Table of Contents

** **

 

** **

**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 September 30, 2010.**

 

**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.**

(Exactname of Registrant 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**

(Addressof principal executive offices, including zip code)

 

Registrant’stelephone number, including area code: **011-44-20-7605-1151**

 

Indicate by check whetherthe Registrant (1) has filed all reports to be filed by Section 13 or15(d) of the Securities and Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe 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 toRule 405 of Regulation S-T (§232.405 of this chapter) during the preceding12 months (or for such shorter period that the registrant was required tosubmit and post such files). Yes o  No o

 

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

 

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o  No x

 

As of November 19, 2010the registrant had outstanding 32,550,590 shares of common stock, $0.001 parvalue, (excludes 6,349,793 common shares held as treasury stock).

 

 

 

----

Table ofContents

 

NOTEREGARDING FORWARD 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 profit, 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 of thisreport, and that are otherwise described from time to time in the Company’sSecurities and Exchange Commission reports filed after this report. The Companyassumes no obligation and does not intend to update these forward-lookingstatements.

 

The Company’s main operatingcurrency is UK Sterling (£).

 

1

----

Table ofContents

 

**INDEX**

 
| **PART I — FINANCIAL INFORMATION** | ** ** | ** **                                                                                                                                                  |
|----------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                   | ** ** | ** **                                                                                                                                                  | ** ** | ** ** |
| Item 1                                       |       | Condensed Consolidated  Balance Sheets — September 30, 2010 (unaudited) and  December 31, 2009                                          |   | 3 |
|                                         |       |                                                                                                                                                        |   |   |
|                                         |       | Condensed  Consolidated Statements of Operations — for the three months ended  September 30, 2010 (unaudited) and 2009 (unaudited)                |   | 4 |
|                                         |       |                                                                                                                                                        |   |   |
|                                         |       | Condensed Consolidated Statements of Operations — for  the nine months ended September 30, 2010 (unaudited) and 2009  (unaudited)                 |   | 5 |
|                                         |       |                                                                                                                                                        |   |   |
|                                         |       | Condensed Consolidated Statement of Stockholders’  Equity and Comprehensive Loss — for the nine months ended September 30,  2010 (unaudited) |   | 6 |
|                                         |       |                                                                                                                                                        |   |   |
|                                         |       | Condensed  Consolidated Statements of Cash Flows — for the nine months ended  September 30, 2010 (unaudited) and 2009 (unaudited)            |   | 7 |
|                                         |       |                                                                                                                                                        |   |   |
|                                         |       | Notes to Condensed Consolidated Financial Statements                                                                                                        |   | 8 |
|                                         |       |                                                                                                                                                        |   |   |
| Item 2                                       |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                 |   | 20 |
|                                         |       |                                                                                                                                                        |   |   |
| Item 3                                       |       | Quantitative  and Qualitative Disclosure About Market Risk                                                                                                  |   | 28 |
|                                         |       |                                                                                                                                                        |   |   |
| Item 4T                                      |       | Controls &  Procedures                                                                                                                             |   | 29 |
|                                         |       |                                                                                                                                                        |   |   |
| **PART II — OTHER INFORMATION**    |       |                                                                                                                                                        |
| ** **                                   | ** ** | ** **                                                                                                                                                  | ** ** | ** ** |
| Item 1                                       |       | Legal Proceedings                                                                                                                                           |   | 30 |
|                                         |       |                                                                                                                                                        |   |   |
| Item 1A                                      |       | Risk Factors                                                                                                                                                |   | 30 |
|                                         |       |                                                                                                                                                        |   |   |
| Item 2                                       |       | Unregistered  Sale of Equity Securities and Use of Proceeds                                                                                                 |   | 30 |
|                                         |       |                                                                                                                                                        |   |   |
| Item 3                                       |       | Defaults Upon  Senior Securities                                                                                                                            |   | 30 |
|                                         |       |                                                                                                                                                        |   |   |
| Item 4                                       |       | [Removed and Reserved]                                                                                                                                      |   | 30 |
|                                         |       |                                                                                                                                                        |   |   |
| Item 5                                       |       | Other Information                                                                                                                                           |   | 30 |
|                                         |       |                                                                                                                                                        |   |   |
| Item 6                                       |       | Exhibits                                                                                                                                                    |   | 30 |
|                                         |       |                                                                                                                                                        |   |   |
| SIGNATURES                                   |       | 31                                                                                                                                                          |

 

Allfinancial amounts are in thousands except share and per share data.

 

2

----

Table of Contents

 

**MGT CAPITAL INVESTMENTS, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                                      | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                      | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                      |       |                         |       |                        |       |
| Current  assets:                                                                                                                |       |                         |       |                        |       |
| Cash  and cash equivalents                                                                                                      |       | $                            | 10,569     |                        | $          | 22,165 |   |
| Accounts  receivable                                                                                                            |       | 61                           |       | 97                          |       |
| Other  receivables — related party                                                                                         |       | 68                           |       | 105                         |       |
| Prepaid  expenses and other current assets                                                                                      |       | 539                          |       | 620                         |       |
| Deferred  consideration for sale of assets                                                                                      |       | 772                          |       | —                      |       |
| Loans  receivable — related party — current                                                                           |       | 1,107                        |       | 398                         |       |
| Total  current assets                                                                                                           |       | 13,116                       |       | 23,385                      |       |
|                                                                                                                            |       |                         |       |                        |       |
| Property  and equipment, at cost, net                                                                                           |       | 265                          |       | 290                         |       |
| Investments,  at cost                                                                                                           |       | —                       |       | 224                         |       |
| Security  deposits                                                                                                              |       | 188                          |       | 219                         |       |
| Loans  receivable — related party — long term                                                                         |       | 315                          |       | 159                         |       |
| Total  assets                                                                                                                   |       | $                            | 13,884     |                        | $          | 24,277 |   |
|                                                                                                                            |       |                         |       |                        |       |
| **Liabilities**                                                                                                                 |       |                         |       |                        |       |
| Current  liabilities:                                                                                                           |       |                         |       |                        |       |
| Accounts  payable                                                                                                               |       | $                            | 332        |                        | $          | 916 |   |
| Accrued  expenses                                                                                                               |       | 970                          |       | 1,214                       |       |
| Deferred  revenue                                                                                                               |       | 206                          |       | 114                         |       |
| Total  current liabilities                                                                                                      |       | 1,508                        |       | 2,244                       |       |
|                                                                                                                            |       |                         |       |                        |       |
| **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                                                                                                     |       | 300,143                      |       | 299,878                     |       |
| Accumulated  other comprehensive loss                                                                                           |       | (4,888                       | )          | (4,549                      | )          |
| Accumulated  deficit                                                                                                            |       | (272,679                     | )          | (265,827                    | )          |
|                                                                                                                            |       | 22,615                       |       | 29,541                      |       |
| Treasury  stock, at cost, 6,349,793 shares of common stock                                                                      |       | (18,912                      | )          | (18,912                     | )          |
| Total  stockholders’ equity                                                                                                |       | 3,703                        |       | 10,629                      |       |
| Non-controlling  interest                                                                                                       |       | 8,673                        |       | 11,404                      |       |
| Total  equity                                                                                                                   |       | 12,376                       |       | 22,033                      |       |
|                                                                                                                            |       |                         |       |                        |       |
| Total  liabilities and equity                                                                                                   |       | $                            | 13,884     |                        | $          | 24,277 |   |

 

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

 

3

----

Table ofContents

 

**MGT CAPITAL INVESTMENTS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(unaudited)**

 
| ** **                                                           | ** ** | **Three months ended September 30,** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                           | ** ** | **2010**                                                 | ** ** | **2009** | ** ** |
| ** **                                                           | ** ** | ** **                                               | ** ** | **(revised see note 3)** | ** ** |
| Revenues                                                             |       | $                                                        | 62         |   | $ | 45 |   |
| Cost  of revenue                                                     |       | 1                                                        |       | — |   |
| Gross  profit                                                        |       | 61                                                       |       | 45 |   |
|                                                                 |       |                                                     |       |   |   |
| Operating  expenses                                                  |       |                                                     |       |   |   |
| Selling,  general and administrative expenses                        |       | 1,822                                                    |       | 3,754 |   |
| Research  and development cost                                       |       | 187                                                      |       | 340 |   |
|                                                                 |       | 2,009                                                    |       | 4,094 |   |
|                                                                 |       |                                                     |       |   |   |
| Operating  loss                                                      |       | (1,948                                                   | )          | (4,049 | ) |
|                                                                 |       |                                                     |       |   |   |
| Non-Operating  income / (expenses)                                   |       |                                                     |       |   |   |
| Interest  and other income / (expense), net                          |       | (27                                                      | )          | 471 |   |
| Provision  for loan receivable – related party                  |       | (1,711                                                   | )          | — |   |
|                                                                 |       | (1,738                                                   | )          | 471 |   |
|                                                                 |       |                                                     |       |   |   |
| Net  loss from continuing operations before income tax               |       | (3,686                                                   | )          | (3,578 | ) |
|                                                                 |       |                                                     |       |   |   |
| Income  tax benefit                                                  |       | —                                                   |       | — |   |
|                                                                 |       |                                                     |       |   |   |
| Net  loss from continuing operations before non-controlling interest |       | (3,686                                                   | )          | (3,578 | ) |
|                                                                 |       |                                                     |       |   |   |
| Discontinued  operations                                             |       |                                                     |       |   |   |
| Net  loss from operations of Medicexchange, net of income taxes      |       | —                                                   |       | (136 | ) |
|                                                                 |       | —                                                   |       | (136 | ) |
|                                                                 |       |                                                     |       |   |   |
| Net  loss before non-controlling interest                            |       | (3,686                                                   | )          | (3,714 | ) |
|                                                                 |       |                                                     |       |   |   |
| Net  loss attributable to non-controlling interest                   |       | 854                                                      |       | 1,119 |   |
|                                                                 |       |                                                     |       |   |   |
| Net  loss attributable to MGT Capital Investments, Inc.         |       | $                                                        | (2,832     | ) | $ | (2,595 | ) |
|                                                                 |       |                                                     |       |   |   |
| Per  share data:                                                     |       |                                                     |       |   |   |
|                                                                 |       |                                                     |       |   |   |
| Basic  and diluted loss per share from continuing operations         |       | $                                                        | (0.09      | ) | $ | (0.07 | ) |
| Basic  and diluted loss per share from discontinued operations       |       | —                                                   |       | (0.01 | ) |
|                                                                 |       | $                                                        | (0.09      | ) | $ | (0.08 | ) |
|                                                                 |       |                                                     |       |   |   |
| Weighted  average number of common shares outstanding                |       | 32,550,590                                               |       | 32,550,590 |   |

 

Theaccompanying notes are an integral part of these condensed consolidated financialstatements.

