medicsightplc (“Medicsight”) and Medicexchange Limited (“Medicexchange”).  We alsohave wholly owned subsidiaries MGT Capital Investments (UK) Limited, MGTInvestments (Gibraltar) Limited, Medicexchange Inc. and Medicsight NomineesLimited.

 

·                  Medicsight andits wholly owned subsidiaries is a medical imaging software development companylisted on the AIM Market of the London Stock Exchange (ticker symbol MDST) thatdevelops and commercializes enterprise-wide Computer-Aided Detection (“CAD”) applicationswhich analyze Computer Tomography (“CT”) scans for the early detection andmeasurement of colorectal polyps and lung lesions.  The Company holds 86million shares (55%) of the 155 million shares issued capital of Medicsight.

 

·                  Medicexchange andits majority owned subsidiaries provide medical imaging professionals with aglobal web portal containing an online sales channel for diagnostic, treatmentand surgery planning solutions.  This combined with a variety of relevantclinical papers, training materials and content gives these professionalsaccess to information and products that they otherwise would have difficultyaccessing.  The Company holds 22.5 million shares (73%) of the 30.8million issued share capital of Medicexchange.  Medicexchange’s shares arenot publicly traded.

 

The Company has incurred significant operating lossessince inception and has just commenced generating revenue from operations.  As a result, the Company has generatednegative cash flows from operations and has an accumulated deficit of $258,625at June 30, 2009.  The Company isoperating in a developing industry based on new technology and its primarysource of funds to date has been through the issuance of securities.  While the Company is optimistic and believesappropriate actions are being taken, there can be no assurance thatmanagement’s efforts will be successful or that the products the Companydevelops and markets will be accepted by consumers.

 

**2. Summary of significant accounting policies**

 

*Principlesof consolidation*

 

The financial statements include the accounts of ourCompany and our wholly and majority owned subsidiaries.  Our main operating subsidiaries areMedicsight and Medicexchange.  Thefunctional currencies of our subsidiaries are their local currencies.  Allintercompany transactions and balances have been eliminated.  All foreigncurrency translation gains and losses arising on consolidation were recorded instockholders’ equity as a component of accumulated other comprehensive income(loss) in accordance with Statement of Financial Accounting Standards 

 

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(“SFAS”)No. 52, “*Foreign Currency Translation”.*  Non-controlling interest represents the minority equity investment inany of the MGT Capital Investments, Inc. group of companies, plus theminorities’ share of the net operating result and, in accordance with SFASNo. 160, “*Noncontrolling Interests inConsolidated Financial Statements”*, as amended, other components ofequity relating to the non-controlling interest.

 

*Use ofestimates*

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the USA requires management tomake estimates and assumptions that affect the amounts of assets andliabilities and disclosure of contingent liabilities at the date of thefinancial statements and the reported amounts of revenue and expenses duringthe reporting period. Actual results could differ from those estimates.

 

*Cash andcash equivalents*

 

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

 

*Marketablesecurities*

 

The Company invests some of its cash balances in short-termhighly liquid available for sale marketable securities, which are carried inour balance sheet at fair value in accordance with SFAS No. 115, “*Accounting for Certain Investments in Debt and EquitySecurities”,* with unrealized gains and losses reported instockholders’ equity as a component of accumulated other comprehensive income(loss) - unless the Company concludes that unrealized losses represent another-than-temporary impairment.  In thatcircumstance, such losses would be reflected in the consolidated statements ofoperations.  Realized gains and lossesare included in other income/(expense). Fair value is based upon quoted market prices for these or similarinstruments.

 

*Investments*

 

Investments consists of equity ownership in variouscorporations where our investment is less than 20% of issued sharecapital.  The Company records theseinvestments at historical cost, subject to any provision for impairment.

 

*Property andequipment*

 

Property and equipment are stated at cost.  Depreciation is calculated using the straightline method on the various asset classes over their estimated useful lives,which range from two to five years. Leasehold improvements are depreciated over the term of the lease.

 

*Goodwill*

 

We account for goodwill in accordance with theprovisions of SFAS No. 142, “*Goodwill and OtherIntangible Assets*”.  Under SFAS No. 142, goodwill andintangible assets with indefinite lives are reviewed for impairment annually ormore frequently if events or changes in circumstances indicate that the assetmight be impaired.  The first step of thegoodwill impairment test, used to identify potential impairment, compares thefair value of a reporting unit with its carrying amount, including goodwill.  We compare the book value to the market value(market capitalization plus a control premium) for the reporting unit. If themarket value exceeds the book value, goodwill is considered not impaired, andthus the second step of the impairment test is not necessary.  If our book value exceeds the market value,the second step of the goodwill impairment test is performed to measure theamount of impairment loss, if any.  Thesecond step of the goodwill impairment test, used to measure the amount ofimpairment loss, compares the implied fair value of the goodwill with the bookvalue of the goodwill.  If the carryingvalue of the goodwill exceeds the implied fair value of the goodwill, animpairment loss would be recognized in an amount equal to the excess.  Any loss recognized cannot exceed thecarrying amount of goodwill.  After agoodwill impairment loss is recognized, the adjusted 

 

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carryingamount of goodwill is its new accounting basis. Subsequent reversal of a previously recognized goodwill impairment lossis prohibited once the measurement of that loss is completed.

 

As of March 31, 2009 Medicsight’s share price hadfallen to a level at which book value exceeded market value.  As aconsequence, we carried out an impairment review at the end of the firstquarter of 2009 and concluded that the goodwill was fully impaired.  Seenote 9.

 

*Impairmentof long-lived assets and long-lived assets to be disposed of*

 

The Company evaluates the carrying value of long-livedassets for impairment whenever events or changes in circumstances indicate thatthe carrying amount of an asset may not be recoverable.  The Company’s assessment for impairment of anasset involves estimating the undiscounted cash flows expected to result fromuse of the asset and its eventual disposition. An impairment loss recognized is measured as the amount by which thecarrying amount of the asset exceeds the fair value of the asset.

 

*Foreigncurrency translation*

 

The accounts of the Company’s foreign subsidiaries aremaintained using the local currency as the functional currency. For thesesubsidiaries, assets and liabilities are translated into US dollars atperiod-end exchange rates, and income and expense accounts are translated ataverage monthly exchange rates.  Netgains and losses from foreign currency translation are excluded from operatingresults and are accumulated as a separate component of stockholders’ equity.

 

Gains and losses on foreign currency transactions arereflected in selling, general and administrative expenses in the incomestatement.

 

*Revenuerecognition*

 

*Medicsight*

 

The Company recognizes revenue in accordance withAmerican Institute of Certified Public Accountants (“AICPA”) Statement ofPosition (“SOP”) 97-2, “*Software RevenueRecognition”*, as amended by SOP 98-4 and SOP 98-9, as well asTechnical Practice Aids issued from time to time by the AICPA, and SEC StaffAccounting Bulletin No. 104.  TheCompany recognizes revenue when it is realized or realizable and earned.  The Company considers revenue realized orrealizable and earned when it has persuasive evidence of an arrangement, theproduct has been shipped or the services have been provided to the customer,the sales price is fixed or determinable, and collectability is probable.

 

License fee revenue is derived from the licensing ofcomputer software. Maintenance revenue is derived from softwaremaintenance.  The Company’s softwarelicenses are generally sold as part of an arrangement that includesmaintenance and support.

 

The Company licenses software and sells maintenancethrough visualization solution partners and original equipmentmanufacturers.  The Company receivesregular sales reports detailing the number of licenses sold by originalequipment manufacturers, value-added resellers and independent distributors(collectively, “Resellers”) to end users. The Company generally offers terms that require payment 30 days frominvoicing.

 

Provided the Reseller i) assumes all risk of thepurchase, ii) has the ability and obligation to pay regardless of receivingpayment from the end user, and all other revenue recognition criteria are met,license revenue from Resellers is recognized upon shipment of its product tovendors (“sell-in basis”).

 

Additionally:

 

Software — revenue from license fees is recognizedwhen notification of shipment to the end user has occurred, there are nosignificant Company obligations with regard to implementation and the Company’sservices are not considered essential to the functionality of other elements ofthe arrangement.

 

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Services — revenue from maintenance and supportarrangements is deferred and recognized ratably over the term of themaintenance and support arrangements.

 

Multiple-element arrangements — the Company entersinto arrangements with resellers that include a combination of softwareproducts, maintenance and support.  Forsuch arrangements, the Company recognizes revenue using the residualmethod.  The Company allocates the totalarrangement fee among the various elements of the arrangement based on the fairvalue of each of the undelivered elements determined by vendor-specificobjective evidence.  The fair value ofmaintenance and support services is established based on renewal rates.  In software arrangements for which theCompany does not have vendor-specific objective evidence of fair value for allelements, revenue is deferred until the earlier of when vendor-specificobjective evidence is determined for the undelivered elements (residual method)or when all elements for which the Company does not have vendor-specificobjective evidence of fair value have been delivered.

 

As of June 30, 2009 we recorded $48 of deferredrevenue relating to license revenue and $23 relating to support and maintenanceservices, compared with $42 relating to license revenue and $20 relating tosupport and license revenue at December 31, 2008.

 

*Medicexchange*

 

We recognize revenue when the following revenuerecognition criteria are met: persuasive evidence of an arrangement exists,services have been rendered, the selling price is fixed or determinable, andcollectability is reasonably assured. Deferred revenue is recorded when payments are received in advance ofperforming our service obligations.

 

As of June 30, 2009 we recorded $nil deferredrevenue relating to Medicexchange, compared with $15 at December 31, 2008.

 

*Research and development*

 

Costs incurred in connection with the development ofsoftware products that are intended for sale are accounted for in accordancewith SFAS No. 86, “*Accounting for the Costsof Computer Software to be Sold, Leased, or Otherwise Marketed*”.  Costs incurred prior to technologicalfeasibility being established for the product are expensed as incurred.

 

Technological feasibility is established uponcompletion of a detailed program design or, in its absence, completion of aworking model.  Thereafter, all softwareproduction costs can be capitalized and subsequently reported at the lower ofun-amortized cost or net realizable value. Capitalized costs are amortized based on current and future revenue foreach product with an annual minimum equal to the straight-line amortizationover the remaining estimated economic life of the product.  Amortization commences when the product isavailable for general release to customers.

 

The Company concluded that no such expenditures neededto be capitalized because the Company did not incur any material softwareproduction costs and all such costs incurred represent research and developmentcosts.  The Company’s research anddevelopment costs are comprised of staff cost, consultancy costs and researchand development software costs for the Medicsight CAD system.

 

For the six months ended June 30, 2009 and 2008the Company expended $1,330 and $1,227 respectively, for research anddevelopment expenses for Medicsight CAD and its products.

 

*Fair value of financial instruments*

 

On January 1, 2008 the Company adopted theprovisions of SFAS No. 157, “*Fair Value Measurements*”,for financial assets and financial liabilities.  In accordance withFinancial Accounting Standards Board Staff Position (“FSP”) SFAS No. 157-2,“*Effective Date of FASB Statement No. 157*”,the Company applied SFAS No. 157 for non-financial assets andnon-financial liabilities on January 1, 2009.  SFAS No. 157 defines fair value,establishes a framework for measuring fair value and expands disclosure aboutfair value measurements.

 

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*Income taxes*

 

Effective January 1, 2007 the Company adoptedFASB Interpretation No. 48, “*Accountingfor Uncertainty in Income Taxes”,*an interpretation of FASB Statement No. 109*, “Accounting for Income Taxes”*(“FIN 48”).  FIN 48 clarifies theaccounting for uncertainty in income taxes recognized in financial statements andrequires the impact of a tax position to be recognized in the financialstatements if that position is more likely than not of being sustained by thetaxing authority.  At the adoption date of January 1, 2007 and alsoas of June 30, 2009, the Company did not have any unrecognized taxbenefits.  We do not expect that theamount of unrecognized tax benefits will significantly increase or decreasewithin the next twelve months.  The Company’s policy is to recognizeinterest and penalties related to tax matters in the income tax provision inthe Consolidated Statements of Operations.  There was no interest andpenalties for the six months ended June 30, 2009 and 2008.  Tax years beginning in 2004 are generallysubject to examination by taxing authorities, although net operating lossesfrom all years are subject to examinations and adjustments for at least threeyears following the year in which the attributes are used.

 

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

 

*Loss per share*

 

Basic loss per share is calculated by dividing netloss attributable to the ordinary shareholders by the weighted average numberof common shares outstanding during the period. Diluted loss per share is calculated by dividing the net lossattributable to the ordinary shareholders by the sum of the weighted averagenumber of common shares outstanding and the diluted potential ordinary shares.

 

The computation of diluted loss per share excludes alloptions because they are anti-dilutive. For the six months ended June 30, 2009 there were 13,286,250options excluded with a weighted average exercise price of $0.89 pershare.  For the six months ended June 30, 2008 there were 15,082,500options excluded with a weighted average exercise price of $1.72 per share.

 

*Comprehensive income (loss)*

 

Comprehensive income (loss) as defined by SFAS No. 130,“*Reporting Comprehensive Income*”,includes net income (loss) and items defined as other comprehensive income(loss).  SFAS No. 130 requires thatitems defined as other comprehensive income (loss), such as foreign currencytranslation adjustments and unrealized gains and losses on certain marketablesecurities, be separately classified in the financial statements.  Such items are reported in the consolidatedstatements of stockholders’ equity as comprehensive (loss).

 

*Segment reporting*

 

The Company follows the provisions of SFAS No. 131,“*Disclosure About Segments of an Enterprise andRelated Information*”.  Theapproach designates the internal organization that is used by management formaking operating decisions and assessing performance as the source of theCompany’s reportable segments. SFAS No. 131 also requires disclosuresabout products and services, geographic areas and major customers.  Weoperate in two segments, Medicsight, a medical imaging company, andMedicexchange, a web portal for radiologists.

 

*Stock options*

 

The Company follows SFAS No. 123 (revised), “*Share-Based Payment” *, which requiresthat compensation cost relating to share-based payment transactions berecognized as an expense in the 

 

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financialstatements, and that measurement of that cost be based on the estimated fairvalue of the equity or liability instrument issued.  SFAS No. 123(R) alsorequires that forfeitures be estimated and recorded over the vesting period ofthe instrument.

