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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 March 31, 2009.** |
|                                                    |                                                                                                    |   |
| **OR**                                                  |
| ** **                                              |                                                                                                    |
| **o**                                                   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from             to             **

 

**Commission file number: 0-26886**

 

**MGT CAPITAL INVESTMENTS, INC.**

(Exact name ofregistrant as specified in its charter)

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

 

**Kensington Centre, 66 Hammersmith Road, London W14 8UD, UNITED KINGDOM**

(Address ofprincipal executive offices, including zip code)

 

Registrant’stelephone number, including area code: **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 the Securitiesand Exchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  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 Exchange Act).  Yes o  No x

 

As of May 14, 2009 the registrant had outstanding32,550,590 shares of common stock, $0.001 par value, (excludes 6,349,793 commonshares held as treasury stock).

 

 

 

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NOTE REGARDINGFORWARD LOOKING STATEMENTS

 

This Form 10-Q,including “Management’s Discussion and Analysis of Financial Condition andResults of Operations” in Item 2, contains forward-looking statements thatinvolve risks and uncertainties, as well as assumptions that, if they nevermaterialize or prove incorrect, could cause the results of MGT CapitalInvestments, Inc. and its consolidated subsidiaries (the “Company”) todiffer materially from those expressed or implied by such forward-lookingstatements. All statements other than statements of historical fact arestatements that could be deemed forward-looking statements, including anyprojections of revenue, gross margin, expenses, earnings or losses fromoperations, synergies or other financial items; any statements of the plans,strategies and objectives of management for future operations, including therate of market development and acceptance of medical imaging technology; theexecution of restructuring plans; any statement concerning developments,performance or industry rankings relating to products or services; anystatements regarding future economic conditions or performance; any statementsof expectation or belief; and any statements of assumptions underlying any ofthe foregoing. The risks, uncertainties and assumptions referred to aboveinclude the performance of contracts by suppliers, customers and partners;employee management issues; the difficulty of aligning expense levels withrevenue changes; and other risks that are described herein, including but notlimited to the specific risks areas discussed in “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” in Item 2 ofthis report, and that are otherwise described from time to time in theCompany’s Securities and Exchange Commission reports filed after this report.The Company assumes no obligation and does not intend to update theseforward-looking statements.

 

The Company’smain operating currency is UK Sterling (£).

 

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**INDEX**

 
| **PART I — FINANCIAL INFORMATION** |                                                                                                                                    |
|----------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                   | ** **                                                                                                                              | ** ** |
| Item  1                                      | Condensed  Consolidated Balance Sheets — March 31, 2009 (unaudited) and  December 31, 2008                               | 4 |
|                                         |                                                                                                                                    |   |
|                                         | Condensed Consolidated Statements of Operations — for  the three months ended March 31, 2009 (unaudited) and 2008 (unaudited) | 5 |
|                                         |                                                                                                                                    |   |
|                                         | Condensed Consolidated Statement of Stockholders’  Equity and Comprehensive Income/(Loss) — March 31, 2009 (unaudited)   | 6 |
|                                         |                                                                                                                                    |   |
|                                         | Condensed Consolidated Statements of Cash Flows — for  the three months ended March 31, 2009 (unaudited) and 2008 (unaudited) | 7 |
|                                         |                                                                                                                                    |   |
|                                         | Notes to  Condensed Consolidated Financial Statements                                                                                   | 8 |
|                                         |                                                                                                                                    |   |
| Item 2                                       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                             | 21 |
|                                         |                                                                                                                                    |   |
| Item 3                                       | Quantitative  and Qualitative Disclosure About Market Risk                                                                              | 29 |
|                                         |                                                                                                                                    |   |
| Item 4                                       | Controls &  Procedures                                                                                                         | 29 |
|                                         |                                                                                                                                    |   |
| **PART II — OTHER  INFORMATION**   |                                                                                                                                    |
| ** **                                   | ** **                                                                                                                              | ** ** |
| Item 1                                       | Legal Proceedings                                                                                                                       | 29 |
|                                         |                                                                                                                                    |   |
| Item  1A                                     | Risk  Factors                                                                                                                           | 29 |
|                                         |                                                                                                                                    |   |
| Item 2                                       | Unregistered  Sale of Equity Securities and Use of Proceeds                                                                             | 32 |
|                                         |                                                                                                                                    |   |
| Item 3                                       | Defaults Upon  Senior Securities                                                                                                        | 32 |
|                                         |                                                                                                                                    |   |
| Item 4T                                      | Submission of  Matters to a Vote of Security Holders                                                                                    | 32 |
|                                         |                                                                                                                                    |   |
| Item 5                                       | Other Information                                                                                                                       | 33 |
|                                         |                                                                                                                                    |   |
| Item 6                                       | Exhibits                                                                                                                                | 34 |
|                                         |                                                                                                                                    |   |
| SIGNATURES                                   |                                                                                                                                    | 35 |

 

All financialamounts are in thousands except share and per share data.

 

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**MGT CAPITAL INVESTMENTS, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                                | ** ** | **March 31  2009** | ** ** | **December 31  2008** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                                                                                                | ** ** | **(unaudited)**         | ** ** | **Revised note 3**         | ** ** |
| **Assets**                                                                                                                |       |                    |       |                       |       |
| Current assets:                                                                                                           |       |                    |       |                       |       |
| Cash and cash equivalents                                                                                                 |       | $                       | 32,606     |                       | $          | 38,294 |   |
| Marketable securities                                                                                                     |       | 1,120                   |       | 1,884                      |       |
| Accounts receivable                                                                                                       |       | 15                      |       | 134                        |       |
| Other receivables – related party                                                                                    |       | 88                      |       | 49                         |       |
| Prepaid expenses and other current assets                                                                                 |       | 694                     |       | 851                        |       |
| Total current assets                                                                                                      |       | 34,523                  |       | 41,212                     |       |
|                                                                                                                      |       |                    |       |                       |       |
| Property and equipment, at cost, net                                                                                      |       | 610                     |       | 706                        |       |
| Intangible assets, net of accumulated amortization  of $133 (2008: $100)                                                  |       | 266                     |       | 299                        |       |
| Investments, at cost                                                                                                      |       | 776                     |       | 776                        |       |
| Security deposits                                                                                                         |       | 290                     |       | 301                        |       |
| Goodwill                                                                                                                  |       | —                  |       | 12,157                     |       |
| Total assets                                                                                                              |       | $                       | 36,465     |                       | $          | 55,451 |   |
|                                                                                                                      |       |                    |       |                       |       |
| **Liabilities**                                                                                                           |       |                    |       |                       |       |
| Current liabilities:                                                                                                      |       |                    |       |                       |       |
| Accounts payable                                                                                                          |       | $                       | 1,901      |                       | $          | 2,877 |   |
| Accrued expenses                                                                                                          |       | 1,234                   |       | 1,386                      |       |
| Deferred revenue                                                                                                          |       | 75                      |       | 77                         |       |
| Total current liabilities                                                                                                 |       | 3,210                   |       | 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                                                                                                |       | 298,721                 |       | 298,376                    |       |
| Accumulated other comprehensive (loss)                                                                                    |       | (6,140                  | )          | (4,959                     | )          |
| Accumulated deficit                                                                                                       |       | (254,780                | )          | (239,450                   | )          |
|                                                                                                                      |       | 37,840                  |       | 54,006                     |       |
| Treasury stock, at cost, 6,349,793 shares of common  stock                                                                |       | (18,912                 | )          | (18,912                    | )          |
| Total stockholders’ equity                                                                                           |       | 18,928                  |       | 35,094                     |       |
| Non-controlling interest                                                                                                  |       | 14,327                  |       | 16,017                     |       |
| Total equity                                                                                                              |       | 33,255                  |       | 51,111                     |       |
|                                                                                                                      |       |                    |       |                       |       |
| Total stockholders’ equity, liabilities and  non-controlling interest                                                |       | $                       | 36,465     |                       | $          | 55,451 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

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**MGT CAPITAL INVESTMENTS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(unaudited)**

 
| ** **                                                   | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                   | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| ** **                                                   | ** ** | ** **                                           | ** ** | **Revised note 3** | ** ** |
|                                                         |       |                                                 |       |   |   |
| Revenues                                                     |       | $                                                    | 74         |   | $ | 52 |   |
| Cost of revenue                                              |       | 2                                                    |       | 12 |   |
| Gross margin                                                 |       | 72                                                   |       | 40 |   |
|                                                         |       |                                                 |       |   |   |
| Operating expenses                                           |       |                                                 |       |   |   |
| Selling, general and administrative expenses                 |       | 3,687                                                |       | 5,505 |   |
| Research and development cost                                |       | 459                                                  |       | 595 |   |
| Impairment of goodwill                                       |       | 12,157                                               |       | — |   |
|                                                         |       | 16,303                                               |       | 6,100 |   |
|                                                         |       |                                                 |       |   |   |
| Operating loss                                               |       | (16,231                                              | )          | (6,060 | ) |
|                                                         |       |                                                 |       |   |   |
| Interest and other (expense)/income                          |       | (695                                                 | )          | 508 |   |
|                                                         |       |                                                 |       |   |   |
| Net loss before non-controlling interest                     |       | (16,926                                              | )          | (5,552 | ) |
|                                                         |       |                                                 |       |   |   |
| Net loss attributable to non-controlling interest            |       | 1,596                                                |       | 1,773 |   |
|                                                         |       |                                                 |       |   |   |
| Net loss attributable to MGT Capital  Investments, Inc. |       | $                                                    | (15,330    | ) | $ | (3,779 | ) |
|                                                         |       |                                                 |       |   |   |
| Per share data:                                              |       |                                                 |       |   |   |
|                                                         |       |                                                 |       |   |   |
| Basic and diluted loss per share                             |       | $                                                    | (0.47      | ) | $ | (0.10 | ) |
|                                                         |       |                                                 |       |   |   |
| Weighted average number of common shares  outstanding        |       | 32,550,590                                           |       | 38,846,986 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

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**MGT CAPITAL INVESTMENTS, INC AND SUBSIDIARIES**

**CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY ANDCOMPREHENSIVEINCOME/(LOSS)**

**Revised note 3**

**(in thousands)**

 
| ** **                    | ** ** | ** **            | ** ** | ** **  | ** ** | **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     |       | —                |       | —      |       | 345               |       | —            |       | —       |       | —                 |       | 345             |       | 136          |       | 481        |       |
| COMPREHENSIVE  LOSS           |       |                  |       |        |       |              |       |              |       |         |       |                   |       |            |       |         |       |       |       |
| Net  loss for the period      |       | —                |       | —      |       | —            |       | —            |       | (15,330      | )          | —                 |       | (15,330         | )          | (1,596       | )          | (16,926    | )          |
| Translation  adjustment       |       | —                |       | —      |       | —            |       | (1,181            | )          | —       |       | —                 |       | (1,181          | )          | (230         | )          | (1,411     | )          |
| Total  comprehensive loss     |       | —                |       | —      |       | —            |       | (1,181            | )          | (15,330      | )          | —                 |       | (16,511         | )          | (1,826       | )          | (18,337    | )          |
|                          |       |                  |       |        |       |              |       |              |       |         |       |                   |       |            |       |         |       |       |       |
| BALANCE,  MARCH 31, 2009 |       | 38,900                |       | $           | 39         |              | $          | 298,721           |       | $            | (6,140     | )                      | $          | (254,780        | )          | $            | (18,912    | )          | $          | 18,928 |   | $ | 14,327 |   | $ | 33,255 |   |

 

Theaccompanying notes are an integral part of these statements.