 

4

----

Table ofContents

 

**MGT CAPITAL INVESTMENTS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(unaudited)**

 
| ** **                                                           | ** ** | **Nine months ended September 30,** | ** ** |
|----------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                           | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| ** **                                                           | ** ** | ** **                                              | ** ** | **(revised see note 3)** | ** ** |
| Revenues                                                             |       | $                                                       | 388        |   | $ | 146 |   |
| Cost  of revenue                                                     |       | 115                                                     |       | — |   |
| Gross  profit                                                        |       | 273                                                     |       | 146 |   |
|                                                                 |       |                                                    |       |   |   |
| Operating  expenses                                                  |       |                                                    |       |   |   |
| Selling,  general and administrative expenses                        |       | 7,035                                                   |       | 11,176 |   |
| Research  and development cost                                       |       | 1,100                                                   |       | 1,670 |   |
| Impairment  of goodwill                                              |       | —                                                  |       | 12,157 |   |
|                                                                 |       | 8,135                                                   |       | 25,003 |   |
|                                                                 |       |                                                    |       |   |   |
| Operating  loss                                                      |       | (7,862                                                  | )          | (24,857 | ) |
|                                                                 |       |                                                    |       |   |   |
| Non-Operating  income / (expenses)                                   |       |                                                    |       |   |   |
| Interest  and other expenses, net                                    |       | —                                                  |       | (440 | ) |
| Provision  for loan receivable – related party                  |       | (1,711                                                  | )          | — |   |
|                                                                 |       | (1,711                                                  | )          | (440 | ) |
|                                                                 |       |                                                    |       |   |   |
| Net  loss from continuing operations before income tax               |       | (9,573                                                  | )          | (25,297 | ) |
|                                                                 |       |                                                    |       |   |   |
| Income  tax benefit                                                  |       | 167                                                     |       | — |   |
|                                                                 |       |                                                    |       |   |   |
| Net  loss from continuing operations before non-controlling interest |       | (9,406                                                  | )          | (25,297 | ) |
|                                                                 |       |                                                    |       |   |   |
| Discontinued  operations                                             |       |                                                    |       |   |   |
| Net  loss from operations of Medicexchange, net of income taxes      |       | (234                                                    | )          | (840 | ) |
| Gain  on sale of Medicexchange, net of income taxes                  |       | 149                                                     |       | — |   |
|                                                                 |       | (85                                                     | )          | (840 | ) |
|                                                                 |       |                                                    |       |   |   |
| Net  loss before non-controlling interest                            |       | (9,491                                                  | )          | (26,137 | ) |
|                                                                 |       |                                                    |       |   |   |
| Net  loss attributable to non-controlling interest                   |       | 2,639                                                   |       | 4,367 |   |
|                                                                 |       |                                                    |       |   |   |
| Net  loss attributable to MGT Capital Investments, Inc.         |       | $                                                       | (6,852     | ) | $ | (21,770 | ) |
|                                                                 |       |                                                    |       |   |   |
| Per  share data:                                                     |       |                                                    |       |   |   |
|                                                                 |       |                                                    |       |   |   |
| Basic  and diluted loss per share from continuing operations         |       | $                                                       | (0.20      | ) | $ | (0.64 | ) |
| Basic  and diluted loss per share from discontinued operations       |       | (0.01                                                   | )          | (0.03 | ) |
|                                                                 |       | $                                                       | (0.21      | ) | $ | (0.67 | ) |
|                                                                 |       |                                                    |       |   |   |
| Weighted  average number of common shares outstanding                |       | 32,550,590                                              |       | 32,550,590 |   |

 

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

 

5

----

Table ofContents

 

**MGT CAPITAL INVESTMENTS, INC.AND SUBSIDIARIES**

**CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY ANDCOMPREHENSIVE LOSS**

**(in thousands)**

**(unaudited)**

**Nine months ended September 30,2010**

** **
| ** **                   | ** ** | **Common stock** | ** ** | **Additional********paid-in** | ** ** | **Accumulated********other********comprehensive** | ** ** | **Accumulated** | ** ** | **Treasury** | ** ** | **Total********stockholders’** | ** ** | **Non-********controlling** | ** ** | **Total**    | ** ** |
|------------------------------|------------|-----------------------|------------|-------------------------------|------------|---------------------------------------------------|------------|-----------------|------------|--------------|------------|-------------------------------------|------------|-----------------------------|------------|--------------|------------|
| ** **                   | ** ** | **Shares**            | ** ** | **Amount**                    | ** ** | **capital**                                       | ** ** | **loss**        | ** ** | **deficit**  | ** ** | **stock**                           | ** ** | **equity**                  | ** ** | **interest** | ** ** | **equity** | ** ** |
|                         |       |                  |       |                          |       |                                              |       |            |       |         |       |                                |       |                        |       |         |       |   |   |
| BALANCE,  DECEMBER 31, 2009  |       | 38,900                |       | $                             | 39         |                                              | $          | 299,878         |       | $            | (4,549     | )                                   | $          | (265,827                    | )          | $            | (18,912    | ) | $ | 10,629 |   | $ | 11,404 |   | $ | 22,033 |   |
|                         |       |                  |       |                          |       |                                              |       |            |       |         |       |                                |       |                        |       |         |       |   |   |
| Stock-based  compensation    |       | —                |       | —                        |       | 265                                               |       | —          |       | —       |       | —                              |       | 265                         |       | 261          |       | 526 |   |
|                         |       |                  |       |                          |       |                                              |       |            |       |         |       |                                |       |                        |       |         |       |   |   |
| Disposal  of Medicexchange   |       | —                |       | —                        |       | —                                            |       | —          |       | —       |       | —                              |       | —                      |       | (233         | )          | (233 | ) |
|                         |       |                  |       |                          |       |                                              |       |            |       |         |       |                                |       |                        |       |         |       |   |   |
| COMPREHENSIVE  LOSS          |       |                  |       |                          |       |                                              |       |            |       |         |       |                                |       |                        |       |         |       |   |   |
|                         |       |                  |       |                          |       |                                              |       |            |       |         |       |                                |       |                        |       |         |       |   |   |
| Net  loss for the period     |       | —                |       | —                        |       | —                                            |       | —          |       | (6,852       | )          | —                              |       | (6,852                      | )          | (2,639       | )          | (9,491 | ) |
|                         |       |                  |       |                          |       |                                              |       |            |       |         |       |                                |       |                        |       |         |       |   |   |
| Translation  adjustment      |       | —                |       | —                        |       | —                                            |       | (339            | )          | —       |       | —                              |       | (339                        | )          | (120         | )          | (459 | ) |
|                         |       |                  |       |                          |       |                                              |       |            |       |         |       |                                |       |                        |       |         |       |   |   |
| Total  comprehensive loss    |       |                  |       |                          |       |                                              |       |            |       |         |       |                                |       | (7,191                      | )          | (2,759       | )          | (9,950 | ) |
|                         |       |                  |       |                          |       |                                              |       |            |       |         |       |                                |       |                        |       |         |       |   |   |
| BALANCE,  SEPTEMBER 30, 2010 |       | 38,900                |       | $                             | 39         |                                              | $          | 300,143         |       | $            | (4,888     | )                                   | $          | (272,679                    | )          | $            | (18,912    | ) | $ | 3,703 |   | $ | 8,673 |   | $ | 12,376 |   |

 

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

 

6

----

Table ofContents

 

**MGT CAPITAL INVESTMENTS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

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

**(unaudited)**

 
| ** **                                                                     | ** ** | **Nine months ended September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| ** **                                                                     | ** ** | ** **                                              | ** ** | **(revised see note 3)** | ** ** |
| Cash  flows from operating activities                                          |       |                                                    |       |   |   |
| Net  loss before non-controlling interest                                      |       | $                                                       | (9,491     | ) | $ | (26,137 | ) |
|                                                                           |       |                                                    |       |   |   |
| Adjustments  to reconcile net loss to net cash used in operating activities:   |       |                                                    |       |   |   |
| Loss  from discontinued operations                                             |       | 234                                                     |       | 840 |   |
| Stock-based  compensation expense                                              |       | 515                                                     |       | 1,504 |   |
| Depreciation                                                                   |       | 109                                                     |       | 239 |   |
| Accrued  interest receivable                                                   |       | (10                                                     | )          | — |   |
| Loss  on impairment of goodwill                                                |       | —                                                  |       | 12,157 |   |
| Loss  on impairment of marketable securities                                   |       | —                                                  |       | 1,146 |   |
| Loss  on impairment of loan receivable                                         |       | 1,703                                                   |       | — |   |
| Gain  on disposal of Medicexchange and other investments                       |       | (201                                                    | )          | — |   |
| (Increase)/decrease  in assets                                                 |       |                                                    |       |   |   |
| Accounts  receivable                                                           |       | 30                                                      |       | 83 |   |
| Other  receivables — related party                                        |       | 36                                                      |       | (13 | ) |
| Prepaid  expenses and other current assets                                     |       | 145                                                     |       | (107 | ) |
| Increase/(decrease)  in liabilities                                            |       |                                                    |       |   |   |
| Accounts  payable                                                              |       | (336                                                    | )          | (1,370 | ) |
| Accrued  expenses and other payables                                           |       | (273                                                    | )          | 401 |   |
| Deferred  revenue                                                              |       | 9                                                       |       | 7 |   |
| Net  cash used in operating activities                                         |       | (7,530                                                  | )          | (11,250 | ) |
|                                                                           |       |                                                    |       |   |   |
| Cash  flows from investing activities:                                         |       |                                                    |       |   |   |
| Issuance  of Moneygate loans receivable – related party                   |       | (1,472                                                  | )          | — |   |
| Issuance  of “Dunamis Capital” loans receivable – related party |       | (1,100                                                  | )          | — |   |
| Cash  in Medicexchange subsidiaries disposed of                                |       | (1,101                                                  | )          | — |   |
| Sale  of marketable securities                                                 |       | —                                                  |       | 947 |   |
| Purchase  of property, plant and equipment                                     |       | (83                                                     | )          | (21 | ) |
| Deposit  of restricted cash                                                    |       | —                                                  |       | (1,000 | ) |
| Investment  in convertible notes                                               |       | —                                                  |       | (1,000 | ) |
| Receipt  of deferred consideration                                             |       | 382                                                     |       | — |   |
| Net  cash used in investing activities                                         |       | (3,374                                                  | )          | (1,074 | ) |
|                                                                           |       |                                                    |       |   |   |
| Cash  flows of discontinued operations                                         |       |                                                    |       |   |   |
| Net  cash used in Medicexchange operating activities                           |       | (226                                                    | )          | (633 | ) |
| Net  cash used in discontinued operations                                      |       | (226                                                    | )          | (633 | ) |
|                                                                           |       |                                                    |       |   |   |
| Effects  of exchange rates on cash and cash equivalents                        |       | (466                                                    | )          | 1,576 |   |
| Net  change in cash and cash equivalents                                       |       | (11,596                                                 | )          | (11,381 | ) |
| Cash  and cash equivalents, beginning of period                                |       | 22,165                                                  |       | 38,294 |   |
| Cash  and cash equivalents, end of period                                      |       | $                                                       | 10,569     |   | $ | 26,913 |   |

 

*Non-cash items*

 

In the nine month periodended September 30, 2010 the Company disposed of Medicexchange and otherinvestments.  The consideration for thiswas $1,136 which has been deferred and is payable in installments throughMarch 31, 2011.  When received, itwill be recorded in investing activities.

 

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

 

7

----

Table ofContents

 

**MGT CAPITAL INVESTMENTS, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

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

**(unaudited)**

 

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

 

The accompanying unaudited condensed consolidatedfinancial statements of MGT Capital Investments, Inc. have been preparedin accordance with generally accepted accounting principles for interimfinancial information and with the instructions to Form 10-Q andRule 8-03 of Regulation S-X. Accordingly, they do not include all of theinformation and notes required by accounting principles generally accepted inthe United States of America. In the opinion of management, all adjustments, consistingonly of normal recurring adjustments, have been included. Operating results forthe nine months ended September 30, 2010 are not necessarily indicative ofthe results that may be expected for any subsequent quarter or for theyear ending December 31, 2010. These condensed consolidated financial statements should be read inconjunction with the consolidated financial statements and notes theretoincluded in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2009. The condensed consolidated financial statements includethe accounts of the Company and its majority owned subsidiaries. Allintercompany accounts and transactions have been eliminated.

 

MGT Capital Investments, Inc. (“MGT”, “theCompany”, “the Group”, “we”, “us”) is a holding company.  We currentlyhave a controlling interest in our operating subsidiary, Medicsight plc (“Medicsight”)and a 49% holding in Moneygate Group Limited (“Moneygate”). On March 31,2010 we disposed of our controlling interest in Medicexchange Limited (“Medicexchange”)and various other investments. We also have wholly owned subsidiaries MGTCapital Investments (UK) Limited, MGT Investments (Gibraltar) Limited, andMedicsight Nominees Limited.

 

·                  Medicsight and its whollyowned subsidiaries is a medical imaging software development company listed onthe AIM Market of the London Stock Exchange (Ticker symbol “MDST”) thatdevelops and commercializes enterprise-wide Computer-Aided Detection (“CAD”) applicationswhich analyze Computer Tomography (“CT”) scans to assist radiologists in theearly detection and measurement of colorectal polyps and lung lesions. Medicsight currently has limited revenue and is awaiting regulatory approvalsin key markets.  The Company holds 86million shares (55%) of the 155 million issued share capital of Medicsight.

