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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **x** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended June 30, 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 for thepast 90 days.  Yes x  No o

 

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

 

Indicate by check 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 August 5, 2010the registrant had outstanding 32,550,590 shares of common stock, $0.001 parvalue, (excludes 6,349,793 common shares held as treasury stock).

 

 

 

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NOTEREGARDING FORWARD LOOKING STATEMENTS

 

ThisForm 10-Q, including “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” in Item 2, contains forward-lookingstatements that involve risks and uncertainties, as well as assumptions that,if they never materialize or prove incorrect, could cause the results of MGTCapital Investments, Inc and its consolidated subsidiaries (the “Company”)to differ 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 any projectionsof revenue, gross profit, expenses, earnings or losses from operations,synergies or other financial items; any statements of the plans, strategies andobjectives of management for future operations, including the rate of marketdevelopment and acceptance of medical imaging technology; the execution ofrestructuring plans; any statement concerning developments, performance orindustry rankings relating to products or services; any statements regardingfuture economic conditions or performance; any statements of expectation orbelief; and any statements of assumptions underlying any of the foregoing. Therisks, uncertainties and assumptions referred to above include the performanceof contracts by suppliers, customers and partners; employee management issues;the difficulty of aligning expense levels with revenue changes; and other risksthat are described herein, including but not limited to the specific risksareas discussed in “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” in Item 2 of this report, and that are otherwisedescribed from time to time in the Company’s Securities and Exchange Commissionreports filed after this report. The Company assumes no obligation and does notintend to update these forward-looking statements.

 

TheCompany’s main operating currency is UK Sterling (£).

 

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**INDEX**

 
| **PART I  — FINANCIAL INFORMATION** | ** ** | ** **                                                                                                                                            |
|-----------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                    | ** ** | ** **                                                                                                                                            | ** ** | ** ** |
| Item 1                                        |       | Condensed Consolidated  Balance Sheets — June 30, 2010 (unaudited) and  December 31, 2009                                         |   | 3 |
|                                          |       |                                                                                                                                                  |   |   |
|                                          |       | Condensed  Consolidated Statements of Operations — for the three months ended  June 30, 2010 (unaudited) and 2009 (unaudited)               |   | 4 |
|                                          |       |                                                                                                                                                  |   |   |
|                                          |       | Condensed Consolidated Statements of Operations — for  the six months ended June 30, 2010 (unaudited) and 2009 (unaudited)                  |   | 5 |
|                                          |       |                                                                                                                                                  |   |   |
|                                          |       | Condensed Consolidated Statement of Stockholders’  Equity and Comprehensive Loss — for the six months ended June 30, 2010  (unaudited) |   | 6 |
|                                          |       |                                                                                                                                                  |   |   |
|                                          |       | Condensed Consolidated Statements of Cash Flows — for  the six months ended June 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                                                           |   | 19 |
|                                          |       |                                                                                                                                                  |   |   |
| Item 3                                        |       | Quantitative and Qualitative  Disclosure About Market Risk                                                                                            |   | 27 |
|                                          |       |                                                                                                                                                  |   |   |
| Item 4T                                       |       | Controls &  Procedures                                                                                                                       |   | 27 |
|                                          |       |                                                                                                                                                  |   |   |
| **PART II — OTHER INFORMATION**     |       |                                                                                                                                                  |
| ** **                                    | ** ** | ** **                                                                                                                                            | ** ** | ** ** |
| Item 1                                        |       | Legal Proceedings                                                                                                                                     |   | 28 |
|                                          |       |                                                                                                                                                  |   |   |
| Item 1A                                       |       | Risk Factors                                                                                                                                          |   | 28 |
|                                          |       |                                                                                                                                                  |   |   |
| Item 2                                        |       | Unregistered Sale of  Equity Securities and Use of Proceeds                                                                                           |   | 29 |
|                                          |       |                                                                                                                                                  |   |   |
| Item 3                                        |       | Defaults Upon  Senior Securities                                                                                                                      |   | 29 |
|                                          |       |                                                                                                                                                  |   |   |
| Item 4                                        |       | [Removed and Reserved]                                                                                                                                |   | 29 |
|                                          |       |                                                                                                                                                  |   |   |
| Item 5                                        |       | Other Information                                                                                                                                     |   | 29 |
|                                          |       |                                                                                                                                                  |   |   |
| Item 6                                        |       | Exhibits                                                                                                                                              |   | 29 |
|                                          |       |                                                                                                                                                  |   |   |
| SIGNATURES                                    |       | 30                                                                                                                                                    |

 

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

 

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**MGT CAPITAL INVESTMENTS, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                                      | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                      | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                      |       |                    |       |                        |       |
| Current  assets:                                                                                                                |       |                    |       |                        |       |
| Cash  and cash equivalents                                                                                                      |       | $                       | 13,330     |                        | $          | 22,165 |   |
| Accounts  receivable                                                                                                            |       | 55                      |       | 97                          |       |
| Other  receivables — related party                                                                                         |       | 292                     |       | 105                         |       |
| Prepaid  expenses and other current assets                                                                                      |       | 613                     |       | 620                         |       |
| Deferred  consideration for sale of assets                                                                                      |       | 754                     |       | —                      |       |
| Loans  receivable — related party — current                                                                           |       | 1,888                   |       | 398                         |       |
| Total  current assets                                                                                                           |       | 16,932                  |       | 23,385                      |       |
|                                                                                                                            |       |                    |       |                        |       |
| Property  and equipment, at cost, net                                                                                           |       | 245                     |       | 290                         |       |
| Investments,  at cost                                                                                                           |       | —                  |       | 224                         |       |
| Security  deposits                                                                                                              |       | 180                     |       | 219                         |       |
| Loans  receivable — related party — long term                                                                         |       | —                  |       | 159                         |       |
| Total  assets                                                                                                                   |       | $                       | 17,357     |                        | $          | 24,277 |   |
|                                                                                                                            |       |                    |       |                        |       |
| **Liabilities**                                                                                                                 |       |                    |       |                        |       |
| Current  liabilities:                                                                                                           |       |                    |       |                        |       |
| Accounts  payable                                                                                                               |       | $                       | 443        |                        | $          | 916 |   |
| Accrued  expenses                                                                                                               |       | 1,052                   |       | 1,214                       |       |
| Deferred  revenue                                                                                                               |       | 95                      |       | 114                         |       |
| Total  current liabilities                                                                                                      |       | 1,590                   |       | 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                                                                                                     |       | 300,569                 |       | 299,878                     |       |
| Accumulated  other comprehensive loss                                                                                           |       | (5,274                  | )          | (4,549                      | )          |
| Accumulated  deficit                                                                                                            |       | (269,847                | )          | (265,827                    | )          |
|                                                                                                                            |       | 25,487                  |       | 29,541                      |       |
| Treasury  stock, at cost, 6,349,793 shares of common stock                                                                      |       | (18,912                 | )          | (18,912                     | )          |
| Total  stockholders’ equity                                                                                                |       | 6,575                   |       | 10,629                      |       |
| Non-controlling  interest                                                                                                       |       | 9,192                   |       | 11,404                      |       |
| Total  equity                                                                                                                   |       | 15,767                  |       | 22,033                      |       |
|                                                                                                                            |       |                    |       |                        |       |
| Total  liabilities and equity                                                                                                   |       | $                       | 17,357     |                        | $          | 24,277 |   |

 

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

 

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**MGT CAPITAL INVESTMENTS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(unaudited)**

 
| ** **                                                           | ** ** | **Three months ended June 30,** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                           | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                                                           | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Revenues                                                             |       | $                                    | 264        |   | $ | 40 |   |
| Cost  of revenue                                                     |       | 114                                  |       | — |   |
| Gross  profit                                                        |       | 150                                  |       | 40 |   |
|                                                                 |       |                                 |       |   |   |
| Operating  expenses                                                  |       |                                 |       |   |   |
| Selling,  general and administrative expenses                        |       | 2,386                                |       | 4,009 |   |
| Research  and development cost                                       |       | 517                                  |       | 871 |   |
|                                                                 |       | 2,903                                |       | 4,880 |   |
|                                                                 |       |                                 |       |   |   |
| Operating  loss                                                      |       | (2,753                               | )          | (4,840 | ) |
|                                                                 |       |                                 |       |   |   |
| Interest  and other income / (expense), net                          |       | 34                                   |       | (213 | ) |
|                                                                 |       |                                 |       |   |   |
| Net  loss from continuing operations before income tax               |       | (2,719                               | )          | (5,053 | ) |
|                                                                 |       |                                 |       |   |   |
| Income  tax expense                                                  |       | (3                                   | )          | — |   |
|                                                                 |       |                                 |       |   |   |
| Net  loss from continuing operations before non-controlling interest |       | (2,722                               | )          | (5,053 | ) |
|                                                                 |       |                                 |       |   |   |
| Discontinued  operations                                             |       |                                 |       |   |   |
| Net  loss from operations of Medicexchange, net of income taxes      |       | —                               |       | (444 | ) |
|                                                                 |       | —                               |       | (444 | ) |
|                                                                 |       |                                 |       |   |   |
| Net  loss before non-controlling interest                            |       | (2,722                               | )          | (5,497 | ) |
|                                                                 |       |                                 |       |   |   |
| Net  loss attributable to non-controlling interest                   |       | 836                                  |       | 1,652 |   |
|                                                                 |       |                                 |       |   |   |
| Net  loss attributable to MGT Capital Investments, Inc.         |       | $                                    | (1,886     | ) | $ | (3,845 | ) |
|                                                                 |       |                                 |       |   |   |
| Per  share data:                                                     |       |                                 |       |   |   |
|                                                                 |       |                                 |       |   |   |
| Basic  and diluted loss per share from continuing operations         |       | $                                    | (0.06      | ) | $ | (0.11 | ) |
| Basic  and diluted loss per share from discontinued operations       |       | —                               |       | (0.01 | ) |
|                                                                 |       | $                                    | (0.06      | ) | $ | (0.12 | ) |
|                                                                 |       |                                 |       |   |   |
| Weighted  average number of common shares outstanding                |       | 32,550,590                           |       | 32,550,590 |   |