 

**Recent accounting pronouncements**

 

In June 2009 the Financial Accounting Standards Board (“FASB”)approved the FASB Accounting Standards Codification (the “Codification”) as thesingle source of authoritative non-governmental GAAP.  All existing accounting standard documents,such as FASB, American Institute of Certified Public Accountants, EmergingIssues Task Force and other related literature, excluding guidance from theSecurities and Exchange Commission, will be superseded by theCodification.  All othernon-grandfathered, non-SEC accounting literature not included in theCodification will become non-authoritative. The Codification does not change GAAP, but instead introduces a newstructure that will combine all authoritative standards into a comprehensive,topically organized online database.  TheCodification will be effective for interim or annual periods ending after September 15,2009, and will impact the Company’s financial statement disclosures beginningwith the quarter ending September 30, 2009 as all future references toauthoritative accounting literature will be referenced in accordance with the Codification.  There will be no changes to the content ofthe Company’s financial statements or disclosures as a result of implementingthe Codification.

 

In June 2009 the FASB issued FAS 167, *“Amendments to FASB Interpretation No. 46(R)”,* whichchanges the approach to determining the primary beneficiary of a variableinterest entity (“VIE”) and requires companies to more frequently assesswhether they must consolidate VIEs.  Thisnew standard is effective for us beginning on January 1, 2010.  We are currently assessing the potentialimpacts, if any, on our consolidated financial statements.

 

On April 1, 2009 we adopted the provisions ofthree Staff Positions (“FSPs”) that are intended to provide additionalapplication guidance and enhance disclosures about fair value measurements andimpairments of securities.  FSP FAS 157-4 clarifies the objective andmethod of fair value measurement even when there has been a significantdecrease in market activity for the asset being measured.  FSP FAS 115-2and FAS 124-2 establish a new model for measuring other-than-temporaryimpairments for debt securities, including establishing criteria for when torecognize a write-down through earnings versus other comprehensiveincome.  FSP FAS 107-1 and APB 28-1 expand the fair value disclosuresrequired for all financial instruments within the scope of SFAS No. 107, “*Disclosures about Fair Value of Financial Instruments*”, tointerim periods.  The adoption of FSP FAS 157-4 and FSP FAS 115-2 and FAS124-2 did not have a material impact on our consolidated financialstatements.  The adoption of FSP FAS 107-1 and APB 28-1 has resulted inincreased disclosures in our interim periods.

 

On January 1, 2009 we adopted the provisions ofSFAS No. 141 (Revised 2007), “*Business Combinations*”. SFAS No. 141(R) significantly changes the accounting for businesscombinations.  Under SFAS No. 141(R), an acquiring entity is requiredto recognize all the assets acquired and liabilities assumed in a transactionat the acquisition-date fair value with only limited exceptions.  SFASNo.141(R) also includes a substantial number of new disclosurerequirements.  In April 2009 the FASB issued FSP FAS 141(R)-1 whichamends SFAS No. 141(R) by establishing a model to account for certainpre-acquisition contingencies.  Under the FSP, an acquirer is required torecognize at fair value an asset acquired or a liability assumed in a businesscombination that arises from a contingency if the acquisition-date fair valueof that asset or liability can be determined during the measurement period. If the acquisition-date fair value cannot be determined, then the acquirershould follow the recognition criteria in SFAS No. 5, “*Accounting for Contingencies*”, and FASB Interpretation No. 14,“*Reasonable Estimation of the Amount of a Loss — aninterpretation of FASB Statement No. 5*”.  SFAS No. 141(R) andFSP FAS 141(R)-1 became effective for us beginning January 1, 2009, andwill apply prospectively to business combinations completed on or after thatdate.

 

In May 2009, the FASB issued Statement ofFinancial Accounting Standards No. 165, Subsequent Events (“SFAS 165”).SFAS 165 establishes general standards of accounting for and disclosure ofevents that occur after the balance sheet date but before financial statementsare issued or are available to be issued. In particular, SFAS 165 sets forththe period after the balance sheet date during which management should evaluateevents or transactions that may occur for potential recognition or disclosurein the financial statements, the circumstances under which an entity shouldrecognize events 

 

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ortransactions occurring after the balance sheet date in its financial statementsand the disclosures that an entity should make about events or transactionsthat occurred after the balance sheet date. SFAS 165 requires the disclosure of the date through which an entity hasevaluated subsequent events and the basis for that date, that is, whether thatdate represents the date the financial statements were issued or were availableto be issued. This Statement is effective for financial statements issued forinterim and annual periods ending after June 15, 2009 and it has not had amaterial impact on our financial reporting.

 

**3. Non-controlling interest**

 

On January 1, 2009 we adopted the provisions ofSFAS No. 160, “*Noncontrolling Interestsin Consolidated Financial Statements — an Amendment of ARB No. 51”*. SFAS No. 160 establishes accounting and reporting standards for thenon-controlling interest (formerly known as minority interest) in a subsidiary(which may include variable interest entities) and for the deconsolidation of asubsidiary.  Significant changes include: balance sheet and incomestatement presentation and expanded disclosures; accounting for changes in aparent’s ownership interest in a subsidiary that do not result indeconsolidation; and recognition and measurement of a gain or loss when asubsidiary is deconsolidated.  For balance sheet presentation,non-controlling interests are now recorded within equity and so-called“mezzanine” display is not permitted.  In income statements, the amount ofincome attributable to the non-controlling interest is not a deduction thatimpacts net income.  As a result of these requirements, various financialstatements ratios have been impacted.  The statement requires prospectiveapplication except for the presentation and disclosure requirements, which mustbe applied retrospectively for all periods presented.  Prior periods were reclassified to conform tothe current period presentation.

 

**4. Cash and cash equivalents**

 

We invest our cash in short-term deposits with majorbanks.  At June 30, 2009 we held $30,777 in cash and cash equivalents.

 

Cash and cash equivalents consist of cash andtemporary investments with maturities of 90 days or less when purchased.

 

*Concentrations*

 

The Company maintains its cash and cash equivalents atmajor financial institutions in Europe.  Cash held in foreign institutionsis not insured by the Federal Deposit Insurance Corporation and amounted to$30,777 as of June 30, 2009 and $38,294 as of December 31,2008.  The Company periodically evaluates the relative credit standing offinancial institutions considered in its cash investment strategy.

 

**5.  Restricted cash**

 

$1,000 has been classified as restricted cash in linewith the conditions of the second closing in the XShares Group, Inc.Securities Purchase Agreement (see note 6).

 

**6.  Convertible note**

 

On May 14, 2009 we executed and delivered aConvertible Promissory Note (the “Note”) in the principal amount of $1,100 withXShares Group, Inc. (“XShares”), a Delaware corporation.  We havepreviously invested in XShares (see note 8). The principal amount included a fee of $100 payable to us.  All ofthe Note shall be converted into Series B Preferred Stock of XShares (the“Series B Shares”) at the Initial Closing (as defined below).  In theevent that an Amended and Restated Certificate of Incorporation designating therights and preferences of the Series B Shares (the “Certificate”) is notapproved by a majority of the stockholders of XShares, then the entire unpaidprincipal sum of the Note, plus interest thereon, shall be immediately paid tothe Company or converted into shares of XShares’ common stock at a price of$0.001 per share at the option of the Company.  A copy of the 

 

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Noteis annexed as Exhibit 10.5 to our quarterly report on Form 10-Q forthe three months ended March 31, 2009.

 

Simultaneously with executing the Note, we enteredinto a Securities Purchase Agreement (the “SPA”) with XShares, pursuant to whichwe agreed to purchase an aggregate of 73,943,662 Series B Shares at apurchase price of $0.0284 per share for at total of $2,100.  The SPAcontains the standard representations and warranties for a transaction of thistype and is subject to the approval by the stockholders of XShares of theCertificate.  The Series B Sharesare redeemable at the option of XShares, at a price of 1.05 times the originalissue price.

 

It is anticipated that the purchase of the Series BShares will take place in two closings.

 

1.               The initialclosing of 38,732,394 Series B Shares will occur upon the filing of theCertificate with the Secretary of State of the State of Delaware and certainother conditions  (the “InitialClosing”).

 

2.               The secondclosing of 35,211,268 Series B Shares will occur upon the later of (i) July 16,2009 or (ii) five days following the filing of the Certificate.  Acopy of the SPA and a form of the Certificate are annexed as Exhibits 10.3 and10.4, respectively, to our quarterly report on Form 10-Q for the threemonths ended March 31, 2009.

 

The fee of $100 payable to the Company is recognizedratably over the term of the Note; this has been recognized in interestincome.  We also accrue coupon interestat an annualized rate of 10% as provided for in the Note.

 

On August 5, 2009 an amendment to the SPA wassigned (see note 17).  This, together with certainother terms and conditions, changed the date of the initial closing until December 31,2009, unless otherwise agreed by us.

 

On August 6, 2009 a Second Amendment to the SPA was signed (see note17).  This amended the terms of thesecond closing to allow for the investment to be made in a convertible notewith a maturity date of December 31, 2009.

 

**7.  Marketable securities**

 

At December 31, 2008 investments in marketablesecurities consisted of HipCricket Inc. (“HipCricket”) and a fund managed byBank Sarasin & Company Limited. In the three months ended June 30, 2009 we liquidated our holdingsin the fund managed by Sarasin and our investments in marketable securities at June 30,2009 related solely to HipCricket.  Ourholdings in marketable securities as of June 30, 2009 and December 31,2008 were as follows:

 
|                       |   | **Market  value** |   | **Cost** |   | **Unrealized  gains** |   | **Transfer to net  loss** | ** ** |
|----------------------------|--------|-------------------|--------|----------|--------|-----------------------|--------|-------------------------------------|------------|
|                       |   |              |   |     |   |                  |   |                                |       |
| At December 31,  2008 |   | $                 | 1,884  |     | $      | 2,985                 |   | $                                   | —     |   | $ | (1,101 | ) |
| At June 30, 2009      |   | $                 | 224    |     | $      | 186                   |   | $                                   | 38         |   | $ | — |   |

 

In the three months ended March 31, 2009 weaccounted for all losses in net income as we considered the reductions in valueto be other than temporary.  In the threemonths ended June 30, 2009 the rise in the fair value in our holdings inavailable-for-sale marketable securities has been accounted for in a componentof equity and disclosed in other comprehensive income.

 

*Valuation of investments held at fair value*

 

On January 1, 2008 the Company adopted theprovisions of SFAS No. 157, “*Fair Value Measurements*”,for financial assets and financial liabilities.  SFAS No. 157 definesfair value, establishes a framework for measuring fair value in generallyaccepted accounting principles and expands disclosures about fair valuemeasurements.  Effective January 1, 2009 the Company adopted theprovisions of SFAS No. 157 related to other nonfinancial assets andliabilities, in accordance with Financial Accounting Standards Board Staff Position(“FSP”) SFAS No. 157-2, “*Effective Date of FASBStatement No. 157*”.

 

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The adoption of SFAS No. 157 also requires theCompany to attribute our investments using the fair value hierarchy defined inthe statement.  The hierarchy consists ofthe following three levels with associated definitions:

 

Level 1 inputs are unadjusted, quoted prices in activemarkets for identical assets or liabilities

 

Level 2 inputs are inputs other than quoted pricesincluded within Level 1 that are observable for the asset orliability, either directly or indirectly.  Level 2 inputs includequoted prices for identical assets or liabilities in markets that are notactive, that is, markets in which there are few transactions.

 

Level 3 inputs are unobservable inputs that aresupported by little or no market activity.  These inputs requiresignificant management judgment and reflect our estimate of assumptions thatmarket participants would use in pricing the asset.

 

We have valued HipCricket using its closing price onthe AIM market of the London Stock Exchange as of June 30, 2009.  Due to the low number of market transactionsfor HipCricket each transaction can potentially and has historically had asignificant effect on the share price. It is for this reason we deem these to be a Level 2 input in the fairvalue hierarchy.  However, we stillbelieve that this is the best price at which to determine the current value.

 

The following table analyzes our investments holdingsusing the fair value hierarchy.

 
|             | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Total** | ** ** |
|------------------|------------|------------------|------------|------------------|------------|-----------|------------|
|             |       |             |       |             |       |      |       |
| HipCricket  Inc. |       | $                | —     |             | 224        |      | $          | 224 |   |
|                  |            |                  |            |                  |            |           |            |  |  |

 

Thefollowing table analyzes the losses incurred on the investments during the sixmonths ended June 30, 2009

 
|                         |   | **Loss on  impairment  deemed  other than  temporary** |   | **Unrealized  gains** |   | **Realized  losses** |   | **Total** |   |
|------------------------------|--------|-------------------------------------------------------------|--------|-----------------------|--------|----------------------|--------|-----------|--------|
|                         |   |                                                        |   |                  |   |                 |   |      |   |
| HipCricket  Inc.             |   | $                                                           | (739   | )                     | 38     |                 | — |      | $      | (701 | ) |
| Other  marketable securities |   | (25                                                         | )      | —                |   | (12                  | )      | (37       | )      |
| Total                        |   | $                                                           | (764   | )                     | 38     |                 | (12    | )         | $      | (738 | ) |

 

**8.****    ****Investments at cost**

 

We account for investments in non-marketablesecurities under the cost method of accounting where we own less than a 20%interest in each of the companies and we do not have significant influence overthe entity.  We continually review eachinvestment to assess for other-than-temporary decreases in value.

 

*Eurindia Limited*

 

In 2000 MGT invested in Eurindia Limited (“Eurindia”),a UK company that invested in IT start-up companies.  MGT has a 6% holdingin Eurindia and accounts for this investment on a cost basis.

 

We carried out an impairment review of our holdings inEurindia Limited as of December 31, 2008.  Eurindia Limited’smanagement had informed us that they intended to pay a liquidating dividend ofbetween 30 cents and 50 cents per share in the first half of 2009.  Weassumed the dividend to be the lower of these two values and impaired ourholding to the value of 30 cents per share. As of June 30, 2009 the investment had not been liquidated.

 

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Eurindia Limited’s management has informed us that itnow intends to liquidate the investment by means of an IPO.  Due to the turbulence in financial markets,however, and specifically the weakness of the market for IPOs, we are currentlynot able to accurately ascertain the potential value of the investment on anIPO or the timescale in which it might be realized.  As a consequence we have fully impaired ourinvestment and recognized an impairment loss of $176 in net loss.  We consider the amount of this impairment tobe a Level 3 input under the SFAS No. 157 fair value hierarchy, since itis based on significant unobservable inputs.

 

*XShares Group*

 

In 2007 the Company invested $960 in Series Cpreferred shares of XShares Group, Inc. (“XShares”), an investment advisorthat creates, issues and supports exchange traded funds with a particularhealthcare specialty.  In the year ended December 31,2008 the Company invested an additional $2,040 in shares of XShares bringingthe total invested to $3,000.  We accountfor these investments on a cost basis as our total holdings are less than 20%.  In Fiscal 2008 we reviewed the carrying valueof our investment in XShares.  XShareswas in the process of attempting to raise funds to drive the businessforward.  As of December 31, 2008 weimpaired this investment to $600.  As of June 30, 2009 thefund-raising was partially complete and, after reviewing our holding, weimpaired the investment to $370, which we believe approximates fair value.