 

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**MGT CAPITAL INVESTMENTS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

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

** (unaudited)**

 
| ** **                                                                   | ** ** | **Three Months ended March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2009**                                        | ** ** | **2008** | ** ** |
| ** **                                                                   | ** ** | ** **                                      | ** ** | **Revised note 3** | ** ** |
| Cash flows from operating  activities                                        |       |                                            |       |   |   |
| Net loss attributable to MGT Capital  Investments, Inc.                 |       | $                                               | (15,330    | ) | $ | (3,779 | ) |
|                                                                         |       |                                            |       |   |   |
| Adjustments to reconcile  net loss to net cash used in operating activities: |       |                                            |       |   |   |
| Loss attributable to non-controlling interest                                |       | (1,596                                          | )          | (1,773 | ) |
| Stock-based compensation expense                                             |       | 481                                             |       | 1,091 |   |
| Depreciation                                                                 |       | 83                                              |       | 110 |   |
| Amortization                                                                 |       | 33                                              |       | — |   |
| Loss on impairment of goodwill                                               |       | 12,157                                          |       |   |   |
| Loss on impairment of marketable securities deemed  other than temporary     |       | 764                                             |       | — |   |
| Unrealized currency loss on foreign denominated  intercompany transactions   |       | 234                                             |       | — |   |
| (Increase)/decrease in  assets                                               |       |                                            |       |   |   |
| Accounts receivable                                                          |       | 114                                             |       | (44 | ) |
| Other receivables — related party                                       |       | (46                                             | )          | (33 | ) |
| Prepaid expenses and other current assets                                    |       | (330                                            | )          | (169 | ) |
| Increase/(decrease) in  liabilities                                          |       |                                            |       |   |   |
| Accounts payable                                                             |       | (1,589                                          | )          | (1,230 | ) |
| Accrued expenses                                                             |       | (147                                            | )          | (16 | ) |
| Deferred revenue                                                             |       | (1                                              | )          | 3 |   |
| Net cash used in operating  activities                                       |       | (5,173                                          | )          | (5,840 | ) |
|                                                                         |       |                                            |       |   |   |
| Cash flows from investing  activities:                                       |       |                                            |       |   |   |
| Cash short-term deposits                                                     |       | —                                          |       | (2,000 | ) |
| Purchase of marketable securities                                            |       | —                                          |       | (3,688 | ) |
| Sale of marketable securities                                                |       | —                                          |       | 276 |   |
| Purchase of fixed assets                                                     |       | (14                                             | )          | (269 | ) |
| Purchase of common stock in subsidiary (net of  commissions)                 |       | —                                          |       | (900 | ) |
| Net cash used in investing  activities                                       |       | (14                                             | )          | (6,581 | ) |
|                                                                         |       |                                            |       |   |   |
| Cash flows from financing  activities:                                       |       |                                            |       |   |   |
| Purchase of common stock (net of commissions)                                |       | —                                          |       | (1,877 | ) |
| Net cash used in financing  activities                                       |       | —                                          |       | (1,877 | ) |
|                                                                         |       |                                            |       |   |   |
| Effects of exchange rates  on cash                                           |       | (501                                            | )          | 132 |   |
| Net change in cash and  cash equivalents                                     |       | (5,688                                          | )          | (14,166 | ) |
| Cash and cash equivalents,  beginning of period                              |       | 38,294                                          |       | 92,373 |   |
| Cash and cash equivalents,  end of period                                    |       | $                                               | 32,606     |   | $ | 78,207 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements

 

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**MGT CAPITAL INVESTMENTS, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

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

**(unaudited)**

 

**1. Organization, basis ofpresentation 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 do not include all of the information andnotes required by accounting principles generally accepted in the United Statesof America. In the opinion of management, all adjustments, consisting only ofnormal recurring adjustments, have been included. Operating results for thethree months ended March 31, 2009 are not necessarily indicative of theresults that may be expected for any subsequent quarter or for the yearending December 31, 2009. These condensed consolidated financialstatements should be read in conjunction with the consolidated financialstatements and notes thereto included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2008.  The condensed consolidatedfinancial statements include the accounts of the Company and its majority ownedsubsidiaries. All intercompany accounts and transactions have 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 also have wholly owned subsidiaries MGTCapital Investments (UK) Limited, MGT Investments (Gibraltar) Limited,Medicexchange Inc., Medicsight Nominees Limited, HTTP Tech Inc. and MedicalVision Systems Inc.

 

·                  Medicsight and its wholly ownedsubsidiaries is a medical imaging software development company listed on theAIM Market of the London Stock Exchange (ticker symbol MDST) that develops andcommercializes 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 and its majority ownedsubsidiaries provide medical imaging professionals with a global web portalcontaining an online sales channel for diagnostic, treatment and surgeryplanning solutions.  This combined with a variety of relevant clinicalpapers, training materials and content gives these professionals access toinformation 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 aresult, the Company has generated negative cash flows from operations and hasan accumulated deficit of $254,780 at March 31, 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 theCompany is optimistic and believes appropriate actions are being taken, therecan be no assurance that management’s efforts will be successful or that theproducts the Company develops and markets will be accepted by consumers.

 

**2. Summary of Significant AccountingPolicies**

 

*Principles of Consolidation*

 

The financial statements include the accounts of ourCompany and our wholly and majority owned subsidiaries. Our main operatingsubsidiaries are Medicsight and Medicexchange. The functional currencies of oursubsidiaries are their local currencies.  All intercompany transactionsand balances have been eliminated.  All foreign currency translation gainsand losses arising on consolidation were recorded in stockholders’ equity as acomponent of accumulated other comprehensive income (loss) in accordance withStatement of Financial Accounting Standards No. 52, *Foreign Currency Translation.*  Non-controlling interest represents the minority equity investment in any ofthe MGT Capital Investments, Inc. group of companies, plus the minorities’share of the net operating result and, in accordance with  Statement of Financial Accounting Standards No. 160,*Noncontrolling Interests in ConsolidatedFinancial Statements*, asamended, other components of equity relating to the non-controlling interest.

 

*Use of Estimates*

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the amountsof assets and liabilities and disclosure of contingent liabilities at the dateof the financial statements and the reported amounts of revenue and expensesduring the reporting period. Actual results could differ from those estimates.

 

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*Cash and cash equivalents*

 

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

 

*Marketable securities*

 

The Company invests some of its cash balances inshort-term highly liquid available for sale marketable securities, which arecarried in our balance sheet at fair value in accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 115 *Accounting for Certain Investments in Debt and Equity Securities,*with unrealized gains and losses reported in stockholders’ equity as acomponent of accumulated other comprehensive income (loss) - unless the Companyconcludes that unrealized losses represent an other-than-temporary impairment.In that circumstance, such losses would be reflected in the consolidatedstatements of operations. Realized gains and losses are included in otherincome. 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 share capital. TheCompany records these investments at historical cost, subject to any provisionfor impairment.

 

*Property and equipment*

 

Property and equipment are stated at cost.Depreciation is calculated using the straight line method on the various assetclasses 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 Other Intangible Assets.” Under SFAS No. 142, goodwill and intangible assets with indefinite livesare reviewed for impairment annually or more frequently if events or changes incircumstances indicate that the asset might 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. Wecompare the book value to the market value (market capitalization plus acontrol premium) for the reporting unit. If the market value exceeds the bookvalue, goodwill is considered not impaired, and thus the second step of the impairmenttest is not necessary. If our book value exceeds the market value, the secondstep of the goodwill impairment test is performed to measure the amount ofimpairment loss, if any. The second step of the goodwill impairment test, usedto measure the amount of impairment loss, compares the implied fair value ofthe goodwill with the book value of the goodwill. If the carrying value of thegoodwill exceeds the implied fair value of the goodwill, an impairment losswould be recognized in an amount equal to the excess. Any loss recognizedcannot exceed the carrying amount of goodwill. After a goodwill impairment lossis recognized, the adjusted carrying amount of goodwill is its new accountingbasis. 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 a consequence, we carried out animpairment review and concluded that the goodwill was fully impaired.  See note 7.

 

*Impairment of long-livedassets 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’sassessment for impairment of an asset involves estimating the undiscounted cashflows expected to result from use of the asset and its eventual disposition. Animpairment loss recognized is measured as the amount by which the carryingamount of the asset exceeds the fair value of the asset.

 

*Foreign currencytranslation*

 

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 at year-endexchange rates, and income and expense accounts are translated at averagemonthly exchange rates. Net gains and losses from foreign currency translationare excluded from operating results and are accumulated as a separate componentof stockholders’ equity.

 

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

 

*Revenue Recognition*

 

*Medicsight*

 

The Company recognizes revenue in accordance withAmerican Institute of Certified Public Accountants (“AICPA”) Statement ofPosition (“SOP”) 97-2, Software Revenue Recognition, as amended by SOP 98-4 andSOP 98-9, as well as Technical Practice Aids issued from time to time by theAICPA, and SEC Staff Accounting Bulletin No. 104. The Company recognizesrevenue when it is realized or realizable and earned. The Company considersrevenue realized or realizable and earned when it has persuasive evidence of anarrangement, 

 

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the product has been shipped or the services have beenprovided to the customer, the sales price is fixed or determinable, andcollectability is probable.

 

License fee revenue is derived from the licensing ofcomputer software. Maintenance revenue is derived from software maintenance.The Company’s software licenses are generally sold as part of anarrangement that includes maintenance and support.

 

The Company licenses software and sells maintenancethrough visualization solution partners and original equipment manufacturers.The Company receives regular sales reports detailing the number of licensessold by original equipment manufacturers, value-added resellers and independentdistributors (collectively, “Resellers”) to end users. The Company generallyoffers terms that require 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 to vendors(“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 — the Company entersinto arrangements with resellers that include a combination of softwareproducts, maintenance and support. For such arrangements, the Companyrecognizes revenue using the residual method. The Company allocates the total arrangementfee among the various elements of the arrangement based on the fair value ofeach of the undelivered elements determined by vendor-specific objectiveevidence. The fair value of maintenance and support services is establishedbased on renewal rates. In software arrangements for which the Company does nothave vendor-specific objective evidence of fair value for all elements, revenueis deferred until the earlier of when vendor-specific objective evidence isdetermined for the undelivered elements (residual method) or when all elementsfor which the Company does not have vendor-specific objective evidence of fairvalue have been delivered.

 

As of March 31, 2009 we recorded $22 of deferredrevenue relating to support and maintenance services and $41 relating todeferred license revenue, compared with $20 relating to support and licenserevenue and $42 relating to deferred 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 whenpayments are received in advance of performing our service obligations.

 

As of March 31, 2009 we recorded $12 of 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 Costs of Computer Software to beSold, 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 software production costs can be capitalized andsubsequently reported at the lower of un-amortized cost or net realizablevalue. 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 commenceswhen the product is available 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 and development costs are comprised of staffcost, consultancy costs and research and development software costs for theMedicsight CAD system.

 

For the three months ended March 31, 2009 and March 31,2008 the Company expended $459 and $595 respectively, for research anddevelopment expenses for Medicsight CAD and its products.

 

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*Fair value of financialinstruments*

 

On January 1, 2008 the Company adopted theprovisions of SFAS No. 157, “Fair Value Measurements,” for financialassets and financial liabilities.  Inaccordance with Financial Accounting Standards Board Staff Position (FSP) No. SFAS157-2, “Effective Date of FASB Statement No. 157,” the Company appliedSFAS 157 for non-financial assets and non-financial liabilities on January 1,2009. SFAS 157 defines fair value, establishes a framework for measuring fairvalue and expands disclosure about fair value measurements.