 

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

 

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**MGT CAPITAL INVESTMENTS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(unaudited)**

 
| ** **                                                           | ** ** | **Six months ended June 30,** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                           | ** ** | **2010**                      | ** ** | **2009** | ** ** |
| ** **                                                           | ** ** | ** **                    | ** ** | ** ** | ** ** |
| Revenues                                                             |       | $                             | 326        |   | $ | 101 |   |
| Cost  of revenue                                                     |       | 114                           |       | — |   |
| Gross  profit                                                        |       | 212                           |       | 101 |   |
|                                                                 |       |                          |       |   |   |
| Operating  expenses                                                  |       |                          |       |   |   |
| Selling,  general and administrative expenses                        |       | 5,213                         |       | 7,422 |   |
| Research  and development cost                                       |       | 913                           |       | 1,330 |   |
| Impairment  of goodwill                                              |       | —                        |       | 12,157 |   |
|                                                                 |       | 6,126                         |       | 20,909 |   |
|                                                                 |       |                          |       |   |   |
| Operating  loss                                                      |       | (5,914                        | )          | (20,808 | ) |
|                                                                 |       |                          |       |   |   |
| Interest  and other income / (expense), net                          |       | 27                            |       | (911 | ) |
|                                                                 |       |                          |       |   |   |
| Net  loss from continuing operations before income tax               |       | (5,887                        | )          | (21,719 | ) |
|                                                                 |       |                          |       |   |   |
| Income  tax benefit                                                  |       | 167                           |       | — |   |
|                                                                 |       |                          |       |   |   |
| Net  loss from continuing operations before non-controlling interest |       | (5,720                        | )          | (21,719 | ) |
|                                                                 |       |                          |       |   |   |
| Discontinued  operations                                             |       |                          |       |   |   |
| Net  loss from operations of Medicexchange, net of income taxes      |       | (234                          | )          | (704 | ) |
| Gain  on sale of Medicexchange, net of income taxes                  |       | 149                           |       | — |   |
|                                                                 |       | (85                           | )          | (704 | ) |
|                                                                 |       |                          |       |   |   |
| Net  loss before non-controlling interest                            |       | (5,805                        | )          | (22,423 | ) |
|                                                                 |       |                          |       |   |   |
| Net  loss attributable to non-controlling interest                   |       | 1,785                         |       | 3,248 |   |
|                                                                 |       |                          |       |   |   |
| Net  loss attributable to MGT Capital Investments, Inc.         |       | $                             | (4,020     | ) | $ | (19,175 | ) |
|                                                                 |       |                          |       |   |   |
| Per  share data:                                                     |       |                          |       |   |   |
|                                                                 |       |                          |       |   |   |
| Basic  and diluted loss per share from continuing operations         |       | $                             | (0.11      | ) | $ | (0.57 | ) |
| Basic  and diluted loss per share from discontinued operations       |       | (0.01                         | )          | (0.02 | ) |
|                                                                 |       | $                             | (0.12      | ) | $ | (0.59 | ) |
|                                                                 |       |                          |       |   |   |
| Weighted  average number of common shares outstanding                |       | 32,550,590                    |       | 32,550,590 |   |

 

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

 

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

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

**(in thousands)**

**(unaudited)**

**Six months ended June 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   |       | —                |       | —                        |       | 691                                               |       | —          |       | —       |       | —                              |       | 691                         |       | 185          |       | 876 |   |
|                        |       |                  |       |                          |       |                                              |       |            |       |         |       |                                |       |                        |       |         |       |   |   |
| Disposal  of Medicexchange  |       | —                |       | —                        |       | —                                            |       | —          |       | —       |       | —                              |       | —                      |       | (233         | )          | (233 | ) |
|                        |       |                  |       |                          |       |                                              |       |            |       |         |       |                                |       |                        |       |         |       |   |   |
| COMPREHENSIVE  LOSS         |       |                  |       |                          |       |                                              |       |            |       |         |       |                                |       |                        |       |         |       |   |   |
|                        |       |                  |       |                          |       |                                              |       |            |       |         |       |                                |       |                        |       |         |       |   |   |
| Net  loss for the period    |       | —                |       | —                        |       | —                                            |       | —          |       | (4,020       | )          | —                              |       | (4,020                      | )          | (1,785       | )          | (5,805 | ) |
|                        |       |                  |       |                          |       |                                              |       |            |       |         |       |                                |       |                        |       |         |       |   |   |
| Translation  adjustment     |       | —                |       | —                        |       | —                                            |       | (725            | )          | —       |       | —                              |       | (725                        | )          | (379         | )          | (1,104 | ) |
|                        |       |                  |       |                          |       |                                              |       |            |       |         |       |                                |       |                        |       |         |       |   |   |
| Total  comprehensive loss   |       |                  |       |                          |       |                                              |       |            |       |         |       |                                |       | (4,745                      | )          | (2,164       | )          | (6,909 | ) |
|                        |       |                  |       |                          |       |                                              |       |            |       |         |       |                                |       |                        |       |         |       |   |   |
| BALANCE,  JUNE 30, 2010     |       | 38,900                |       | $                             | 39         |                                              | $          | 300,569         |       | $            | (5,274     | )                                   | $          | (269,847                    | )          | $            | (18,912    | ) | $ | 6,575 |   | $ | 9,192 |   | $ | 15,767 |   |

 

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

 

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**MGT CAPITAL INVESTMENTS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

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

**(unaudited)**

 
| ** **                                                                   | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                   | ** ** | **2010**                      | ** ** | **2009** | ** ** |
|                                                                         |       |                          |       |   |   |
| Cash  flows from operating activities                                        |       |                          |       |   |   |
| Net  loss before non-controlling interest                                    |       | $                             | (5,805     | ) | $ | (22,423 | ) |
|                                                                         |       |                          |       |   |   |
| Adjustments  to reconcile net loss to net cash used in operating activities: |       |                          |       |   |   |
| Loss  from discontinued operations                                           |       | 234                           |       | 704 |   |
| Stock-based  compensation expense                                            |       | 865                           |       | 1,021 |   |
| Depreciation                                                                 |       | 74                            |       | 156 |   |
| Accrued  interest receivable                                                 |       | (3                            | )          | — |   |
| Loss  on impairment of goodwill                                              |       | —                        |       | 12,157 |   |
| Loss  on impairment of marketable securities                                 |       | —                        |       | 1,182 |   |
| Gain  on disposal of Medicexchange and other investments                     |       | (201                          | )          | — |   |
| (Increase)/decrease  in assets                                               |       |                          |       |   |   |
| Accounts  receivable                                                         |       | 34                            |       | 101 |   |
| Other  receivables — related party                                      |       | (194                          | )          | (4 | ) |
| Prepaid  expenses and other current assets                                   |       | 19                            |       | (163 | ) |
| Increase/(decrease)  in liabilities                                          |       |                          |       |   |   |
| Accounts  payable                                                            |       | (332                          | )          | (1,222 | ) |
| Accrued  expenses and other payables                                         |       | (116                          | )          | 265 |   |
| Deferred  revenue                                                            |       | 5                             |       | — |   |
| Net  cash used in operating activities                                       |       | (5,420                        | )          | (8,226 | ) |
|                                                                         |       |                          |       |   |   |
| Cash  flows from investing activities:                                       |       |                          |       |   |   |
| Moneygate  loans receivable                                                  |       | (1,370                        | )          | — |   |
| Cash  in Medicexchange subsidiaries disposed of                              |       | (1,101                        | )          | — |   |
| Sale  of marketable securities                                               |       | —                        |       | 947 |   |
| Purchase  of property, plant and equipment                                   |       | (40                           | )          | (13 | ) |
| Deposit  of restricted cash                                                  |       | —                        |       | (1,000 | ) |
| Investment  in convertible notes                                             |       | —                        |       | (1,000 | ) |
| Receipt  of deferred consideration                                           |       | 382                           |       | — |   |
| Net  cash used in investing activities                                       |       | (2,129                        | )          | (1,066 | ) |
|                                                                         |       |                          |       |   |   |
| Cash  flows of discontinued operations                                       |       |                          |       |   |   |
| Net  cash used in Medicexchange operating activities                         |       | (226                          | )          | (607 | ) |
| Net  cash used in discontinued operations                                    |       | (226                          | )          | (607 | ) |
|                                                                         |       |                          |       |   |   |
| Effects  of exchange rates on cash and cash equivalents                      |       | (1,060                        | )          | 2,382 |   |
| Net  change in cash and cash equivalents                                     |       | (8,835                        | )          | (7,517 | ) |
| Cash  and cash equivalents, beginning of period                              |       | 22,165                        |       | 38,294 |   |
| Cash  and cash equivalents, end of period                                    |       | $                             | 13,330     |   | $ | 30,777 |   |

 

*Non cash items*

 

In the six month periodended June 30, 2010 the Company disposed of Medicexchange and other investments.  The consideration for this was $1,136 whichhas been deferred and is payable in installments through March 31,2011.  When received, it will be recordedin investing activities.