 

We estimated this impairment based on management’sreview and discussion of the strategy and business plan of XShares and reviewof draft Fiscal 2008 financial accounts prepared by an independentaccountant.  These inputs are subject tomanagement’s judgment and we have therefore deemed them to be Level 3 inputs inthe fair value hierarchy.  The value ofour investment has been reduced as previously invested cash has been used tofund business operations and as yet the business is not generating sufficientcash.  However, we have reviewed XShares’business plan and we have adjusted our investment to a level we believereflects the future market valuation and with no active market we believe thisis the best method with which to determine the value of our investment.

 

In the three months ended June 30, 2009 weinvested $1,000 in a convertible note with a principal of $1,100 and havereserved $1,000 for a further investment in XShares.

 

The following table presents the changes in Level 3instruments for the six months ended June 30, 2009.

 
|                      |   | **January 1, 2009** |   | **Purchases** |   | **Impairment  losses  included in  earnings** |   | **June 30****,  2009** |   | **Change in  impairment  losses relating  to instruments  still held at****June 30****,  2009** |   |
|---------------------------|--------|-------------------------------|--------|---------------|--------|----------------------------------------------------|--------|-----------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------|--------|
|                      |   |                          |   |          |   |                                               |   |                        |   |                                                                                                                          |   |
| Eurindia  Limited         |   | $                             | 176    |          | — |                                               | (176   | )                           | $      | —                                                                                                                        |   | $ | (176 | ) |
| XShares  Group, Inc. |   | 600                           |   | —        |   | (230                                               | )      | 370                         |   | (230                                                                                                                          | )      |
|                      |   | $                             | 776    |          | — |                                               | (406   | )                           | $      | 370                                                                                                                           |   | $ | (406 | ) |

 

**9. Goodwill**

 
| Balance at December 31,  2008 |   | $       | 12,157 |   |
|------------------------------------|--------|---------|--------|--------|
| Impairment  of goodwill            |   | (12,157 | )      |
| Balance at June 30, 2009      |   | $       | — |   |

 

At December 31, 2008 our goodwill totaled $12.2million, which was entirely related to our shareholding in Medicsightplc.  We assess the impairment of goodwill of our reporting unitsannually, or more often if events or changes in circumstances indicate that thecarrying value may not be recoverable.  This assessment is based upon ananalysis of both the market value and discounted anticipated future cash flowof the reporting unit.

 

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The shares of Medicsight plc are traded on the AIMMarket of the London Stock Exchange.  We consider this to be a Level 1input in the fair value hierarchy as defined in SFAS No. 157, as this isan unadjusted quoted price in an active market.

 

The estimate of future cash flow is based upon, amongother things, certain assumptions about expected future operating performanceand an appropriate discount rate determined by our management.  Ourestimates of discounted cash flows may differ from actual cash flows due to,among other things, timings of regulatory approvals, economic conditions in thehealthcare IT market, changes to our business model or changes in operatingperformance.

 

In addition, estimates of discounted cash flows wouldinvolve assumptions on a business with limited revenue history and developingrevenue models, which increase the risk of differences between the projectedand actual performance.  Significantdifferences between these estimates and actual cash flows could materiallyaffect our future financial results.  We consider these to be Level 3inputs in the fair value hierarchy as defined in SFAS No. 157, “*Fair Value Measurements*”, as this is an unobservable inputwith little or no market activity that require significant management judgment.

 

We conducted our annual impairment test of goodwill asof December 31, 2008 in accordance with SFAS No. 142.  As aresult of this test we determined that no adjustment to the carrying value ofgoodwill was required.

 

In the three months ended March 31, 2009, themarket value of Medicsight plc, as traded on the AIM Market of the London StockExchange, declined from $53.0 million to $13.2 million.  Following thisdecline in value we conducted an impairment test of goodwill as of March 31,2009 in accordance with SFAS No. 142.  Due to the uncertaintiesinvolved in using the unobservable inputs to estimate future cash flows, weused market price, Level 1 inputs, as the primary basis of our impairmentreview.  As a result of this test we determined that the carrying amountof Medicsight plc exceeded its fair value and recorded an impairment loss of$12,157 during the quarter ended March 31, 2009.

 

**10. Interest and other income/(expense)**

 

Wehad the following interest and other income amounts:

 
| ** **                          | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                          | ** ** | **2009**                                        | ** ** | **2008**                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                |       |                                            |       |                                          |       |   |   |   |   |
| Impairment loss on Eurindia         |       | $                                               | (176       | )                                             | $          | — |   | $ | (176 | ) | $ | — |   |
| Impairment loss on HipCricket       |       | —                                          |       | —                                        |       | (739 | ) | — |   |
| Impairment loss on XShares          |       | (230                                            | )          | —                                        |       | (230 | ) | — |   |
| Loss on other marketable securities |       | (12                                             | )          | —                                        |       | (37 | ) | — |   |
| Interest income                     |       | 120                                             |       | 637                                           |       | 189 |   | 1,145 |   |
| Total                               |       | $                                               | (298       | )                                             | $          | 637 |   | $ | (993 | ) | $ | 1,145 |   |

 

Theloss on marketable securities relates to losses considered other than temporaryon our holdings in HipCricket and other marketable securities in the threemonths ended March 31, 2009 and realized losses on other marketablesecurities in the three months ended June 30, 2009.

 

**11. Comprehensive income (loss)**

 

Comprehensive income (loss), as defined by SFAS No. 130,“*Reporting Comprehensive Income”*,includes net income (loss) and items defined as other comprehensiveincome.  SFAS No. 130 requires that items defined as othercomprehensive income (loss), such as foreign currency translation adjustmentsand unrealized gains and losses on certain marketable securities, be separatelyclassified in 

 

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thefinancial statements.  Such items are reported in the consolidatedstatements of stockholders’ equity as comprehensive income (loss) as follows:

 
| ** **                                                            | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                            | ** ** | **2009**                                        | ** ** | **2008**                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Net loss as reported                                                  |       | $                                               | (5,497     | )                                             | $          | (7,893 | ) | $ | (22,423 | ) | $ | (13,445 | ) |
| Unrealized foreign exchange gain (loss)                               |       | 3,588                                           |       | (205                                          | )          | 2,177 |   | (73 | ) |
| Unrealized gain (loss) on marketable securities                       |       | 38                                              |       | (232                                          | )          | 38 |   | (101 | ) |
| Comprehensive loss                                                    |       | $                                               | (1,871     | )                                             | $          | (8,330 | ) | $ | (20,208 | ) | $ | (13,619 | ) |
| Comprehensive loss attributable to non-controlling interest           |       | 225                                             |       | 2,757                                         |       | 2,051 |   | 4,530 |   |
| Comprehensive loss attributable to MGT Capital Investments, Inc. |       | $                                               | (1,646     | )                                             | $          | (5,573 | ) | $ | (18,157 | ) | $ | (9,089 | ) |

 

Theunrealized foreign exchange loss predominantly relates to the movement, in thethree and six month periods ended June 30, 2009, on the difference betweenMedicsight’s net assets translated at the period end rate and reservestranslated at historical rates.

 

Thetotal accumulated other comprehensive loss as of June 30, 2009 is theresult of net foreign currency translation losses and unrealized gains onmarketable securities.

 

**12.****Segmentreporting**

 

Under SFAS No. 131, “*Disclosures about Segments of an Enterprise and Related Information”*,operating segments are defined as components of an enterprise about whichseparate financial information is available that is evaluated regularly by thechief operating decision maker, or decision-making group in deciding how toallocate resources and in assessing performance.  Our chief operatingdecision-making group is composed of the Chief Executive Officer and members ofsenior management.  Our reportable operating segments are Medicsight andMedicexchange.

 

The accounting policies of the segments are the sameas those described in the summary of significant accounting policies.  Weevaluate performance of our operating segments based on revenue and operatingincome (loss).

 

Medicsight listed on the AIM Market of the LondonStock Exchange on June 21, 2007.  AIM listing rules requireMedicsight to publish results under International Financial Reporting Standards(“IFRS”) in sterling.

 

The following is a reconciliation between Medicsight’spublished financial statements and the US GAAP consolidated results:

 
| ** **                              | ** ** | **Medicsight  plc** | ** ** | **Medicsight  plc**       | ** ** | **Medicsight  plc** | ** ** | **Medicexchange**  | ** ** | **Corporate  and other** | ** ** | **Total**          | ** ** |
|-----------------------------------------|------------|---------------------|------------|---------------------------|------------|---------------------|------------|--------------------|------------|-------------------------------|------------|--------------------|------------|
| ** **                              | ** ** | **(IFRS)**          | ** ** | **GAAP Adj’ts** | ** ** | **(US GAAP)**  | ** ** | **(US GAAP)** | ** ** | **(US GAAP)**            | ** ** | **(US GAAP)** | ** ** |
|                                    |       |                |       |                      |       |                |       |               |       |                          |       |               |       |
| **Six months ended June 30, 2009** |       |                |       |                      |       |                |       |               |       |                          |       |               |       |
| Net revenue to external customers       |       | $                   | 101        |                      | $          | —              |       | $                  | 101        |                          | $          | 20                 |       | $ | — |   | $ | 121 |   |
| Operating loss                          |       | (7,286              | )          | 107                       |       | (7,179              | )          | (622               | )          | (13,629                       | )          | (21,430            | )          |
| Assets                                  |       | 24,477              |       | —                    |       | 24,477              |       | 2,069              |       | 9,037                         |       | 35,583             |       |
|                                    |       |                |       |                      |       |                |       |               |       |                          |       |               |       |
| **Six months ended June 30, 2008** |       |                |       |                      |       |                |       |               |       |                          |       |               |       |
| Net revenue to external customers       |       | $                   | 88         |                      | $          | —              |       | $                  | 88         |                          | $          | 49                 |       | $ | — |   | $ | 137 |   |
| Operating loss                          |       | (9,629              | )          | 40                        |       | (9,589              | )          | (2,101             | )          | (2,900                        | )          | (14,590            | )          |
| Assets                                  |       | 45,161              |       | —                    |       | 45,161              |       | 3,525              |       | 29,687                        |       | 78,373             |       |

 

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The principal GAAP adjustments are the accounting forstock options and cumulative translation adjustments.

 

The main operations and fixed assets of Medicsight arein the United Kingdom while Medicexchange’s are in the USA and China.

 

**13. Stock-based compensation**

 

We have issued stock options from MGT and ourprincipal subsidiary companies, Medicsight and Medicexchange.

 

*MGT stock option plan*

 

On December 5, 2007 we approved the 2007 MGTstock option plan and granted options for 1,975,000 shares under thisplan.  At June 30, 2009 there were 1,975,000 options outstanding and658,333 of the options issued were exercisable.  Options issued under thisplan vest in equal one-thirds after employees have been employed for 12, 24 and36 months from the date of grant.

 

*Medicsight stock option plans*

 

We have eleven stock option plans in Medicsight, whoseshares were listed on the AIM Market of the London Stock Exchange on September 21,2007.

 

Plan A - on February 26, 2003 we approved stockoption plan “A” and in the three month period ended March 31, 2003 wegranted options for 2,971,000 shares under this plan.  At June 30,2009 there were 119,000 options outstanding, all of which were exercisable.

 

Plan B - on August 15, 2005 we approved stockoption plan “B” and between July 1, 2003 and March 31, 2005 wegranted options for 3,420,500 shares under this plan.  At June 30,2009 there were 196,000 options outstanding, all of which were exercisable.

 

Plan C - on August 15, 2005 we approved stockoption plan “C” and between April 1, 2005 and June 30, 2006 wegranted options for 515,000 shares under this plan.  Options issued underthis plan vest in equal one-thirds after employees have been employed for 12,24 and 36 months from date of grant.  At June 30, 2009 there were218,333 options outstanding, all of which were exercisable.

 

Plan D - On July 13, 2006 we approved stockoption plan “D” and granted options for 1,375,000 shares under this plan. Options under this plan vest in equal one-thirds after employees have beenemployed for 12, 24 and 36 months from the date of grant.  At June 30, 2009 there were 150,000options outstanding, all of which were exercisable.

 

Plan E - on February 22, 2007 we approved andgranted options for 5,900,000 shares under stock option plan “E”.  Optionsunder this plan vest in equal one-thirds after employees have been employed for12, 24 and 36 months from the grant date. At June 30, 2009 there were 1,252,500 options outstanding and984,167 of the options issued were exercisable.

 

Plan F - on May 16, 2007 we approved andsubsequently granted options for 350,000 shares under stock option plan“F”.  Options under this plan vest in equal one-thirds after employeeshave been employed for 12, 24 and 36 months from the grant date.  At June 30,2009 there were 50,000 options outstanding and 33,333 of the options issuedwere exercisable.

 

Plan G - on December 18, 2007 we approved andsubsequently granted options for 3,025,000 shares under stock option plan“G”.  Options under this plan vest in equal one-thirds after employees 

 

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havebeen employed for 12, 24 and 36 months from the grant date.  At June 30,2009 there were 241,667 options outstanding and 141,667 of the options issuedwere exercisable.

 

Plan H - on June 2, 2008 we approved andsubsequently granted options for 750,000 shares under stock option plan“H”.  Options under this plan vest inequal one thirds after employees have been employed for 12, 24 and 36 monthsfrom the grant date.  At June 30, 2009 there were nil optionsoutstanding.

 

Plan I - on December 16, 2008 we approved andsubsequently granted options for 1,805,000 shares under stock option plan “I”.Options under this plan vest in equal one thirds after employees have beenemployed for 12, 24 and 36 months from the grant date.  At June 30,2009 135,000 options were outstanding, none of which were exercisable.

 

Plan J - on May 14, 2009 we approved andsubsequently granted options for 7,848,750 shares under stock option plan“J”.  Options under this plan vest inequal one sixths after employees have been employed for 6, 12, 18, 24, 30 and36 months from the grant date.  At June 30, 2009 7,848,750 optionswere outstanding, none of which were exercisable.

 

Plan K - on May 20, 2009 we approved andsubsequently granted options for 300,000 shares under stock option plan “K”.  Options under this plan vest in equal onethirds on June 30, 2009, September 30, 2009 and December 31,2009.  At June 30, 2009 300,000options were outstanding and 100,000 of the options were exercisable.

 

*Medicexchange stock option plans*

 

We have two stock option plans in Medicexchange, whoseshares are not publicly traded.