 

*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 statementsand requires 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 March 31, 2009, the Company did not have any unrecognized taxbenefits. We do not expect that the amount of unrecognized tax benefits willsignificantly increase or decrease within the next twelve months.  TheCompany’s policy is to recognize interest and penalties related to tax mattersin the income tax provision in the Consolidated Statements of Operations. There was no interest and penalties for the three months ended March 31,2009 and 2008. Tax years beginning in 2004 are generally subject to examinationby taxing authorities, although net operating losses from all years are subjectto examinations and adjustments for at least three years following the year inwhich 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 taxesand taxes currently payable is reflected in the balance sheet as deferredtaxes. Deferred tax assets and/or liabilities, if any, are classified ascurrent and non-current based on the classification of the related asset orliability for financial reporting purposes, or based on the expected reversaldate for deferred taxes that are not related to an asset or liability.Valuation allowances are recorded to reduce deferred tax assets to that amountwhich is more likely than not 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 iscalculated by dividing the net loss attributable to the ordinary shareholdersby the sum of the weighted average number of common shares outstanding and thediluted potential ordinary shares.

 

The computation of diluted loss per share excludes alloptions because they are anti-dilutive. For the three months ended March 31,2009 there were 15,819,168 options excluded with a weighted average exerciseprice of $1.31 per share.  For the threemonths ended March 31, 2008 there were 14,420,000 options excluded with aweighted average exercise price of $1.73.

 

*Comprehensive**income(loss)*

 

Comprehensive income (loss) as defined by SFAS No. 130,“Reporting Comprehensive Income,” includes net income (loss) and items definedas other comprehensive income (loss). SFAS No. 130 requires that itemsdefined 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 itemsare reported in the consolidated statements of stockholders’ equity ascomprehensive (loss).

 

*Segment reporting*

 

The Company follows the provisions of SFAS No. 131,“Disclosure About Segments of an Enterprise and Related 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 web portal for radiologists.

 

*Stock options*

 

The Company follows Statement of Financial AccountingStandards No. 123 (revised), *Share-BasedPayment SFAS 123(R) *, which requires that compensation costrelating to share-based payment transactions be recognized as an expense in thefinancial statements, and that measurement of that cost be based on theestimated fair value of the equity or liability instrument issued.  SFAS No 123(R) also requires thatforfeitures be estimated and recorded over the vesting period of theinstrument.

 

**Recent accountingpronouncements**

 

On January 1, 2009 theCompany adopted the provisions of SFAS No. 141 (Revised 2007), “BusinessCombinations” (SFAS No. 141R).  SFASNo. 141R significantly changes the accounting for businesscombinations.  Under SFAS No. 141R,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.141Ralso includes a substantial number of new disclosure requirements.  In April 2009 the FASB issued FSP FAS141(R)-1 which amends SFAS No. 141(R) by establishing a model toaccount for certain pre-acquisition contingencies.  Under the FSP, an 

 

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acquirer 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 theacquisition-date fair value cannot be determined, then the acquirer shouldfollow the recognition criteria in SFAS No. 5, Accounting forContingencies, 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 FAS141(R)-1 became effective for us beginning January 1, 2009, and will applyprospectively to business combinations completed on or after that date.

 

In April 2009 theFinancial Accounting Standards Board (“FASB”) issued three Staff Positions(“FSPs”) that are intended to provide additional application guidance andenhance disclosures about fair value measurements and impairments ofsecurities.  FSP FAS 157-4 clarifies theobjective and method of fair value measurement even when there has been asignificant decrease in market activity for the asset being measured.  FSP FAS 115-2 and FAS 124-2 establish a newmodel for measuring other-than-temporary impairments for debt securities,including establishing criteria for when to recognize a write-down through earningsversus other comprehensive income.  FSPFAS 107-1 and APB 28-1 expands the fair value disclosures required for allfinancial instruments within the scope of SFAS No. 107, Disclosures aboutFair Value of Financial Instruments, to interim periods.  All of these FSPs are effective for usbeginning April 1, 2009.  We areassessing the potential impact that the adoption of FSP FAS 157-4 and FSP FAS115-2 and FAS 124-2 may have on our consolidated financial statements.  FSP FAS 107-1 and APB 28-1 will result inincreased disclosures in our interim periods.

 

**3. Non-controlling interest**

 

On January 1, 2009 theCompany adopted the provisions of SFAS No. 160, “Non-controlling Interestsin Consolidated Financial Statements — an Amendment of ARB No. 51.”  SFAS No. 160 establishes accounting andreporting standards for the non-controlling interest (formerly known asminority interest) in a subsidiary (which may include variable interestentities) and for the deconsolidation of a subsidiary.  Significant changes include: Balance sheetand income statement presentation and expanded disclosures; Accounting forchanges in a parent’s ownership interest in a subsidiary that do not result indeconsolidation; Recognition and measurement of a gain or loss when a subsidiaryis deconsolidated.  For balance sheetpresentation, non-controlling interests are now recorded within equity andso-called “mezzanine” display is not permitted. In income statements, the amount of income attributable to thenon-controlling interest is not a deduction that impacts net income.  As a result of these requirements, variousfinancial statements ratios have been impacted. The Statement requires prospective application except for thepresentation and disclosure requirements, which must be applied retrospectivelyfor all periods presented. Proir periods were reclassified to conform to thecurrent period presentation.

 

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**4. Cash and cash equivalents**

 

We invest our cash in short-term deposits with majorbanks.  At March 31, 2009 we held $32,606 in cash and cashequivalents.

 

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 FDIC and amounted to $32,606 as of March 31, 2009and $38,294 as of December 31, 2008.  The Company periodicallyevaluates the relative credit standing of financial institutions considered inits cash investment strategy.

 

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**5. Marketable securities**

 

Investments in marketable securities consisting ofHipCricket Inc. and a fund managed by Bank Sarasin & Company Limitedas of December 31 were as follows:

 
| ** **                | ** ** | **Market  value** | ** ** | **Cost** | ** ** | **Unrealized  gains** | ** ** | **Transfer to net  loss** | ** ** |
|---------------------------|------------|-------------------|------------|----------|------------|-----------------------|------------|-------------------------------------|------------|
|                      |       |              |       |     |       |                  |       |                                |       |
| At December 31, 2008 |       | $                 | 1,884      |     | $          | 2,985                 |       | $                                   | —     |   | $ | (1,101 | ) |
| At March 31, 2009    |       | $                 | 1,120      |     | $          | 1,884                 |       | $                                   | —     |   | $ | (764 | ) |

 

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.

 

*Valuation of investmentsheld at fair value*

 

On January 1, 2008 the Company adopted the provisions of SFAS No. 157,“Fair Value Measurements,” for financial assets and financial liabilities.  SFAS 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principlesand expands disclosures about fair value measurements.  Effective January 1, 2009 the Companyadopted the provisions of SFAS No. 157 related to other nonfinancialassets and liabilities, in accordance with Financial Accounting Standards BoardStaff Position (FSP) No. SFAS 157-2, “Effective Date of FASB Statement No. 157.”

 

The adoption of SFAS 157 also requires the Company to attribute ourinvestments using the fair value hierarchy defined in the statement. Thehierarchy consists of the following three levels with associated definitions:

 

Level 1 inputsare unadjusted, quoted prices in active markets for identical assets orliabilities

 

Level 2 inputsare inputs other than quoted prices included within Level 1 that are observablefor the asset or liability, either directly or indirectly.  Level 2 inputs include quoted prices foridentical assets or liabilities in markets that are not active, that is,markets in which there are few transactions.

 

Level 3 inputsare unobservable inputs that are supported by little or no marketactivity.  These inputs require significant management judgment andreflect our estimate of assumptions that market participants would use inpricing the asset.

 

We have valuedHipCricket Inc using its closing price on the AIM market of the London StockExchange as of March 31, 2009. Due to the low number of markettransactions for HipCricket Inc each transaction can potentially and hashistorically had a significant effect on the share price. It is for this reasonwe deem these to be a Level 2 input in the fair value hierarchy. However, westill believe that this is the best price at which to determine the current value.

 

Our investments in other marketable securities relate to holdings incorporate bonds issued by highly rated companies.  We have valued these investments at marketprices as of December 31, 2008 and consider these to be Level 1 inputs asthese are active markets.

 

The following table analyzes our investments holdings using the fairvalue hierarchy.

 
| ** **                  | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Total** | ** ** |
|-----------------------------|------------|------------------|------------|------------------|------------|-----------|------------|
|                        |       |             |       |             |       |      |       |
| HipCricket Inc              |       | $                | —     |             | 186        |      | $          | 186 |   |
| Other marketable securities |       | 934              |       | —           |       | 934       |       |
| Total                       |       | $                | 934        |             | 186        |      | $          | 1,120 |   |

 

The followingtable analyzes the losses incurred on the investments during the three monthsended March 31, 2009

 
| ** **                  | ** ** | **Loss on  impairment  deemed  other than  temporary** | ** ** | **Other realized  losses** | ** ** | **Total** | ** ** |
|-----------------------------|------------|-------------------------------------------------------------|------------|----------------------------|------------|-----------|------------|
|                        |       |                                                        |       |                       |       |      |       |
| HipCricket Inc              |       | $                                                           | 739        |                       | —     |      | $          | 739 |   |
| Other marketable securities |       | 25                                                          |       | —                     |       | 25        |       |
| Total                       |       | $                                                           | 764        |                       | —     |      | $          | 764 |   |

 

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** **

**6.****    ****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 each investment to assess forother-than-temporary decreases in value.

 

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.  Eurindia Limited’smanagement has informed us that they intend to pay a liquidating dividend ofbetween 30 cents and 50 cents per share during the first half of 2009.  In Fiscal 2008 we assumed the dividend to bethe lower of these two values and impaired our holding to the value of 30 centsa share.  As of March 31, 2009 westill consider that this approximates the investment’s fair value.  We consider this input to be a Level 3 inputunder the SFAS 157 fair value hierarchy, which is a significant unobservableinput.

 

In 2007 the Company invested $960 in C preferenceshares of XShares Group LLC, an investment advisor that creates, issues andsupports exchange traded funds with a particular healthcare specialty. In theyear ended December 31, 2008 the Company invested an additional $2,040 inshares of XShares Group LLC bringing the 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 value of our investment in XShares LLC.XShares LLC was in the process of attempting to raise funds to drive thebusiness forward. As this process had not been completed we impaired thisinvestment to $600.  As of March 31,2009 we believe that the $600 valuation still approximates fair value.

 

We estimated this impairment based on management’sreview and discussion of the strategy and business plan of XShares LLC andreview of draft Fiscal 2008 financial accounts prepared by an independentaccountant. These inputs are subject to management’s judgment and we havetherefore deemed them to be Level 3 inputs in the fair value hierarchy. Thevalue of our investment has been reduced as previously invested cash has beenused to fund business operations and as yet the business is not generatingsufficient cash. However, we have reviewed XShares LLC’s business plan andwe have adjusted our investment to a level we believe reflects the futuremarket valuation and with no active market we believe this is the best methodwith which to determine the value of our investment.

 

The followingtable presents the changes in Level 3 instruments for the three months ended March 31,2009.

 
| ** **       | ** ** | **January 1, 2009** | ** ** | **Purchases** | ** ** | **Impairment  losses  included in  earnings** | ** ** | **March 31,  2009** | ** ** | **Change in  impairment  losses relating  to instruments  still held at  March 31,  2009** | ** ** |
|------------------|------------|-------------------------------|------------|---------------|------------|----------------------------------------------------|------------|--------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|
|             |       |                          |       |          |       |                                               |       |                     |       |                                                                                                                     |       |
| Eurindia Limited |       | $                             | 176        |          | —     |                                               | —     |                     | $          | 176                                                                                                                      |       | $ | — |   |
| XShares LLC      |       | 600                           |       | —        |       | —                                             |       | 600                      |       | —                                                                                                                   |       |
|             |       | $                             | 776        |          | —     |                                               | —     |                     | $          | 776                                                                                                                      |       | $ | — |   |

 

**7. Goodwill**

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

 

At December 31, 2008, our goodwill totaled $12.2million, which was entirely related to our shareholding in Medicsight plc.  We assess the impairment of goodwill of ourreporting units annually, or more often if events or changes in circumstancesindicate that the carrying value may not be recoverable.  This assessment is based upon an analysis ofboth the market value and discounted anticipated future cash flow of thereporting unit.