 

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

 

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**MGT CAPITAL INVESTMENTS, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

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

**(unaudited)**

 

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

 

The accompanyingunaudited condensed consolidated financial statements of MGT CapitalInvestments, Inc. have been prepared in accordance with generally acceptedaccounting principles for interim financial information and with theinstructions to Form 10-Q and Rule 8-03 of Regulation S-X.Accordingly, they do not include all of the information and notes required byaccounting principles generally accepted in the United States of America. Inthe opinion of management, all adjustments, consisting only of normal recurringadjustments, have been included. Operating results for the six months endedJune 30, 2010 are not necessarily indicative of the results that may beexpected for any subsequent quarter or for the year ending December 31,2010.  These condensed consolidatedfinancial statements should be read in conjunction with the consolidated financialstatements and notes thereto included in the Company’s Annual Report onForm 10-K for the year ended December 31, 2009. The condensedconsolidated financial statements include the accounts of the Company and itsmajority owned subsidiaries. All intercompany accounts and transactions havebeen eliminated.

 

MGT CapitalInvestments, Inc. (“MGT”, “the Company”, “the Group”, “we”, “us”) is aholding company.  We currently have a controlling interest in ouroperating subsidiary, Medicsight plc (“Medicsight”) and a 49% holding inMoneygate Group Limited (“Moneygate”). On March 31, 2010 we disposed ofour controlling interest in Medicexchange Limited (“Medicexchange”) and variousother investments. We also have wholly owned subsidiaries MGT CapitalInvestments (UK) Limited, MGT Investments (Gibraltar) Limited, and MedicsightNominees 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”)applications which analyze Computer Tomography (“CT”) scans to assistradiologists in the early detection and measurement of colorectal polyps andlung lesions.  Medicsight currently has limited revenue and is awaitingregulatory approvals in key markets.  TheCompany holds 86 million shares (55%) of the 155 million issued share capitalof Medicsight.

 

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

 

The Company has incurredsignificant operating losses since inception and has recently commencedgenerating revenue from operations.  As aresult, the Company has generated negative cash flows from operations and hasan accumulated deficit of $269,847 at June 30, 2010.  The Company’s subsidiary Medicsight isoperating in a developing industry based on new technology and its primarysource of funds to date has been through the issuance of securities.  While the Company is optimistic and believesappropriate actions are being taken, there can be no assurance that management’sefforts will be successful or that the products the Company develops and marketswill be accepted by consumers.

 

**2. Summary of significantaccounting policies**

 

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

 

*RevenueRecognition*

 

*Medicsight*

 

We recognize revenue whenit is realized or realizable and earned. We consider revenue realized or realizable and earned when we havepersuasive evidence of an arrangement, the product has been shipped or the serviceshave been provided to the customer, the sales price is fixed or determinableand collectability is probable.

 

Software — License feerevenue is derived from the licensing of computer software.  Maintenance revenue is derived from softwaremaintenance.  Our software licenses aregenerally sold as part of an arrangement that includes maintenance and support.

 

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We license software andsell maintenance through visualization solution partners and original equipmentmanufacturers.  We receive regular salesreporting detailing the number of licenses sold by original equipment manufacturers,value-added resellers and 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 the purchase, ii) has the ability and obligation to payregardless of receiving payment from the end user, and all other revenuerecognition criteria are met, license revenue from Resellers is recognized uponshipment of its product to vendors (“sell-in basis”).

 

Revenue from license feesis recognized when notification of shipment to the end user has occurred, thereare no significant Company obligations with regard to implementation and theCompany’s services are not considered essential to the functionality of otherelements of the arrangement.

 

Services — Revenue frommaintenance and support arrangements is deferred and recognized ratably overthe term of the maintenance and support arrangements.

 

Multiple-elementarrangements — we enter into arrangements with Resellers that include acombination of software products, maintenance and support.  For such arrangements, we recognize revenueusing the residual method.  We allocatethe total arrangement fee among the various elements of the arrangement basedon the fair value of each of the undelivered elements determined by vendor-specificobjective evidence.  The fair value ofmaintenance and support services is evidence of fair value for all elements,revenue is deferred until the earlier of when vendor-specific objectiveevidence is determined for the undelivered elements (residual method) or whenall elements for which we do not have vendor-specific objective evidence offair 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. A warranty provision is therefore not required.

 

MedicCO2LON is sold exclusively through our distribution partner MEDRAD Inc.Revenue is recognized as goods and orders are satisfied and goods are deliveredto our distribution partner. We generally offer terms which require paymentswith 45 days from invoicing.

 

*Equity-basedcompensation*

 

We recognize compensationexpense for all equity-based payments. Under fair value recognition provisions, we recognize equity-basedcompensation net of an estimated forfeiture rate and recognize compensationcost only for those shares expected to vest over the requisite service periodof the award.

 

The fair value of eachoption award is estimated on the date of grant using the Black-Scholes optionvaluation model.  The Black-Scholesoption valuation model requires the development of assumptions that are inputinto the model.  These assumptions arethe expected stock volatility, the risk-free interest rate, the option’sexpected life and the dividend yield on the underlying stock. Expectedvolatility is calculated based on the historical volatility of our common stockover the expected option life and other appropriate factors.  Risk-free 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 theappropriate fair value model and calculating the fair value of equity-basedpayment awards require the input of the subjective assumptions describedabove.  The assumptions used incalculating the fair value of equity-based payment awards represent management’sbest estimates, which involve inherent uncertainties and the application ofmanagement judgment.  As a result, iffactors change and we use different assumptions, our equity-based compensationexpense could be materially different in the future.  In addition, we are required to estimate theexpected forfeiture rate and recognize expense only for those shares expectedto vest.  If our actual forfeiture rateis materially different from our estimate, the equity-based compensationexpense could be significantly different from what we have recorded in thecurrent period.

 

*Researchand development*

 

We incur costs incurredin connection with the development of software products that are intended forsale.  Costs incurred prior totechnological feasibility being established for the product are expensed asincurred.  Technological feasibility isestablished 

 

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upon completion of a detail program design or, inits absence, completion of a working model. Thereafter, all software production costs are capitalized andsubsequently reported at the lower of unamortized cost or net realizable value.  Capitalized costs are amortized based oncurrent and future revenue for each product with an annual minimum equal to thestraight-line amortization over the remaining estimated economic life of theproduct.  Amortization commences when theproduct is available for general release to customers.

 

We concluded thatcapitalizing such expenditures on completion of a working model wasinappropriate because we did not incur any material software production costsand therefore have decided to expense all research and development costs.  Our research and development costs arecomprised of staff, consultancy and other costs expensed on the Medicsightproducts.

 

*Fair value of financialinstruments*

 

On January 1, 2008the Company adopted certain provisions of FASB ASC 820, “Fair ValueMeasurements and Disclosures” for financial assets and financial liabilitiesand on January 1, 2009 for non-financial assets and non-financialliabilities.  This establishes aframework for measuring fair value and expands disclosure about fair valuemeasurements.  Applying fair valuemeasurements to our financial instruments requires management’s judgment,especially when using Level 2 and Level 3 inputs.

 

*Financial instruments*

 

TheCompany holds financial instruments. Short term trade receivables and payables are held at cost at amountsthat approximate their fair value due to their short term nature.  The Company also has receivables due fromMoneygate (see note 5) that represent a concentration of credit risk.

 

*Investments*

 

Investments in variouscorporations where our investment is less than 20% of issued share capital areaccounted for under the cost method. Investments where we hold between 20% and 50% of issued share capitaland we have significant influence over the investee are accounted for under theequity method.  Moneygate is accountedfor under the equity method.

 

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

 

We evaluate the carryingvalue of long-lived assets for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable.  Our assessment forimpairment of an asset involves estimating the undiscounted cash flows expectedto result from use of the asset and its eventual disposition.  An impairment loss recognized is measured asthe amount by which the carrying amount of the asset exceeds the fair value ofthe asset.

 

Calculating the estimatedfair value of an asset involves significant judgments and a variety ofassumptions.  Judgments that we makeconcerning the value of its intangible assets include assessing time and costinvolved for development, time to market, and risks of regulatory failure orobsolescence (due to market, environmental or technological advances forexample).  For calculating fair valuebased on discounted cash flows, we forecast future operating results and futurecash flows, which include long-term forecasts of revenue growth, gross profitsand capital expenditures.

 

**Recent accountingpronouncements**

 

In October 2009 the Financial AccountingStandards Board (“FASB”) FASB issued an update to Accounting StandardsCodification (“ASC”) Topic 605, Revenue Recognition, with regards tomultiple-deliverable arrangements.  Theupdate is effective for revenue arrangements entered into in fiscal yearsbeginning on or after June 15, 2010. We do not expect theadoption of this update to have a material impact on our financialposition or results of operations.

 

In October 2009 the Financial AccountingStandards Board (“FASB”) FASB issued an update to Accounting StandardsCodification (“ASC”) Topic 985, Software, with regards to certain revenuearrangements that include software elements. The update is effective for revenue arrangements entered into in fiscalyears beginning on or after June 15, 2010. We do not expect theadoption of this update to have a material impact on our financialposition or results 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 of thisupdate has not had a material impact on our financial position or resultsof operations.

 

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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.

 

**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 ofJune 30, 2010 £250 ($382) had been received in accordance with thesale 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 received representsthe gain on sale recorded in the Consolidated Statement of Operations.  HipCricket was recorded in the financialstatements 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. Thisprofit on disposal has been recognized in discontinued operations.