 

Plan A - on July 20, 2006 we approvedMedicexchange stock option plan “A” and granted options for 950,000 sharesunder this plan.  Options issued under this plan vest in equal one-thirdsafter employees have been employed for 12, 24 and 36 months from the date ofgrant.  At June 30, 2009 there were650,000 options outstanding and 466,667 of the options issued were exercisable.

 

Plan B - on July 26, 2007 we approvedMedicexchange stock option plan “B” and granted options for 300,000 sharesunder this plan.  Options issued underthis plan vest equal one-thirds after employees have been employed for 12, 24and 36 months from the date of grant.  At June 30, 2009 there were150,000 options outstanding and 50,000 of the options issued were exercisable.

 

The assumptions used in the Black-Scholes optionvaluation model used in the calculation of grant date fair value for the aboveoptions are highly subjective and can materially affect the resultingvaluation.  These assumptions are basedon multiple factors including United Kingdom treasury bonds for the risk-freerate at the time of grant, expected future exercising patterns (we cannot basethe estimate on the historical exercise patterns as no options have beenexercised) and the volatility of the MGT stock price.

 
| ** **                | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|---------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
|                      | ** ** | **2009**                              |       | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
|                      |       |                                  |       |                                |       |   |   |   |   |
| Dividend  yield           |       | 0%                                    |       | 0%                                  |       | 0% |   | 0% |   |
| Expected  volatility      |       | 105.7%                                |       | 25% - 65%                           |       | 105.7% |   | 25% - 65% |   |
| Risk-free  rate           |       | 3.89%                                 |       | 4.65% - 5.50%                       |       | 3.89% |   | 4.65% - 5.50% |   |
| Expected  life of options |       | 6.75 years                            |       | 3 years                             |       | 6.75 years |   | 3 years |   |

 

The following table summarizes stock option activityfor the six months ended June 30, 2009:

 

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|                                   | ** ** | **Outstanding**            | ** ** | **Exercisable**                             | ** ** |
|----------------------------------------|------------|----------------------------|------------|---------------------------------------------|------------|
|                                   | ** ** | **Number of  shares** | ** ** | **Weighted-  average  exercise price** | ** ** | **Number of  shares** | ** ** | **Weighted-  average  exercise price** | ** ** |
|                                   |       |                       |       |                                        |       |   |   |   |   |   |   |   |   |
| Outstanding  at December 31, 2008 |       | 16,137,500                 |       | £                                      | 0.91       |   | $ | (1.31 | ) | 5,679,166 |   | £ | 0.98 |   | $ | (1.42 | ) |
|                                   |       |                       |       |                                        |       |   |   |   |   |   |   |   |   |
| Granted                                |       | 8,148,750                  |       | 0.09                                        |       | (0.12 | )  |   |   |   |   |   |   |
| Exercised                              |       | —                     |       | —                                      |       | — |   |   |   |   |   |   |   |
| Forfeited                              |       | (11,000,000                | )          | 0.68                                        |       | (1.12 | ) |   |   |   |   |   |   |
|                                   |       |                       |       |                                        |       |   |   |   |   |   |   |   |   |
| Outstanding  at June 30, 2009     |       | 13,286,250                 |       | £                                      | 0.54       |   | $ | (0.89 | ) | 3,117,500 |   | £ | 0.98 |   | $ | (1.63 | ) |

 

The following is a summary of the status of the stockoptions outstanding at June 30, 2009:

 
| ** **                                    | ** ** | **Outstanding options** | ** ** | **Exercisable options**       | ** ** |
|-----------------------------------------------|------------|------------------------------|------------|------------------------------------|------------|
| ** **                                    | ** ** | ** **                   | ** ** | **Remaining**                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **Number**                   | ** ** | **contractual life  (years)** | ** ** | **Average  exercise price** | ** ** | **Number** | ** ** | **Average exercise  price** | ** ** |
|                                          |       |                         |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| MGT Capital  Investments, Inc. 2007 Plan |       | 1,975,000                    |       | 8.4                                |       |   |   | $ | 3.69 |   | 658,333 |   |   |   | $ | 3.69 |   |
| Medicsight  Plan A                            |       | 119,000                      |       | 4.0                                |       | £ | 0.75 |   | $ | 1.24 |   | 119,000 |   | £ | 0.75 |   | $ | 1.24 |   |
| Medicsight  Plan B                            |       | 196,000                      |       | 5.3                                |       | £ | 0.75 |   | $ | 1.24 |   | 196,000 |   | £ | 0.75 |   | $ | 1.24 |   |
| Medicsight  Plan C                            |       | 218,333                      |       | 6.0                                |       | £ | 0.75 |   | $ | 1.24 |   | 218,333 |   | £ | 0.75 |   | $ | 1.24 |   |
| Medicsight  Plan D                            |       | 150,000                      |       | 7.0                                |       | £ | 0.83 |   | $ | 1.37 |   | 150,000 |   | £ | 0.83 |   | $ | 1.37 |   |
| Medicsight  Plan E                            |       | 1,252,500                    |       | 7.7                                |       | £ | 0.50 |   | $ | 0.83 |   | 984,167 |   | £ | 0.50 |   | $ | 0.83 |   |
| Medicsight  Plan F                            |       | 50,000                       |       | 7.9                                |       | £ | 0.75 |   | $ | 1.24 |   | 33,333 |   | £ | 0.75 |   | $ | 1.24 |   |
| Medicsight  Plan G                            |       | 241,667                      |       | 8.4                                |       | £ | 1.10 |   | $ | 2.00 |   | 141,667 |   | $ | 1.10 |   | $ | 2.00 |   |
| Medicsight  Plan H                            |       | —                       |       | 8.9                                |       |   | — |   |   | — |   | — |   | — |   | — |   |
| Medicsight  Plan I                            |       | 135,000                      |       | 9.5                                |       | £ | 0.24 |   | $ | 0.40 |   | — |   | — |   | — |   |
| Medicsight  Plan J                            |       | 7,848,750                    |       | 9.9                                |       | £ | 0.09 |   | $ | 0.14 |   | — |   |   | — |   |   | — |   |
| Medicsight  Plan K                            |       | 300,000                      |       | 9.9                                |       | £ | 0.10 |   | $ | 0.17 |   | 100,000 |   | £ | 0.10 |   | $ | 0.17 |   |
| Medicexchange  Plan A                         |       | 650,000                      |       | 7.3                                |       | £ | 0.40 |   | $ | 0.66 |   | 466,667 |   | £ | 0.40 |   | $ | 0.66 |   |
| Medicexchange  Plan B                         |       | 150,000                      |       | 9.1                                |       | £ | 1.00 |   | $ | 1.65 |   | 50,000 |   | £ | 1.00 |   | $ | 1.65 |   |

 

On May 14, 2009 we approved Medicsight PlanJ.  Our employees were given theopportunity to forfeit all their existing options in Plans A through I and, intheir place, receive in Plan J 50% of the number of forfeited options.  Under FAS 123(R) this is accounted foras a modification of the existing options, specifically a cancel andreissue.  Of the options issued in Plan J3,032,500 were issued as new options and 4,816,250 were issued as replacementsfor options cancelled in existing plan.

 

On March 11, 2008 we modified the vesting termsfor 450,000 options in Medicsight plan E, and 150,000 options in Medicexchangeplan B for a former employee and allowed these options to be transferred to hisestate.

 

The total grant date fair value for Plan J is $3,146,of which $55 relates to the modification charge for the six months to June 30,2009.  The modification charge for thesix months to June 30, 2008 was $347.

 

We recorded the following amounts related tostock-based expenses in the Statement of Operations for the following periods:

 

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| ** **                           | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                           | ** ** | **2009**                                        | ** ** | **2008**                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                 |       |                                            |       |                                          |       |   |   |   |   |
| Selling,  general and administrative |       | $                                               | 512        |                                          | $          | 752 |   | $ | 965 |   | $ | 1,792 |   |
|                                 |       |                                            |       |                                          |       |   |   |   |   |
| Research and  development            |       | 36                                              |       | 37                                            |       | 64 |   | 88 |   |
|                                 |       |                                            |       |                                          |       |   |   |   |   |
| Total                                |       | $                                               | 548        |                                          | $          | 789 |   | $ | 1,029 |   | $ | 1,880 |   |

 

Of the $1,029 stock-based expense in the six monthsended June 30, 2009, $275 was allocated to the non-controlling interest.

 

No compensation costs were capitalized.

 

The aggregate intrinsic value for options outstandingand exercisable at June 30, 2009 was $nil. The aggregate intrinsic valuefor all outstanding options was $531.

 

A summary of non-vested options at June 30, 2009and the change during the six months ended June 30, 2009 is presentedbelow:

 
| ** **                          | ** ** | **Number of  options** | ** ** | **Weighted average  grant date fair  value** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|-------------------------------------------------------------|------------|
|                                |       |                        |       |                                                        |       |   |   |
| Non-vested  at January 1, 2009 |       | 10,458,334                  |       | £                                                      | 0.35       |   | $ | (0.51 | ) |
| Granted                             |       | 8,148,750                   |       | 0.24                                                        |       | (0.40 | )  |
| Vested                              |       | (1,974,983                  | )          | 0.25                                                        |       | (0.41 | ) |
| Forfeited                           |       | (6,463,351                  | )          | 0.29                                                        |       | (0.48 | ) |
| Non-vested  at June 30, 2009   |       | 10,168,750                  |       | £                                                      | 0.33       |   | $ | (0.55 | ) |

 

At June 30, 2009 there was $6,228 of totalunrecognized compensation cost related to non-vested stock-based compensationarrangements granted under the option plans.

 

Non-vested awards are expected to be recognized over aweighted average period of 1.25 years.

 

**14. Non-controlling interest**

 

The Company has non-controlling investors in bothMedicsight and Medicexchange as follows:

 
| ** **                                                  | ** ** | **Medicsight** | ** ** | **Medicexchange** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------|------------|----------------|------------|-------------------|------------|-----------|------------|
|                                                        |       |           |       |              |       |      |       |
| Non-controlling  interest at January 1, 2009           |       | $              | 15,036     |              | $          | 981       |       | $ | 16,017 |   |
| Non-controlling  share of operating losses                  |       | (3,185         | )          | (63               | )          | (3,248    | )          |
| Non-controlling  share of stock-based expense               |       | 273            |       | 2                 |       | 275       |       |
| Non-controlling  share of other comprehensive income (loss) |       | 1,221          |       | (24               | )     | 1,197     |       |
| Non-controlling  interest at June 30, 2009             |       | $              | 13,345     |              | $          | 896       |       | $ | 14,241 |   |

 

**15. Related party transactions**

 

Tim Paterson-Brown, our Chief Executive Officer, is anon-executive director of Accsys Technologies plc, which has a subsidiary companyTitan Wood Limited.  Titan Wood Limitedrents space in 66 Hammersmith Road.  Inthe six month period ended June 30, 2009 and 2008 respectively, $160 and$70 of office related costs were recharged to Titan Wood Limited.  At June 30, 2009 there was a balancereceivable from Titan Wood Limited of $59 of which $59 remains unpaid as of August 7, 2009.  This is payable within 30 days under theterms of the invoice.

 

On the signing of the Second Amendment our CEO, Tim Paterson-Brown, wasappointed the Series B Director of XShares Group, Inc. As of this date,therefore, XShares Group, Inc. became a related party.

 

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**16. Commitments**

 

*Lease commitments and securitydeposit*

 

On August 25, 2006 we executed a 10-yearagreement with Pirbright Holdings Limited, to lease 8,787 square feet of officespace at the Kensington Centre, 66 Hammersmith Road, London W14 8UD, UnitedKingdom.  Under this lease agreement our UK property rent, services andrelated costs are be approximately £330 ($545) per annum, paid quarterly inadvance.  We have the right to terminate this agreement on the expiry ofthe fifth year of the lease.  Our annual rent is subject to upward onlyreview on August 24, 2011.

 

We have two 10-month rent-free periods: the firstcommencing August 25, 2006; the second commencing August 25,2011.  We have accounted for this lease as an operating lease and haveaccounted for the lease rental expenses on a straight-line basis over theperiod of the lease.

 

The following is a schedule of the future minimumrental payments required under operating leases that have initial or remainingnon-cancellable terms in excess of one year:

 
| **Year ending December 31,** | ** ** |   | ** ** |
|---------------------------------------------|------------|--------|------------|
| 2009  (remaining six months)                |       | $      | 318        |   |
| 2010                                        |       | 635    |       |
| 2011                                        |       | 245    |       |
| 2012                                        |       | 5      |       |
| 2013                                        |       | 2      |       |
| Later years                                 |       | — |       |
| **Total minimum**                           |       | $      | 1,205      |   |

 

*Other commitments*

 

In July 2008 we entered into an agreement with apartner to develop interfaces for our software.  We have committed to payEuros 1,445 ($2,030) over an expected thirty-six month period.  As at June 30,2009 we have paid Euros 995 ($1,397).  These payments will be recoveredagainst future royalty payments, should the products be successfullycommercialized.  These payments have been expensed to the income statementand classified as research and development.

 

**17. Subsequent events**

 

We evaluated subsequent events and their potential impact on our resultsof operations, financial position and disclosures, from the balance sheet datethrough August 14, 2009.

 

*XShares*

 

On August 5, 2009 we signed an Amendmentto the Securities purchase Agreement with XShares Group, Inc.  A copy of the Amendment is attached hereto asExhibit 10.6.

 

The amendment allows for:

 

·      The date of the first closing to beextended until December 31, 2009;

 

·      Our CEO, Tim Paterson-Brown, to beappointed as the Series B Preferences Shares director on the XSharesboard;

 

·      Certain additional post closing covenants;and

 

·      Certain additional closing conditions.

 

On August 6,2009 a Second Amendment to the SPA was signed. A copy of the Second Amendment is attached hereto as Exhibit 10.7.  This amended the terms of the second closingto allow for the investment to be made in a Convertible Note with a maturitydate of December 31, 2009.  TheConvertible Note is attached hereto as Exhibit 10.8.

 

On the signing of the Second Amendmentour CEO, Tim Paterson-Brown, was appointed the Series B Director of XSharesGroup, Inc. As of this date, therefore, XShares Group, Inc. became a relatedparty.

 

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**Item 2. Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

This report contains forward-looking statements madein reliance upon the safe harbor provisions of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended.  These statements may be identified bythe use of words such as “anticipate”, “estimates”, “should”, “expect”,“guidance”, “project”, “intend”, “plan”, “believe” and other words and terms ofsimilar meaning, in connection with any discussion of our financial statements,business, results of operations, liquidity and future operating or financialperformance.  Please also refer to our “Note Regarding Forward LookingStatements” at the front of this Form.