 

The shares of Medicsight plc are traded on the AIMexchange of the London Stock Exchange. We consider this to be a Level 1 input in the fair value hierarchy asdefined in SFAS No. 157 “Fair Value Measurements”, as this is anunadjusted 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.  Our estimates of discounted cash flows maydiffer from actual cash flows due to, among other things, timings of regulatoryapprovals, economic conditions in the healthcare IT market, changes to ourbusiness model or changes in operating performance.

 

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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. Significant differences between these estimates andactual cash flows could materially affect our future financial results.  We consider these to be Level 3 inputs in thefair value hierarchy as defined in SFAS No. 157 “Fair Value Measurements”,as this is an 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, “Goodwill andOther Intangible Assets.”  As a result ofthis 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 conductedan impairment test of goodwill as of March 31, 2009 in accordance withSFAS No. 142, “Goodwill and Other Intangible Assets.”  Due to the uncertainties involved in usingthe unobservable inputs to estimate future cash flows, we used market price,Level 1 inputs as the basis of our impairment review.  As a result of this test we determined thatthe carrying amount of Medicsight plc exceeded its fair value and recorded animpairment loss of $12.2 million during the quarter ended March 31, 2009.

 

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

 

We had the following interest and other incomeamounts:

 
| ** **                    | ** ** | **Three months ended  March 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------------|------------|
| ** **                    | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
|                          |       |                                             |       |   |   |
| Loss on marketable securities |       | $                                                | (764       | ) | $ | — |   |
| Interest income               |       | 69                                               |       | 508 |   |
| Total                         |       | $                                                | (695       | ) | $ | 508 |   |

 

The loss on marketable securities relates to lossesconsidered other than temporary on our holdings in HipCricket and othermarketable securities.

 

**9. 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 the financial statements.  Such items are reported in theconsolidated statements of stockholders’ equity as comprehensive income (loss)as follows:

 
| ** **                                                             | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                             | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
|                                                                   |       |                                             |       |   |   |
| Net loss as reported                                                   |       | $                                                | (16,926    | ) | $ | (5,552 | ) |
| Unrealized foreign exchange (loss) gain                                |       | (1,411                                           | )          | 132 |   |
| Unrealized gain on marketable securities                               |       | —                                           |       | 131 |   |
| Comprehensive  loss                                                    |       | $                                                | (18,337    | ) | $ | (5,289 | ) |
| Comprehensive  loss attributable to non-controlling interest           |       | 1,826                                            |       | 1,773 |   |
| Comprehensive loss attributable to MGT Capital  Investments, Inc. |       | $                                                | (16,511    | ) | $ | (3,516 | ) |

 

 

The unrealized foreign exchange loss predominantlyrelates to the movement, in the three month period ended March 31, 2009,on the difference between Medicsight’s net assets translated at the period endrate and the reserves translated at historical rates.

 

The total accumulated other comprehensive loss as of March 31,2009 is the result of foreign currency translation.

 

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**10.****Segment reporting**

 

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)** | ** ** |
|                                 |       |                |       |                      |       |                |       |               |       |                          |       |               |       |
| **Three months March 31, 2009** |       |                |       |                      |       |                |       |               |       |                          |       |               |       |
| Net revenue to external customers    |       | $                   | 61         |                      | $          | —              |       | $                  | 61         |                          | $          | 13                 |       | $ | — |   | $ | 74 |   |
| Operating loss                       |       | (3,504              | )          | (30                       | )          | (3,534              | )          | (263               | )          | (12,434                       | )          | (16,231            | )          |
| Assets                               |       | 24,329              |       | —                    |       | 24,329              |       | 2,621              |       | 9,515                         |       | 36,465             |       |
|                                 |       |                |       |                      |       |                |       |               |       |                          |       |               |       |
| **Three months March 31, 2008** |       |                |       |                      |       |                |       |               |       |                          |       |               |       |
| Net revenue to external customers    |       | $                   | 34         |                      | $          | —              |       | $                  | 34         |                          | $          | 18                 |       | $ | — |   | $ | 52 |   |
| Operating loss                       |       | (4,040              | )          | 13                        |       | (4,027              | )          | (934               | )          | (1,099                        | )          | (6,060             | )          |
| Assets                               |       | 49,138              |       | —                    |       | 49,138              |       | 3,682              |       | 48,065                        |       | 100,885            |       |

 

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

 

The main operations and fixed assets of Medicsight arein the UK while Medicexchange’s are in the US and China.

 

**11. 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 March 31, 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 nine 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 March 31,2009 there were 231,500 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 March 31,2009 there were 448,500 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 

 

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36months from date of grant.  At March 31, 2009 there were 268,333options outstanding and 251,667 of the options issued 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 March 31,2009 there were 811,667 options outstanding and 583,334 of the options issuedwere 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 March 31, 2009 there were5,449,168 options outstanding and 3,667,500 of the options issued wereexercisable.

 

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 March 31,2009 there were 350,000 options outstanding and 116,667 of the options issuedwere exercisable.

 

Plan G - on December 18, 2007 we approved and subsequentlygranted options for 3,025,000 shares under stock option plan “G”.  Optionsunder this plan vest in equal one-thirds after employees have been employed for12, 24 and 36 months from the grant date.  At March 31, 2009 therewere 2,950,000 options outstanding and 983,333 the options issued wereexercisable.

 

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 in equal one thirds after employees have been employedfor 12, 24 and 36 months from the grant date.  At March 31, 2009there were 750,000 options outstanding and none of the options wereexercisable.

 

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 March 31,2009 1,785,000 options were outstanding and none of the options wereexercisable.

 

*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 March 31, 2009 there were 650,000 options outstanding and466,666 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 under this plan vest equal one-thirds afteremployees have been employed for 12, 24 and 36 months from the date of grant. At March 31, 2009 there were 150,000 options outstanding and 50,000 of theoptions 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 based on multiple factors including UnitedKingdom treasury bonds for the risk-free rate at the time of grant, expectedfuture exercising patterns (we cannot base the estimate on the historicalexercise patterns as no options have been exercised) and the volatility of theMGT stock price.

 

The following table summarizes stock option activityfor the three months ended March 31, 2009:

 
| ** **                            | ** ** | **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                               |       | —                     |       | —                                      |       | — |   |   |   |   |   |   |   |
| Exercised                             |       | —                     |       | —                                      |       | — |   |   |   |   |   |   |   |
| Forfeited                             |       | (318,332                   | )          | 0.65                                        |       | (0.93 | ) |   |   |   |   |   |   |
|                                  |       |                       |       |                                        |       |   |   |   |   |   |   |   |   |
| Outstanding at March 31, 2009    |       | 15,819,168                 |       | £                                      | 0.92       |   | $ | (1.31 | ) | 7,457,500 |   | £ | 0.87 |   | $ | (1.23 | ) |

 

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The following is a summary of the status of the stockoptions outstanding at March 31, 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                    |       | 8.7                                |       |   |   | $ | 3.69 |   | 658,333 |   |   |   | $ | 3.69 |   |
| Medicsight Plan A                            |       | 231,500                      |       | 4.3                                |       | £ | 0.75 |   | $ | (1.07 | ) | 231,500 |   | £ | 0.75 |   | $ | (1.07 | ) |
| Medicsight Plan B                            |       | 448,500                      |       | 5.5                                |       | £ | 0.75 |   | $ | (1.07 | ) | 448,500 |   | £ | 0.75 |   | $ | (1.07 | ) |
| Medicsight Plan C                            |       | 268,333                      |       | 6.3                                |       | £ | 0.75 |   | $ | (1.07 | ) | 251,667 |   | £ | 0.75 |   | $ | (1.07 | ) |
| Medicsight Plan D                            |       | 811,667                      |       | 7.3                                |       | £ | 0.83 |   | $ | (1.18 | ) | 583,334 |   | £ | 0.83 |   | $ | (1.18 | ) |
| Medicsight Plan E                            |       | 5,449,168                    |       | 7.9                                |       | £ | 0.50 |   | $ | (0.71 | ) | 3,667,500 |   | £ | 0.50 |   | $ | (0.71 | ) |
| Medicsight Plan F                            |       | 350,000                      |       | 8.2                                |       | £ | 0.75 |   | $ | (1.07 | ) | 116,667 |   | £ | 0.75 |   | $ | (1.07 | ) |
| Medicsight Plan G                            |       | 2,950,000                    |       | 8.7                                |       | £ | 1.10 |   | $ | (2.00 | ) | 983,333 |   | $ | 1.10 |   | $ | (2.00 | ) |
| Medicsight Plan H                            |       | 750,000                      |       | 9.2                                |       | £ | 0.69 |   | $ | (1.56 | ) | — |   | — |   | — |   |
| Medicsight Plan I                            |       | 1,785,000                    |       | 9.7                                |       | £ | 0.24 |   | $ | (0.34 | ) | — |   | — |   | — |   |
| Medicexchange Plan A                         |       | 650,000                      |       | 7.5                                |       | £ | 0.40 |   | $ | (0.57 | ) | 466,666 |   | £ | 0.40 |   | $ | (0.57 | ) |
| Medicexchange Plan B                         |       | 150,000                      |       | 8.3                                |       | £ | 1.00 |   | $ | (1.42 | ) | 50,000 |   | £ | 1.00 |   | $ | (1.42 | ) |

 

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 modification charge for the three months ended March 31,2009 was $37 compared with $333 for the three months ended March 31, 2008.

 

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

 
| ** **                          | ** ** | **Three months  ended  March 31,** | ** ** | **Three months  ended  March 31,** | ** ** |
|-------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                          | ** ** | **2009**                                     | ** ** | **2008**                                     | ** ** |
|                                |       |                                         |       |                                         |       |
| Selling, general and administrative |       | $                                            | 453        |                                         | $          | 1,040 |   |
|                                |       |                                         |       |                                         |       |
| Research and development            |       | 28                                           |       | 51                                           |       |
|                                |       |                                         |       |                                         |       |
| Total                               |       | $                                            | 481        |                                         | $          | 1,091 |   |

 

Of the $481 stock-based expense in the quarter, $136was allocated to non-controlling interest.

 

No compensation costs were capitalized.

 

The aggregate intrinsic value for options outstandingand exercisable at March 31, 2009 was $nil. The aggregate intrinsic valuefor all outstanding options was $nil.

 

A summary of non-vested options at March 31, 2009and the change during the three months ended March 31, 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                            |       | —                      |       |                                                        |       |   |   |
| Vested                             |       | (1,841,666                  | )          | 0.26                                                        |       | (0.37 | ) |
| Forfeited                          |       | (255,000                    | )          | 0.32                                                        |       | (0.45 | ) |
| Non-vested at March 31, 2009  |       | 8,361,668                   |       | £                                                      | 0.42       |   | $ | (0.60 | ) |

 

At March 31, 2009 there was $5,036 of totalunrecognized compensation cost related to non-vested stock-based compensationarrangements granted under the option plans.

 

Non-vested awards are expected to be recognised over aweighted average period of 1.15 years.