 

·                  The Company has a 49%holding in Moneygate Group Limited, a UK based firm of Independent FinancialAdvisors.

 

The Company has incurred significant operatinglosses since inception and has recently commenced generating revenue fromoperations.  As a result, the Company hasgenerated negative cash flows from operations and has an accumulated deficit of$272,679 at September 30, 2010.  TheCompany’s subsidiary Medicsight is operating in a developing industry based onnew technology and its primary source of funds to date has been through theissuance 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 significantaccounting policies**

 

Webelieve the critical accounting policies listed below reflect significantjudgments, estimates and assumptions used in the preparation of ourconsolidated financial statements.

 

*RevenueRecognition*

 

*Medicsight*

 

We recognize revenue when it is realized orrealizable and earned.  We considerrevenue realized or realizable and earned when we have persuasive evidence ofan arrangement, the product has been shipped or the services have been providedto the customer, the sales price is fixed or determinable and collectability isprobable.

 

Software — License fee revenue is derived from thelicensing of computer software. Maintenance revenue is derived from software maintenance.  Our software licenses are generally sold aspart of an arrangement that includes maintenance and support.

 

We license software and sell maintenance throughvisualization solution partners and original equipment manufacturers.  We receive regular sales reporting detailingthe number of licenses sold by original equipment manufacturers, value-addedresellers and

 

8

----

Table ofContents

 

independent distributors (collectively, “Resellers”)to end users.  We generally offer termsthat 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 tovendors (“sell-in basis”).

 

Revenue from license fees is recognized whennotification of shipment to the end user has occurred, there are no significantCompany obligations with regard to implementation and the Company’s servicesare not considered essential to the functionality of other elements of thearrangement.

 

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

 

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

 

Hardware — Revenueis derived from the sale of our MedicCO2LON product. This product is an automated CO2 insufflation device, and is generally sold as partof an arrangement that includes a one year warranty. The risk of incurringwarranty related expense is mitigated by the warranty contractually agreed withthe supplier. The Company will review the risk of warranty liabilities on aregular basis, and will make any and all appropriate provisions accordingly. Atthe present time, the Company feels that the warranty liability is insignificantand has therefore not made any provision.

 

MedicCO2LONis sold exclusively through our distribution partner MEDRAD Inc. Revenue isrecognized as goods and orders are satisfied and goods are delivered to ourdistribution partner. We generally offer terms which require payments with 45days from invoicing.

 

*Equity-basedcompensation*

 

We recognize compensation expense for allequity-based payments.  Under fair valuerecognition provisions, we recognize equity-based compensation net of anestimated forfeiture rate and recognize compensation cost only for those sharesexpected to vest over the requisite service period of the award.

 

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

 

Determining the appropriate fair value model andcalculating the fair value of equity-based payment awards require the input ofthe subjective assumptions described above. The assumptions used in calculating the fair value of equity-basedpayment awards represent management’s best estimates, which involve inherentuncertainties and the application of management judgment.  As a result, if factors change and we usedifferent assumptions, our equity-based compensation expense could bematerially different in the future.  Inaddition, we are required to estimate the expected forfeiture rate andrecognize expense only for 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.

 

*Researchand development*

 

We incur costs in connection with the developmentof software products that are intended for sale.  Costs incurred prior to technologicalfeasibility being established for the product are expensed as incurred.  Technological feasibility is established uponcompletion of a detail program design or, in its absence, completion of aworking model.  Thereafter, all softwareproduction costs are capitalized and subsequently reported at the lower ofunamortized cost or net realizable value. Capitalized costs are amortized based on current and future revenue foreach product with an annual minimum equal to the straight-line amortizationover the

 

9

----

Table of Contents

 

remaining estimated economic life of theproduct.  Amortization commences when theproduct is available for general release to customers.

 

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

 

*Fair value of financialinstruments*

 

On January 1, 2008 the Company adopted certainprovisions of FASB ASC 820, Fair Value Measurements and Disclosures, forfinancial assets and financial liabilities and on January 1, 2009 fornon-financial assets and non-financial liabilities.  This establishes a framework for measuringfair value and expands disclosure about fair value measurements.  Applying fair value measurements to ourfinancial instruments requires management’s judgment, especially when usingLevel 2 and Level 3 inputs.

 

*Financial instruments*

 

The Company holds financialinstruments.  Short term tradereceivables and payables are held at cost at amounts that approximate theirfair value due to their short term nature. The Company also has receivables duefrom Moneygate (see note 5) that represent a concentration of credit risk.

 

*Investments*

 

Investments in various corporations where ourinvestment is less than 20% of issued share capital are accounted for under thecost method.  Investments where we holdbetween 20% and 50% of issued share capital and we have significant influenceover the investee are accounted for under the equity method.  Moneygate is accounted for under the equitymethod.

 

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

 

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

 

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

 

**Recent accounting pronouncements**

 

In October 2009 the Financial AccountingStandards Board (“FASB”) issued an update to Accounting Standards Codification(“ASC”) Topic 605, Revenue Recognition, with regards to multiple-deliverablearrangements.  The update is effectivefor revenue arrangements entered into in fiscal years beginning on or afterJune 15, 2010. We do not expect the adoption of this update tohave a material impact on our financial position or results of operations.

 

In October 2009 the Financial AccountingStandards Board (“FASB”) issued an update to Accounting Standards Codification(“ASC”) Topic 985, Software, with regards to certain revenue arrangements thatinclude software elements.  The update iseffective for revenue arrangements entered into in fiscal years beginning on orafter June 15, 2010. We do not expect the adoption of thisupdate to have a material impact on our financial position or results ofoperations.

 

In December 2009 the FASB issued an update toASC Topic 810, Consolidations, with regards to improvements to financialreporting by enterprises involved with variable interest entities. The adoption ofthis update on January 1, 2010 has not had a material impact on ourfinancial position or results of operations.

 

In April 2010 the FASB issued an update to ASCTopic 605, Milestone Method of Revenue Recognition, relating to research anddevelopment projects. The amendments in the ASU are effective on a prospectivebasis for milestones achieved in fiscal years, and interim periods within thoseyears, beginning on or after June 15, 2010. We do not expect the adoptionof this update to have a material impact on our financial position orresults of operations.

 

In August 2010, the Financial AccountingStandards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-21,Accounting for Technical Amendments to Various SEC Rules and Schedules.ASU 2010-21 amends various SEC paragraphs in the FASB Accounting StandardsCodifications pursuant to SEC Final Rule, Technical Amendments to Rules, Forms,Schedules

 

10

----

Table of Contents

 

and Codification of Financial Reporting Policies.The Company does not expect the provisions of ASU 2010-21 to have a materialeffect on the financial position, results of operations or cash flows of theCompany.

 

In August 2010, the FASB issued ASU 2010-22,Accounting for Various Topics. ASU 2010-22 amends various SEC paragraphs in theFASB Accounting Standards Codification based on external comments received andthe issuance of Staff Accounting Bulletin (“SAB”) No. 112, which amends orrescinds portions of certain SAB topics. The Company does not expect theprovisions of ASU 2010-22 to have a material effect on the financial position,results of operations or cash flows of the Company.

 

**3. Divestment of investments and discontinued activities**

 

On March 31, 2010 the Company sold its stockin Medicexchange and various non-core investments to an unrelated third partyin return for consideration of £750 ($1,136). This consideration is deferred and will be paid in installments throughMarch 2011.  As ofSeptember 30, 2010 £250 ($379) had been received. The thirdpayment installment in the original agreement was due on August 30, 2010,without interest. At the request of the third party, and in discussion andnegotiation with management, it was agreed that the remaining installmentswould be modified. The revised agreement now includes the following paymentinstallments; October 30, 2010, £75($113); December 15, 2010, £175 ($265); and February 28, 2011, £250 ($379).

 

TheOctober 30, 2010 payment has been received and the next payment is due on December 15,2010. As compensation for delaying the third installment payment, the lastpayment will be received one month earlier than in the original agreement.

 

The investments disposed of and the relatedconsideration is as follows:

 
| **Asset**                 | ** ** | **Consideration** | ** ** |
|---------------------------|------------|-------------------|------------|
| Medicexchange Limited     |       | $                 | 927        |   |
| Medicexchange Inc.        |       | 1                 |       |
| Hipcricket, Inc.     |       | 205               |       |
| Eurindia Limited          |       | 1                 |       |
| XShares equity            |       | 1                 |       |
| XShares convertible notes |       | 1                 |       |
| Total                     |       | $                 | 1,136      |   |

 

Eurindia and the XShares convertible notes andequity investment had been fully impaired so the consideration receivedrepresents the gain on sale recorded in the Consolidated Statement ofOperations.  HipCricket was recorded inthe financial statements at $224 meaning a loss on sales of $19 was recorded(see note 7).

 

Before their disposal, Medicexchange Limited andMedicexchange Inc. were consolidated into the MGT Consolidated FinancialStatements.  Consideration of $928 wasallocated to Medicexchange and MGT recorded a profit on disposal of $149, netof tax. This profit on disposal has been recognized in discontinued operations.In the nine months ended September 30, 2010, discontinued operations containstransactions up to the date of disposal, March 31, 2010. Within this period, Medicexchangeattained revenue of $15, operating expenses of $249, and a net loss fromoperations of $234. In the nine months ended September 30, 2009, Medicexchangeattained revenue of $37, operating expenses of $877, and a net loss fromoperations of $840.

 

**4. Cash and cash equivalents**

 

Weinvest our cash in short-term deposits with major banks.  At September 30,2010 we held $10,569 in cash and cash equivalents.

 

Cashand cash equivalents consist of cash and temporary investments with maturitiesof 90 days or less when purchased.

 

*Concentrations*

 

The Company maintains its cash and cash equivalentsat major financial institutions in Europe.  Cash held in foreigninstitutions is not insured by the Federal Deposit Insurance Corporation andamounted to $10,569 asof September 30, 2010 and $22,165 as of December 31, 2009.  The Companyperiodically evaluates the relative credit standing of financial institutionsconsidered in its cash investment strategy.

 

11

----

Table ofContents

 

**5. Loansreceivable — related party**

 

*Moneygate*

 

InFiscal 2009 we purchased 49% of the share capital of Moneygate Group Limited(“Moneygate”).  Moneygate is a relatedparty as we have significant influence over it and have representation on theboard of directors.  On acquisition weprovided loan facilities of £250 ($395) for working capital and £2,000 ($3,162)for acquisitions. During the nine months ended September 30, 2010 we allowed aportion of the acquisition facility to be used for working capital asacquisitions have been delayed. 

 

On,August 3, 2010 Moneygate agreed to convert all monies advanced to July 31,2010, of £1,247 ($1,888) and future monies up to £2,000 ($3,162) in total in toconvertible loan notes. On August 3, 2010, MGT Capital Investments Limited, acompany incorporated in England and Wales (“MGT UK”), and a wholly ownedsubsidiary of MGT Capital Investments, Inc., entered into an agreement with anunrelated third party for the sale of its Moneygate convertible loan note of£2,000 ($3,162). 

 

Underthe terms of the its agreement with Moneygate, the Company advanced additionalworking capital funding. At September 30, 2010, £900 ($1,423) had been advancedfor working capital and £410 ($648) for acquisitions.  In October 2010, additional funding wasadvanced to Moneygate and as at October 31, 2010, £1,025 ($1,620) had beenadvanced for working capital and £460 ($727) for acquisitions. 

 

Underthe terms of the convertible note sale discussed above these additional fundswould have been sold as part of the convertible loan sale. 

 

OnNovember 18, 2010, the previously executed agreement to sell the Moneygateconvertible loan notes of up to £2,000 ($3,162) to a third party was terminated.Concurrent with the termination, the Company amended its convertible loan withMoneygate to remove the convertible feature and fix its amount repayable at£1,485 ($2,305) with no future advances. The amended loan agreement isrepayable on or before 2 years from November 18, 2010. The loan will accrue 5%interest per annum and is collateralized by a debenture over the assets ofMoneygate. 

 

TheCompany engaged an outside valuation firm to perform a valuation on the Company’sinvestment and loan note receivable from Moneygate. This report concluded thaton the scenario of Moneygate being unsuccessful in raising adequate financethen the value of the Company’s loan note receivable from Moneygate was £199($315). On this basis we have impaired the carrying value of the loan notesreceivable to this amount, incurring a charge in the period of $1,711.