 

**Executive summary**

 

MGTCapital Investments, Inc. achieved the following results in the six monthsended June 30, 2009:

 

·              Revenue from licenseand other sales decreased 12% to $121 compared to $137 in 2008.

 

·              Gross profitincreased 11% to $119 compared to $107 in 2008.

 

·              Other operatingexpenses, excluding the goodwill impairment, decreased 36% to $9,392 comparedto $14,697 in 2008.

 

·              $12,157 of goodwillrelating to Medicsight was fully impaired in the first quarter.

 

·              Net loss increased115% to $19,175 and resulted in a loss per share of $0.59 compared to a netloss of $8,915 and net loss per share of $0.23 in 2008.

 

Revenue has fallen due to the decrease in revenue inMedicexchange following the slow down of medical equipment sales in China.  Medicsight’s revenue has increased slightlyand, due to its higher gross profit compared to Medicexchange, has pushed upgross profit overall.

 

Operating costs, excluding the goodwill impairment,have decreased by $5,305 due to a focus on reducing costs and because of areduction in headcount in Medicsight in the six months ended June 30,2009.  A fall in the value of sterlingfrom $1.99:£1.00 to $1.65:£1.00 contributed to the reduction in reportablecosts by approximately $2,600 using the average exchange rate for the sixmonths ended June 30, 2008 as the majority of our costs are incurred insterling in Medicsight.

 

The significant increase in net loss was due to theimpairment of $12,157 of goodwill relating to Medicsight.

 

Our balance sheet remains strong with cash and cashequivalents and marketable securities of $31,001 compared to $40,178 as of December 31,2008.  The movement is mainlyattributable to cash used in operating activities ($9,430).

 

*Goodwill impairment*

 

At December 31, 2008 our goodwill totaled$12,157, which was entirely related to our shareholding in Medicsightplc.  We assess the impairment of goodwill of our reporting unitsannually, or more often if events or changes in circumstances indicate that thecarrying value may not be 

 

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recoverable. This assessment is based upon an analysis of both the market value anddiscounted anticipated future cash flow of the reporting unit.

 

The shares of Medicsight plc are traded on the AIMMarket of the London Stock Exchange.  We consider this to be a Level 1input in the fair value hierarchy as defined in SFAS No. 157, as this isan unadjusted quoted price in an active market.

 

The estimate of future cash flow is based upon, amongother things, certain assumptions about expected future operating performanceand an appropriate discount rate determined by our management.  Ourestimates of discounted cash flows may differ from actual cash flows due to,among other things, timings of regulatory approvals, economic conditions in thehealthcare IT market, changes to our business model or changes in operatingperformance.

 

In addition, estimates of discounted cash flows wouldinvolve assumptions on a business with limited revenue history and developingrevenue models, which increase the risk of differences between the projectedand actual performance.  Significantdifferences between these estimates and actual cash flows could materiallyaffect our future financial results.  We consider these to be Level 3inputs in the fair value hierarchy as defined in SFAS No. 157, as this isan unobservable input with little or no market activity that requiresignificant management judgment.

 

We conducted our annual impairment test of goodwill asof December 31, 2008 in accordance with SFAS No. 142.  As a resultof this test we determined that no adjustment to the carrying value of goodwillwas required.

 

In the period between December 31, 2008 and March 31,2009, the market value of Medicsight plc, as traded on the AIM Market of theLondon Stock Exchange, declined from $53.0 million to $13.2 million. Following this decline in value we conducted an impairment test of goodwill asof March 31, 2009 in accordance with SFAS No. 142, “*Goodwill and Other Intangible Assets*”.  Due to theuncertainties involved in using the unobservable inputs to estimate future cashflows, we used market price, Level 1 inputs as the basis of our impairmentreview.  As a result of this test we determined that the carrying amountof Medicsight plc exceeded its fair value and recorded an impairment loss of $12,157during the quarter ended March 31, 2009.

 

**Critical accounting policies and estimates**

 

The accompanying discussion and analysis of ourfinancial condition and results of operations are based upon our condensedconsolidated financial statements and the related disclosures, which have beenprepared in accordance with U.S. generally accepted accounting principles(“GAAP”).  The preparation of thesecondensed consolidated financial statements requires us to make estimates,assumptions and judgments that affect the reported amounts in our condensedconsolidated financial statements and accompanying notes.  These estimates form the basis for makingjudgments about the carrying values of assets and liabilities.  We base our estimates and judgments onhistorical experience and on various other assumptions that we believe to bereasonable under the circumstances.  Actual results could differ fromthese estimates.

 

We believe the following policies to be the mostcritical to an understanding of our financial condition and results ofoperations because they require us to make estimates, assumptions and judgmentsabout matters that are inherently uncertain.

 

*Revenue recognition*

 

*Medicsight*

 

We recognize revenue in accordance with AmericanInstitute of Certified Public Accountants (“AICPA”) Statement of Position(“SOP”) 97-2, “*Software Revenue Recognition*”, asamended by SOP 98-4 and SOP 98-9, as well as Technical Practice Aids issuedfrom time to time by the AICPA, and SEC Staff Accounting Bulletin No. 104.  We recognize revenue when it is realized orrealizable and earned.  We considerrevenue realized or realizable and earned when we have persuasive evidence ofan arrangement, the product has been shipped or the services have been providedto the customer, the sales price is fixed or determinable and collectability isprobable.

 

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License fee revenue is derived from the licensing ofcomputer software.  Maintenance revenueis derived from software maintenance. Our software licenses are generally sold as part of an arrangement thatincludes maintenance and support.

 

We license software and sell maintenance throughvisualization solution partners and original equipment manufacturers.  We receive regular sales reporting detailingthe number of licenses sold by original equipment manufacturers, value-addedresellers and independent distributors (collectively, “Resellers”) to endusers.  We generally offer terms thatrequire payment 30 days from invoicing.

 

Provided the Reseller i) assumes all risk of thepurchase, ii) has the ability and obligation to pay regardless of receivingpayment from the end user, and all other revenue recognition criteria are met,license revenue from Resellers is recognized upon shipment of its product tovendors (“sell-in basis”).

 

Additionally:

 

Software — Revenue from license fees is recognizedwhen notification of shipment to the end user has occurred, there are nosignificant Company obligations with regard to implementation and the Company’sservices are not considered essential to the functionality of other elements ofthe arrangement.

 

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

 

Multiple-element arrangements — We enter intoarrangements with Resellers that include a combination of software products,maintenance and support.  For sucharrangements, we recognize revenue using the residual method.  We allocate the total arrangement fee amongthe various elements of the arrangement based on the fair value of each of theundelivered elements determined by vendor-specific objective evidence.  The fair value of maintenance and supportservices is evidence of fair value for all elements, revenue is deferred untilthe earlier of when vendor-specific objective evidence is determined for theundelivered elements (residual method) or when all elements for which we do nothave vendor-specific objective evidence of fair value have been delivered.

 

*Medicexchange*

 

We recognize revenue when the following revenuerecognition criteria are met:  persuasive evidence of an arrangementexists, services have been rendered, the selling price is fixed or determinableand collectability is reasonable assured.  Deferred revenue is recordedwhen payments are received in advance of performing our service obligations.

 

*Goodwill*

 

We account for goodwill in accordance with theprovisions of SFAS No. 142.  Under SFAS No. 142, goodwill andintangible assets with indefinite lives are reviewed for impairment annually ormore frequently if events or changes in circumstances indicate that the assetmight be impaired.  The first step of thegoodwill impairment test, used to identify potential impairment, compares thefair value of a reporting unit with its carrying amount, includinggoodwill.  We compare the book value tothe market value (market capitalization plus a control premium) for thereporting unit.  If the market valueexceeds the book value, goodwill is considered not impaired, and thus thesecond step of the impairment test is not necessary.  If our book value exceeds the market value,the second step of the goodwill impairment test is performed to measure theamount of impairment loss, if any.  Thesecond step of the goodwill impairment test, used to measure the amount ofimpairment loss, compares the implied fair value of the goodwill with the bookvalue of the goodwill.  If the carryingvalue of the goodwill exceeds the implied fair value of the goodwill, an impairmentloss would be recognized in an amount equal to the excess.  Any loss recognized cannot exceed thecarrying amount of goodwill.  After agoodwill impairment loss is recognized, the adjusted carrying amount of goodwillis its new accounting basis.  Subsequentreversal of a previously recognized goodwill impairment loss is prohibited oncethe measurement of that loss is completed.

 

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*Equity-based compensation*

 

We recognize compensation expense for all equity-basedpayments in accordance with SFAS No. 123(R).  Under the fair value recognition provisionsof SFAS No. 123(R), we recognize equity-based compensation net of anestimated forfeiture rate and recognize compensation cost only for those sharesexpected to vest over the requisite service period of the award.

 

The fair value of each option award is estimated onthe date of grant using the Black-Scholes option valuation model.  The Black-Scholes option valuation modelrequires the development of assumptions that are input into the model.  These assumptions are the expected stockvolatility, the risk-free interest rate, the option’s expected life and thedividend yield on the underlying stock. Expected volatility is calculated basedon the historical volatility of our common stock over the expected option lifeand other appropriate factors.  Risk-freeinterest rates are calculated based on continuously compounded risk-free ratesfor the appropriate term.  The dividendyield is assumed to be zero as we have never paid or declared any cashdividends on our common stock and do not intend to pay dividends on our commonstock in the foreseeable future.  Theexpected forfeiture rate is estimated based on historical experience.

 

Determining the appropriate fair value model andcalculating the fair value of equity-based payment awards require the input ofthe subjective assumptions described above. The assumptions used in calculating the fair value of equity-basedpayment awards represent management’s best estimates, which involve inherentuncertainties and the application of management judgment.  As a result, if factors change and we usedifferent assumptions, our equity-based compensation expense could bematerially different in the future.  Inaddition, we are required to estimate the expected forfeiture rate and recognizeexpense only for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate,the equity-based compensation expense could be significantly different fromwhat we have recorded in the current period.

 

*Research and development*

 

Costs incurred in connection with the development ofsoftware products that are intended for sale are accounted for in accordancewith SFAS No. 86, “*Accounting for the Costsof Computer Software to be Sold, Leased, or Otherwise Marketed*”.  Costs incurred prior to technologicalfeasibility being established for the product are expensed as incurred.  Technological feasibility is established uponcompletion of a detail program design or, in its absence, completion of aworking model.  Thereafter, all softwareproduction costs are capitalized and subsequently reported at the lower ofunamortized cost or net realizable value. Capitalized costs are amortized based on current and future revenue foreach product with an annual minimum equal to the straight-line amortizationover the remaining estimated economic life of the product.  Amortization commences when the product isavailable for general release to customers.

 

We concluded that capitalizing such expenditures oncompletion of a working model was inappropriate because we did not incur anymaterial software production costs and therefore have decided to expense allresearch and development costs.  Ourresearch and development costs are comprised of staff, consultancy and othercosts expensed on the Medicsight products.

 

*Fair value of financial instruments*

 

On January 1, 2008 we adopted the provisions ofSFAS No. 157, “*Fair Value Measurements*”,for financial assets and financial liabilities.  Applying fair valuemeasurements to our financial instruments requires management’s judgment,especially when using Level 2 and Level 3 inputs as defined in SFAS No. 157’sfair value hierarchy.

 

*Impairment of long-lived assets andlong-lived assets to be disposed of*

 

We evaluate the carrying value of long-lived assetsfor impairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable.  Our assessment for impairment of an assetinvolves estimating the undiscounted cash flows expected to result from use ofthe asset and its eventual disposition. An impairment loss recognized is measured as the amount by which thecarrying amount of the asset exceeds the fair value of the asset.

 

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Calculating the estimated fair value of an assetinvolves significant judgments and a variety of assumptions.  Judgments that we make concerning the valueof its intangible assets include assessing time and cost involved fordevelopment, time to market, and risks of regulatory failure or obsolescence(due to market, environmental or technological advances for example).  For calculating fair value based ondiscounted cash flows, we forecast future operating results and future cashflows, which include long-term forecasts of revenue growth, gross profits andcapital expenditures.

 

**Results of operations**

 

*Revenue and gross profit*

 

We have generated revenues of $121 and gross profit of$119 for the six months ended June 30, 2009, compared to $137 and $107 forthe six months ended June 30, 2008.  Medicsight increased revenues inthe period and Medicexchange’s decreased.

 

Medicsight has sold licenses in Europe where it hasregulatory approvals.

 

Medicexchange generated revenue from advertising salesin China and the USA.

 

*Operating expenses*

 

Our research and development expense for the sixmonths ended June 30, 2009 was $1,330 compared to $1,227 for the sixmonths ended June 30, 2008.  Ourresearch and development costs were comprised of staff, staff relatedconsultancy, stock options and product development software costs expensed onthe research and development of Medicsight’s products.

 

Our selling, general and administrative expenses forthe six months ended June 30, 2009 were $8,062 compared to $13,470 for sixmonths ended June 30, 2008, with the significant items being:

 

·              People relatedcosts have decreased by $2,761 (40%) due to a reduced head count in bothMedicexchange and Medicsight, a lower provision for bonus costs, reducedrecruitment costs and the effect of the fall in the value of sterling againstthe dollar;

 

·                  Stock optioncharges have decreased by $851 (45%) in the first half of 2009 due to theeffect of modifications made to plans in the first half of 2008, pushing up thecost in that period, and the fall in the value of sterling against the dollar;and

 

·                  A strengtheningof the dollar against sterling has reduced all elements of selling, general andadministrative expenses by approximately $2,600 in the six months ended June 30,2009 compared to the six months ended June 30, 2008.

 

At the end of the quarter ended March 31, 2009 weimplemented a redundancy program in Medicsight to reduce costs.  As aconsequence, we expect people related costs to continue to decrease.

 

Following an impairment review in the three months to March 312009, we fully impaired $12,157 of goodwill relating to Medicsight.  There was no impairment charge in the threemonths to June 30, 2009 or in the six months to June 30,2008.  As explained in the executivesummary, we based our fair value measurements on the market price of Medicsightshares listed on the AIM Market of the London Stock Exchange as of March 31,2009.

 

Interest and other (expense) income was an expense of$993 in the six months to June 30, 2009 compared to income of $1,145 inthe same period in the prior year.  Theexpense was made up of impairment losses in Eurindia ($176) and HipCricket($739) which were incurred in the three months to March 31, 2009 andimpairment losses on XShares ($230) incurred in the three months to June 30,2009.  There were also realized losses onother investments ($37) and interest income of $189 spread over the six monthsto June 30, 2009.  The interestincome consisted of bank interest and a portion of the arrangement fee andinterest from the XShares convertible note.