 

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**12. 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                   |       | (1,563         | )          | (33               | )          | (1,596    | )          |
| Non-controlling share of stock-based expense                |       | 137            |       | (1                | )          | 136       |       |
| Non-controlling share of other comprehensive  (loss) income |       | (231           | )          | 1                 |       | (230      | )          |
| Non-controlling interest at March 31, 2009             |       | $              | 13,379     |              | $          | 948       |       | $ | 14,327 |   |

 

**13. Related Party Transactions**

 

Tim Paterson-Brown, our Chief Executive Officer, is anon-executive director of Accsys Technologies plc, which has a subsidiarycompany Titan Wood Limited. Titan Wood Limited rents space in 66 HammersmithRoad. In the three month period ended March 31, 2009 and 2008respectively, $88 and $79 of office related costs were recharged to Titan WoodLimited. At March 31, 2009 there was a balance receivable from Titan WoodLimited of $88 of which $28 remains unpaid as of May 13, 2009. This ispayable within 30 days under the terms of the invoice.

 

**14. Commitments**

 

*Lease Commitments andSecurity Deposit*

 

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, UK.  Under this lease agreement our UK propertyrent, services and related costs are be approximately £330 ($471) per annum,paid quarterly in advance.  We have the right to terminate this agreementon the expiry of the fifth year of the lease.  Our annual rent is subjectto upward only review 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 have accounted forthe lease rental expenses on a straight-line basis over the period of thelease.

 

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 nine months)                |       | $          | 459        |   |
| 2010                                        |       | 612        |       |
| 2011                                        |       | 235        |       |
| 2012                                        |       | 5          |       |
| 2013                                        |       | 1          |       |
| Later Years                                 |       | —     |       |
| **Total minimum**                           |       | $          | 1,312      |   |

 

*Othercommitments*

 

In July 2008 we entered into an agreement with apartner to develop interfaces for our software. We have committed to pay Euros 1,445 ($1,908) over an expectedthirty-six month period.  As at March 31,2009 we have paid Euros 725 ($957). These payments will be recovered against future royalty payments, shouldthe products be successfully commercialized. These payments have been expensed to the income statement and classifiedas research and development.

 

**15. Subsequent Events**

 

On May 14, 2009, the Company executed and delivereda Convertible Promissory Note (the “Note”) in the principal amount of $1,100with XShares Group, Inc. (“XSG”), a Delaware corporation.  The principal amount includes a fee of $100payable to the Company.  All of the Noteshall be converted into Series B Preferred Stock of XSG (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 XSG, then the entireunpaid principal sum of the Note, plus interest thereon, shall be immediatelypaid to the Company or converted into shares of XSG’s common stock at a priceof $0.001 per share at the option of the Company .  A copy of the Note is annexed hereto asExhibit 10.5. 

 

Simultaneously with executing the Note, the Companyentered into a Securities Purchase Agreement (the “SPA”) with XSG, pursuant towhich the Company agreed to purchase an aggregate of 73,943,662 Series B Sharesat a purchase price of $0.0284 per share. The SPA contains the standard representations and warranties for atransaction of this type and is subject to the approval by the stockholders ofXSG of the Certificate. The Series B Shares are redeemable at the option ofXSG, at a price of 1.05 times the original issue price.

 

It is anticipated that the purchase and sale of theSeries B Shares will take place in two closings. 

 

1.    The initial closing of38,732,394 Series B Shares will occur immediately upon the filing of theCertificate with the Secretary of State of the State of Delaware (the “InitialClosing”).  

 

2.    The second closing of35,211,268 Series B Shares will occur upon the later of (i) July 16, 2009 or (ii)five days following the filing of the Certificate.  A copy of the SPA and a form of theCertificate are annexed hereto as Exhibits 10.3 and 10.4, respectively.

 

During the year ended December 31, 2007, the Companyacquired shares valued at $960 in XSG’s predecessor, XShares Group, LLC.   This investment was introduced to theCompany by Asia IT (a related party).  In the year ended December 31, 2008, the Company acquired additionalshares of XSG valued at $2,040, bringing the total historical investment to$3,000. As of December 31, 2008, this investment was deemed impaired to a valueof $600.

 

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**Item 2. Management’sDiscussion and 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**

 

MGT Capital Investments, Inc. achieved thefollowing results in the first quarter of 2009:

 

·           Revenue fromlicense and other sales increased 42% to $74 compared to $52 in 2008.

 

·           Gross marginincreased 80% to $72 compared to $40 in 2008.

 

·           Other operatingexpenses, excluding the goodwill impairment, decreased 32% to $4,146 comparedto $6,100 in 2008.

 

·           $12,157 ofgoodwill relating to Medicsight was fully impaired.

 

·           Net loss increased305% to $15,330 and resulted in a loss per share of $0.47 compared to a netloss of $3,779 and net loss per share of $0.10 in 2008.  The large increase was due to the impairmentof goodwill relating to Medicsight.

 

Whileremaining small in value, revenue has increased due to higher sales of sales ofMedicsight products and we expect revenue to continue to grow year after year.

 

Operatingcosts, excluding the goodwill impairment, have reduced by $1,954 due to ageneral focus on reducing costs and significantly because of a fall in thevalue of sterling from $1.99:£1 to $1.42:£1. On a like for like exchange rate, operating costs for the three monthsended March 31, 2008 would have been approximately $4,548.

 

Our balancesheet remains strong with cash, cash equivalents and marketable securities of$33,726 compared to $40,178 in December, 2008. The movement is mainlyattributable to cash used in operating activities ($5,173), cash used ininvesting activities ($14) and the effects of exchange rates ($501).

 

*Goodwillimpairment*

 

At December 31,2008, our goodwill totaled $12.2 million, which was entirely related to ourshareholding in Medicsight plc.  Weassess the impairment of goodwill of our reporting units annually, or moreoften if events or changes in circumstances indicate that the carrying valuemay not be recoverable.  This assessmentis based upon an analysis of both the market value and discounted anticipatedfuture cash flow of the reporting unit.

 

The shares ofMedicsight plc are traded on the AIM Market of the London Stock Exchange.  We consider this to be a Level 1 input in thefair value hierarchy as defined in SFAS No. 157 “Fair Value Measurements”,as this is an unadjusted quoted price in an active market.

 

The estimateof future cash flow is based upon, among other things, certain assumptionsabout expected future operating performance and an appropriate discount ratedetermined 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 would involve assumptions on a business withlimited revenue history and developing revenue models, which increase the riskof differences between the projected and actual performance. Significantdifferences between these estimates and actual cash flows could materiallyaffect our future financial results.  Weconsider these to be Level 3 inputs in the fair value hierarchy as defined inSFAS No. 157 “Fair Value Measurements”, as this is an unobservable inputwith little or no market activity that require significant management judgment.

 

We conductedour annual impairment test of goodwill as of December 31, 2008 inaccordance with SFAS No. 142, “Goodwill and Other Intangible Assets.”  As a result of this test we determined thatno adjustment to the carrying value of goodwill was required.

 

In the periodbetween December 31, 2008 and March 31, 2009, the market value ofMedicsight plc, as traded on the AIM Market of the London Stock Exchange,declined from $53.0 million to $13.2 million. Following this decline in value we conducted an impairment test ofgoodwill as of March 31, 2009 in accordance with SFAS No. 142,“Goodwill and Other Intangible Assets.” Due to the uncertainties involved in using the unobservable inputs toestimate future cash flows, we used market price, Level 1 inputs as the basisof our impairment review.  As 

 

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aresult of this test we determined that the carrying amount of Medicsight plcexceeded its fair value and recorded an impairment loss of $12.2 million duringthe quarter ended March 31, 2009.

 

**Critical accountingpolicies and estimates**

 

Theaccompanying discussion and analysis of our financial condition and results ofoperations are based upon our condensed consolidated financial statements andthe related disclosures, which have been prepared 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 formthe basis for making judgments about the carrying values of assets andliabilities. We base our estimates and judgments on historical experience andon various other assumptions that we believe to be reasonable under thecircumstances.  Actual results coulddiffer from these estimates.

 

We believe thefollowing policies to be the most critical to an understanding of our financialcondition and results of operations because they require us to make estimates,assumptions and judgments about matters that are inherently uncertain.

 

*Revenue Recognition*

 

*Medicsight*

 

The Companyrecognizes revenue in accordance with American Institute of Certified PublicAccountants (“AICPA”) Statement of Position (“SOP”) 97-2, Software RevenueRecognition, as amended by SOP 98-4 and SOP 98-9, as well as Technical PracticeAids issued from time to time by the AICPA, and SEC Staff Accounting Bulletin No. 104.The Company recognizes revenue when it is realized or realizable and earned.The Company considers revenue realized or realizable and earned when it haspersuasive evidence of an arrangement, the product has been shipped or theservices have been provided to the customer, the sales price is fixed ordeterminable, and collectability is probable.

 

License feerevenue is derived from the licensing of computer software. Maintenance revenueis derived from software maintenance. The Company’s software licenses aregenerally sold as part of an arrangement that includes maintenance and support.

 

The Companylicenses software and sells maintenance through visualization solution partnersand original equipment manufacturers. The Company receives regular salesreporting detailing the number of licenses sold by original equipmentmanufacturers, value-added resellers and independent distributors(collectively, “Resellers”) to end users. The Company generally offers termsthat require payment 30 days from invoicing.

 

Provided theReseller i) assumes all risk of the purchase, ii) has the ability andobligation to pay regardless of receiving payment from the end user, and allother revenue recognition criteria are met, license revenue from Resellers isrecognized upon shipment of its product to vendors (“sell-in basis”).

 

Additionally:

 

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

 

Services —Revenue from maintenance and support arrangements is deferred and recognizedratably over the term of the maintenance and support arrangements.

 

Multiple-ElementArrangements — The Company enters into arrangements with Resellers that includea combination of software products, maintenance and support. For sucharrangements, the Company recognizes revenue using the residual method. TheCompany allocates the total arrangement fee among the various elements of thearrangement based on the fair value of each of the undelivered elementsdetermined by vendor-specific objective evidence. The fair value of maintenanceand support services is evidence of fair value for all elements, revenue isdeferred until the earlier of when vendor-specific objective evidence isdetermined for the undelivered elements (residual method) or when all elementsfor which the Company does not have vendor-specific objective evidence of fairvalue have been delivered.

 

*Medicexchange*

 

We recognizerevenue when the following revenue recognition criteria are met: persuasive evidence of an arrangement exists, services have been rendered, theselling price is fixed or determinable and collectability is reasonableassured.  Deferred revenue is recorded when payments are received inadvance of performing our service obligations.

 

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*Goodwill*

 

We account forgoodwill in accordance with the provisions of SFAS No. 142, “Goodwill andOther Intangible 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 the goodwill impairment test, used toidentify potential impairment, compares the fair value of a reporting unit withits carrying amount, including goodwill. We compare the book value to themarket value (market capitalization plus a control premium) for the reportingunit. If the market value exceeds the book value, goodwill is considered notimpaired, and thus the second step of the impairment test is not necessary. If ourbook value exceeds the market value, the second step of the goodwill impairmenttest is performed to measure the amount of impairment loss, if any. The secondstep of the goodwill impairment test, used to measure the amount of impairmentloss, compares the implied fair value of the goodwill with the book value ofthe goodwill. If the carrying value of the goodwill exceeds the implied fairvalue of the goodwill, an impairment loss would be recognized in an amountequal to the excess. Any loss recognized cannot exceed the carrying amount ofgoodwill. After a goodwill impairment loss is recognized, the adjusted carryingamount of goodwill is its new accounting basis. Subsequent reversal of apreviously recognized goodwill impairment loss is prohibited once themeasurement of that loss is completed.

 

*Equity-based compensation*

 

We recognizecompensation expense for all equity-based payments in accordance with SFAS No. 123(R).Under the fair value recognition provisions of SFAS No. 123(R), werecognize equity-based compensation net of an estimated forfeiture rate andrecognize compensation cost only for those shares expected to vest over therequisite service period of the award.