 

**4. Cash andcash equivalents**

 

Weinvest our cash in short-term deposits with major banks.  At June 30, 2010we held $13,330 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 itscash and cash equivalents at major financial institutions in Europe.  Cashheld in foreign institutions is not insured by the Federal Deposit InsuranceCorporation and amounted to $13,330 as of June 30,2010 and $22,165 as of December 31, 2009.  The Company periodicallyevaluates the relative credit standing of financial institutions considered inits cash investment strategy.

 

**5. Loansreceivable — related party**

 

InFiscal 2009 we purchased 49% of Moneygate and provided loan facilities of £250($377) for working capital and £2,000 ($3,015) for acquisitions.  In the six months ended June 30, 2010 weincreased the working capital facility as acquisitions have been delayed andMoneygate still requires cash to fund its operations.

 

Asof June 30, 2010 £675 ($1,017) had been advanced for working capital and £572($871) for acquisitions.  The fundsadvanced for the acquisition facility have been used to complete theacquisition of a small IFA Company, legal fees, due diligence fees and signingon payments to support organic growth of numbers of advisors.

 

Inanticipation of the sale of the Moneygate loan facility to a third party, forwhich terms were agreed as at June 30, 2010 the acquisition facility originallyclassified as a non-current asset has been classified as a current assetalongside the working capital 

 

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facility. The acquisitionfacility pays interest at a rate of 5% per annum.  Interest of £6 ($9) has been accrued for inthe six months ended June 30, 2010. The working capital facility is a non-interest bearing loan (see note14).

 

Moneygateis classified as a related party because MGT has representation on its board ofdirectors (see note 12).

 

**6. Investments at cost**

 

We account forinvestments in non-marketable securities under the cost method of accountingwhere we own less than a 20% interest in each of the companies and we do nothave significant influence over the entity. We continually review each investment to assess for other-than-temporarydecreases in value.

 

*Eurindia Limited*

 

In 2000 MGT invested inEurindia Limited (“Eurindia”), a UK company that invested in IT start-upcompanies.  MGT had a 6% holding in Eurindia and accounted for thisinvestment on a cost basis.  As atDecember 31, 2009 this investment had been fully impaired.  On March 31, 2010 we disposed of all ofour holding in Eurindia for $1 leading to a gain on sale of $1 (see note 3).

 

*XShares Group*

 

In 2007 and 2008 weinvested $3,000 in Series C preferred shares of XShares Group, Inc. (“XShares”),an investment advisor that creates, issues and supports exchange traded fundswith a particular healthcare specialty. In the year ended December 31, 2009 the Company also invested$2,000 in XShares convertible notes with a principal of $2,100.  As at December 31, 2009 the equityinvestment and the convertible notes were fully impaired. On March 31,2010 we disposed of all of our equity holdings in XShares for $1 and theconvertible notes for $1, leading to a gain on sale of $2 (see note 3).

 

*HipCricket Inc.*

 

In Fiscal 2007 weinvested $2,000 in HipCricket Inc., a company engaged in mobile marketing.  In the year ended December 31, 2009HipCricket Inc. was delisted from the AIM Market and we accounted for it as aninvestment held at cost.  As at December 31,2009 the investment was held at a book value of $224.  On March 31, 2010 we disposed of all ofour holding in HipCricket for $205 resulting in a loss on sale of $19 (see note3).

 

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

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

 

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**7.****Interestand other income / (expense)**

 

We had the followinginterest and other income amounts from continuing operations:

 
| ** **                                | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 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 Loss on Eurindia               |       | —                           |       | (176                           | )          | — |   | (176 | ) |
| Impairment Loss on HipCricket             |       | —                           |       | —                         |       | — |   | (739 | ) |
| Impairment Loss on XShares                |       | —                           |       | (230                           | )          | — |   | (230 | ) |
| Interest income                           |       | 34                               |       | 205                            |       | 43 |   | 271 |   |
| Loss on other marketable securities       |       | —                           |       | (12                            | )          | — |   | (37 | ) |
| Total                                     |       | $                                | 34         |                           | $          | (213 | ) | $ | 27 |   | $ | (911 | ) |

 

**8. Comprehensive income (loss)**

 

Comprehensiveincome (loss) includes net income (loss) and items defined as othercomprehensive income.  Items defined asother comprehensive income, such as foreign currency translation adjustmentsand unrealized gains and losses on certain marketable securities are separatelyclassified in the financial statements.  Such items are reported in the consolidatedstatements of stockholders’ equity as comprehensive income as follows:

 
| ** **                                                       | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                       | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                             |       |                             |       |                           |       |   |   |   |   |
| Net loss before non-controlling interest, as reported            |       | $                                | (2,722     | )                              | $          | (5,497 | ) | $ | (5,805 | ) | $ | (22,423 | ) |
| Unrealized foreign exchange gain (loss)                          |       | 153                              |       | 3,588                          |       | (1,104 | ) | 2,177 |   |
| Unrealized gain on marketable securities                         |       | —                           |       | 38                             |       | — |   | 38 |   |
| Comprehensive loss                                               |       | $                                | (2,569     | )                              | $          | (1,871 | ) | $ | (6,909 | ) | $ | (20,208 | ) |
| Comprehensive loss attributable to non-controlling interest      |       | 834                              |       | 225                            |       | 2,164 |   | 2,051 |   |
| Comprehensive loss attributable to MGT Capital Investments, Inc. |       | $                                | (1,735     | )                              | $          | (1,646 | ) | $ | (4,745 | ) | $ | (18,157 | ) |

 

The total accumulatedother comprehensive loss as of June 30, 2010 is the result of net foreigncurrency translation losses.

 

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

 

Medicsight listed on theAIM Market of the London Stock Exchange on June 21, 2007.  AIM listing rules require Medicsight topublish results under International Financial Reporting Standards (“IFRS”) insterling.

 

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The following is a reconciliation betweenMedicsight’s published financial statements and the US GAAP consolidatedresults:

 
| ** **                         | ** ** | **Medicsight  plc** | ** ** | **Medicsight  plc**  | ** ** | **Medicsight  plc** | ** ** | **Discontinued  operations** | ** ** | **Corporate  and Other** | ** ** | **Total**     | ** ** |
|------------------------------------|------------|---------------------|------------|----------------------|------------|---------------------|------------|------------------------------|------------|--------------------------|------------|---------------|------------|
| ** **                         | ** ** | **(IFRS)**          | ** ** | **GAAP Adj’ts** | ** ** | **(US GAAP)**       | ** ** | **(US GAAP)**                | ** ** | **(US GAAP)**            | ** ** | **(US GAAP)** | ** ** |
|                               |       |                |       |                 |       |                |       |                         |       |                     |       |          |       |
| **Six months ended June 30, 2010** |       |                |       |                 |       |                |       |                         |       |                     |       |          |       |
| Net  revenue to external customers |       | $                   | 326        |                 | $          | —              |       | $                            | 326        |                     | $          | —        |       | $ | — |   | $ | 326 |   |
| Operating  loss                    |       | (3,765              | )          | (232                 | )          | (3,997              | )          | —                       |       | (1,917                   | )          | (5,914        | )          |
| Assets                             |       | $                   | 13,063     |                 | $          | —              |       | $                            | 13,063     |                     | $          | —        |       | $ | 4,294 |   | $ | 17,357 |   |
|                               |       |                |       |                 |       | —              |       |                         |       |                     |       |          |       |
| **Six months ended June 30, 2009** |       |                |       |                 |       |                |       |                         |       |                     |       |          |       |
| Net  revenue to external customers |       | $                   | 101        |                 | $          | —              |       | $                            | 101        |                     | $          | 20            |       | $ | — |   | $ | 121 |   |
| Operating  loss                    |       | (7,286              | )          | 107                  |       | (7,179              | )          | (622                         | )          | (13,629                  | )          | (21,430       | )          |
| Assets                             |       | $                   | 24,477     |                 | $          | —              |       | $                            | 24,477     |                     | $          | 2,069         |       | $ | 9,037 |   | $ | 35,583 |   |

 

Theprincipal GAAP adjustments are the accounting for stock options and cumulativetranslation adjustments.

 

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

 

**10 .Stock-based compensation**

 

Wehave issued stock options from MGT and our principal subsidiary company,Medicsight.

 

*MGT stock option plan*

 

OnDecember 5, 2007 we approved the 2007 MGT stock option plan and granted optionsfor 1,975,000 shares under this plan.  AtJune 30, 2010 there were 1,975,000 options outstanding and 1,316,673 of theoptions issued were exercisable.  Optionsissued under this plan vest in equal one-thirds after employees have beenemployed for 12, 24 and 36 months from the date of grant.

 

*Medicsight stock option plans*

 

Wehave twelve Stock Option Plans in Medicsight, whose shares were listed on theAIM Market of the London Stock Exchange on September 21, 2007.

 

Plan A - on February 26,2003 we approved stock option plan “A” and in the three month period endedMarch 31, 2003 we granted options for 2,971,000 shares under this plan.  At June 30, 2010 there were 28,500 optionsoutstanding, all of which were exercisable.

 

Plan B - on August 15,2005 we approved stock option plan “B” and between July 1, 2003 and March 31,2005 we granted options for 3,420,500 shares under this plan.  At June 30, 2010 there were 156,500 optionsoutstanding, all of which were exercisable.

 

Plan C - 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 this plan.  Options issued under this plan vest in equalone-thirds after employees have been employed for 12, 24 and 36 months fromdate of grant.  At June 30, 2010 therewere 85,000 options outstanding, all of which were exercisable.