 

Moneygateis classified as a related party because the Company has representation on itsboard of directors (see note 12).

 

*DunamisCapital*

 

OnSeptember 6, 2010, Medicsight made a short term loan of $1,100 (£696) toDunamis Capital. This is due to be repaid on December 31, 2010, along withinterest of $36 (£23). As of September 30, 2010 interest of $7 (£5) hasbeen accrued. Dunamis is a related party as two directors of Medicsight arealso directors of Dunamis Capital (see Note 12).

 

**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 eachinvestment to assess for other-than-temporary decreases in value.

 

*Eurindia Limited*

 

In 2000 MGT invested in Eurindia Limited (“Eurindia”),a UK company that invested in IT start-up companies.  MGT had a 6% holdingin Eurindia and accounted for this investment on a cost basis.  As of December 31, 2009 this investmenthad been fully impaired.  OnMarch 31, 2010 we disposed of all of our holding in Eurindia for $1leading to a gain on sale of $1 (see notes 3 and 7).

 

*XShares Group*

 

In 2007 and 2008 we invested $3,000 inSeries C preferred shares of XShares Group, Inc. (“XShares”), aninvestment advisor that creates, issues and supports exchange traded funds witha particular healthcare specialty.  Inthe year ended December 31, 2009 the Company also invested $2,000 inXShares convertible notes with a principal of $2,100.  As of December 31, 2009 the equity 

 

12

----

Table of Contents

 

investment and the convertible notes were fullyimpaired. On March 31, 2010 we disposed of all of our equity holdings inXShares for $1 and the convertible notes for $1, leading to a gain on sale of$2 (see notes 3 and 7).

 

*HipCricket Inc.*

 

In Fiscal 2007 we invested $2,000 in HipCricketInc., a company engaged in mobile marketing. In the year ended December 31, 2009 HipCricket Inc. was delistedfrom the AIM Market and we accounted for it as an investment held at cost.  As of December 31, 2009 the investmentwas held at a book value of $224.  OnMarch 31, 2010 we disposed of all of our holdings in HipCricket for $205resulting in a loss on sale of $19 (see notes 3 and 7).

 

The following table presents the changes in Level 3instruments for the nine months ended September 30, 2010.

 
| ** **               | ** ** | **January 1, 2010** | ** ** | **Sales** | ** ** | **Profit / (loss)  on sale  included in  earnings** | ** ** | **September 30****,  2010** | ** ** | **Change in impairment  losses relating  to instruments  still held at****September 30, ****2010** | ** ** |
|--------------------------|------------|--------------------------|------------|-----------|------------|-------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                     |       |                     |       |      |       |                                                                    |       |                             |       |                                                                                                                                       |       |
| Eurindia Limited         |       | $                        | —     |      | (1         | )                                                                       | 1          |                             | $          | —                                                                                                                                     |       | $ | — |   |
| XShares Group, Inc. |       | —                   |       | (1        | )          | 1                                                                       |       | —                           |       | —                                                                                                                                     |       |
| HipCricket Inc.          |       | 224                      |       | (205      | )          | (19                                                                     | )          | —                           |       | —                                                                                                                                     |       |
|                     |       | $                        | 224        |      | (207       | )                                                                       | (17        | )                                | $          | —                                                                                                                                     |       | $ | — |   |

 

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

 

We had the following interest and other incomeamounts from continuing operations:

 
| ** **                                   | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                   | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Loss on sale of HipCricket                   |       | $                                                    | —     |                                                | $          | — |   | $ | (19 | ) | $ | — |   |
| Gain on sale of XShares convertible notes    |       | —                                               |       | —                                              |       | 1 |   | — |   |
| Gain on sale of XShares equity               |       | —                                               |       | —                                              |       | 1 |   | — |   |
| Gain on sale of Eurindia                     |       | —                                               |       | —                                              |       | 1 |   | — |   |
| Impairment Gain / (Loss) on Eurindia         |       | —                                               |       | 38                                                  |       | — |   | (176 | ) |
| Impairment Loss on HipCricket                |       | —                                               |       | —                                              |       | — |   | (701 | ) |
| Impairment Loss on XShares                   |       | —                                               |       | —                                              |       | — |   | (230 | ) |
| Impairment Loss on Moneygate loan receivable |       | —                                               |       | —                                              |       | — |   | — |   |
| Interest income                              |       | 15                                                   |       | 32                                                  |       | 66 |   | 303 |   |
| Gain / (Loss) on other marketable securities |       | —                                               |       |                                                |       | — |   | (37 | ) |
| Other expenses                               |       | (50                                                  | )          | —                                              |       | (50 | ) | — |   |
| Currency gain on short term investments      |       | —                                               |       | 401                                                 |       | — |   | 401 |   |
| Total                                        |       | $                                                    | (35        | )                                                   | $          | 471 |   | $ | — |   | $ | (440 | ) |

 

**8.Comprehensive income (loss)**

 

Comprehensive income (loss)includes net income (loss) and items defined as other comprehensiveincome.  Items defined as othercomprehensive income, such as foreign currency translation adjustments andunrealized gains and losses on certain marketable securities are separatelyclassified in the financial statements. Such items are reported in the consolidated statements of stockholders’equity as comprehensive income as follows:

 

13

----

Table ofContents

 
| ** **                                                            | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                            | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Net loss before non-controlling interest, as reported                 |       | $                                                    | (3,686     | )                                                   | $          | (3,714 | ) | $ | (9,491 | ) | $ | (26,137 | ) |
| Unrealized foreign exchange gain (loss)                               |       | 645                                                  |       | (748                                                | )          | (459 | ) | 1,429 |   |
| Unrealized (loss) on marketable securities                            |       | —                                               |       | (38                                                 | )          | — |   | — |   |
| Comprehensive loss                                                    |       | $                                                    | (3,041     | )                                                   | $          | (4,500 | ) | $ | (9,950 | ) | $ | (24,708 | ) |
| Comprehensive loss attributable to non-controlling interest           |       | 595                                                  |       | 1,393                                               |       | 2,759 |   | 3,444 |   |
| Comprehensive loss attributable to MGT Capital Investments, Inc. |       | $                                                    | (2,446     | )                                                   | $          | (3,107 | ) | $ | (7,191 | ) | $ | (21,264 | ) |

 

Thetotal accumulated other comprehensive loss as of September 30, 2010 is theresult of net foreign currency translation losses.

 

**9.****Reconciliation of Medicsight’s results and US GAAPconsolidated results**

 

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

 

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

 
| ** **                                    | ** ** | **Medicsight  plc** | ** ** | **Medicsight  plc**       | ** ** | **Medicsight  plc** | ** ** | **Discontinued  operations** | ** ** | **Corporate  and Other** | ** ** | **Total**          | ** ** |
|-----------------------------------------------|------------|---------------------|------------|---------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|--------------------|------------|
| ** **                                    | ** ** | **(IFRS)**          | ** ** | **GAAP Adj’ts** | ** ** | **(US GAAP)**  | ** ** | **(US GAAP)**           | ** ** | **(US GAAP)**            | ** ** | **(US GAAP)** | ** ** |
|                                          |       |                |       |                      |       |                |       |                         |       |                          |       |               |       |
| **Nine months ended September 30, 2010** |       |                |       |                      |       |                |       |                         |       |                          |       |               |       |
| Net  revenue to external customers            |       | $                   | 388        |                      | $          | —              |       | $                            | 388        |                          | $          | —             |       | $ | — |   | $ | 388 |   |
| Operating  loss                               |       | (5,508              | )          | (359                      | )          | (5,867              | )          | —                       |       | (1,995                        | )          | (7,862             | )          |
| Assets                                        |       | $                   | 11,873     |                      | $          | —              |       | $                            | 11,873     |                          | $          | —             |       | $ | 2,011 |   | $ | 13,884 |   |
|                                          |       |                |       |                      |       |                |       |                         |       |                          |       |               |       |
| **Nine months ended September 30, 2009** |       |                |       |                      |       |                |       |                         |       |                          |       |               |       |
| Net  revenue to external customers            |       | $                   | 146        |                      | $          | —              |       | $                            | 146        |                          | $          | —             |       | $ | — |   | $ | 146 |   |
| Operating  loss                               |       | (10,183             | )          | 143                       |       | (10,040             | )          | —                       |       | (14,817                       | )          | (24,857            | )          |
| Assets                                        |       | $                   | 21,350     |                      | $          | —              |       | $                            | 21,350     |                          | $          | —             |       | $ | 2,927 |   | $ | 24,277 |   |

 

The principal GAAPadjustments are the accounting for stock options and cumulative translationadjustments.

 

The main operations and fixed assets of Medicsightare in the United Kingdom.

 

**10.Stock-based compensation**

 

We have issued stock optionsfrom MGT and our principal subsidiary company, Medicsight.

 

*MGT stockoption plan*

 

On December 5, 2007 weapproved the 2007 MGT stock option plan and granted options for 1,975,000shares under this plan.  At September 30,2010 there were 475,000 options outstanding and 316,668 of the options issuedwere exercisable.  Options issued underthis plan vest in equal one-thirds after employees have been employed for 12,24 and 36 months from the grant date.

 

*Medicsightstock option plans*

 

We have twelve Stock OptionPlans in Medicsight, whose shares were listed on the AIM Market of the LondonStock Exchange on September 21, 2007.

 

Plan A - on February 26, 2003 we approvedstock option plan “A” and in the three month period ended March 31, 2003we granted options for 2,971,000 shares under this plan.  At September 30, 2010 there were nooptions outstanding.

 

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 September 30, 2010 there were 150,000options outstanding, all of which were exercisable.

 

14

----

Table ofContents

 

PlanC - on August 15, 2005 we approved stock option plan “C” and between April 1,2005 and June 30, 2006 we granted options for 515,000 shares under thisplan.  Options issued under this planvest in equal one-thirds after employees have been employed for 12, 24 and 36months from the grant date.  At September 30, 2010 there were 85,000options outstanding, all of which were exercisable.

 

PlanD - On July 13, 2006 we approved stock option plan “D” and granted optionsfor 1,375,000 shares under this plan. Options under this plan vest in equal one-thirds after employees havebeen employed for 12, 24 and 36 months from the grant date.  At September 30, 2010 therewere no options outstanding.

 

Plan E - on February 22, 2007 we approved andgranted options for 5,900,000 shares under stock option plan “E”.  Options under this plan vest in equalone-thirds after employees have been employed for 12, 24 and 36 months from thegrant date.  At September 30, 2010there were 790,000 options outstanding, all of which were exercisable.

 

Plan F - on May 16, 2007 we approved andsubsequently granted options for 350,000 shares under stock option plan “F”.  Options under this plan vest in equalone-thirds after employees have been employed for 12, 24 and 36 months from thegrant date.  At September 30, 2010there were 50,000 options outstanding, all of which were exercisable.

 

Plan G - on December 18, 2007 we approved andsubsequently granted options for 3,025,000 shares under stock option plan “G”.  Options under this plan vest in equalone-thirds after employees have been employed for 12, 24 and 36 months from thegrant date.  At September 30, 2010there were 150,000 options outstanding, 100,000 of which were exercisable.

 

Plan H - on June 2, 2008 we approved andsubsequently granted options for 750,000 shares under stock option plan “H”.  Options under this plan vest in equal onethirds after employees have been employed for 12, 24 and 36 months from thegrant date.  At September 30, 2010there were no options outstanding.

 

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 September 30, 2010 108,333 optionswere outstanding, 41,666 of which were exercisable.

 

Plan J - on May 14, 2009 we approved andsubsequently granted options for 7,848,750 shares under stock option plan “J”.  Options under this plan vest in equal onesixths after employees have been employed for 6, 12, 18, 24, 30 and 36 monthsfrom the grant date.  At September 30,2010 there were 6,838,560 options outstanding, 2,406,251 of which wereexercisable.

 

Plan K - on May 20, 2009 we approved andsubsequently granted options for 300,000 shares under stock option plan “K”.  Options under this plan vest in equal onethirds on June 30, 2009, September 30, 2009 and December 31,2009.  At September 30, 2010 therewere 300,000 options outstanding, all of which were exercisable.