 

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Interest and other income/(expense) in the six monthsended June 30, 2008 was an income figure as opposed to an expense inthe six months to June 30, 2009 due to the higher levels of cash held,higher interest rates and investment gains rather than impairments.

 

*Income tax*

 

Our effective tax rate for the six months ended June 30,2009 is 0%.  The difference in our effective tax rate from the federalstatutory rate is primarily due to a 100% valuation allowance provided for alldeferred tax assets.

 

*Net loss and net loss per share*

 

Net loss attributable to equity holders of MGT CapitalInvestments, Inc. was $3,845 for the three months ended June 30, 2009compared to a net loss of $5,136 for the three months ended June 30, 2008.  Net loss per share for the three months endedJune 30, 2009 was $0.12 (based on weighted average shares outstanding of32,550,590), compared to $0.14 for the three months ended June 30, 2008(based on weighted average shares outstanding of 35,539,746).

 

Net loss attributable to equity holders of MGT CapitalInvestments, Inc. was $19,175 for the six months ended June 30, 2009compared to a net loss of $8,915 for the six months ended June 30,2008.  Net loss per share for the sixmonths ended June 30, 2009 was $0.59 (based on weighted average sharesoutstanding of 32,550,590), compared to $0.23 for the six months ended June 30,2008 (based on weighted average shares outstanding of 37,956,351).

 

The increase in net loss between the six months ended June 30,2008 and the six months ended June 30, 2009 was predominantly due tothe goodwill impairment in the three months to March 31, 2009.

 

*Operational currency*

 

Our main operating currency is UK sterling.  Ourresults of operations are affected by changes in the $:£ rates used totranslate the operational result.  Forsix months ended June 30, 2009 the average rate was $1.65: £1.00 and forsix months ended June 30, 2008 the rate was $1.99:£1.00, a decrease of17%.

 

**Operating results by business segment**

 

We consider MGT’s business segments to be those of its two operatingsubsidiaries, Medicsight and Medicexchange.

 

**Medicsight**

 
| ** **                                                | ** ** | **Three months ended June 30,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------|------------|
|                                                      | ** ** | **2009**                             |       | **2008** |   |
|                                                      |       |                                 |       |   |   |
| Revenue                                                   |       | $                                    | 40         |   | $ | 54 |   |
| Selling, general and administration costs                 |       | 2,814                                |       | 4,984 |   |
| Research and development                                  |       | 871                                  |       | 632 |   |
| Operating expense                                         |       | (3,685                               | )          | (5,616 | ) |
| Stock-based compensation (included in operating expenses) |       | 301                                  |       | 495 |   |
| Operating loss                                            |       | (3,645                               | )          | (5,562 | ) |
| Interest and other income                                 |       | 15                                   |       | 424 |   |
|                                                           |            |                                      |            |  |  |  |  |

 

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| ** **                                                | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                | ** ** | **2009**                           | ** ** | **2008** | ** ** |
|                                                      |       |                               |       |   |   |
| Revenue                                                   |       | $                                  | 101        |   | $ | 88 |   |
| Selling, general and administration costs                 |       | 5,950                              |       | 8,450 |   |
| Research and development                                  |       | 1,330                              |       | 1,227 |   |
| Operating expense                                         |       | (7,280                             | )          | (9,677 | ) |
| Stock-based compensation (included in operating expenses) |       | 611                                |       | 1,201 |   |
| Operating loss                                            |       | (7,179                             | )          | (9,589 | ) |
| Interest and other income                                 |       | 54                                 |       | 736 |   |
|                                                           |            |                                    |            |  |  |  |  |

 
|       |   | **June 30,  2009** | ** ** | **December 31,  2008** |   |
|------------|--------|-------------------------|------------|-----------------------------|--------|
|       |   | ** **              | ** ** | ** **                  |   |
| Cash       |   | $                       | 22,709     |                        | $      | 26,624 |   |
| Net assets |   | 21,519                  |       | 25,302                      |   |
|            |        |                         |            |                             |        |  |  |

 

In the three months ended June 30, 2009 sales ofour CAD products fell compared to the same period in the prior year and thefirst quarter of 2009 due to delays by some partners in the integration of ourColonCAD 4.0 product with their visualization technologies.  We are currently working to resolvethis.  In June 2008 we released ournew MedicRead 3.0 standalone visualization and CAD software and expectthis to contribute to revenue in the next two quarters.

 

At the end of the first quarter of 2009 we streamlinedMedicsight’s operations and reduced staff numbers to forty-five in order toreduce our operating costs and cash flow.  This, together with the fall in the value of sterling, has resulted inthe reduction in operating expenses in the six months ended June 30, 2009.

 

Research and development is made up of staff, staffrelated consultancy, stock options and product development software costsexpensed on the research and development of Medicsight’s products.    This has increased compared to thecomparative periods in 2008 due to development of our MedicRead software.  In the third and fourth quarters of 2009 weexpect our research and development costs to decrease as a result of reducedheadcount and the timing of certain stages of MedicRead’s development.

 

In local currency terms, bonus charges fell as webelieve that, after the redundancy program in Medicsight, any potential yearend performance related bonuses would, in total, be lower than in the previousyear.

 

In the three months ended June 30, 2009 we approvedMedicsight Plan J.  Our employees weregiven the opportunity to forfeit all their existing options in Plans A throughI and, in their place, receive in Plan J 50% of the number of forfeitedoptions.  Under FAS 123(R) this isaccounted for as a modification of the existing options, specifically a canceland reissue.  Of the options issued inPlan J 3,032,500 were issued as new options and 4,816,250 were issued asreplacements for options cancelled in existing plan.

 

In the three months ended June 30, 2009 the stockoption charge fell as we made modifications to certain options in the sixmonths ended June 30, 2008 and the charge has not been repeated in the sixmonths ended June 30, 2009. The modification charge for this amounts $55, which is expensed over 3years.

 

Interest and other income was generated by returns onthe investment of the proceeds from the IPO in June 2007.  Interestincome has fallen in the first two quarters of 2009 compared to the same periodin 2008 as the level of cash invested was lower, combined with lower investmentreturns due to significantly lower interest rates.  We believe thatcontinuing low interest rates, combined with lower cash balances, will mean alower level of interest and other income during Fiscal 2009 compared to Fiscal2008.

 

Cash and net assets were lower at June 30, 2009compared to December 31, 2008 because of Medicsight’s net loss and also assterling fell in value against the US dollar.

 

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**Medicexchange**

 
| ** **                                                | ** ** | **Three months ended June 30,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                | ** ** | **2009**                             | ** ** | **2008** | ** ** |
|                                                      |       |                                 |       |   |   |
| Revenue from external customers                           |       | $                                    | 7          |   | $ | 32 |   |
| Cost of revenue                                           |       | —                               |       | (19 | ) |
| Gross profit                                              |       | 7                                    |       | 13 |   |
| Operating expenses                                        |       | (366                                 | )          | (1,180 | ) |
| Operating loss                                            |       | (359                                 | )          | (1,167 | ) |
| Stock-based compensation (included in operating expenses) |       | 13                                   |       | 27 |   |
|                                                           |            |                                      |            |  |  |  |  |

 
| ** **                                                | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                | ** ** | **2009**                           | ** ** | **2008** | ** ** |
|                                                      |       |                               |       |   |   |
| Revenue from external customers                           |       | $                                  | 20         |   | $ | 49 |   |
| Cost of profit                                            |       | (2                                 | )          | (30 | ) |
| Gross margin                                              |       | 18                                 |       | 19 |   |
| Operating expenses                                        |       | (640                               | )          | (2,120 | ) |
| Operating loss                                            |       | (622                               | )          | (2,101 | ) |
| Stock-based compensation (included in operating expenses) |       | 8                                  |       | 152 |   |
|                                                           |            |                                    |            |  |  |  |  |

 
| ** **        | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------|------------|-------------------------|------------|-----------------------------|------------|
|              |       |                    |       |                        |       |
| Cash              |       | $                       | 1,203      |                        | $          | 1,322 |   |
| Net (liabilities) |       | (2,364                  | )          | (1,412                      | )          |
|                   |            |                         |            |                             |            |  |  |

 

In the first six months of 2008 Medicexchange’srevenue was derived from both online and offline sales; in the same period in2009 we focused on online sales, leading to a lower level of sales but at ahigher margin.  The online sales were split between China and the USA60%/40% respectively.  We expect our focus to continue be on online sales.

 

We have reduced our spending on operations.  In September 2008we made the decision to scale back our London cost base and increased ouremphasis on our New York office as this is closer to our target market. We have also outsourced some of our website costs to external contracts toreduce our cost.  Salary costs have fallen after a number of London andBeijing-based staff left the business.  Also, all Medicexchange’s Beijingemployees have now started to work for Medicsight and are no longer a cost toMedicexchange.  Our China business is now focused solely on theShanghai-based Maydeal website.

 

We also use less office space and the lower number ofstaff has lead to a lower level of ancillary costs.  We have also reducedour discretionary spending, demonstrated by the reduction in all other listedcost categories.

 

**Liquidity and capital resources**

 

*Working capital information*

 
| ** **                                       | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Working capital summary**            |       |                    |       |                        |       |
| Cash, cash equivalents and marketable securities |       | $                       | 31,001     |                        | $          | 40,178 |   |
| Current assets                                   |       | 34,105                  |       | 41,212                      |       |
| Current liabilities                              |       | (3,651                  | )          | (4,340                      | )          |
| Working capital surplus                          |       | $                       | 30,454     |                        | $          | 36,872 |   |
| Ratio of current assets to current liabilities   |       | 9.3                     |       | 9.5                         |       |

 

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| ** **                                             | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                             | ** ** | **2009**                           | ** ** | **2008** | ** ** |
| **Cash flow summary**                        |       |                               |       |   |   |
| Cash (used for) provided by Operating activities       |       | $                                  | (8,830     | ) | $ | (11,096 | ) |
| Investing activities                                   |       | (1,069                             | )          | (5,308 | ) |
| Financing activities                                   |       | —                             |       | (20,150 | ) |
| Effects of exchange rates on cash and cash equivalents |       | 2,382                              |       | (73 | ) |
| Net cash flow                                          |       | $                                  | (7,517     | ) | $ | (36,627 | ) |

 

Our cash, cash equivalents and marketable securitieshave decreased during 2009 predominantly because of the cash used in operatingactivities.  Our net cash used in operating activities differs from netloss because of various non-cash adjustments such as the transfer tonon-controlling interest, stock-based compensation and impaired investments andgoodwill.  Even though net loss was greater in the six months ended June30, 2009 compared to the same period in the prior year, cash used in operatingactivities was lower.  This was due to lower levels of expenditure in thesix months ended June 30, 2009, and the fact that net loss included the$12,157 non-cash goodwill impairment charge relating to goodwill.

 

Our ratio of current assets to current liabilities hasremained relatively constant at 9.3.  This is a result of the $30,777 ofcash held in the Company.

 

*Valuation of investments held at fair value*

 

At December 31, 2008 investments held at fairvalue consisted of HipCricket and a fund managed by Bank Sarasin &Company Limited.  In the three monthsended June 30, 2009 we liquidated our holdings in this fund.

 

We have valued HipCricket using its closing price onthe AIM market of the London Stock Exchange as of June 30, 2009.  Due to the low number of market transactionsfor HipCricket, each transaction potentially has, and has historically had, asignificant effect on the share price. It is for this reason we deem this to be a Level 2 input in the fairvalue hierarchy.  However, we stillbelieve that this is the best price at which to determine the current value.

 

In the three months ended June 30, 2009HipCricket’s fair value increased by $38; in the three months ended March 31,2009 it was impaired by $739.  Weclassify this investment as available for sale and generally recognize anymovement in fair value in equity and other comprehensive income.  In the three months ended March 31,2009, however, we considered the impairment in HipCricket’s fair value to beother than temporary and recognized the movement in net loss.  In the second quarter of 2009 we recognizedthe increase in fair value in equity.

 

On liquidation of our investments in other marketablesecurities the realized loss on investment of $12 was recognized in net loss.

 

*Impairment review of Eurindia Limited*

 

We account for our investments in Eurindia Limited andXShares Group, Inc. at cost subject to impairment.

 

In 2000 MGT invested in Eurindia Limited (“Eurindia”),a UK company that invested in IT start-up companies.  MGT has a 6% holdingin Eurindia and accounts for this investment on a cost basis. During 2007 wereceived two dividends totaling $423 ($0.72 per share) which we recorded inOther Income.

 

We carried out an impairment review of our holdings inEurindia as of December 31, 2008.  Eurindia’s management had informedus that it intended to pay a liquidating dividend of between 30 cents and 50cents per share in the first half of 2009.  We assumed the dividend to bethe lower of these two values and impaired our holding to the value of 30 centsper share.  As of June 30, 2009 theinvestment had not been liquidated.

 

Eurindia management has informed us that it nowintends to liquidate the investment by means of an IPO.  Due to the turbulence in financial markets,however, and specifically the weakness of the market for IPOs, we are currentlynot able to accurately ascertain the potential value of the investment 

 

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onan IPO or the timescale in which it might be realized.  As a consequence we have fully impaired ourinvestment and recognized an impairment loss of $176 in net loss.  We consider the amount of this impairment tobe a Level 3 input under the SFAS No. 157 fair value hierarchy, which is asignificant unobservable input.

 

*Investment in XShares Group, Inc.*

 

In 2007 we invested $960 in Series C preferredshares of XShares Group, Inc. (“XShares”), an investment advisor thatcreates, issues and supports exchange traded funds with a particular healthcarespecialty.  In the year ended December 31,2008 we invested an additional $2,040 in shares of XShares bringing the totalinvested to $3,000.  We account for theseinvestments on a cost basis as our total holdings are less than 20%.  In Fiscal 2008 we reviewed the carrying valueof our investment in XShares.  XShareswas in the process of attempting to raise funds to drive the businessforward.  As of December 31, 2008 weimpaired this investment to $600.  As of June 30, 2009 thefund-raising was partially complete and, after reviewing our holding, weimpaired the investment to $370, which we believe approximates fair value.

 

We estimated this impairment based on management’sreview and discussion of the strategy and business plan of XShares and reviewof draft Fiscal 2008 financial accounts prepared by an independentaccountant.  These inputs are subject tomanagement’s judgment and we have therefore deemed them to be Level 3 inputs inthe fair value hierarchy.  The value ofour investment has been reduced as previously invested cash has been used tofund business operations and as yet the business is not generating sufficientcash.  However, we have reviewed XShares’business plan and we have adjusted our investment to a level we believereflects the future market valuation and with no active market we believe thisis the best method with which to determine the value of our investment.