 

Plan D - On July 13, 2006we approved stock option plan “D” and granted options for 1,375,000 sharesunder this plan.  Options under this planvest in equal one-thirds after employees have been employed for 12, 24 and 36months from the date of grant.  At June 30,2010 there were no options outstanding.

 

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Plan E - on February 22,2007 we approved and granted options for 5,900,000 shares under stock optionplan “E”.  Options under this plan vestin equal one-thirds after employees have been employed for 12, 24 and 36 monthsfrom the grant date.  At June 30, 2010there were 800,000 options outstanding, all of which were exercisable.

 

Plan F - on May 16, 2007we approved and subsequently granted options for 350,000 shares under stockoption plan “F”.  Options under this planvest in equal one-thirds after employees have been employed for 12, 24 and 36months from the grant date.  At June 30,2010 there were 50,000 options outstanding, all of which were exercisable.

 

Plan G - on December 18,2007 we approved and subsequently granted options for 3,025,000 shares understock option plan “G”.  Options underthis plan vest in equal one-thirds after employees have been employed for 12,24 and 36 months from the grant date.  AtJune 30, 2010 there were 150,000 options outstanding, 100,000 were exercisable.

 

Plan H - on June 2, 2008we approved and subsequently granted options for 750,000 shares under stockoption plan “H”.  Options under this planvest in equal one thirds after employees have been employed for 12, 24 and 36months from the grant date.  At June 30,2010 there were no options outstanding.

 

Plan I - on December 16,2008 we approved and subsequently granted options for 1,805,000 shares understock option plan “I”. Options under this plan vest in equal one thirds afteremployees have been employed for 12, 24 and 36 months from the grant date.  At June 30, 2010 108,333 options wereoutstanding, 41,666 of which were exercisable.

 

Plan J - on May 14, 2009we approved and subsequently granted options for 7,848,750 shares under stockoption plan “J”.  Options under this planvest in equal one sixths after employees have been employed for 6, 12, 18, 24,30 and 36 months from the grant date.  AtJune 30, 2010 there were 6,998,565 options outstanding, 2,414,373 of which wereexercisable.

 

Plan K - on May 20, 2009we approved and subsequently granted options for 300,000 shares under stockoption plan “K”.  Options under this planvest in equal one thirds on June 30, 2009, September 30, 2009 and December 31,2009.  At June 30, 2010 there were300,000 options outstanding, all of which were exercisable.

 

Plan L - on January 26,2010 we approved and subsequently granted options for 100,000 shares understock option plan “L”.  Options underthis plan vest in equal one sixths after employees have been employed for 6,12, 18, 24, 30 and 36 months from the grant date.  At June 30, 2010 there were 100,000 optionsoutstanding, none of which were exercisable.

 

*Medicexchange stock option plans*

 

UntilMarch 31, 2010 we had two stock option plans in Medicexchange.  As Medicexchange was divested at this datethese plans are no longer within the MGT Group.

 

The assumptions used inthe Black-Scholes option valuation model used in the calculation of grant datefair value for the above options are highly subjective and can materiallyaffect the resulting valuation.  Theseassumptions are based on multiple factors including United Kingdom treasurybonds for the risk-free rate at the time of grant, expected future exercisingpatterns (we cannot base the estimate on the historical exercise patterns as nooptions have been exercised) and the volatility of the MGT stock price.

 

Thefollowing assumptions were used to estimate fair value:

 
| ** **                | ** ** | **Six months ended  June 30** | ** ** |
|---------------------------|------------|-------------------------------|------------|
| ** **                | ** ** | **2010**                      | ** ** | **2009** | ** ** |
|                      |       |                          |       |   |   |
| Dividend  yield           |       | 0                             | %          | 0 | % |
| Expected  volatility      |       | 88                            | %          | 105.7 | % |
| Risk-free  rate           |       | 3.96                          | %          | 3.89 | % |
| Expected  life of options |       | 5.9  years                    |       | 6.75  years |   |

 

The following table summarizes stock optionactivity for the six months ended June 30, 2010:

 

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| ** **                             | ** ** | **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                              |       | (451,461              | )          | £                                 | 0.64       |   | $ | 0.96 |   |   |   |   |   |   |   |
| Transferred with sale of Medicexchange |       | (400,000              | )          | £                                 | 0.63       |   | $ | 0.95 |   |   |   |   |   |   |   |
|                                   |       |                  |       |                                   |       |   |   |   |   |   |   |   |   |
| Outstanding at June 30, 2010           |       | 10,751,898            |       | £                                 | 0.59       |   | $ | 0.89 |   | 5,292,712 |   | £ | 0.81 |   | $ | 1.22 |   |

 

The following is a summary of the status of thestock options outstanding at June 30, 2010:

 
| ** **                              | ** ** | **Outstanding options** | ** ** | **Exercisable options**                  | ** ** |
|-----------------------------------------|------------|------------------------------|------------|-----------------------------------------------|------------|
| ** **                              | ** ** | **Number**                   | ** ** | **Remaining  contractual life  (years)** | ** ** | **Average  exercise price** | ** ** | **Number** | ** ** | **Average exercise  price** | ** ** |
|                                    |       |                         |       |                                          |       |   |   |   |   |   |   |   |   |   |   |
| MGT Capital Investments, Inc. 2007 Plan |       | 1,975,000                    |       | 7.4                                           |       |   |   | $ | 3.69 |   | 1,316,673 |   |   |   | $ | 3.69 |   |
| Medicsight Plan A                       |       | 28,500                       |       | 2.5                                           |       | £ | 0.75 |   | $ | 1.13 |   | 28,500 |   | £ | 0.75 |   | $ | 1.13 |   |
| Medicsight Plan B                       |       | 156,500                      |       | 4.2                                           |       | £ | 0.75 |   | $ | 1.13 |   | 156,500 |   | £ | 0.75 |   | $ | 1.13 |   |
| Medicsight Plan C                       |       | 85,000                       |       | 5.6                                           |       | £ | 0.75 |   | $ | 1.13 |   | 85,000 |   | £ | 0.75 |   | $ | 1.13 |   |
| Medicsight Plan D                       |       | —                       |       | 6.0                                           |       | £ | 0.83 |   | $ | 1.25 |   | — |   | £ | 0.83 |   | $ | 1.25 |   |
| Medicsight Plan E                       |       | 800,000                      |       | 6.6                                           |       | £ | 0.50 |   | $ | 0.75 |   | 800,000 |   | £ | 0.50 |   | $ | 0.75 |   |
| Medicsight Plan F                       |       | 50,000                       |       | 6.9                                           |       | £ | 0.75 |   | $ | 1.13 |   | 50,000 |   | £ | 0.75 |   | $ | 1.13 |   |
| Medicsight Plan G                       |       | 150,000                      |       | 7.5                                           |       | £ | 1.10 |   | $ | 1.66 |   | 100,000 |   | £ | 1.10 |   | $ | 1.66 |   |
| Medicsight Plan H                       |       | —                       |       | 7.9                                           |       | £ | 0.69 |   | $ | 1.04 |   | — |   | £ | 0.69 |   | $ | 1.04 |   |
| Medicsight Plan I                       |       | 108,333                      |       | 8.5                                           |       | £ | 0.24 |   | $ | 0.36 |   | 41,666 |   | £ | 0.24 |   | $ | 0.36 |   |
| Medicsight Plan J                       |       | 6,998,565                    |       | 8.9                                           |       | £ | 0.09 |   | $ | 0.14 |   | 2,414,373 |   | £ | 0.09 |   | $ | 0.14 |   |
| Medicsight Plan K                       |       | 300,000                      |       | 8.9                                           |       | £ | 0.10 |   | $ | 0.15 |   | 300,000 |   | £ | 0.10 |   | $ | 0.15 |   |
| Medicsight Plan L                       |       | 100,000                      |       | 9.5                                           |       | £ | 0.09 |   | $ | 0.14 |   | — |   | £ | 0.09 |   | $ | 0.14 |   |

 

On May 14, 2009 weapproved Medicsight Plan J. Employees who were employed on May 14, 2009 weregiven the opportunity to forfeit all their existing options in Plans A throughI and, in their place, receive in Plan J 50% of the number of forfeitedoptions.  We accounted for this as amodification of the existing options, specifically a cancel and reissue.  Of the options issued in Plan J 3,032,500 wereissued as new options and 4,816,250 were issued as replacements for optionscancelled in existing plans.The modification charge for the six monthsended June 30, 2010 was $2.  In the sixmonths ended June 30, 2009 it was $37.

 

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

 
| ** **                           | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended********June 30,** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|--------------------------------------|------------|
| ** **                           | ** ** | **2010**                         | ** ** | **2009**                             | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                 |       |                             |       |                                 |       |   |   |   |   |
| Selling,  general and administrative |       | $                                | 409        |                                 | $          | 500 |   | $ | 830 |   | $ | 957 |   |
|                                 |       |                             |       |                                 |       |   |   |   |   |
| Research  and development            |       | 18                               |       | 36                                   |       | 35 |   | 64 |   |
|                                 |       |                             |       |                                 |       |   |   |   |   |
| Discontinued  operations             |       | —                           |       | 12                                   |       | 11 |   | 8 |   |
|                                 |       |                             |       |                                 |       |   |   |   |   |
| Total                                |       | $                                | 427        |                                 | $          | 548 |   | $ | 876 |   | $ | 1,029 |   |

 

Of the $876stock-based expense in the six months ended June 30, 2010, $185 was allocated to the non-controlling interest.

 

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No compensation costs werecapitalized.