 

Plan L - on January 26, 2010 we approved andsubsequently granted options for 100,000 shares under stock option plan “L”.  Options under this plan vest in equal onesixths after employees have been employed for 6, 12, 18, 24, 30 and 36 monthsfrom the grant date.  At September 30,2010 there were 100,000 options outstanding, 16,667 of which were exercisable.

 

*Medicexchangestock option plans*

 

Until March 31, 2010 wehad two stock option plans in Medicexchange. As Medicexchange was divested at this date these plans are no longerpart of MGT Capital investments Inc.

 

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

 

The following assumptionswere used to estimate fair value:

 
| ** **                | ** ** | **Nine months ended  September 30** | ** ** |
|---------------------------|------------|----------------------------------------------------|------------|
| ** **                | ** ** | **2010**                                           | ** ** | **2009** | ** ** |
|                      |       |                                               |       |   |   |
| Dividend  yield           |       | 0                                                  | %          | 0 | % |
| Expected  volatility      |       | 88                                                 | %          | 105 | % |
| Risk-free  rate           |       | 3.96                                               | %          | 3.89 | % |
| Expected  life of options |       | 5.9  years                                         |       | 6.75  years |   |

 

15

----

Table of Contents

 

The following table summarizes stock optionactivity for the nine months ended September 30, 2010:

 
| ** **                             | ** ** | **Outstanding**            | ** ** | **Exercisable**                             | ** ** |
|----------------------------------------|------------|----------------------------|------------|---------------------------------------------|------------|
| ** **                             | ** ** | **Number of  shares** | ** ** | **Weighted-  average  exercise price** | ** ** | **Number of  shares** | ** ** | **Weighted-  average  exercise price** | ** ** |
|                                   |       |                       |       |                                        |       |   |   |   |   |   |   |   |   |
| Outstanding at December 31, 2009  |       | 11,503,359                 |       | £                                      | 0.58       |   | $ | 0.92 |   | 4,605,890 |   | £ | 0.94 |   | $ | 1.50 |   |
|                                   |       |                       |       |                                        |       |   |   |   |   |   |   |   |   |
| Granted                                |       | 100,000                    |       | £                                      | 0.09       |   | $ | 0.14 |   |   |   |   |   |   |   |
| Exercised                              |       | —                     |       | —                                      |       |   |   |   |   |   |   |   |   |
| Forfeited                              |       | (2,156,466                 | )          | £                                      | 1.83       |   | $ | 2.80 |   |   |   |   |   |   |   |
| Transferred with sale of Medicexchange |       | (400,000                   | )          | £                                      | 0.63       |   | $ | 0.97 |   |   |   |   |   |   |   |
|                                   |       |                       |       |                                        |       |   |   |   |   |   |   |   |   |
| Outstanding at September 30, 2010 |       | 9,046,893                  |       | £                                      | 0.29       |   | $ | 0.44 |   | 4,256,252 |   | £ | 0.42 |   | $ | 0.64 |   |

 

The following is a summary of the status of the stockoptions outstanding at September 30, 2010:

 
| ** **                                   | ** ** | **Outstanding options** | ** ** | **Exercisable options**                  | ** ** |
|----------------------------------------------|------------|------------------------------|------------|-----------------------------------------------|------------|
| ** **                                   | ** ** | **Number**                   | ** ** | **Remaining  contractual life  (years)** | ** ** | **Average  exercise price** | ** ** | **Number** | ** ** | **Average exercise  price** | ** ** |
|                                         |       |                         |       |                                          |       |   |   |   |   |   |   |   |   |   |   |
| MGT Capital Investments, Inc. 2007 Plan |       | 475,000                      |       | 7.2                                           |       |   |   | $ | 3.69 |   | 316,668 |   |   |   | $ | 3.69 |   |
| Medicsight Plan A                            |       | —                       |       | 2.2                                           |       | £ | 0.75 |   | $ | 1.15 |   | — |   | £ | 0.75 |   | $ | 1.15 |   |
| Medicsight Plan B                            |       | 150,000                      |       | 3.9                                           |       | £ | 0.75 |   | $ | 1.15 |   | 150,000 |   | £ | 0.75 |   | $ | 1.15 |   |
| Medicsight Plan C                            |       | 85,000                       |       | 5.3                                           |       | £ | 0.75 |   | $ | 1.15 |   | 85,000 |   | £ | 0.75 |   | $ | 1.15 |   |
| Medicsight Plan D                            |       | —                       |       | 5.8                                           |       | £ | 0.83 |   | $ | 1.27 |   | — |   | £ | 0.83 |   | $ | 1.27 |   |
| Medicsight Plan E                            |       | 790,000                      |       | 6.4                                           |       | £ | 0.50 |   | $ | 0.77 |   | 790,000 |   | £ | 0.50 |   | $ | 0.77 |   |
| Medicsight Plan F                            |       | 50,000                       |       | 6.7                                           |       | £ | 0.75 |   | $ | 1.15 |   | 50,000 |   | £ | 0.75 |   | $ | 1.15 |   |
| Medicsight Plan G                            |       | 150,000                      |       | 7.2                                           |       | £ | 1.10 |   | $ | 1.69 |   | 100,000 |   | £ | 1.10 |   | $ | 1.69 |   |
| Medicsight Plan H                            |       | —                       |       | 7.7                                           |       | £ | 0.69 |   | $ | 1.06 |   | — |   | £ | 0.69 |   | $ | 1.06 |   |
| Medicsight Plan I                            |       | 108,333                      |       | 8.3                                           |       | £ | 0.24 |   | $ | 0.37 |   | 41,666 |   | £ | 0.24 |   | $ | 0.37 |   |
| Medicsight Plan J                            |       | 6,838,560                    |       | 8.6                                           |       | £ | 0.09 |   | $ | 0.14 |   | 2,406,251 |   | £ | 0.09 |   | $ | 0.14 |   |
| Medicsight Plan K                            |       | 300,000                      |       | 8.6                                           |       | £ | 0.10 |   | $ | 0.15 |   | 300,000 |   | £ | 0.10 |   | $ | 0.15 |   |
| Medicsight Plan L                            |       | 100,000                      |       | 9.2                                           |       | £ | 0.09 |   | $ | 0.14 |   | 16,667 |   | £ | 0.09 |   | $ | 0.14 |   |

 

On May 14, 2009 we approved Medicsight Plan J.Employees who were employed on May 14, 2009 were given the opportunity toforfeit all their existing options in Plans A through I and, in their place,receive in Plan J 50% of the number of forfeited options.  We accounted for this as a modification ofthe existing options, specifically a cancel and reissue.  Of the options issued in Plan J 3,032,500were issued as new options and 4,816,250 were issued as replacements foroptions cancelled in existing plans.The modificationcharge for the nine months ended September 30, 2010 was $2. In the ninemonths ended September 30, 2009 it was $9.

 

Werecorded the following amounts related to stock-based expenses in the Statementof Operations for the following periods:

 
| ** **                           | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended********September 30,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                           | ** ** | **2010**                                             | ** ** | **2009**                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                 |       |                                                 |       |                                                      |       |   |   |   |   |
| Selling,  general and administrative |       | $                                                    | (360       | )                                                         | $          | 470 |   | $ | 470 |   | $ | 1,427 |   |
|                                 |       |                                                 |       |                                                      |       |   |   |   |   |
| Research  and development            |       | 10                                                   |       | 14                                                        |       | 45 |   | 78 |   |
|                                 |       |                                                 |       |                                                      |       |   |   |   |   |
| Discontinued  operations             |       | —                                               |       | 14                                                        |       | 11 |   | 22 |   |
|                                 |       |                                                 |       |                                                      |       |   |   |   |   |
| Total                                |       | $                                                    | (350       | )                                                         | $          | 498 |   | $ | 526 |   | $ | 1,527 |   |

 

16

----

Table ofContents

 

Of the $526 and $(350) stock-based expense, in thenine and three months ended September 30, 2010 respectively, $261 and $(76)correspondingly was allocated to thenon-controlling interest. The credit in the 3 months ended September 30,2010 is a result of Tim Paterson-Brown and Allan Rowley forfeiting their MGTCapital Investments Inc. stock options (See note 12). 1,500,000 options wereforfeited in total; of these, 1,000,000 options had already vested. The chargefor the remaining 500,000 was reversed and amount to $751.

 

Nocompensation costs were capitalized.

 

Theaggregate intrinsic value for options outstanding and exercisable at September 30,2010 was $nil.

 

Asummary of non-vested options at September 30, 2010 and the change duringthe nine months ended September 30, 2010 is presented below:

 
| ** **                             | ** ** | **Number of  Options** | ** ** | **Weighted Average  Grant Date Fair  Value** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|-------------------------------------------------------------|------------|
|                                   |       |                        |       |                                                        |       |   |   |
| Non-vested  at January 1, 2010    |       | 6,897,469                   |       | £                                                      | 0.31       |   | $ | 0.49 |   |
| Granted                                |       | 100,000                     |       | £                                                      | 0.04       |   | $ | 0.07 |   |
| Vested                                 |       | (1,450,996                  | )          | £                                                      | 0.23       |   | $ | 0.35 |   |
| Forfeited                              |       | (755,832                    | )          | £                                                      | 0.81       |   | $ | 1.24 |   |
| Non-vested  at September 30, 2010 |       | 4,790,641                   |       | £                                                      | 0.25       |   | $ | 0.38 |   |

 

At September 30, 2010 there was $1,403 of total unrecognized compensation cost related to non-vestedstock-based compensation arrangements granted under the option plans.Non-vestedawards are expected to be recognized over a weighted average period of 1.64years.

 

**11.  Non-controlling interest**

 

The Company has non-controlling investors inMedicsight and, prior to its disposal, in Medicexchange as follows:

 
| ** **                                           | ** ** | **Medicsight** | ** ** | **Discontinued  operations  of ****Medicexchange** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|----------------|------------|---------------------------------------------------------|------------|-----------|------------|
|                                                 |       |           |       |                                                    |       |      |       |
| Non-controlling interest at January 1, 2010     |       | $              | 11,150     |                                                    | $          | 254       |       | $ | 11,404 |   |
| Non-controlling share of (losses)                    |       | (2,625         | )          | (14                                                     | )          | (2,639    | )          |
| Non-controlling share of stock-based expense         |       | 258            |       | 3                                                       |       | 261       |       |
| Non-controlling share of other comprehensive  (loss) |       | (110           | )          | (10                                                     | )          | (120      | )          |
| Disposal of Medicexchange                            |       | —         |       | (233                                                    | )          | (233      | )          |
| Non-controlling interest at September 30,  2010 |       | $              | 8,673      |                                                    | $          | —    |       | $ | 8,673 |   |

 

**12.  Related Party Transactions**

 

Accsys Technologies

 

Tim Paterson-Brown, our Chief Executive Officer,was a non-executive director of Accsys Technologies plc, but resigned from thisposition on April 6, 2010.  AccsysTechnologies plc has a subsidiary company Titan Wood Limited, which rents spacein 66 Hammersmith Road.  In the ninemonth period ended September 30, 2010 and 2009 respectively, £89 ($140)and £117 ($194) of office related costs were recharged to Titan WoodLimited.  At September 30, 2010there was a balance receivable from Titan Wood Limited of £43 ($68) of which£43 ($68) remains unpaid as of October 30, 2010.  This is payable within 30 days under theterms of the invoice.

 

Moneygate Group

 

In Fiscal 2009 we purchased 49% of the sharecapital of Moneygate Group Limited (“Moneygate”).  Moneygate is a related party as we havesignificant influence over it and have representation on the board ofdirectors.  On acquisition we providedloan facilities of £250 ($395) for working capital and £2,000 ($3,162) foracquisitions. During the nine months ended September 30, 2010 we allowed aportion of the acquisition facility to be used for working capital asacquisitions have been delayed. 

 

17

----

Table ofContents

 

On, August 3, 2010 Moneygateagreed to convert all monies advanced to date £1,247 ($1,888) and future moniesup to £2,000 ($3,162) in total in to convertible loan notes. On August 3, 2010MGT Capital Investments Limited, a company incorporated in England and Wales(“MGT UK”), and a wholly owned subsidiary of MGT Capital Investments, Inc.,entered into an agreement with an unrelated third party for the sale of itsMoneygate convertible loan note of £2,000 ($3,162). 