 

On May 14, 2009 we executed and delivered aConvertible Promissory Note (the “Note”) in the principal amount of $1,100 withXShares.  The principal amount included a fee of $100 payable to us. All of the Note shall be converted into Series B Preferred Stock ofXShares (the “Series B Shares”) at the Initial Closing (as defined below). In the event that an Amended and Restated Certificate of Incorporationdesignating the rights and preferences of the Series B Shares (the“Certificate”) is not approved by a majority of the stockholders of XShares,then the entire unpaid principal sum of the Note, plus interest thereon, shallbe immediately paid to the Company or converted into shares of XShares’ commonstock at a price of $0.001 per share at the option of the Company.  A copyof the Note is annexed as Exhibit 10.5 to our quarterly report on Form 10-Qfor the three months ended March 31, 2009.

 

Simultaneously with executing the Note, we enteredinto a Securities Purchase Agreement (the “SPA”) with XShares, pursuant towhich we agreed to purchase an aggregate of 73,943,662 Series B Shares ata purchase price of $0.0284 per share for a total of $2,100.  The SPAcontains the standard representations and warranties for a transaction of thistype and is subject to the approval of the Certificate by the stockholders ofXShares.  The Series B Shares areredeemable at the option of XShares, at a price of 1.05 times the originalissue price.

 

It is anticipated that the purchase and sale of the Series BShares will take place in two closings.

 

1.               The initialclosing of 38,732,394 Series B Shares will occur upon the filing of theCertificate with the Secretary of State of the State of Delaware and certainother conditions (the “Initial Closing”).

 

2.               The secondclosing of 35,211,268 Series B Shares will occur upon the later of (i) July 16,2009 or (ii) five days following the filing of the Certificate.  Acopy of the SPA and a form of the Certificate are annexed as Exhibits 10.3 and10.4, respectively, to our quarterly report on Form 10-Q for the threemonths ended March 31, 2009.

 

The fee of $100 payable to the Company is recognizedratably over the term of the Note; this has been recognized in interestincome.  We also accrue coupon interestat an annualized rate of 10% as provided for in the Note.

 

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On August 5, 2009 we signed an Amendment to the Securitiespurchase Agreement with XShares Group, Inc.  A copy of the Amendment is attached hereto asExhibit 10.6.

 

The amendment allows for:

 

·      The date of the first closing to beextended until December 31, 2009;

 

·      Our CEO, Tim Paterson-Brown, to beappointed as the Series B Preferences Shares director on the XSharesboard;

 

·      Certain additional post closing covenants;and

 

·      Certain additional closing conditions.

 

On August 6, 2009 a Second amendment tothe SPA was signed.  A copy of the SecondAmendment is attached hereto as Exhibit 10.7. This amended the terms of the second closing to allow for the investmentto be made in a Convertible Note with a maturity date of December 31,2009.  The Convertible Note is attachedhereto as Exhibit 10.8.

 

*Investment in Medicsight*

 

Our condensed consolidated financial statementsinclude the results and financial condition of our subsidiary,Medicsight.  Our holding in Medicsight is 86,000,000 shares out ofMedicsight’s issued share capital of 155,524,504 shares.

 

As of June 30, 2009 Medicsight’s share price was£0.14 ($0.23) compared to £0.235 ($0.34), as of December 31, 2008. This valued Medicsight at £12,040 ($19,890), compared to £20,210 ($29,262) asof December 31, 2008.

 

As of August 3, 2009 Medicsight’s share price was£0.13 ($0.22) valuing the Company’s investment at £11,395 ($18,825), assuminga $:£ exchange rate of 1.6520.

 

*Risks and uncertainties related to our future capitalrequirements*

 

To date we have primarily financed our operationsthrough private placements of equity securities.  To the extent thatadditional capital is raised through the sale of equity or equity-relatedsecurities of the Company or its subsidiaries, the issuance of such securitiescould result in dilution to our stockholders.

 

No assurance can be given, however, that we will haveaccess to the capital markets in the future, or that financing will beavailable on acceptable terms to satisfy our cash requirements to implement ourbusiness strategies.

 

If we are unable to access the capital markets orobtain acceptable financing, our results of operations and financial conditionscould be materially and adversely affected.  We may be required to raisesubstantial additional funds through other means.

 

Our technology has not yet been regulated in alltarget territories and as a result commercial results have been limited and wehave not generated significant revenues.  We cannot assure ourstockholders that our technology and products will be commercializedsuccessfully, or that if so commercialized, that revenues will be sufficient tofund our operations.

 

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If adequate funds are not available to us, we may berequired to curtail operations significantly or to obtain funds throughentering into arrangements with collaborative partners or others that mayrequire us to relinquish rights to certain of our technologies or products thatwe would not otherwise relinquish.

 

*Capital commitments*

 

On August 25, 2006 we executed a 10-yearagreement with Pirbright Holdings Limited, to lease 8,787 square feet of officespace at the Kensington Centre, 66 Hammersmith Road, London W14 8UD, UnitedKingdom.

 

Under this lease agreement our UK property rent,services and related costs will be approximately £330 ($545) per annum, paidquarterly in advance.  We have the right to terminate this agreement onthe expiration of the fifth year of the lease.  Our annual rent is subjectto upward only review on August 24, 2011.  We have two 10-monthrent-free periods: the first commencing August 25, 2006; the second commencingAugust 25, 2011.

 

We have satellite offices in Tokyo (Japan) and Beijing(China) — which are on three and two year rental agreements respectively.

 

In July 2008 we entered into an agreement with apartner to develop interfaces for our software.  We have committed to payEuros 1,445 ($2,030) over an expected thirty-six month period.  As at June 30,2009 we have paid Euros 995 ($1,397).  These payments will be recoveredagainst future royalty payments, should the products be successfullycommercialized.

 

The following table analyzes our contractualobligations.

 
| ** **                       | ** ** | **Payments due by period** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|
| **Contractual obligations** | ** ** | **Total**                                 | ** ** | **Less than 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** |
| Operating lease obligations      |       | $                                         | 1,205      |   | $ | 635 |   | $ | 568 |   | $ | 2 |   |
| Purchase obligations             |       | 633                                       |       | 633 |   | — |   | — |   |
|                             |       |                                      |       |   |   |   |   |   |   |
| Total                            |       | $                                         | 1,838      |   | $ | 1,268 |   | $ | 568 |   | $ | 2 |   |

 

**Recent accounting pronouncements**

 

In June 2009 the Financial Accounting Standards Board (“FASB”)approved the FASB Accounting Standards Codification (the “Codification”) as thesingle source of authoritative non-governmental GAAP.  All existing accounting standard documents,such as FASB, American Institute of Certified Public Accountants, EmergingIssues Task Force and other related literature, excluding guidance from theSecurities and Exchange Commission, will be superseded by theCodification.  All othernon-grandfathered, non-SEC accounting literature not included in theCodification will become non-authoritative. The Codification does not change GAAP, but instead introduces a newstructure that will combine all authoritative standards into a comprehensive,topically organized online database.  TheCodification will be effective for interim or annual periods ending after September 15,2009, and will impact the Company’s financial statement disclosures beginningwith the quarter ending September 30, 2009 as all future references toauthoritative accounting literature will be referenced in accordance with the Codification.  There will be no changes to the content ofthe Company’s financial statements or disclosures as a result of implementingthe Codification.

 

In June 2009 the FASB issued FAS 167, *“Amendments to FASB Interpretation No. 46(R)”,* whichchanges the approach to determining the primary beneficiary of a variableinterest entity (“VIE”) and requires companies to more frequently assesswhether they must consolidate VIEs.  Thisnew standard is effective for us beginning on January 1, 2010.  We are currently assessing the potentialimpacts, if any, on our consolidated financial statements.

 

On April 1, 2009 we adopted the provisions ofthree Staff Positions (“FSPs”) that are intended to provide additionalapplication guidance and enhance disclosures about fair value measurements andimpairments of securities.  FSP FAS 157-4 clarifies the objective andmethod of fair value measurement even when there has been a significantdecrease in market activity for the asset being measured.  FSP FAS 115-2and FAS 124-2 establish a new model for measuring other-than-temporary 

 

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impairmentsfor debt securities, including establishing criteria for when to recognize awrite-down through earnings versus other comprehensive income.  FSPFAS 107-1 and APB 28-1 expand the fair value disclosures required for allfinancial instruments within the scope of SFAS No. 107, “*Disclosures about Fair Value of Financial Instruments*”, tointerim periods.  The adoption of FSP FAS 157-4 and FSP FAS 115-2 and FAS124-2 did not have a material impact on our consolidated financialstatements.  The adoption of FSP FAS 107-1 and APB 28-1 has resulted inincreased disclosures in our interim periods.

 

OnJanuary 1, 2009 we adopted the provisions of SFAS No. 141 (Revised2007), “*Business Combinations*”.  SFAS No. 141(R) significantlychanges the accounting for business combinations.  Under SFAS No. 141(R),an acquiring entity is required to recognize all the assets acquired andliabilities assumed in a transaction at the acquisition-date fair value withonly limited exceptions.  SFAS No.141(R) also includes a substantialnumber of new disclosure requirements.  In April 2009 the FASB issuedFSP FAS 141(R)-1 which amends SFAS No. 141(R) by establishing a modelto account for certain pre-acquisition contingencies.  Under the FSP, anacquirer is required to recognize at fair value an asset acquired or aliability assumed in a business combination that arises from a contingency ifthe acquisition-date fair value of that asset or liability can be determinedduring the measurement period.  If the acquisition-date fair value cannotbe determined, then the acquirer should follow the recognition criteria in SFASNo. 5, “*Accounting for Contingencies*”,and FASB Interpretation No. 14, “*Reasonable Estimation ofthe Amount of a Loss — an interpretation of FASB Statement No. 5*”. SFAS No. 141(R) and FSP FAS 141(R)-1 became effective for usbeginning January 1, 2009, and will apply prospectively to businesscombinations completed on or after that date.

 

On January 1, 2009 we adopted the provisions ofSFAS No. 160, “*Noncontrolling Interestsin Consolidated Financial Statements — an Amendment of ARB No. 51”*. SFAS No. 160 establishes accounting and reporting standards for the non-controllinginterest (formerly known as minority interest) in a subsidiary (which mayinclude variable interest entities) and for the deconsolidation of asubsidiary.  Significant changes include: balance sheet and incomestatement presentation and expanded disclosures; Accounting for changes in aparent’s ownership interest in a subsidiary that do not result indeconsolidation; recognition and measurement of a gain or loss when asubsidiary is deconsolidated.  For balance sheet presentation, non-controllinginterests are now recorded within equity and so-called “mezzanine” display isnot permitted.  In income statements, the amount of income attributable tothe non-controlling interest is not a deduction that impacts net income. As a result of these requirements, various financial statements ratios havebeen impacted.  The statement requires prospective application except forthe presentation and disclosure requirements, which must be appliedretrospectively for all periods presented. Prior periods were reclassified to conform to the current periodpresentation.

 

In May 2009, the FASB issued Statement ofFinancial Accounting Standards No. 165, Subsequent Events (“SFAS 165”).SFAS 165 establishes general standards of accounting for and disclosure ofevents that occur after the balance sheet date but before financial statementsare issued or are available to be issued. In particular, SFAS 165 sets forththe period after the balance sheet date during which management should evaluateevents or transactions that may occur for potential recognition or disclosurein the financial statements, the circumstances under which an entity shouldrecognize events or transactions occurring after the balance sheet date in itsfinancial statements and the disclosures that an entity should make aboutevents or transactions that occurred after the balance sheet date.  SFAS 165 requires the disclosure of the datethrough which an entity has evaluated subsequent events and the basis for thatdate, that is, whether that date represents the date the financial statementswere issued or were available to be issued. This Statement is effective forfinancial statements issued for interim and annual periods ending after June 15,2009 and it has not had a material impact on our financial reporting.

 

**Item 3.**    **Quantitativeand qualitative disclosures about market risk**

 

*Interest rate risk*

 

Our exposure to market rate risk for changes ininterest rates relates primarily to our investment portfolio.  We placeour investments in a mixture of cash deposits and available-for-salemarket securities.  A decline in interestrate would have an adverse impact on interest income.

 

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We do not have any debt and we do not use derivativefinancial instruments.

 

*Foreign exchange risk*

 

We are exposed to foreign currency exchange ratefluctuations related to the operation of our international subsidiaries. Our main operating currency is UK sterling.  We also have subsidiaryoperations in Japan and China who operate in their local currencies.

 

Our operating costs in Fiscal 2008 were predominantlyin UK sterling; we do not foresee any change in Fiscal 2009 or Fiscal2010.  A ten percent increase or declinein the US dollar exchange rate against all foreign currencies would havecreated an decrease or increase in our operating costs in the six months ended****June 30, 2009 of approximately $822.

 

At the end of each reporting period, expenses of thesubsidiaries are converted into US dollars using the average currency rate ineffect for the period and assets and liabilities are converted into US dollarsusing the exchange rate in effect at the end of the period.

 

Additionally, we are exposed to foreign currencyexchange rate fluctuations relating to payments we make to vendors andsuppliers using foreign currencies.

 

We currently do not hedge against this foreigncurrency risk.

 

Fluctuations in exchange rates may impact ourfinancial condition and results of operations.

 

**Item4T.                     Controls and procedures**

 

*Evaluation of disclosure controlsand procedures*

 

Management of the Company, including the ChiefExecutive Officer and the Chief Financial Officer, evaluated the effectivenessof the design and operation of the Company’s disclosure controls and procedures(as such term is defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934) as of the end of the period covered bythis report. Based upon that evaluation, the Company’s Chief Executive Officerand the Chief Financial Officer concluded that the Company’s disclosurecontrols and procedures were effective as of the end of the period covered bythis report for the information required to be disclosed by the Company in thereports it files or submits under the Securities Exchange Act of 1934, asamended, to be recorded, processed, summarized and reported within the timeperiods specified in the Securities and Exchange Commission’s rules andforms.

 

*Changes in internal control overfinancial reporting*

 

There have not been any changes in the Company’sinternal control over financial reporting (as such term is defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) during the fiscal quarter ended June 30,2009 that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

**PART II. OTHER INFORMATION**

 

**Item1.                           Legal proceedings**

 

None.