 

The fair valueof each option award is estimated on the date of grant using the Black-Scholesoption valuation model. The Black-Scholes option valuation model requires thedevelopment of assumptions that are input into the model. These assumptions arethe expected stock volatility, the risk-free interest rate, the option’sexpected life and the dividend yield on the underlying stock. Expectedvolatility is calculated based on the historical volatility of our common stockover the expected option life and other appropriate factors. Risk-free interestrates are calculated based on continuously compounded risk-free rates for theappropriate term. The dividend yield is assumed to be zero as we have neverpaid or declared any cash dividends on our common stock and do not intend topay dividends on our common stock in the foreseeable future. The expectedforfeiture rate is estimated based on historical experience.

 

Determiningthe appropriate fair value model and calculating the fair value of equity-basedpayment awards require the input of the subjective assumptions described above.The assumptions used in calculating the fair value of equity-based paymentawards represent management’s best estimates, which involve inherentuncertainties and the application of management judgment. As a result, iffactors change and we use different assumptions, our equity-based compensationexpense could be materially different in the future. In addition, we arerequired to estimate the expected forfeiture rate and recognize expense onlyfor those shares expected to vest. If our actual forfeiture rate is materiallydifferent from our estimate, the equity-based compensation expense could besignificantly different from what we have recorded in the current period.

 

*Research and development*

 

Costs incurredin connection with the development of software products that are intended forsale are accounted for in accordance with Statement of Financial AccountingStandards No. 86, “Accounting for the Costs of Computer Software to beSold, Leased, or Otherwise Marketed”. Costs incurred prior to technologicalfeasibility being established for the product are expensed as incurred.Technological feasibility is established upon completion of a detail programdesign or, in its absence, completion of a working model. Thereafter, allsoftware production costs are capitalized and subsequently reported at thelower of unamortized cost or net realizable value. Capitalized costs areamortized based on current and future revenue for each product with an annualminimum equal to the straight-line amortization over the remaining estimated economiclife of the product. Amortization commences when the product is available forgeneral release to customers.

 

The Companyconcluded that capitalizing such expenditures on completion of a working modelwas inappropriate because the Company did not incur any material softwareproduction costs and therefore has decided to expense all research anddevelopment costs. The Company’s research and development costs are comprisedof staff, consultancy and other costs expensed on the Medicsight products.

 

*Fair value of financialinstruments*

 

On January 1,2008 the Company adopted the provisions of SFAS No. 157, “Fair ValueMeasurements,” for financial assets and financial liabilities.  Applying fair value measurements to ourfinancial instruments requires management’s judgment, especially when usingLevel 2 and Level 3 inputs as defined in SFAS 157’s fair value hierarchy.

 

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

 

The Companyevaluates the carrying value of long-lived assets for impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset 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 ismeasured as the amount by which the carrying amount of the asset exceeds thefair value of the asset.

 

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Calculatingthe estimated fair value of an asset involves significant judgments and avariety of assumptions. Judgments that the Company makes 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). Forcalculating fair value based on discounted cash flows, we forecast futureoperating results and future cash flows, which include long-term forecasts ofrevenue growth, gross margins and capital expenditures.

 

**Results of Operations**

 

Three monthsended March 31, 2009 vs. March 31, 2008

 

*Revenue and Margin*

 

We havegenerated revenues of $74 and gross margin of $72 for the three months ended March 31,2009, compared to $52 and $40 for the three months ended March 31,2008.  Medicsight increased revenues inthe period and Medicexchange’s fell slightly.

 

Medicsight hassold licenses in Europe where it has regulatory approvals.

 

Medicexchangegenerated revenue from advertising sales in China and the USA.

 

*Operating Expenses*

 

Our researchand development expense for the three months ended March 31, 2009 was $459compared to $595 for the three months ended March 31, 2008. Our researchand development costs were comprised of staff, staff related consultancy, stockoptions and product development software costs expensed on the research anddevelopment of Medicsight’s products.

 

Our selling,general and administrative expenses for the three months ended March 31,2009 were $3,687 compared to $5,505 for three months ended March 31, 2008,with the significant items being:

 

·                  A strengthening of the dollar against Sterling hasreduced all elements of selling, general and administrative expenses byapproximately $1,350 in the three months ended March 31, 2009 compared tothe three months ended March 31, 2008.

 

·                  People related costs decreased by $283 (11%) due to areduced head count in Medicexchange, a lower provision for bonus costs andreduced recruitment costs.

 

·                  Stock option charges have decreased by $610 (56%) fromthe first quarter of 2008 due to the effect of modifications made to plans inthe first quarter of 2008, pushing up the cost in that period, and the fall inthe value of sterling against the dollar.

 

At the end ofthe quarter ended March 31, 2009 we implemented a redundancy program inMedicsight to reduce costs.  As aconsequence, we expect people related costs to continue to decrease.  Related redundancy costs amounted to $102.

 

Professionalfees in MGT Capital Investments, Inc.’s company only income statement haveincreased due to costs relating to a strategic review.

 

Following animpairment review, we fully impaired $12,157 of goodwill relating toMedicsight, compared to a $nil impairment charge in the three months ended March 31,2008.  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 andother income included an expense of $695 in the three months ended March 31,2009 compared to income of $508 in the same period in the prior year.   The expense related to a $739 impairment ofHipcricket and a $25 impairment of other marketable securities.  This expense was included in net loss as weconsidered the loss to be other than temporary. In the same period in the prior year gains made on these marketablesecurities were included in other comprehensive income. Also included ininterest and other income was interest income of $69 compared to $508 in thethree months ended March 31, 2008. The fall was due to lower the lower level of cash held and lowerinterest rates.

 

*Income Tax*

 

Our effectivetax rate for the three months ended March 31, 2009 is 0%.  Thedifference in the Company’s effective tax rate from the Federal statutory rateis primarily due to a 100% valuation allowance provided for all deferred taxassets.

 

*Net loss and net loss per share*

 

Net lossattributable to equity holders of MGT Capital Investments, Inc. was$15,330 for the three months ended March 31, 2009 

 

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compared to a net loss of $3,779 for the three monthsended March 31, 2008. Net loss per share for the three months ended March 31,2009 was $0.47 (based on weighted average shares outstanding of 32,550,590),compared to $0.10 for the three months ended March 31, 2008 (based onweighted average shares outstanding of 38,846,986).

 

*Operational currency*

 

Our mainoperating currency is UK sterling.  Itsresults of operations are affected by changes in the $: £ rates used totranslate the operational result. For three months ended March 31, 2009the average rate was $1.43: £1.00 and for three months ended March 31,2008 the rate was $1.99:£1.00, a decrease of 28%.

 

**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 March 31,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                 | ** ** | **2009**                              | ** ** | **2008** | ** ** |
|                                                       |       |                                  |       |   |   |
| Revenue                                                    |       | $                                     | 61         |   | $ | 34 |   |
| Selling, general and administration costs                  |       | 3,136                                 |       | 3,466 |   |
| Research and development                                   |       | 459                                   |       | 595 |   |
| Operating expense                                          |       | 3,595                                 |       | 4,061 |   |
| Stock-based compensation (included in operating  expenses) |       | 310                                   |       | 706 |   |
| Operating loss                                             |       | (3,534                                | )          | (4,027 | ) |
| Interest and other income                                  |       | 39                                    |       | 312 |   |
|                                                            |            |                                       |            |  |  |  |  |

 
| ** ** | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------|------------|--------------------------|------------|-----------------------------|------------|
|       |       |                     |       |                        |       |
| Cash       |       | $                        | 22,348     |                        | $          | 26,624 |   |
| Net assets |       | 21,597                   |       | 25,302                      |       |
|            |            |                          |            |                             |            |  |  |

 

Medicsight revenue improvedin the three months ended March 31, 2009 due to increased interest in our ColonCADTM product as itdevelops traction in the market.  Whilewe have regulatory approval in a number of territories, our revenues have beengenerated in the EU.  We expect Europeanrevenues to continue to improve year after year, but believe that the US andJapanese markets offer a higher revenue opportunities once regulatory approvalis granted.  Support and maintenancerevenue is currently low, but we intend to build this as a revenue stream.

 

The fall in the value of sterling against the dollaris the main reason for the decrease in operating costs.

 

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.  These have decreased in three months ended March 31, 2009 dueto the fluctuations in currency exchange rates.

 

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.  The stock option charge fell as wemade modifications to certain options in the three months ended March 31,2008 and the charge has not been repeated in the three months ended March 31,2009.

 

We are currently streamlining Medicsight’s operationsand reducing staff numbers in order to reduce our operating costs and cashflow.  We therefore expect costs in 2009to be lower due to reduced salary and discretionary expenses.  This headcount reduction is being implementedacross multiple departments and all locations.

 

Interest and other income was generated by returns onthe investment of the proceeds from the IPO in June 2007.  Interest income has fallen in the firstquarter of 2009 compared to the same period in 2008 as the level of cashinvested was lower , combined with lower investment returns due tosignificantly lower interest rates.  Webelieve that continuing low interest rates, combined with lower cash balances,will mean a lower level of interest and other income during Fiscal 2009compared to Fiscal 2008.

 

Cash and net assets were lower at March 31, 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 March 31,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                 | ** ** | **2009**                              | ** ** | **2008** | ** ** |
|                                                       |       |                                  |       |   |   |
| Revenue from external customers                            |       | $                                     | 13         |   | $ | 18 |   |
| Cost of revenue                                            |       | 2                                     |       | 12 |   |
| Gross margin                                               |       | 11                                    |       | 6 |   |
| Operating expenses                                         |       | (274                                  | )          | (940 | ) |
| Operating loss                                             |       | (263                                  | )          | (934 | ) |
| Stock-based compensation (included in operating  expenses) |       | 5                                     |       | 125 |   |
|                                                            |            |                                       |            |  |  |  |  |

 
| ** **        | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------|------------|--------------------------|------------|-----------------------------|------------|
|              |       |                     |       |                        |       |
| Cash              |       | $                        | 1,300      |                        | $          | 1,322 |   |
| Net (liabilities) |       | (1,698                   | )          | (1,412                      | )          |
|                   |            |                          |            |                             |            |  |  |

 

In the first quarter of 2008 Medicexchange’s revenuewas derived from both online and offline sales; in the same period in 2009 wefocused on online sales, leading to a lower level of sales but at a highermargin.  The online sales were splitbetween the US and China 60%/40% respectively. We expect our focus to continue be on online sales.

 

We have reduced our spend on operations.  In September 2008 we made the decisionto scale back our London cost base and increased our emphasis on our New Yorkoffice as this is closer to our target market. We have also outsourced some of our website costs to external contractsto reduce our cost.  Salary costs havefallen after a number of London and Beijing-based staff left the business.  Also, all Medicexchange’s Beijing employeeshave now started to work for Medicsight and are no longer a cost toMedicexchange.  Our China business is nowfocused solely on the Shanghai-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 reduced our discretionaryspending, demonstrated by the reduction in all other listed cost categories.