 

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

 

Asummary of non-vested options at June 30, 2010 and the change during the sixmonths ended June 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       |   | $ | 0.48 |   |
| Granted                        |       | 100,000                     |       | £                                                      | 0.04       |   | $ | 0.07 |   |
| Vested                         |       | (1,434,326                  | )          | £                                                      | 0.23       |   | $ | 0.39 |   |
| Forfeited                      |       | (104,166                    | )          | £                                                      | 0.41       |   | $ | 0.63 |   |
| Non-vested  at June 30, 2010   |       | 5,458,977                   |       | £                                                      | 0.19       |   | $ | 0.30 |   |

 

At June 30, 2010 therewas $1,900of total unrecognized compensation costrelated to non-vested stock-based compensation arrangements granted under theoption plans.Non-vested awards are expected to be recognized over a weighted averageperiod of 1.9 years.

 

**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)                    |       | (1,771         | )          | (14                                                     | )          | (1,785    | )          |
| Non-controlling share of stock-based expense         |       | 182            |       | 3                                                       |       | 185       |       |
| Non-controlling share of other comprehensive  (loss) |       | (369           | )          | (10                                                     | )          | (379      | )          |
| Disposal of Medicexchange                            |       | —         |       | (233                                                    | )          | (233      | )          |
| Non-controlling interest at June 30, 2010            |       | $              | 9,192      |                                                    | $          | —    |       | $ | 9,192 |   |

 

**12.  Related Party Transactions**

 

Tim Paterson-Brown, ourChief Executive Officer, was a non-executive director of Accsys Technologiesplc, but resigned from this position on April 6, 2010.  Accsys Technologies plc has a subsidiarycompany Titan Wood Limited, which rents space in 66 Hammersmith Road.  In the six month period ended June 30, 2010and 2009 respectively, £70 ($106) and £106 ($160) of office related costs wererecharged to Titan Wood Limited.  At June30, 2010 there was a balance receivable from Titan Wood Limited of £88 ($132)of which £88 ($132) remains unpaid as of July 30, 2010.  This is payable within 30 days under theterms of the invoice.

 

In Fiscal 2009 wepurchased 49% of the share capital 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 ($377) for working capital and £2,000 ($3,015) foracquisitions.    In the six months ended June30, 2010 we increased the working capital facility as acquisitions have beendelayed and Moneygate still requires cash to fund its operations.

 

Asof June 30, 2010 £675 ($1,017) had been advanced for working capital and £572($871) for acquisitions.  The fundsadvanced for the acquisition facility have been used to complete theacquisition of a small IFA Company, legal fees, due diligence fees and signingon payments to support organic growth of numbers of advisors.

 

Inanticipation of the sale of the Moneygate loan facility to a third party, forwhich terms were agreed as at June 30, 2010 the acquisition facility originallyclassified as a non-current asset has been classified as a current assetalongside the working capital facilityThe acquisition facility pays interest ata rate of 5% per annum.  Interest of £6($9) has been accrued for in the six months ended June 30, 2010. The workingcapital facility does not pay interest (see note 5).

 

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We charged Moneygate a£65 ($98) management fee for services provided in the six months to June 30,2010 and £106 ($160) including sales tax, was outstanding as of June 30, 2010relating to this and previous services charges. As of July 30, 2010 £106 ($160)remained unpaid. This is payable within 30 days under the terms of the invoice.

 

**13.  Commitments**

 

*LeaseCommitments and Security Deposit*

 

On August 25, 2006 weexecuted a 10-year agreement with Pirbright Holdings Limited, to lease 8,787square feet of office space at the Kensington Centre, 66 Hammersmith Road,London W14 8UD, United Kingdom.  Underthis lease agreement our UK property rent, services and related costs areapproximately £330 ($497) per annum, paid quarterly in advance.  We have the right to terminate this agreementon the expiry of the fifth year of the lease.  Our annual rent is subject to upward onlyreview on August 24, 2011.

 

We have two 10-monthrent-free periods: the first commencing August 25, 2006; the second commencingAugust 25, 2011.  We have accounted forthis lease as an operating lease and have accounted for the lease rental expenseson a straight-line basis over the period of the lease.

 

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

 

The following is aschedule of the future minimum rental payments required under operating leasesthat have initial or remaining non-cancellable terms in excess of one year:

 
| **Year ending December 31,** | ** ** | ** ** | ** ** |
|------------------------------|------------|------------|------------|
| 2010 (remaining six months)  |       | $          | 217        |   |
| 2011                         |       | 263        |       |
| 2012                         |       | 17         |       |
| 2013                         |       | 2          |       |
| 2014                         |       | —     |       |
| Later years                  |       | —     |       |
| **Total minimum**            |       | $          | 499        |   |

 

Thetotallease rental expense for the six months ended June 30, 2010 was £172 ($261) comparedto £207 ($311) at June 30, 2009.

 

*Other commitments*

 

In July 2008 we enteredinto an agreement with a partner to develop interfaces for our software.  We have committed to pay Euros 1,445 ($1,764)over an expected thirty-six month period. As at June 30, 2010 we have paidEuros 845 ($1,031).  These payments willbe recovered against future royalty payments, should the products besuccessfully commercialized.  Thesepayments have been expensed to the income statement and classified as researchand development.

 

**14.  Subsequent Events**

 

Moneygate agreed to convert all monies advanced todate £1,247 ($1,888) and future monies up to £2,000($3,015) in total in to convertable loan notes. On August 3, 2010 MGT Capital InvestmentsLimited, a company incorporated in England and Wales (“MGT UK”), and a whollyowned subsidiary of MGT Capital Investments, Inc., entered into an agreementwith an unrelated third party for the sale of its Moneygate convertible loannote of £2,000 ($3,015). Payment of the £2,000 ($3,015) will consist of fourseparate tranches, three tranches are time based and will all be fully paid byJune 2011. The fourth tranche is on demand and will be received as required. Weexpect all funds to be received within the next 12 months. MGT will recoup allfunds previously advanced to Moneygate and retain its equity in Moneygateeffectively free of charge.

 

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**Item 2. Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

The terms “MGT”, “the Company”, “we”, “our” and “us” refer to MGT Capital Investments, Inc. and its subsidiaries, as a consolidatedentity, unless the context suggests otherwise.

 

This quarterly report onForm 10-Q contains forward-looking statements made in reliance upon the safeharbor provisions of Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended.  These statements may be identified by the useof words such as “anticipate”, “estimates”, “should”, “expect”, “guidance”, “project”,“intend”, “plan”, “believe” and other words and terms of similar meaning, inconnection with any discussion of our financial statements, business, resultsof operations, liquidity and future operating or financial performance.  Please also refer to our “Note RegardingForward Looking Statements” at the front of this Form.

 

**Executive summary**

 

As of March 31,2010, following a detailed strategic review we have reduced our ongoingoperating cost base and have disposed of our investments in Medicexchange,XShares, Hipcricket and Eurindia. Following the agreement signed on August 3,2010, MGT will recoup all funds advanced to Moneygate but will continue to holdits equity. Going forward we will primarily be focusing our cash and resourceson our investment holding in Medicsight plc. Medicexchange’s results have beenclassified as discontinued operations.

 

The Company achieved the following results in thesix months ended June 30, 2010:

 

·                              Revenue from license and other sales was $326 compared to $101 in 2009.Gross profit on revenues was $212 compared with $101 in 2009

 

·                              Other operating expenses, excluding the 2009 impairment of goodwill,decreased 30% to $6,126 compared to $8,752 in 2009.

 

·                              Net loss attributable to MGT Capital Investments, Inc. decreased 79 % to$4,020 and resulted in a loss per share of $0.12 compared to a net loss of$19,175 and net loss per share of $0.59 in 2009.

 

Revenue remains limitedas we await regulatory approvals in what we consider to be our key markets ofthe USA and Japan. With regards to regulatory approvals for ColonCAD, wereceived a second request for Additional Information (AI) from the FDA inJanuary 2010.   After working closelywith the clinical, statistical and legal advisors, the Company sent acomprehensive response to the FDA on June 2, 2010.  We are currently awaiting feedback from theFDA on the status of the application. We also await a further update from theMinistry of Health, Labour and Welfare (MHLW) regulatory authorities in Japan.

 

Operating costs,excluding the goodwill impairment that impacted the consolidated statement ofoperations in the first quarter of Fiscal 2009, have decreased by 30%.  This was predominantly due to two headcountreductions that Medicsight took in Fiscal 2009, the impact of which is beingfully felt in the first half of Fiscal 2010. Together with reduced staff costs, a focus on reducing other expenseshas reduced our discretionary spending.

 

Our investment in Moneygateis accounted for by the equity method, and is currently generating net losses.The investment has been reduced to $0.

 

Net loss fromMedicexchange amounted to $234, which is accounted for in discontinuedoperations together with a gain on sale of $149, and will not occur in thefuture.

 

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 cashequivalents of $13,330 compared to $22,165 as of December 31, 2009.  The decrease is mainly attributable to cashused in operating activities ($5,420).

 

**Critical accountingpolicies and estimates**

 

Our discussion and analysisof financial condition and results of operations are based upon our consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”). Thenotes to the consolidated financial statements contained in this Annual Reportdescribe our significant accounting policies used in the preparation of theconsolidated financial statements. The preparation of these financialstatements requires us to make estimates 

 

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and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and 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.

 

*RevenueRecognition*

 

*Medicsight*

 

We recognize revenue whenit is realized or realizable and earned. We consider revenue realized or realizable and earned when we havepersuasive evidence of an arrangement, the product has been shipped or theservices have been provided to the customer, the sales price is fixed ordeterminable and collectability is probable.