 

Under the terms of the its agreement with Moneygate,the Company advanced additional working capital funding. At September 30, 2010,£900 ($1,423) had been advanced for working capital and £410 ($648) foracquisitions.  In October 2010,additional funding was advanced to Moneygate and as at October 31, 2010 £1,025($1,620) had been advanced for working capital and £460 ($727) for acquisitions.  

 

Under the terms of the convertible note salediscussed above these additional funds would have been sold as part of theconvertible loan sale. 

 

On November 18, 2010, the previously executed agreement to sell theMoneygate convertible loan notes of up to £2,000 ($3,162) to a third party wasterminated. Concurrent with the termination the Company amended its convertibleloan with Moneygate to remove the convertible feature and fix its amountrepayable at £1,485 ($2,305) with no future advances. The amended loanagreement is repayable on or before 2 years after the effective date. The loanwill accrue 5% interest per annum and is secured by a debenture over the assetsof Moneygate. 

 

The Company engaged an outside valuation firm to perform a valuation onthe Company’s investment and loan note receivable from Moneygate. This reportconcluded that on the scenario of Moneygate being unsuccessful in raisingadequate finance then the value of the Company’s loan note receivable fromMoneygate was £199 ($315). On this basis we have impaired the carrying value ofthe loan notes receivable to this amount.

 

Dunamis

 

Allan Rowley, ChiefFinancial Officer of MGT Capital investments Inc. and Chief Executive Officerof Medicsight, along with David Sumner, the Chairman of Medicsight, are bothdirectors of Dunamis Capital. Dunamis Capital (www.dunamis-capital.com) is aUnited Arab Emirates (UAE) registered company regulated by the Dubai FinancialServices Authority (DFSA). Dunamis Capital is provider of global investmentbanking and private wealth management services to the small and mid-capenterprises sector and related investment community. Dunamis focuses on theemerging markets spanning the Middle East, North African and South Asian region(Menasa), sub-Saharan Africa and Asia. Dunamis’s head office is located in theUAE, with additional presence in the UK and China. Dunamis is 100% owned byDavid Sumner and was set up by David with Allan Rowley’s financial consulting assistanceas a corporate financing and advisory firm to theMiddle East and North African region. On September 6, 2010, Medicsightmade a short term loan of $1,100 (£696) to Dunamis Capital which is to be repaidby December 31, 2010, along with $36 (£23) of interest. As of September 30,2010 interest of $7 (£5) has been accrued. The funds were lent to Dunamis inorder to achieve a higher rate of interest than we would have on deposit with afinancial institution and also to demonstrate Medicsight’s financial ability toco-invest with a joint venture in the region using one of its UAE subsidiaries.Dunamis Capital has provided the assets of the business as collateral againstthe loan made by Medicsight.

 

D4D Limited

 

Effective July 6,2010, the Company entered into a service agreement with D4D Limited (a Companythat offers Executive Services for small and mid-cap companies).  D4D isowned by Tim Paterson-Brown and Allan Rowley, and pursuant to the agreement,D4D provides the services of Tim Paterson-Brown (as Chairman and ChiefExecutive Officer) and Allan Rowley (as Chief Financial Officer) to the Companyon similar remuneration to the previous employment contracts.  D4D alsoprovides services to other companies.

 

Onexecuting the contract with D4D Limited on July 6, 2010 Tim Paterson-Brownand Allan Rowley terminated their employment contracts with the Company andforfeited their stock options in MGT Capital investments Inc., but still holdthe offices of Chairman and Chief Executive Officer and Chief Financial Officerrespectively.  In the three months endingSeptember 30, 2010, MGT Capital Investments paid D4D Limited £110 ($174) inrelation to the above service agreement.

 

18

----

Table ofContents

 

**13.  Commitments**

 

*LeaseCommitments and Security 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, UnitedKingdom.  Under this lease agreement ourUK property rent, services and related costs are approximately £330 ($522) perannum, paid quarterly in advance.  Wehave the right to terminate this agreement on the expiry of the fifth year ofthe lease at the option of the company. Our annual rent is subject to 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 leaseas an operating lease and have accounted for the lease rental expenses on astraight-line basis over the period of the lease.

 

We also have a satellite office in Tokyo, Japan,with a two-year rental agreement that began in March 2010.

 

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,** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|
| 2010 (remaining three months)               |       | $          | 126        |   |
| 2011                                        |       | 325        |       |
| 2012                                        |       | 25         |       |
| 2013                                        |       | 2          |       |
| 2014                                        |       | —     |       |
| Later years                                 |       | —     |       |
| **Total minimum**                           |       | $          | 478        |   |

 

Thetotal lease rentalexpense for the nine months ended September 30, 2010 was £364 ($575)compared to £390 ($601) at September 30, 2009.

 

*Other commitments*

 

In July 2008 we entered into an agreement witha partner to develop interfaces for our software.  We have committed to pay Euros 1,445 ($1,967)over an expected thirty-six month period. As at September 30, 2010 we havepaid Euros 845 ($1,150).  These paymentswill be recovered against future royalty payments, should the products besuccessfully commercialized.  Thesepayments have been expensed to the income statement and classified as researchand development. In August 2010 the agreement was varied to include certain triggersto be achieved before moving onto the next stage of development.

 

**14.  Subsequent Events**

 

On November 19, 2010 MGT Capital Investments, Inc.,announced that it has approved the following. The Company has entered into a Stock Purchase Agreement with LaddcapValue Partners III LP (“Laddcap”). Pursuant to the terms of the agreement, Laddcap has agreed to purchase6,500,000 shares of Common Stock of the Company for $1,300,000 or $0.20 pershare payable on meeting of the closing conditions.  The Common Stock that Laddcap is purchasingwill constitute approximately 16.7% of the issued and outstanding Common Stockof the Company.  In addition, Laddcapwill receive a five year warrant to purchase an additional 6,500,000 shares ofthe company at an exercise price of $0.20 per share. The closing of the Laddcaptransaction is subject to regulatory approval.

 

EffectiveNovember 19, 2010, the Company amended its agreement with D4D Limited. Theamendment confirms the commitments of MGT Capital Investments post closing ofthe Laddcap Value Partners III LLC stock purchases agreement.

 

19

----

Table ofContents

 

**Item 2.                   Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

The terms “MGT”, “theCompany”, “we”, “our” and “us” refer to MGTCapital Investments, Inc. and its subsidiaries, as a consolidated entity,unless the context suggests otherwise.

 

This quarterly report on Form 10-Q containsforward-looking statements made in reliance upon the safe harbor provisions of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended. These statements may be identified by the use of words such as “anticipate”,“estimates”, “should”, “expect”, “guidance”, “project”, “intend”, “plan”, “believe”and other words and terms of similar meaning, in connection with any discussionof our financial statements, business, results of operations, liquidity andfuture operating or financial performance. Please also refer to our “Note Regarding Forward Looking Statements” atthe front of this Form.

 

**Executive summary**

 

On November 19, 2010 MGT Capital Investments, Inc.,announced that it has approved the following. The Company has entered into a Stock Purchase Agreement with LaddcapValue Partners III LP (“Laddcap”). Pursuant to the terms of the agreement, Laddcap has agreed to purchase6,500,000 shares of Common Stock of the Company for $1,300,000 or $0.20 pershare.  The Common Stock that Laddcap ispurchasing will constitute approximately 16.7% of the issued and outstandingCommon Stock of the Company.  Inaddition, Laddcap will receive a five year warrant to purchase an additional6,500,000 shares of the company at an exercise price of $0.20 per share. Theclosing of the Laddcap transaction is subject to regulatory approval.

 

As of March 31,2010, following a detailed strategic review we reduced our on-going operatingcost base and disposed of our investments in Medicexchange, XShares, Hipcricketand Eurindia. We continue to hold 49% of the equity in Moneygate and followinga deed of release for the convertible loan note sale has consolidated our loanposition with a new agreement. No further funds will be advanced to Moneygate. Inthe short term, we will primarily be focusing our cash and resources on ourinvestment holding in Medicsight plc. Medicexchange’s results have beenclassified as discontinued operations.

 

The Company achieved the following results in thenine months ended September 30, 2010:

 

·                              Revenue from license and other sales was $388 compared to $146 in 2009.Gross profit on revenues was $273 compared with $146 in 2009.

 

·                              other operating expenses, excluding the 2009 impairment of goodwill,decreased 39% to $7,862 compared to $12,846 in 2009.

 

·                              Net loss attributable to MGT Capital Investments, Inc. decreased 69% to $6,852 and resulted in a loss per share from continuing operations of$0.20 compared to a net loss of $21,770 and net loss per share from continuingoperations of $0.64 in 2009.

 

Revenue remains limited as we await regulatoryapprovals in what we consider to be our key markets of the USA and Japan. Withregards to regulatory approvals for ColonCAD, we received a second request forAdditional Information (AI) from the FDA in January 2010.   After working closely with the clinical,statistical and legal advisors, the Company sent a comprehensive response tothe FDA on June 2, 2010.  We arecurrently awaiting feedback from the FDA on the status of the application. Wealso await a further update from the Ministry of Health, Labour and Welfare(MHLW) regulatory authorities in Japan.

 

Operating costs, excluding the goodwill impairmentthat impacted the consolidated statement of operations in the first quarter ofFiscal 2009, have decreased by 39%.  Thiswas predominantly due to two headcount reductions that Medicsight took inFiscal 2009, the impact of which is being fully felt in the first nine monthsof Fiscal 2010.  Together with reducedstaff costs, a focus on reducing other expenses has reduced our discretionaryspending.

 

20

----

Table ofContents

 

Our investment in Moneygate is accounted for by theequity method, and is currently generating net losses. The investment has beenreduced to £199 ($315).

 

Net loss from Medicexchange amounted to $234, whichis accounted for in discontinued operations together with a gain on sale of$149, and will not occur in the future.

 

The significant reduction in net loss was due tothe impairment of $12,157 of goodwill relating to Medicsight in the firstquarter of Fiscal 2009.

 

We have cash and cash equivalents of $10,569compared to $22,165 as of December 31, 2009.  The decrease is mainly attributable to cashused in operating activities ($7,530) and loans ($2,572) to related parties.

 

On September 6,2010, Medicsight made a short term loan of $1,100 (£696) to Dunamis Capitalwhich is to be repaid by December 31, 2010, along with $36 (£23) ofinterest. As of September 30, 2010 interest of $7 (£5) has been accrued.The funds were lent to Dunamis in order to achieve a higher rate of interestthan we would have on deposit with a financial institution and also todemonstrate Medicsight’s financial ability to co-invest with a joint venture inthe region using one of its UAE subsidiaries. Dunamis is 100% owned by DavidSumner and was set up by David with Allan Rowley’s financial assistance as acorporate financing and advisory firm to the Middle East and North Africanregion. David Sumner is the Chairman of Medicsight and Allan Rowley is theChief Financial Officer of MGT Capital Investments Inc. and Chief ExecutiveOfficer of Medicsight.

 

The Company engaged an outside valuation firm to perform a valuation onthe Company’s investment and loan note receivable from Moneygate. This reportconcluded that on the scenario of Moneygate being unsuccessful in raisingadequate finance then the value of the Company’s loan note receivable fromMoneygate was £199 ($315). On this basis we have impaired the carrying value ofthe loan notes receivable to this amount.

 

**Critical accounting policies andestimates**

 

Our discussion and analysisof financial condition and results of operations are based upon ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States of America (“GAAP”).The notes to the consolidated financial statements contained in this QuarterlyReport describe our significant accounting policies used in the preparation ofthe consolidated financial statements. The preparation of these financialstatements requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting periods. Actual resultscould differ from those estimates. We continually evaluate our criticalaccounting policies and estimates.

 

We believe the criticalaccounting policies listed below reflect significant judgments, estimates andassumptions used in the preparation of our consolidated financial statements.