 

**Liquidity and CapitalResources**

 

*Working Capital information*

 
| ** **                                       | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|--------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **Working capital summary**            |       |                     |       |                        |       |
| Cash, cash equivalents and marketable securities |       | $                        | 33,726     |                        | $          | 40,178 |   |
| Current assets                                   |       | 34,523                   |       | 41,212                      |       |
| Current liabilities                              |       | (3,210                   | )          | (4,340                      | )          |
| Working capital surplus                          |       | $                        | 31,313     |                        | $          | 36,872 |   |
| Ratio of current assets to current liabilities   |       | 10.8                     |       | 9.5                         |       |

 
| ** **                                              | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                              | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| **Cash flow summary**                         | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Cash (used for) provided by                             |       |                                  |       |   |   |
| Operating activities                                    |       | $                                     | (5,173     | ) | $ | (5,840 | ) |
| Investing activities                                    |       | (14                                   | )          | (6,581 | ) |
| Financing activities                                    |       | —                                |       | (1,877 | ) |
| Effects of exchange rates on cash and cash  equivalents |       | (501                                  | )          | 132 |   |
| Net cashflow                                            |       | $                                     | (5,688     | ) | $ | (14,166 | ) |

 

Our cash, cash equivalents and marketable securitieshave reduced during 2009 predominantly because of the cash used in operatingactivities.  Our net cash used inoperating activities differs from net loss because of various non-cashadjustments such as the transfer to non-controlling interest, stock-basedcompensation and impaired investments and goodwill.  Even though net loss was greater in the threemonths ended March 31, 2009 compared to the same period in the prior year,cash used in operating activities was lower. This was due to lower levels of expenditure in the three months ended March 31,2009, and the fact that net loss included the $12,157 non-cash goodwillimpairment charge relating to goodwill.

 

Our ratio of current assets to current liabilities hasremained relatively constant at 10.8. This is a result of the $32,606 of cash held in the Company.

 

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*Valuation of investmentsheld at fair value*

 

We hold investments in HipCricket Inc. and variousmarketable securities at fair value.

 

We have valued HipCricket Inc. using its closing priceon the AIM market of the London Stock Exchange as of March 31, 2009. Dueto the low number of market transactions for HipCricket Inc. each transactioncan potentially and has historically had a significant effect on the shareprice. It is for this reason we deem these to be a Level 2 input in the fairvalue hierarchy. However, we still believe that this is the best price at whichto determine the current value.

 

Our investments in other marketable securities relateto holdings in corporate bonds issued by highly rated companies.  We have valued these investments at marketprices as of March 31, 2009 and consider these to be Level 1 inputs asthese are active markets.

 

In the three months ended March 31, 2009 Hipcricketwas impaired by $739 and other marketable securities by $25. This impairmentloss was recognised in net loss.  In thesame period in the prior year, $131 of gains on these securities wererecognised in other comprehensive income.

 

*Impairment review of investmentsheld at cost*

 

We account for our investments in Eurindia Limited andXShares LLC at cost subject to impairment.

 

We carried out an impairment review of our holdings inEurindia Limited as of December 31, 2008. Eurindia Limited’s management has informed us that they intend to pay aliquidating dividend of between 30 cents and 50 cents per share.  We have assumed the dividend to be the lowerof these two values and have impaired our holding to the value of 30 cents pershare.  We consider the input to thisapproximation of fair value to be a Level 3 input under the SFAS 157 fair valuehierarchy, which is a significant unobservable input.  As at March 31, 2009 we believe thatthis still represents fair value for the investment.

 

We also reviewed the carrying value of our investmentin XShares LLC as of December 31, 2008. XShares LLC was in the process of raising funds to drive the businessforward.  As this process had not beencompleted we have impaired this investment to $600.  As of March 31, 2009 the moves to raisefunds are still taking place and we believe that the $600 valuation stillapproximates fair value.

 

We estimated this impairment based on management’sreview and discussion of the strategy and business plan of X Shares LLC andreview of draft Fiscal 2008 financial accounts prepared by an independentaccountant. These inputs are subject to management’s judgment and we havetherefore deemed them to be Level 3 inputs in the fair value hierarchy. Thevalue of our investment 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 LLC’s business plan and we haveadjusted our investment to a level we believe reflects the future marketvaluation and with no active market we believe this is the best method at whichto determine the value of our investment.

 

*Investment in Medicsight*

 

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

 

As of March 31, 2009 Medicsight’s share price was£0.06 ($0.09) compared to £0.235 ($0.34), as of December 31, 2008.  This valued Medicsight at £9,331 ($13,264),compared to £20,210 ($29,262) as of December 31, 2008.

 

As of May 11, 2009 Medicsight’s share price was£0.12 ($0.18) valuing the Company’s investment at £10,105 ($15,294), assuminga $:£ exchange rate of 1.5135.

 

*Risks and uncertainties related to our future capital requirements*

 

To date we have primarily financed our operationsthrough private placements of equity securities.  To the extent that additional capital israised through the sale of equity or equity-related securities of the Companyor its subsidiaries, the issuance of such securities could result in dilutionto our stockholders.

 

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

 

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, UK.

 

Under this lease agreement our UK property rent,services and related costs will be approximately £330 ($471) 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-month rent-free periods: the first commencing August 25,2006; the second commencing August 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 ($1,908) over an expected thirty-six month period.  As at March 31,2009 we have paid Euros 725 ($957).  These payments will be recoveredagainst future royalty payments, should the products be successfully commercialized.

 

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      |       | $                                         | 1,312      |   | $ | 459 |   | $ | 847 |   | $ | 6 |   |
| Purchase obligations             |       | 951                                       |       | 951 |   | — |   | — |   |
|                             |       |                                      |       |   |   |   |   |   |   |
| Total                            |       | $                                         | 2,263      |   | $ | 1,410 |   | $ | 847 |   | $ | 6 |   |

 

**Recent accountingpronouncements**

 

On January 1, 2009 weadopted the provisions of SFAS No. 141 (Revised 2007), “BusinessCombinations” (SFAS No. 141R).  SFASNo. 141R significantly changes the accounting for businesscombinations.  Under SFAS No. 141R,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.141Ralso includes a substantial number of new disclosure requirements.  In April 2009, the FASB issued FSP FAS141(R)-1 which amends SFAS No. 141(R) by establishing a model toaccount for certain pre-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 bedetermined, then the acquirer should follow the recognition criteria in SFAS No. 5,Accounting for Contingencies, and FASB Interpretation No. 14, ReasonableEstimation of the Amount of a Loss — an interpretation of FASB Statement No. 5.  SFAS No. 141(R) and FSP FAS141(R)-1 became effective for us beginning January 1, 2009, and will applyprospectively to business combinations completed on or after that date.

 

On January 1, 2009 weadopted the provisions of SFAS No. 160, “Non-controlling Interests inConsolidated Financial Statements — an Amendment of ARB No. 51.”  SFAS No. 160 establishes accounting andreporting standards for the non-controlling interest (formerly known asminority interest) in a subsidiary (which may include variable interestentities) and for the deconsolidation of a subsidiary.  Significant changes include: Balance sheetand income statement presentation and expanded disclosures; Accounting forchanges in a parent’s ownership interest in a subsidiary that do not result indeconsolidation; Recognition and measurement of a gain or loss when asubsidiary is deconsolidated.  Forbalance sheet presentation, non-controlling interests are now recorded withinequity and so-called “mezzanine” display is not permitted.  In income statements, the amount of incomeattributable to the non-controlling interest is not a deduction that impactsnet income.  As a result of theserequirements, various financial statements ratios have been impacted.  The Statement requires prospectiveapplication except for the presentation and disclosure requirements, which mustbe applied retrospectively for all periods presented.

 

In April 2009 theFinancial Accounting Standards Board (“FASB”) issued three Staff Positions(“FSPs”) that are intended to provide additional application guidance andenhance disclosures about fair value measurements and impairments ofsecurities.  FSP FAS 157-4 clarifies theobjective and method of fair value measurement even when there has been asignificant decrease in market activity for the asset being measured.  FSP FAS 115-2 and FAS 124-2 establish a newmodel for measuring other-than-temporary impairments for debt securities,including establishing criteria for when to recognize a write-down throughearnings versus other comprehensive income. FSP FAS 107-1 and APB 28-1 expands the fair value disclosuresrequired for all financial instruments within the scope of SFAS No. 107,Disclosures about Fair Value of Financial Instruments, to interim periods.  All of these FSPs are effective for usbeginning April 1, 2009.  We areassessing the potential impact that the adoption of FSP FAS 157-4 and FSP FAS115-2 and FAS 124-2 may have on our consolidated financial statements.  FSP FAS 107-1 and APB 28-1 will result inincreased disclosures in our interim periods.

 

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**Item 3.****                     ****Quantitative and Qualitative DisclosuresAbout Market Risk**

* *

*InterestRate Risk*

 

Our exposure to market raterisk for changes in interest rates relates primarily to our investmentportfolio.  We place our investments in a mixture of cash depositsand available-for-sale market securities. A decline in interest rate wouldhave an adverse impact on interest income.

 

We do not have any debt andwe do not use derivative financial instruments.

 

*ForeignExchange Risk*

 

We are exposed to foreigncurrency exchange rate fluctuations related to the operation of ourinternational subsidiaries.  Our main operating currency is UKsterling.  We also have subsidiaryoperations in Japan and China who operate in their local currencies.

 

Our operating costs inFiscal 2008 were predominantly in UK sterling; we do not foresee any change inFiscal 2009 or Fiscal 2010. A ten percent increase or decline in the US dollarexchange rate against all foreign currencies would have created an increase ordecline in our operating costs in the three months ended****March 31,2009 of approximately $344.

 

At the end of each reportingperiod, expenses of the subsidiaries are converted into US dollars using theaverage currency rate in effect for the period and assets and liabilities areconverted into US dollars using the exchange rate in effect at the end of theperiod.

 

Additionally, we are exposedto foreign currency exchange rate fluctuations relating to payments we make tovendors and suppliers using foreign currencies.

 

We currently do not hedgeagainst this foreign currency risk.

 

Fluctuations in exchangerates may impact our financial condition and results of operations.

 

**Item4T.                     Controls and Procedures**

 

*Evaluation of DisclosureControls and Procedures*

 

Management of the Company, including the Chief Executive Officer andthe Chief Financial Officer, evaluated the effectiveness of the design andoperation of the Company’s disclosure controls and procedures (as such term isdefined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934) as of the end of the period covered by this report. Basedupon that evaluation, the Company’s Chief Executive Officer and the ChiefFinancial Officer concluded that the Company’s disclosure controls andprocedures were effective as of the end of the period covered by this reportfor the information required to be disclosed by the Company in the reports itfiles or submits under the Securities Exchange Act of 1934, as amended, to berecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms.

 

*Changes in Internal Controlover Financial Reporting*

 

There have not been any changes in the Company’s internal control overfinancial reporting (as such term is defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) during the fiscal quarter ended March 31,2009 that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

**PART II.  OTHERINFORMATION**

 

**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 describe various risks and uncertainties to whichwe 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 may emergeat any time, and we cannot predict those risks or estimate the extent to whichthey may affect financial performance. Each of the risks described below couldadversely impact the value of our securities.  These statements, like allstatements in this report, speak only as of the date of this report (unlessanother date is indicated), and we undertake no obligation to update or revisethe statements in light of future developments.

 

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We cannot assure you that MGT will be successful in commercializing anyof the Group’s products and, in particular, the Medicsight products or theMedicexchange portal, or if any of the products or the portal arecommercialized, that they will prove to be profitable for the Company.

 

MGT has only had a limited operating history and has just commencedgenerating revenue from operations upon which an evaluation of its prospectscan be made. MGT’s prospects must be considered keeping in mind the risks,expenses and difficulties frequently encountered in the establishment of a newbusiness in a constantly changing industry. There can be no assurance that MGTwill be able to achieve profitable operations in the foreseeable future if atall.

 

MGT has identified a number of specific risk areas that may affectMGT’s operations and results in the future:

 

**Companyspecific risks**

 

*We may be unable to develop our existing or futuretechnology.*

 

Our Medicsight CAD system may not deliver the levels of accuracy andreliability needed to make it a successful product in the market place.  Additionally, the development of suchaccuracy and reliability may be indefinitely delayed or may never beachieved.  Failure to develop this orother technology could have an adverse material effect on the Company’sbusiness, financial condition, results of operations and future prospects.