 

Software — License feerevenue is derived from the licensing of computer software.  Maintenance revenue is derived from softwaremaintenance.  Our software licenses aregenerally sold as part of an arrangement that includes maintenance and support.

 

We license software andsell maintenance through visualization solution partners and original equipmentmanufacturers.  We receive regular salesreporting detailing the number of licenses sold by original equipmentmanufacturers, value-added resellers and independent distributors(collectively, “Resellers”) to end users. We generally offer terms that require payment 30 days from invoicing.

 

Provided the Reseller i)assumes all risk of the purchase, ii) has the ability and obligation to payregardless of receiving payment from the end user, and all other revenue recognitioncriteria are met, license revenue from Resellers is recognized upon shipment ofits product to vendors (“sell-in basis”).

 

Revenue from license feesis recognized when notification of shipment to the end user has occurred, thereare no significant Company obligations with regard to implementation and theCompany’s services are not considered essential to the functionality of otherelements of the arrangement.

 

Services — Revenue frommaintenance and support arrangements is deferred and recognized ratably overthe term of the maintenance and support arrangements.

 

Multiple-elementarrangements — we enter into arrangements with Resellers that include acombination of software products, maintenance and support.  For such arrangements, we recognize revenueusing the residual method.  We allocatethe total arrangement fee among the various elements of the arrangement basedon the fair value of each of the undelivered elements determined byvendor-specific objective evidence.  Thefair value of maintenance and support services is evidence of fair value forall elements, and revenue is deferred until the earlier of when vendor-specificobjective evidence is determined for the undelivered elements (residual method)or when all elements for which we do not have vendor-specific objectiveevidence 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. A warranty provocation is therefore not required.

 

MedicCO2LON is sold exclusively through our distribution partner MEDRAD Inc.Revenue is recognized as goods and orders are satisfied and goods are deliveredto our distribution partner. We generally offer terms which require paymentswithin 45 days from invoicing.

 

*Equity-basedcompensation*

 

We recognize compensationexpense for all equity-based payments. Under fair value recognition provisions, we recognize equity-basedcompensation net of an estimated forfeiture rate and recognize compensationcost only for those shares expected to vest over the requisite service periodof the award.

 

The fair value of eachoption award is estimated on the date of grant using the Black-Scholes optionvaluation model.  The Black-Scholesoption valuation model requires the development of assumptions that are inputinto the model.  These assumptions arethe expected stock volatility, the risk-free interest rate, the option’sexpected life and the dividend yield on the underlying stock. Expectedvolatility is calculated based on the historical volatility of our common stockover the expected option life and other

 

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appropriate 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 estimated basedon historical experience.

 

Determining theappropriate fair value model and calculating the fair value of equity-basedpayment awards require the input of the subjective assumptions describedabove.  The assumptions used incalculating the fair value of equity-based payment awards represent management’sbest estimates, which involve inherent uncertainties and the application ofmanagement judgment.  As a result, iffactors change and we use different assumptions, our equity-based compensationexpense could be materially different in the future.  In addition, we are required to estimate theexpected forfeiture rate and recognize expense only for those shares expectedto vest.  If our actual forfeiture rateis materially different from our estimate, the equity-based compensationexpense could be significantly different from what we have recorded in thecurrent period.

 

*Researchand development*

 

We incur costs incurredin connection with the development of software products that are intended forsale.  Costs incurred prior totechnological feasibility being established for the product are expensed asincurred.  Technological feasibility isestablished upon completion of a detail program design or, in its absence,completion of a working model. Thereafter, all software production costs are capitalized andsubsequently reported at the lower of unamortized cost or net realizablevalue.  Capitalized costs are amortizedbased on current and future revenue for each product with an annual minimumequal to the straight-line amortization over the remaining estimated economiclife of the product.  Amortizationcommences when the product is available for general release to customers.

 

We concluded thatcapitalizing such expenditures on completion of a working model wasinappropriate because we did not incur any material software production costsand therefore have decided to expense all research and development costs.  Our research and development costs arecomprised of staff, consultancy and other costs expensed on the Medicsightproducts.

 

*Fair value of financialinstruments*

 

On January 1, 2008 theCompany adopted certain provisions of FASB ASC 820, “Fair Value Measurementsand Disclosures” for financial assets and financial liabilities and on January 1,2009 for non-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.

 

*Investments*

 

Investments in variouscorporations where our investment is less than 20% of issued share capital areaccounted for under the cost method. Investments where we hold between 20% and 50% of issued share capitaland we have significant influence over the investee are accounted for under theequity method.

 

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

 

We evaluate the carryingvalue of long-lived assets for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable.  Our assessment forimpairment of an asset involves estimating the undiscounted cash flows expectedto result from use of the asset and its eventual disposition.  An impairment loss recognized is measured asthe amount by which the carrying amount of the asset exceeds the fair value ofthe asset.

 

Calculating the estimatedfair value of an asset involves significant judgments and a variety ofassumptions.  Judgments that we makeconcerning the value of its intangible assets include assessing time and costinvolved for development, time to market, and risks of regulatory failure orobsolescence (due to market, environmental or technological advances forexample).  For calculating fair value basedon discounted cash flows, we forecast future operating results and future cashflows, which include long-term forecasts of revenue growth, gross profits andcapital expenditures.

 

Impairment analyses wereperformed at various points of the year ended December 31, 2009 and the Companydecided to fully impair goodwill relating to Medicsight, its investment inXShares (both the equity and the convertible loan notes), and its holding inEurindia.

 

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**Recent accountingpronouncements**

 

In October 2009 the Financial Accounting StandardsBoard (“FASB”) 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 Accounting StandardsBoard (“FASB”) FASB issued an update to Accounting Standards Codification (“ASC”)Topic 985, Software, with regards to certain revenue arrangements that includesoftware 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, withregards to improvements to financial reporting by enterprises involved withvariable 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 to have amaterial impact on our financial position or results of operations.

 

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**Results of operations**

 

The following operating results are related to ourmajor operating subsidiary, Medicsight, and other investments of MGT Capital Investments,Inc. Activity of the parent holding company on a standalone basis is immaterialand is not included in the discussion below.

 

**Medicsight operatingresults**

 
| ** **                                                 | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                 | ** ** | **2010**                      | ** ** | **2009** | ** ** |
|                                                       |       |                          |       |   |   |
| Revenue                                                    |       | $                             | 326        |   | $ | 101 |   |
| Cost of revenue                                            |       | (114                          | )          | — |   |
| Selling, general and administration costs                  |       | (3,297                        | )          | (5,950 | ) |
| Research and development                                   |       | (913                          | )          | (1,330 | ) |
| Operating expense                                          |       | (4,209                        | )          | (7,280 | ) |
| Stock-based compensation (included in operating  expenses) |       | (406                          | )          | (611 | ) |
| Operating loss                                             |       | (3,997                        | )          | (7,179 | ) |
| Interest and other income                                  |       | 35                            |       | 54 |   |
|                                                            |            |                               |            |  |  |  |  |

 
| ** ** | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|------------|------------|-------------------|------------|-----------------------|------------|
|       |       |              |       |                  |       |
| Cash       |       | $                 | 12,482     |                  | $          | 22,709 |   |
| Net assets |       | 12,225            |       | 21,519                |       |
|            |            |                   |            |                       |            |  |  |

 

In the six months endedJune 30, 2010 sales of our CAD products were flat compared to the comparableperiod in the prior year.  Licenses havebeen sold in Europe but we have yet to receive approvals in the USA and Japan,which we consider to be our key markets.

 

In the six months endedJune 30, 2010 Medicsight launched MedicCO2LON,its insufflator product.  It also signedan agreement with a global medical devices company to distribute MedicCO2LON.  In the six months ended June30, 2010, revenue of $213 had been recognized through MedicCO2LON sales.  Cost of revenue forthe period was $114.

 

With regards to regulatoryapprovals we received a second request for Additional Information (AI) from theFDA in January 2010. After working closely with clinical, statistical and legaladvisors, the Company sent a comprehensive response to the FDA on June 2,2010.  We are currently awaiting feedbackfrom the FDA on the status of the application. We also await a further updatefrom the Ministry of Health, Labour and Welfare (MHLW) regulatory authoritiesin Japan.

 

Our operating expenses have reduced from $7,280 in 2009 to $4,209 in2010.  Due to the delays in receivingregulatory approvals in Japan and the USA Medicsight management made thedecision in Fiscal 2009 to reduce headcount and streamline operations, butwithout jeopardising 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 developmentis made up of staff, staff related consultancy, stock options and productdevelopment software costs expensed on the research and development ofMedicsight’s products.  This hasdecreased compared to the comparative periods in 2009 due to the reduction inheadcount.

 

In the six months endedJune 30, 2010 stock option accounting charges fell as Medicsight employed fewerpeople than in the same period in the prior year.

 

Interest and other incomereduced as Medicsight’s cash balances were lower than in 2009 due to cash spentin operations.

 

**Other investments**

 

*Moneygate*

 

On October 8, 2009 weinvested a nominal sum in Moneygate Group Limited (“Moneygate”), a UK basedIndependent Financial Advisor (“IFA”), and acquired 49% of its sharecapital.  We also provided a £250 ($377)working capital facility and an acquisition facility of £2,000 ($3,015)facility for acquisitions.  As ofDecember 31, 2009 the working capital facility had been fully drawn down as had£100 ($159) of the acquisition facility in anticipation of a potentialacquisition that eventually did not occur.