 

*Revenue Recognition*

 

*Medicsight*

 

We recognize revenue when it is realized orrealizable and earned.  We considerrevenue realized or realizable and earned when we have persuasive evidence ofan arrangement, the product has been shipped or the services have been providedto the customer, the sales price is fixed or determinable and collectability isprobable.

 

Software — License fee revenue is derived from thelicensing of computer software. Maintenance revenue is derived from software maintenance.  Our software licenses are generally sold aspart of an arrangement that includes maintenance and support.

 

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

 

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

 

Revenue from license fees is recognized whennotification of shipment to the end user has occurred, there are no significantCompany obligations with regard to implementation and the Company’s servicesare not considered essential to the functionality of other elements of thearrangement.

 

21

----

Table ofContents

 

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

 

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

 

Hardware — Revenueis derived from the sale of our MedicCO2LON product. This product is an automated CO2 insufflation device, and is generally sold as partof an arrangement that includes a one year warranty. The risk of incurringwarranty related expense is mitigated by the warranty contractually agreed withthe supplier. The company will review the risk of warranty liabilities on aregular basis, and will make any and all appropriate provisions accordingly. Atthe present time, the company feels that the warranty liability isinsignificant and has therefore not made any provision.

 

MedicCO2LONis sold exclusively through our distribution partner MEDRAD Inc. Revenue isrecognized as goods and orders are satisfied and goods are delivered to ourdistribution partner. We generally offer terms which require payments within 45days from invoicing.

 

*Equity-basedcompensation*

 

We recognize compensation expense for allequity-based payments.  Under fair valuerecognition provisions, we recognize equity-based compensation net of anestimated forfeiture rate and recognize compensation cost only for those sharesexpected to vest over the requisite service period of the award.

 

The fair value of each option award is estimated onthe date of grant using the Black-Scholes option valuation model.  The Black-Scholes option valuation modelrequires the development of assumptions that are input into the model.  These assumptions are the expected stockvolatility, the risk-free interest rate, the option’s expected life and thedividend yield on the underlying stock. Expected volatility is calculated basedon the historical volatility of our common stock over the expected option lifeand otherappropriate factors.  Risk-free interest rates are calculated basedon continuously compounded risk-free rates for the appropriate term.  The dividend yield is assumed to be zero aswe have never paid or declared any cash dividends on our common stock and donot intend to pay dividends on our common stock in the foreseeable future.  The expected forfeiture rate is estimatedbased on historical experience.

 

Determining the appropriate fair value model andcalculating the fair value of equity-based payment awards require the input ofthe subjective assumptions described above. The assumptions used in calculating the fair value of equity-basedpayment awards represent management’s best estimates, which involve inherentuncertainties and the application of management judgment.  As a result, if factors change and we usedifferent assumptions, our equity-based compensation expense could bematerially different in the future.  Inaddition, we are required to estimate the expected forfeiture rate andrecognize expense only for 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.

 

*Researchand development*

 

We incur costs incurred in connection with thedevelopment of software products that are intended for sale.  Costs incurred prior to technologicalfeasibility being established for the product are expensed as incurred.  Technological feasibility is established uponcompletion of a detail program design or, in its absence, completion of aworking model.  Thereafter, all softwareproduction costs are capitalized and subsequently reported at the lower ofunamortized cost or net realizable value. Capitalized costs are amortized based on current and future revenue foreach product with an annual minimum equal to the straight-line amortizationover the remaining estimated economic life of the product.  Amortization commences when the product isavailable for general release to customers.

 

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

 

*Fair value of financialinstruments*

 

On January 1, 2008 the Company adopted certainprovisions of FASB ASC 820, Fair Value Measurements and Disclosures, forfinancial assets and financial liabilities and on January 1, 2009 fornon-financial assets and non-financial liabilities.  This 

 

22

----

Table of Contents

 

establishes a framework for measuring fair valueand expands disclosure about fair value measurements.  Applying fair value measurements to ourfinancial instruments requires management’s judgment, especially when usingLevel 2 and Level 3 inputs.

 

*Investments*

 

Investments in various corporations where ourinvestment is less than 20% of issued share capital are accounted for under thecost method.  Investments where we holdbetween 20% and 50% of issued share capital and we have significant influenceover the investee are accounted for under the equity method.

 

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

 

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

 

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

 

Impairment analyses were performed at variouspoints of the year ended December 31, 2009 and the Company decided tofully impair goodwill relating to Medicsight, its investment in XShares (boththe equity and the convertible loan notes), and its holding in Eurindia.

 

**Recent accounting pronouncements**

 

In October 2009 the Financial AccountingStandards Board (“FASB”) issued an update to Accounting Standards Codification(“ASC”) Topic 605, Revenue Recognition, with regards to multiple-deliverablearrangements.  The update is effectivefor revenue arrangements entered into on or after June 15, 2010.  We do not expect theadoption of this update to have a material impact on our financial position orresults of operations.

 

In October 2009 the Financial AccountingStandards Board (“FASB”) issued an update to Accounting Standards Codification(“ASC”) Topic 985, Software, with regards to certain revenue arrangements thatinclude software elements.  The update iseffective for revenue arrangements entered into on or after June 15,2010.  We do not expect theadoption of this update to have a material impact on our financial position orresults of operations.

 

InDecember 2009 the FASB issued an update to ASC Topic 810, Consolidations,with regards to improvements to financial reporting by enterprises involvedwith variable interest entities.  The adoption ofthis update has not had a material impact on our financial position or resultsof operations.

 

InApril 2010 the FASB issued an update to ASC Topic 605, Milestone Method ofRevenue Recognition, relating to research and development projects. Theamendments in the ASU are effective on a prospective basis for milestonesachieved in fiscal years, and interim periods within those years, beginning onor after June 15, 2010. We do not expect the adoption of this update tohave a material impact on our financial position or results of operations.

 

In August 2010, the Financial AccountingStandards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-21,Accounting for Technical Amendments to Various SEC Rules and Schedules.ASU 2010-21 amends various SEC paragraphs in the FASB Accounting StandardsCodification pursuant to SEC Final Rule, Technical Amendments to Rules, Forms,Schedules and Codification of Financial Reporting Policies. The Company doesnot expect the provisions of ASU 2010-21 to have a material effect on thefinancial position, results of operations or cash flows of the Company.

 

In August 2010, the FASB issued ASU 2010-22,Accounting for Various Topics. ASU 2010-22 amends various SEC paragraphs in theFASB Accounting Standards Codification based on external comments received andthe issuance of Staff Accounting Bulletin (“SAB”) No. 112, which amends orrescinds portions of certain SAB topics. The Company does not expect theprovisions of ASU 2010-22 to have a material effect on the financial position,results of operations or cash flows of the Company.

 

23

----

Table of Contents

 

**Results of operations**

 

**ParentHolding Company operating results**

 

Operatinglosses in the parent holding company for the nine months ended September 30,2010, are $1,995 (2009: $14,817). For the three months ended September 30, 2010are $78 (2009: $1,188). For the nine months end September 30, 2010, the largestitems of operating expense are people costs, $677, legal and professional Fees,$716, and insurance, $157. In the period, $1,711 was provided for in relationto the Moneygate loan. These appear below operating loss in the consolidatedstatement of operations.

 

**Medicsight operating results**

 
| ** **                                                 | ** ** | **Nine months ended September 30,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
|                                                       |       |                                                    |       |   |   |
| Revenue                                                    |       | $                                                       | 388        |   | $ | 146 |   |
| Cost of revenue                                            |       | (115                                                    | )          | — |   |
| Selling, general and administration costs                  |       | (5,040                                                  | )          | (8,516 | ) |
| Research and development                                   |       | (1,100                                                  | )          | (1,670 | ) |
| Operating expense                                          |       | (6,140                                                  | )          | (10,186 | ) |
| Stock-based compensation (included in operating  expenses) |       | (581                                                    | )          | (865 | ) |
| Operating loss                                             |       | (5,867                                                  | )          | (10,040 | ) |
| Interest and other income (expense)                        |       | (5                                                      | )          | 466 |   |
|                                                            |            |                                                         |            |  |  |  |  |

 
| ** ** | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|------------|------------|----------------------------------|------------|---------------------------------|------------|
|       |       |                             |       |                            |       |
| Cash       |       | $                                | 10,141     |                            | $          | 22,709 |   |
| Net assets |       | 11,062                           |       | 21,519                          |       |
|            |            |                                  |            |                                 |            |  |  |

 

In the nine months ended September 30, 2010sales of our CAD products were flat compared to the comparable period in theprior year.  Licenses have been sold inEurope but we have yet to receive approvals in the USA and Japan, which weconsider to be our key markets.

 

In the nine months ended September 30, 2010Medicsight launched MedicCO2LON,its insufflator product.  It also signedan agreement with a global medical devices company to distribute MedicCO2LON.  In the nine months ended September 30,2010, revenue of $215 had been recognized through MedicCO2LON sales.  Cost of revenue forthe period was $115.

 

With regards to regulatory approvals we received asecond request for Additional Information (AI) from the FDA in January 2010.After working closely with clinical, statistical and legal advisors, theCompany sent a comprehensive response to the FDA on June 2, 2010.  We are in regular dialogue and continue towork closely with our FDA review team. We also work closely with our reviewersat the Japanese Ministry of Health, Labour and Welfare (MHLW).

 

Our operatingexpenses have reduced from $10,186 in 2009 to $6,140 in 2010. Due to the delaysin receiving regulatory approvals in Japan and the USA, Medicsight’s managementmade the decision in Fiscal 2009 to reduce headcount and streamline operations,but without jeopardizing longer term research, product development or clinicalactivities. The effects of these decisions are now being reflected in thestatement of operations with a significantly lower cost base.

 

Research and development is made up of staff, staffrelated consultancy, stock options and product development software costsexpensed on the research and development of Medicsight’s products.  This has decreased compared to thecomparative periods in 2009 due to the reduction in headcount.

 

In the nine months ended September 30, 2010stock option accounting charges fell as Medicsight employed fewer people thanin the same period in the prior year.

 

Interest and other income reduced as Medicsight’scash balances were lower than in 2009 due to cash spent in operations.

 

**Other investments**

 

*Moneygate*

 

On October 8, 2009 we invested a nominal sumin Moneygate Group Limited (“Moneygate”), a UK based Independent FinancialAdvisor (“IFA”), and acquired 49% of its share capital.  We also provided a £250 ($395) working capitalfacility and an acquisition facility of £2,000 ($3,162) facility foracquisitions.  As of December 31, 2009the working capital facility had been fully drawn down as had £100 ($158) ofthe acquisition facility in anticipation of a potential acquisition thateventually did not occur.

 

Moneygate’s business plan is predicated onacquisition-based growth in the fragmented UK IFA market, and we have providedit with the capital to expand.  In theperiod ended September 30, 2010, Moneygate has completed the acquisition of asmall IFA

 

24

----

Table of Contents

 

company, thus increasing the number of IFAsemployed.  Its management continues toreview a number of further potential acquisitions and hopes to complete thesein the near future.

 

In Q2 2010, Moneygatereceived a verbal offer for financing from a London based finance house, thatwould provide Moneygate with next round finance.  Based on this verbal offer Moneygate agreedto convert all monies advanced to date £1,247 ($1,888) and future monies up to£2,000 ($3,162) in total in to convertible loan notes. On August 3, 2010 MGTCapital Investments Limited, a company incorporated in England and Wales (“MGTUK”), and a wholly owned subsidiary of MGT Capital Investments, Inc., enteredinto an agreement with an unrelated third party (who also relied on the verbalassurances of external financing in to Moneygate) for the sale of its Moneygateconvertible loan note of £2,000 ($3,162). 

 

Under the terms ofthe above agreement MGT Capital Investments Limited further advanced workingcapital funding and as at September 30, 2010, £900 ($1,423) had been advancedfor working capital and £410 ($648) for acquisitions.  The additional funds would be offset againstthe staged payments of the £2,000 ($3,162) loan note sale.

 

In October 2010,additional funding was advanced to Moneygate and as at October 31, 2010 £1,025($1,620) had been advanced for working capital and £460 ($727) foracquisitions.