 

*The market for our technology may be slow todevelop, if at all.*

 

The market for the Medicsight CAD products and Medicexchange.com may beslower to develop or smaller than estimated or it may be more difficult tobuild 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 CAD and Medicexchange.com may be delayedor costs may be higher than anticipated which may result in the Companyrequiring additional funding.  If any ofthese situations were to occur this could have a material adverse effect on theCompany’s business, financial condition, results of operations and futureprospects.

 

*We may be slow to receive required regulatoryapprovals from respective government regulators, if we receive them at all.*

 

The Medicsight CAD system is subject to regulatory requirements in theUnited States of America, Europe, Japan, China and our other targeted markets.Necessary regulatory approvals may not be obtained or may be delayed.  We may incur substantial additional cost inobtaining regulatory approvals for our products in our targeted markets.  The failure to obtain these approvals and/orthe associated costs could have a material adverse effect on the Company’sbusiness, financial condition, results of operations and future prospects.

 

*The medical imaging market we operate in is highlycompetitive.*

 

There are a number of groups and organizations, such as softwarecompanies in the medical imaging field, MDCT scanner manufacturers, screeningcompanies and other healthcare providers that may develop a competitiveoffering to the Medicsight CAD products and Medicexchange.com.  In addition, these competitors may havesignificantly greater resources than MGT. We cannot make any assurance thatthey will not attempt to develop such offerings, that they will not besuccessful in developing such offerings or that any offerings they may developwill not have a competitive edge over Medicsight CAD products andMedicexchange.com. Should a superior offering market come to market, this couldhave a material adverse effect on the Company’s business, financial condition,results of operations and future prospects.

 

*We are a developing company with limited revenuesfrom operations.*

 

MGT has incurred significant operating losses since inception and hasonly recently commenced generating revenues from operations. As a result, MGThas generated negative cash flows from operations and has an accumulateddeficit at December 31, 2008. MGT is operating in a developing industrybased on new technology and its primary source of funds to date has beenthrough the issuance of securities and borrowed funds. There can be noassurance that management’s efforts will be successful or that the products MGTdevelops and markets will be accepted by consumers.  If our products are ultimately unsuccessfulin the market, this could have a material adverse effect on the Company’sbusiness, financial condition, results of operations and future prospects.

 

*Our current corporate structure may place us in anunfavorable market position vis-à-vis our competitors.*

 

MGT’s corporate structure may make it more difficult or costly to takecertain actions. MGT conducts its business through: (a) Medicsight, a UKpublic company which is 55% owned by the Company, and through Medicsight’ssubsidiaries in the United Kingdom, the United States, Japan and Gibraltar; and(b) the Medicexchange subsidiaries, in which MGT’s holdings range between75% and 100%.  Although MGT, Medicsightand Medicexchange share some directors and management, they are required tocomply with corporate governance and other laws and rules applicable topublic companies in the United Kingdom and the United States.  Should MGT propose to take any action, suchas a transfer or allocation of assets or liabilities between MGT and itssubsidiaries, MGT would have to take into consideration the potentiallyconflicting interests of MGT’s stockholders and the non-controllingstockholders.  This may deter MGT fromtaking such actions that might otherwise be in the best interest of MGT orcause MGT to incur additional costs in 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 the subsidiary companies nor MGT has plans to paydividends or make distributions 

 

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to its shareholders, MGT’scorporate structure may deter its subsidiaries from doing so in thefuture.  If at any point we areultimately unable to resolve any of these conflicts, this could have a materialadverse effect on the Company’s business, financial condition, results ofoperations and future prospects.

 

*The protection of our intellectual property may beuncertain, and we may face possible claims of others.*

 

Although we have received patents and have filed patent applicationswith respect to certain aspects of our technology, we generally do not rely onpatent protection with respect to our products and technologies. Instead, werely primarily on a combination of trade secret and copyright law, employee andthird-party non-disclosure agreements and other protective measures to protectintellectual property rights pertaining to our products and technologies. Suchmeasures may not provide meaningful protection of our trade secrets, know-howor other intellectual property in the event of any unauthorized use,misappropriation or disclosure. Others may independently develop similartechnologies or duplicate our technologies. In addition, to the extent that weapply for any patents, such applications may not result in issued patents or,if issued, such patents may not be valid or of value. Third parties could, inthe future, assert infringement or misappropriation claims against us withrespect to our current or future products and technologies, or we may need toassert claims of infringement against third parties. Any infringement ormisappropriation claim by us or against us could place significant strain onour financial resources, divert management’s attention from our business andharm our reputation. The costs of prosecuting or defending an intellectualproperty claim could be substantial and could adversely affect our business,even if we are ultimately successful in prosecuting or defending any suchclaims. If our products or technologies are found to infringe the rights of athird party, we could be required to pay significant damages or license fees orcease production, any of which could have a material adverse effect on ourbusiness.  If a claim is brought againstus, or we ultimately prove unsuccessful on the claims on our merits, this couldhave a material adverse effect on the Company’s business, financial condition,results of operations and future prospects.

 

*We may fail to attract and retain qualifiedpersonnel.*

 

We expect to rapidly expand our operations and grow our sales, researchand development and administrative operations. This expansion is expected toplace a significant strain on our management and will require hiring asignificant number of qualified personnel. Accordingly, recruiting andretaining such personnel in the future will be critical to our success. Thereis intense competition from other companies, research and academicinstitutions, government entities and other organizations for qualifiedpersonnel in the areas of our activities. If we fail to identify, attract,retain and motivate these highly skilled personnel, we may be unable tocontinue our marketing and development activities, and this could have amaterial adverse effect on the Company’s business, financial condition, resultsof operations and future prospects.

 

*If we do not effectively manage changes in ourbusiness, these changes could place a significant strain on our management andoperations.*

 

 Our ability to grow successfullyrequires an effective planning and management process. The expansion and growthof our business could place a significant strain on our management systems,infrastructure and other resources. To manage our growth successfully, we mustcontinue to improve and expand our systems and infrastructure in a timely and efficientmanner. Our controls, systems, procedures and resources may not be adequate tosupport a changing and growing company. If our management fails to respondeffectively to changes and growth in our business, including acquisitions, thiscould have a material adverse effect on the Company’s business, financialcondition, results of operations and future prospects.

 

*We face risks arising from foreign currencyexchange.*

 

As MGT’s main operating currency is UK sterling and its financialstatements are reported in US dollars, MGT’s assets and liabilities and itsresults of operations are affected by movements in the $:£ exchange rate.  Should there be large or unexpectedfluctuations in the $:£ exchange rate, this could have a material effect on theCompany’s business, financial condition, results of operations and futureprospects.  The Company currently doesnot engage in hedging activities to minimize the effect of adverse movements inthe exchange rate.

 

*We may not be able to quickly realize our investmentsat the value at which we have recorded them.*

 

MGT holds a number of investments held at both at market value and atcost.  There is a risk that we may not beable to swiftly realize these investments at the fair value or cost at whichthey are recorded in the financial statements. If we are unable to quickly realize these investments at prices webelieve to be fair, this could have a material effect on the Company’sbusiness, financial condition, results of operations and future prospects.

 

**Generalmarket risks**

 

*We may not be able to access credit.*

 

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

 

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*Recent global economic trends could adverselyaffect our business, liquidity and financial results.*

 

Recent global economic conditions, including disruption of financialmarkets, could adversely affect us, primarily through limiting our access tocapital and disrupting our clients’ businesses. In addition, continuation or worsening of general market conditions ineconomies important to our businesses may adversely affect our clients’ levelof spending and ability to obtain financing, leading to us being unable togenerate the levels of sales that we require. Current and continued disruption of financial markets could have amaterial adverse effect on the Company’s business, financial condition, resultsof operations and future prospects.

 

*We may not be able to maintain effective internalcontrols.*

 

If we fail to maintain the adequacy of our internal accountingcontrols, as such standards are modified, supplemented or amended from time totime, we may not be able to ensure that we can conclude on an ongoing basisthat we have effective internal controls over financial reporting in accordancewith Section 404. Failure to achieve and maintain an effective internalcontrol environment could cause us to face regulatory action and also causeinvestors to lose confidence in our reported financial information, either ofwhich could have a material adverse effect on the Company’s business, financialcondition, results of operations and future prospects.

 

**Item2.                           Unregistered Sales of Equity Securities and Use of Proceeds**

 

In the three months ended March 31, 2009 no shares of common stockwere issued.

 

**Item3.                           Defaults Upon Senior Securities**

 

None.

 

**Item4.                           Submission of Matters to a Vote of Security Holders**

 

None.

 

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**PART II**

 

**Item 5. Other Information**.

 

On May 14, 2009, the Company executed and delivered a Convertible Promissory Note (the“Note”) in the principal amount of $1,100 with XShares Group, Inc.(“XSG”), a Delaware corporation.  Theprincipal amount includes a fee of $100 payable to the Company.  All of the Note shall be converted into Series BPreferred Stock of XSG (the “Series B Shares”) at the Initial Closing (asdefined below).  In the event that anAmended and Restated Certificate of Incorporation designating the rights andpreferences of the Series B Shares (the “Certificate”) is not approved bya majority of the stockholders of XSG, then the entire unpaid principal sum ofthe Note, plus interest thereon, shall be immediately paid to the Company orconverted into shares of XSG’s common stock at a price of $0.001 per share atthe option of the Company.  A copy of theNote is annexed hereto as Exhibit 10.5.

 

Simultaneously with executing theNote, the Company entered into a SecuritiesPurchase Agreement (the “SPA”) with XSG, pursuant to which the Company agreedto purchase an aggregate of 73,943,662 Series B Shares at a purchase priceof $0.0284 per share.  The SPA containsthe standard representations and warranties for a transaction of this type andis subject to the approval by the stockholders of XSG of the Certificate. The Series BShares are redeemable at the option of XSG, at a price of 1.05 times theoriginal issue price.

 

It is anticipated that the purchase and saleof the Series B Shares will take place in two closings.

 

1.     The initial closing of 38,732,394 Series BShares will occur immediately upon the filing of the Certificate with theSecretary of State of the State of Delaware (the “Initial Closing”).

 

2.     The second closing of 35,211,268 Series BShares will occur upon the later of (i) July 16, 2009 or (ii) fivedays following the filing of the Certificate. A copy of the SPA and a form of the Certificate are annexed hereto asExhibits 10.3 and 10.4, respectively.

 

During the year ended December 31, 2007,the Company acquired shares valued at $960 in XSG’s predecessor, XShares Group,LLC.   This investment was introduced tothe Company by Asia IT (a related party).   In the year ended December 31,2008, the Company acquired additional shares of XSG valued at $2,040, bringingthe total historical investment to $3,000. As of December 31, 2008, thisinvestment was deemed impaired to a value of $600.

 

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**Exhibits**

 
| 10.3 |   | Securities Purchase  Agreement with XShares Group, Inc.                                                                         |
|------|--------|---------------------------------------------------------------------------------------------------------------------------------|
| 10.4 |   | Second Amended and Restated  Certificate of Incorporation of XShares Group, Inc.                                                |
| 10.5 |   | Convertible Promissory  Note between XShares Group, Inc. and MGT Capital Investments, Inc.                                      |
| 31.1 |   | Certification pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer —  filed herewith). |
| 31.2 |   | Certification pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer —  filed herewith). |
| 32.1 |   | Certification pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer —  filed herewith). |
| 32.2 |   | Certification pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer —  filed herewith). |

 

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SIGNATURE

 

In accordance with the requirements of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe 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 |
|              |                                |   |
| May 15, 2009 |                                |   |

 

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