 

**Item1A.                        Risk factors**

 

Discussion of our business and operations included inthis quarterly report on Form 10-Q should be read together with the riskfactors set forth below.  They describevarious risks and uncertainties to which we are or may become subject.  These risks and uncertainties, together withother factors described elsewhere in this report, have the potential to affectour business, financial condition, results of operations, cash flows,strategies or prospects in a material and adverse manner.  New risks mayemerge at any time, and we cannot predict those risks or estimate the extent towhich they may affect 

 

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financialperformance.  Each of the risks describedbelow could adversely impact the value of our securities.  Thesestatements, like all statements in this report, speak only as of the date ofthis report (unless another date is indicated), and we undertake no obligationto update or revise the statements in light of future developments.

 

We cannot assure you that MGT will be successful incommercializing any of the Group’s products and, in particular, the Medicsightproducts or the Medicexchange portal, or if any of the products or the portalare commercialized, that they will prove to be profitable for the Company.

 

MGT has only had a limited operating history and hasjust commenced generating revenue from operations upon which an evaluation ofits prospects can be made.  MGT’sprospects must be considered keeping in mind the risks, expenses anddifficulties frequently encountered in the establishment of a new business in aconstantly changing industry.  There canbe no assurance that MGT will be able to achieve profitable operations in theforeseeable future if at all.

 

MGT has identified a number of specific risk areasthat may affect MGT’s operations and results in the future:

 

**Company specific risks**

 

*We may be unable to develop ourexisting or future technology.*

 

Our Medicsight CAD system may not deliver the levelsof accuracy and reliability needed to make it a successful product in themarket place.  Additionally, the development of such accuracy andreliability may be indefinitely delayed or may never be achieved.  Failureto develop this or other technology could have an adverse material effect onthe Company’s business, financial condition, results of operations and futureprospects.

 

*The market for our technology may beslow to develop, if at all.*

 

The market for the Medicsight CAD products andMedicexchange.com may be slower to develop or smaller than estimated or it maybe more difficult to build the market than anticipated.  The medical community may resist MedicsightCAD and the Medicexchange.com products or be slower to accept them than weanticipate.  Revenues from Medicsight CADand Medicexchange.com may be delayed or costs may be higher than anticipatedwhich may result in the Company requiring additional funding.  Medicsight’sprincipal route to market is via commercial distribution partners.  These arrangements are generallynon-exclusive and have no guaranteed sales volumes or commitments.  The partners may be slower to sell ourproducts than anticipated.  Anyfinancial, operational or regulatory risks that affect our partners could alsoaffect the sales of our products.  In thecurrent economic environment, hospitals and clinical purchasing budgets thatare reliant on external debt finance may result in purchasing decisions beingdelayed.  If any of these situations wereto occur this could have a material adverse effect on the Company’s business,financial condition, results of operations and future prospects.

 

*We may be slow to receive requiredregulatory approvals from respective government regulators, if we receive themat all.*

 

The Medicsight CAD system is subject to regulatoryrequirements in the USA, Europe, Japan, China and our other targetedmarkets.  Necessary regulatory approvalsmay not be obtained or may be delayed.  We may incur substantialadditional cost in obtaining regulatory approvals for our products in ourtargeted markets. Any delays in obtaining the necessary regulatoryapprovals increase the risk that our competitors’ products are approved beforeour own.  The failure to obtain theseapprovals on a timely basis and/or the associated costs could have a materialadverse effect on the Company’s business, financial condition, results ofoperations and future prospects.

 

*The medical imaging market weoperate in is highly competitive.*

 

There are a number of groups and organizations, suchas software companies in the medical imaging field, MDCT scanner manufacturers,screening companies and other healthcare providers that may develop acompetitive offering to the Medicsight CAD products andMedicexchange.com.  In addition, these competitors may have significantlygreater resources than MGT.  We cannotmake any assurance that they will not attempt to develop such offerings, thatthey will not be successful in developing such offerings or that any offeringsthey may develop will not have a competitive edge over Medicsight CAD productsand Medicexchange.com. With delayed regulatoryapprovals and/or disputed clinical claims we may not have a commercial orclinical advantage over competitors’ products. Should a superior offering market come to market, this could have amaterial adverse effect on the Company’s business, financial condition, resultsof operations and future prospects.

 

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*We are a developing company withlimited revenues from operations.*

 

MGT has incurred significant operating losses sinceinception and has only recently commenced generating revenues fromoperations.  As a result, MGT hasgenerated negative cash flows from operations and has an accumulated deficit asof June 30, 2009.  MGT is operatingin a developing industry based on new technology and its primary source offunds to date has been through the issuance of securities and borrowedfunds.  There can be no assurance thatmanagement’s efforts will be successful or that the products MGT develops andmarkets will be accepted by consumers.  If our products are ultimatelyunsuccessful in the market, this could have a material adverse effect on theCompany’s business, financial condition, results of operations and future prospects.

 

*Our current corporate structure mayplace us in an unfavorable market position vis-à-vis our competitors.*

 

MGT’s corporate structure may make it more difficultor costly to take certain actions.  MGTconducts its business through: (a) Medicsight, a UK public company whichis 55% owned by the Company, and through Medicsight’s subsidiaries in theUnited Kingdom, the USA, Japan and Gibraltar; and (b) the Medicexchangesubsidiaries, in which MGT’s holdings range between 75% and 100%. Although MGT, Medicsight and Medicexchange share some directors and management,they are required to comply with corporate governance and other laws and rules applicableto public companies in the United Kingdom and the USA.  Should MGT proposeto take any action, such as a transfer or allocation of assets or liabilitiesbetween MGT and its subsidiaries, MGT would have to take into consideration thepotentially conflicting interests of MGT’s stockholders and the non-controllingstockholders.  This may deter MGT from taking such actions that mightotherwise be in the best interest of MGT or cause MGT to incur additional costsin taking such actions.  The subsidiarycompanies would not be able to pay dividends or make other distributions ofprofits or assets to MGT without making pro-rata payments or distributions tothe respective non-controlling stockholders.  Although neither thesubsidiary companies nor MGT has plans to pay dividends or make distributionsto its shareholders, MGT’s corporate structure may deter its subsidiaries fromdoing so in the future.  If at any point we are ultimately unable toresolve any of these conflicts, this could have a material adverse effect onthe Company’s business, financial condition, results of operations and futureprospects.

 

*The protection of our intellectualproperty may be uncertain, and we may face possible claims of others.*

 

Although we have received patents and have filedpatent applications with respect to certain aspects of our technology, wegenerally do not rely on patent protection with respect to our products andtechnologies.  Instead, we rely primarilyon a combination of trade secret and copyright law, employee and third-partynon-disclosure agreements and other protective measures to protect intellectualproperty rights pertaining to our products and technologies.  Such measures may not provide meaningfulprotection of our trade secrets, know-how or other intellectual property in theevent of any unauthorized use, misappropriation or disclosure.  Others may independently develop similartechnologies or duplicate our technologies. In addition, to the extent that we apply for any patents, suchapplications may not result in issued patents or, if issued, such patents maynot be valid or of value.  Third partiescould, in the future, assert infringement or misappropriation claims against uswith respect to our current or future products and technologies, or we may needto assert claims of infringement against third parties.  Any infringement or misappropriation claim byus 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 anintellectual property claim could be substantial and could adversely affect ourbusiness, even if we are ultimately successful in prosecuting or defending anysuch claims.  If our products ortechnologies are found to infringe the rights of a third party, we could berequired to pay significant damages or license fees or cease production, any ofwhich could have a material adverse effect on our business.  If a claim isbrought against us, or we ultimately prove unsuccessful on the claims on ourmerits, this could have a material adverse effect on the Company’s business, financialcondition, results of operations and future prospects.

 

*We may fail to attract and retainqualified personnel.*

 

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We expect to rapidly expand our operations and growour sales, research and development and administrative operations.  This expansion is expected to place asignificant strain on our management and will require hiring a significantnumber of qualified personnel. Accordingly, recruiting and retaining such personnel in the future willbe critical to our success.  There isintense competition from other companies, research and academic institutions,government entities and other organizations for qualified personnel in theareas of our activities.  If we fail toidentify, attract, retain and motivate these highly skilled personnel, we maybe unable to continue our marketing and development activities, and this couldhave a material adverse effect on the Company’s business, financial condition,results of operations and future prospects.

 

*If we do not effectively managechanges in our business, these changes could place a significant strain on ourmanagement and operations.*

 

Our ability to grow successfully requires an effectiveplanning and management process.  Theexpansion and growth of our business could place a significant strain on ourmanagement systems, infrastructure and other resources.  To manage our growth successfully, we mustcontinue to improve and expand our systems and infrastructure in a timely andefficient manner.  Our controls, systems,procedures and resources may not be adequate to support a changing and growingcompany.  If our management fails torespond effectively to changes and growth in our business, includingacquisitions, this could have a material adverse effect on the Company’sbusiness, financial condition, results of operations and future prospects.

 

*We face risks arising from foreigncurrency exchange.*

 

As MGT’s main operating currency is UK sterling andits financial statements are reported in US dollars, MGT’s assets andliabilities and its results of operations are affected by movements in the $:£exchange rate.  Should there be large or unexpected fluctuations in the$:£ exchange rate, this could have a material effect on the Company’s business,financial condition, results of operations and future prospects.  TheCompany currently does not engage in hedging activities to minimize the effectof adverse movements in the exchange rate.

 

*We may not be able to quicklyrealize our investments at the value at which we have recorded them.*

 

MGT holds a number of investments held at both atmarket value and at cost.  There is a risk that we may not be able toswiftly realize these investments at the fair value or cost at which they arerecorded in the financial statements.  If we are unable to quickly realizethese investments at prices we believe to be fair, this could have a materialeffect on the Company’s business, financial condition, results of operationsand future prospects.

 

**General market risks**

 

*We may not be able to access credit.*

 

We face the risk that we may not be able to accesscredit, either from lenders or suppliers, or have facilities reduced orterminated.  Failure to access credit from any of these sources could havea material adverse effect on the Company’s business, financial condition,results of operations and future prospects.

 

*Recent global economic trends couldadversely affect our business, liquidity and financial results.*

 

Recent global economic conditions, includingdisruption of financial markets, could adversely affect us, primarily throughlimiting our access to capital and disrupting our clients’ businesses.  Inaddition, continuation or worsening of general market conditions in economiesimportant to our businesses may adversely affect our clients’ level of spendingand ability to obtain financing, leading to us being unable to generate thelevels of sales that we require.  Current and continued disruption offinancial markets could have a material adverse effect on the Company’sbusiness, financial condition, results of operations and future prospects.

 

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*We may not be able to maintaineffective internal controls.*

 

If we fail to maintain the adequacy of our internalaccounting controls, as such standards are modified, supplemented or amendedfrom time to time, we may not be able to ensure that we can conclude on anongoing basis that we have effective internal controls over financial reportingin accordance with Section 404. Failure to achieve and maintain an effective internal controlenvironment could cause us to face regulatory action and also cause investorsto lose confidence in our reported financial information, either of which couldhave a material adverse effect on the Company’s business, financial condition,results of operations and future prospects.

 

**Item2.                           Unregistered sales of equity securities and use of proceeds**

 

Inthe three months ended June 30, 2009 no shares of common stock wereissued.

 

**Item3.                           Defaults upon senior securities**

 

None.

 

**Item 4.                           Submission of matters to a vote of security holders**

 

OnAugust 4, 2009, we held our annual stockholders meeting. The Boardproposed, and the shareholders approved, the election of each of our Directorsfor an additional term of one year to expire at our next Annual Meeting,tentatively scheduled for August 3, 2010, or until their successors areelected and qualified or until their earlier resignation or removal.  The number of votes cast for and the numberwithheld,as to each Director, were as follows:

 
| **Director**                   | ** ** | **Shares in Favor** | ** ** | **Shares Withheld** | ** ** | **TOTAL**  | ** ** |
|--------------------------------|------------|---------------------|------------|---------------------|------------|------------|------------|
| **Tim Paterson-Brown**         |       | 15,463,555          |       | 1,693,854           |       | 17,157,409 |       |
| **Allan Rowley**               |       | 16,177,040          |       | 980,369             |       | 17,157,409 |       |
| **Neal Wyman**                 |       | 15,462,814          |       | 1,694,595           |       | 17,157,409 |       |
| **Dr. L. Peter Fielding** |       | 16,176,541          |       | 980,868             |       | 17,157,409 |       |
| **Peter Venton**               |       | 15,462,814          |       | 1,694,595           |       | 17,157,409 |       |
| **Sir Christopher Paine**      |       | 16,177,040          |       | 980,369             |       | 17,157,409 |       |
| **Dr. Allan Miller**      |       | 16,177,040          |       | 980,369             |       | 17,157,409 |       |

 

The Board alsoproposed, and the shareholders approved, the ratification of the Board’sselection of Amper, Politziner & Mattia LLP as our independentauditors for the fiscal year ending December 31, 2009.  The number of votes cast for theratification, the number cast against and the number abstained were as follows:

 
| ** **               | ** ** | **Shares For** | ** ** | **Shares Against** | ** ** | **Shares  Abstaining** | ** ** | **TOTAL**  | ** ** |
|--------------------------|------------|----------------|------------|--------------------|------------|------------------------|------------|------------|------------|
| Ratification of Auditors |       | 16,209,016     |       | 942,935            |       | 5,457                  |       | 17,157,408 |       |

 

**Item 5. Other information**.

 

None.

 

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**Item6.                           Exhibits**

 
| 10.6 |   | First  Amendment to Securities Purchase Agreement with XShares Group, Inc.                                        |
|------|--------|------------------------------------------------------------------------------------------------------------------------|
| 10.7 |   | Second  Amendment to Securities Purchase Agreement with XShares Group, Inc.                                       |
| 10.8 |   | Convertible  Promissory Note between XShares Group, Inc. and MGT Capital Investments,  Inc. date August 10, 2009. |
| 31.1 |   | Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief  Executive Officer).              |
| 31.2 |   | Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief  Financial Officer).              |
| 32.1 |   | Certification  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief  Executive Officer).              |
| 32.2 |   | Certification  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief  Financial Officer).              |

 

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SIGNATURE

 

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

 

 
|                 | MGT Capital Investments, Inc. |
|----------------------|------------------------------------|
|                 |                               |   |
|                 |                               |   |
|                 | By:                                | /s/ TIM PATERSON-BROWN |
|                 |                               | Tim Paterson-Brown |
|                 |                               | Chief Executive Officer |
|                 |                               |   |
|                 |                               |   |
|                 | By:                                | /s/ ALLAN ROWLEY |
|                 |                               | Allan Rowley |
|                 |                               | Chief Financial Officer |
|                 |                               |   |
| August 14, 2009 |                               |   |

 

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