 

The London financehouse was unable to complete its financing with Moneygate.  The third party had relied on the assurancesfrom the London finance house, and had the legal opinion that the contract hadnot completed.  In order to avoid thethreat of possible legal ramifications and to remove the prospect of theCompany continuing to finance Moneygate, on November 18, 2010, the previouslyexecuted agreement to sell the Moneygate convertible loan notes of up to £2,000($3,162) to a third party was renegotiated. Following deeds of release betweenMGT Capital Investments Limited and Moneygate; and MGT Capital InvestmentsLimited and the third party; MGT Capital investments Limited extended a loanagreement to Moneygate to fix its amount repayable at £1,485 ($2,305). Thisloan agreement is repayable on or before 2 years from November 18, 2010. Theloan will accrue 5% interest per annum and is secured by a debenture over theassets of Moneygate. No further monies will be advanced to Moneygate.

 

Moneygate are in theprocess of a financing, and are at different stages of discussions with anumber of potential investors. For the period ended September 30, 2010 theCompany impaired the value of the loan receivable to £199 ($315). ShouldMoneygate be successful in its fund raising, the Company may receive more thanthe £199 ($315) carrying value amount. 

 

As Moneygate isaccounted for by the equity method and is currently generating net losses,Moneygate’s results are not reflected in the Consolidated Statement ofOperations or the Consolidated Balance Sheets.

 

Moneygate isclassified as a related party because the Company has representation on itsboard of directors.

 

*Eurindia Limited*

 

In 2000 MGT invested in Eurindia Limited (“Eurindia”),a UK company that invested in IT start-up companies.  MGT had a 6% holding in Eurindia andaccounted for this investment on a cost basis. As of December 31, 2009 this investment had been fullyimpaired.  On March 31, 2010 wedisposed of all of our holding in Eurindia for $1.

 

*XShares Group*

 

In 2007 and 2008 we invested $3,000 in Series Cpreferred shares of XShares Group, Inc. (“XShares”), an investment advisorthat creates, issues and supports exchange traded funds with a particularhealthcare specialty.  In the year ended December 31,2009 the Company invested $2,000 in XShares convertible notes with a principalof $2,100.  As of December 31, 2009the equity investment and the convertible notes had been fully impaired. On March 31,2010 we disposed of all of our equity holdings in XShares for $1 and theconvertible notes for $1 resulting in a total gain on sale of $2.

 

*HipCricket Inc.*

 

In Fiscal 2007 we invested $2,000 in HipCricketInc., a company engaged in mobile marketing. In the year ended December 31, 2009 HipCricket Inc. was delistedfrom the AIM Market and we accounted for it as an investment held at cost.  As of December 31, 2009 the investmentwas held at a book value of $224.  On March 31,2010 we disposed of all of our holding in HipCricket for $205.

 

*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 September 30, 2010 Medicsight’s shareprice was £0.04 ($0.07) compared to £0.08 ($0.13), as of December 31,2009.  This valued the holding at £3,655($5,778), compared to £6,794 ($10,821) as of December 31, 2009.

 

25

----

 

Table of Contents

** **

**Liquidity and capital resources**

 

*Working capital information*

 
| ** **                                     | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **Working capital summary**                    |       |                         |       |                        |       |
| Cash and cash equivalents                      |       | $                            | 10,569     |                        | $          | 22,165 |   |
| Current assets                                 |       | 13,116                       |       | 23,385                      |       |
| Current liabilities                            |       | (1,508                       | )          | (2,244                      | )          |
| Working capital surplus                        |       | $                            | 11,608     |                        | $          | 21,141 |   |
| Ratio of current assets to current liabilities |       | 8.7                          |       | 10.4                        |       |

 
| ** **                                             | ** ** | **Nine months ended September 30,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                             | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| **Cash flow summary**                                  |       |                                                    |       |   |   |
| Cash (used for) provided by                            |       |                                                    |       |   |   |
| Operating activities                                   |       | $                                                       | (7,530     | ) | $ | (11,250 | ) |
| Investing activities                                   |       | (3,374                                                  | )          | (1,074 | ) |
| Discontinued operations – operating activities    |       | (226                                                    | )          | (633 | ) |
| Effects of exchange rates on cash and cash equivalents |       | (466                                                    | )          | 1,576 |   |
| Net cash flow                                          |       | $                                                       | (11,596    | ) | $ | (11,381 | ) |

 

Our cash and cash equivalents have decreased during2010 predominantly because of the $7,530 used in operating activities, andloans ($2,572) issued to related parties. Our net cash used in operating activities differs from net losspredominantly because of various non-cash adjustments such as stock-basedcompensation and movements in working capital.

 

Included in investing activities is a further$1,472 advanced to Moneygate, with $1,005 for the working capital facility and$467 for the acquisition facility.

 

Also included in investing activities is a shortterm loan made to Dunamis Capital of $1,100 (£696) which will be repaid by December 31, 2010,along with $36 (£23) interest. As of September 30, 2010 interest of $7(£5) has been accrued. The funds were lent to Dunamis in order to achieve ahigher rate of interest than we would have on deposit with a financialinstitution and also to demonstrate Medicsight’s financial ability to co-investwith a joint venture in the region using one of its United Arab Emirate (UAE)subsidiaries.

 

Medicexchange was sold during the nine months endedSeptember 30, 2010 and $1,101 of cash was disposed of as part of thistransaction, which is included within investing activities. For considerationof this sale along with other assets sold at the same time MGT was due toreceive 4 installments totaling £750 ($1,136). As ofSeptember 30, 2010 £250 ($382) had been received. The thirdpayment installment in the original agreement was due on August 30, 2010.At the request of the third party, and in discussion and negotiation withmanagement, it was agreed that the remaining installments would be modified. The revised agreement now includes the following payment installments;October 30, 2010, £75 ($113); December 15, 2010, £175 ($265); and February 28,2011, £250 ($379).

 

TheOctober 30, 2010 payment has been received and the next payment is due on December 15,2010. As compensation for delaying the third installment payment, the lastpayment will be received one month earlier than in the original agreement.

 

Our ratio of current assets to current liabilitiesremains strong at 8.7.  This is a resultof the $10,569 of cash held in the Company.

 

*Moneygate acquisition facility*

 

Following deeds of release between MGT Capital Investments Limited andMoneygate; and MGT Capital Investments Limited and the third party; MGT Capitalinvestments Limited extended a loan agreement to Moneygate to fix its amountrepayable at £1,485 ($2,305). This loan agreement is repayable on or before 2years after the effective date. The loan will accrue 5% interest per annum andis secured by a debenture over the assets of Moneygate. No further monies willbe advanced to Moneygate.

 

26

----

Table ofContents

 

*Risks and uncertainties relatedto 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 willhave access to the capital markets in the future, or that financing will beavailable on acceptable terms to satisfy our cash requirements to implement ourbusiness strategies.

 

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

 

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 our stockholders that our technology and products willbe commercialized successfully, or that if so commercialized, that revenueswill be sufficient to fund our operations.

 

If adequate funds are not available to us, we maybe required 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.

 

*Commitments*

 

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

 

Under this lease agreement our UK property rent,services and related costs will be approximately £330 ($522) per annum, paidquarterly in advance.  We have the rightto terminate this agreement on the expiration of the fifth year of thelease.  Our annual rent is subject toupward 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 a satellite office in Tokyo (Japan) with atwo year rental agreement.

 

In July 2008 we entered into an agreement witha partner to develop interfaces for our software.  We have committed to pay Euros 1,445 ($1,967)over an expected thirty-six month period. As at September 30, 2010 we have paid Euros 845 ($1,150).  These payments will be recovered againstfuture 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      |       | $                                         | 478        |   | $ | 126 |   | $ | 350 |   | $ | 2 |   |
| Purchase obligations             |       | 817                                       |       | 817 |   | — |   | — |   |
|                             |       |                                      |       |   |   |   |   |   |   |
| Total                            |       | $                                         | 1,295      |   | $ | 943 |   | $ | 350 |   | $ | 2 |   |

 

**Recent accounting pronouncements**

 

There are no recent accounting pronouncements thathave not yet been adopted that the Company believes may have a material impacton its consolidated financial statements

 

27

----

Table ofContents

 

**Item 3.**                   **Quantitative and qualitative disclosures about market risk**

 

*Interest**rate risk*

 

Our exposure to market rate risk for changes ininterest rates relates primarily to our investment portfolio.  We place our investments in a mixture of cashdeposits and available-for-sale market securities.  A one percent movement in interest rate wouldresult in approximately $106 change in interest income.

 

We do not have any debt and we do not usederivative financial instruments.

 

*Foreign exchange risk*

 

We are exposed to foreign currency exchange ratefluctuations related to the operation of our international subsidiaries.  Our main operating currency is UKsterling.  We also have a subsidiaryoperation in Japan that operates in Yen.

 

Our operating costs in Fiscal 2010 werepredominantly in UK sterling; we do not foresee any change in the remainder of2010.  A ten percent increase or decline inthe US dollar exchange rate against all foreign currencies would have created adecrease or increase in our operating costs in the nine months ended September 30,2010 of approximately $795.

 

At the end of each reporting period, expenses ofthe subsidiaries are converted into US dollars using the average currency ratein effect for the period and assets and liabilities are converted into USdollars using the exchange rate in effect at the end of the period.

 

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

 

We currently do not hedge against this foreigncurrency risk.

 

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

 

28

----

Table ofContents

 

**Item 4.                   Controls and procedures**

 

*Evaluation of disclosure controlsand procedures*

 

Management of the Company, including the ChiefExecutive Officer and the Chief Financial Officer, evaluated the effectivenessof the design and operation of the Company’s disclosure controls and procedures(as such term is defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934), as amended (the “Exchange Act”), as ofthe end of the period covered by this report. Based upon that evaluation, theCompany’s Chief Executive Officer and the Chief Financial Officer concludedthat the Company’s disclosure controls and procedures were effective as of theend of the period covered by this report for the information required to bedisclosed by the Company in the reports it files or submits under the ExchangeAct, as amended, to be recorded, processed, summarized and reported within thetime periods specified in the Securities and Exchange Commission’s rules andforms.

 

*Changes in internal control overfinancial reporting*

 

There have not been any changes in the Company’sinternal control over financial reporting (as such term is defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) during the fiscal quarter ended September 30,2010 that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

29

----

Table ofContents

 

**PART II. OTHER INFORMATION**

 

**Item 1.                  Legal proceedings**

 

None.

 

**Item 1A.               Risk factors**

 

There has been no material change in therisk factors since the filing of our last annual form 10-K

 

**Item 2.                   Unregistered sales of equity securities and use ofproceeds**

 

Inthe three months ended September 30, 2010 no shares of common stock wereissued.

 

**Item 3.                   Defaults upon senior securities**

 

None.

 

**Item 4.                   [Removed and Reserved]**

 

**Item 5.                   Other information**

 

EffectiveJuly 6, 2010 the Company entered into an agreement with D4D Limited (aCompany that offers Executive Services for small and mid-cap companies). D4D is owned by Tim Paterson-Brown and Allan Rowley, and pursuant to theagreement, D4D provides the services of Tim Paterson-Brown (as Chairman andChief Executive Officer) and Allan Rowley (as Chief Financial Officer) to theCompany on similar remuneration to the previous contracts.  D4D alsoprovides services to other companies.

 

Onexecuting the Contract with D4D Limited Tim Paterson-Brown and Allan Rowleyterminated their employment contracts with the Company and forfeited theirstock options in MGT Capital investments Inc., but still hold the offices ofChairman and Chief Executive Officer and Chief Financial Officer respectively.

 

EffectiveNovember 19, 2010, the company amended its agreement with D4D Limited. Theamendment confirms the commitments of MGT Capital Investments post-closing ofthe Laddcap Value Partners III LLC stock purchases agreement.

 

**Item 6.                   Exhibits**

 
| 10.1 | D4D Limited Service  Agreement                                                |
|------|-------------------------------------------------------------------------------|
| 10.2 | D4D Limited Service  Agreement Amendment                                      |
| 31.1 | Certification pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2 | Certification pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1 | Certification pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2 | Certification pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |

 

30

----

Table ofContents

 

SIGNATURE

 

In accordance with therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly 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 |
|              |                           |   |
|              |                           |   |
| November 22, 2010 |                           |   |

 

31

----