 

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Moneygate’s businessplan is predicated on acquisition-based growth in the fragmented UK IFA market,and we have provided it with the capital to expand.  In the period ended June 30, 2010, Moneygatehas completed the acquisition of a small IFA company, thus increasing thenumber of IFAs employed.  Its managementcontinues to review a number of further potential acquisitions and hopes tocomplete these by the end of 2010.

 

In the six months ended June 30, 2010 we extendedthe working capital facility as acquisitions have been delayed and Moneygatestill requires cash to fund its operations. Followingacquisitions we expect Moneygate to generate positive cash flows.

 

Asof June 30, 2010 £675 ($1,017) had been advanced for working capital and £572($871) for acquisitions.  The fundsadvanced for the acquisition facility have been used to complete theacquisition of a small IFA Company, legal fees, due diligence fees and signingon payments to support organic growth of numbers of advisors.

 

Inanticipation of the sale of the Moneygate loan facility to a third party, forwhich terms were agreed as at June 30, 2010 the acquisition facility originallyclassified as a non-current asset has been classified as a current assetalongside the working capital facility. The acquisition facility pays interest at a rate of 5% per annum.  Interest of £6 ($9) has been accrued for inthe six months ended June 30, 2010.  Theworking capital facility does not pay interest.

 

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 MGT has representation on its board ofdirectors.

 

*Eurindia Limited*

 

In 2000 MGT invested inEurindia Limited (“Eurindia”), a UK company that invested in IT start-upcompanies.  MGT had a 6% holding inEurindia and accounted for this investment on a cost basis.  As of December 31, 2009 this investment hadbeen fully impaired.  On March 31, 2010we disposed of all of our holding in Eurindia for $1.

 

*XShares Group*

 

In 2007 and 2008 we invested$3,000 in Series 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 invested $2,000 in XSharesconvertible notes with a principal of $2,100. As of December 31, 2009 the equity investment and the convertible noteshad been fully impaired. On March 31, 2010 we disposed of all of our equityholdings in XShares for $1 and the convertible notes for $1 resulting in atotal gain on sale of $2.

 

*HipCricket Inc.*

 

In Fiscal 2007 weinvested $2,000 in HipCricket Inc., a company engaged in mobile marketing.  In the year ended December 31, 2009HipCricket Inc. was delisted from the AIM Market and we accounted for it as aninvestment held at cost.  As of December 31,2009 the investment was held at a book value of $224.  On March 31, 2010 we disposed of all of ourholding in HipCricket for $205.

 

*Investment in Medicsight*

 

Our condensedconsolidated financial statements include the results and financial conditionof our subsidiary, Medicsight.  Ourholding in Medicsight is 86,000,000 shares out of Medicsight’s issued sharecapital of 155,524,504 shares.

 

As of June 30, 2010Medicsight’s share price was £0.04 ($0.06) compared to £0.08 ($0.13), as ofDecember 31, 2009.  This valuedMedicsight at £3,268 ($4,925), compared to £6,794 ($10,821) as of December 31,2009.

 

As of July 30, 2010Medicsight’s share price was £0.06 ($0.08) valuing the Company’s investment at£4,730 ($7,399), using a $:£ exchange rate of 1.5644.

 

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**Liquidity and capitalresources**

 

*Working capitalinformation*

 
| ** **                                     | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| **Working capital summary**                    |       |               |       |                   |       |
| Cash and cash equivalents                      |       | $                  | 13,330     |                   | $          | 22,165 |   |
| Current assets                                 |       | 16,932             |       | 23,385                 |       |
| Current liabilities                            |       | (1,590             | )          | (2,244                 | )          |
| Working capital surplus                        |       | $                  | 15,342     |                   | $          | 21,141 |   |
| Ratio of current assets to current liabilities |       | 10.6               |       | 10.4                   |       |

 
| ** **                                              | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                              | ** ** | **2010**                      | ** ** | **2009** | ** ** |
| **Cash flow summary**                                   |       |                          |       |   |   |
| Cash (used for) provided by                             |       |                          |       |   |   |
| Operating activities                                    |       | $                             | (5,420     | ) | $ | (8,226 | ) |
| Investing activities                                    |       | (2,129                        | )          | (1,066 | ) |
| Discontinued operations                                 |       | (226                          | )          | (607 | ) |
| Effects of exchange rates on cash and cash  equivalents |       | (1,060                        | )          | 2,382 |   |
| Net cash flow                                           |       | $                             | (8,835     | ) | $ | (7,517 | ) |

 

Our cash and cashequivalents have decreased during 2010 predominantly because of the $5,420 usedin operating activities.  Our net cashused in operating activities differs from net loss predominantly because ofvarious non-cash adjustments such as stock-based compensation and movements inworking capital.

 

Included in investingactivities is a further $1,370 advanced to Moneygate, with $645 for the workingcapital facility and $725 for the acquisition facility.   Medicexchange was sold during the six monthsended June 30, 2010 and $1,101 of cash was disposed of as part of thistransaction, also included within investing activities.

 

Our ratio of current assets to current liabilitiesremains strong at 10.6.  This is a resultof the $13,330 of cash held in the Company.

 

*Moneygate acquisitionfacility*

 

On the purchase of 49% of Moneygate we made available a £2,000 ($3,015)facility to Moneygate to make acquisitions. As of June 30, 2010 £675 ($1,017) had been drawn down. Following theagreement with an unrelated third party dated August 3, 2010, all MGT fundswill be recouped and Moneygate will continue to have access to acquisitionfunds through the third party.

 

*Risks and uncertaintiesrelated to our future capital requirements*

 

To date we have primarilyfinanced our operations through private placements of equity securities.  To the extent that additional capital is raisedthrough the sale of equity or equity-related securities of the Company or itssubsidiaries, the issuance of such securities could result in dilution to ourstockholders.

 

No assurance can begiven, however, that we will have access to the capital markets in the future,or that financing will be available on acceptable terms to satisfy our cashrequirements to implement our business strategies.

 

If we are unable toaccess the capital markets or obtain acceptable financing, our results ofoperations and financial conditions could be materially and adversely affected. We may be required to raise substantialadditional funds through other means.

 

Our technology has notyet been regulated in all target territories and as a result commercial resultshave been limited and we have not generated significant revenues.  We cannot assure our stockholders that ourtechnology and products will be commercialized successfully, or that if socommercialized, that revenues will be sufficient to fund our operations.

 

If adequate funds are notavailable to us, we may be required to curtail operations significantly or toobtain funds through entering into arrangements with collaborative partners orothers that may require us to relinquish rights to certain of our technologiesor products that we would not otherwise relinquish.

 

*Commitments*

 

On August 25, 2006 weexecuted a 10-year agreement with Pirbright Holdings Limited, to lease 8,787square feet of office space at the Kensington Centre, 66 Hammersmith Road,London W14 8UD, United Kingdom.

 

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Under this leaseagreement our UK property rent, services and related costs will be approximately£330 ($497) per annum, paid quarterly in advance.  We have the right to terminate this agreementon the expiration of the fifth year of the lease.  Our annual rent is subject to upward onlyreview on August 24, 2011.  We have two10-month rent-free periods: the first commencing August 25, 2006; the secondcommencing August 25, 2011.

 

We have a satelliteoffice in Tokyo (Japan) with a two year rental agreement.

 

In July 2008 we enteredinto an agreement with a partner to develop interfaces for our software.  We have committed to pay Euros 1,445 ($1,764)over an expected thirty-six month period.  As at June 30, 2010 we have paid Euros 845($1,031).  These payments will berecovered against future royalty payments, should the products be successfullycommercialized.

 

The following table analyzes our contractualobligations.

 
| ** **                       | ** ** | **Payments due by period** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|
| **Contractual obligations** | ** ** | **Total**                                 | ** ** | **Less than 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** |
| Operating lease obligations      |       | $                                         | 499        |   | $ | 217 |   | $ | 280 |   | $ | 2 |   |
| Purchase obligations             |       | 733                                       |       | 733 |   | — |   | — |   |
|                             |       |                                      |       |   |   |   |   |   |   |
| Total                            |       | $                                         | 1,232      |   | $ | 950 |   | $ | 280 |   | $ | 2 |   |

 

**Recent accountingpronouncements**

 

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

 

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**Item 3.**         **Quantitative and qualitative disclosures about marketrisk**

 

Interest*rate risk*

 

Our exposure to marketrate risk for changes in interest rates relates primarily to our investmentportfolio.  We place our investments in amixture of cash deposits and available-for-sale market securities.  A one percent movement in interest rate wouldresult in approximately $133 change in interest income.

 

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

 

*Foreign exchange risk*

 

We are exposed to foreigncurrency exchange rate fluctuations related to the operation of ourinternational subsidiaries.  Our mainoperating currency is UK sterling.  Wealso have a subsidiary operation in Japan that operates in Yen.

 

Our operating costs inFiscal 2010 were predominantly in UK sterling; we do not foresee any change inthe remainder of 2010.  A ten percentincrease or decline in the US dollar exchange rate against all foreigncurrencies would have created a decrease or increase in our operating costs inthe six months ended June 30, 2010 of approximately $478.

 

At the end of eachreporting period, expenses of the subsidiaries are converted into US dollarsusing the average currency rate in effect for the period and assets andliabilities are converted into US dollars using the exchange rate in effect atthe end of the period.

 

Additionally, we areexposed to foreign currency exchange rate fluctuations relating to payments wemake to vendors and suppliers using foreign currencies.

 

We currently do not hedge against this foreigncurrency risk.

 

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

 

**Item 4T.            Controlsand procedures**

 

*Evaluationof disclosure controls and procedures*

 

Management of theCompany, including the Chief Executive Officer and the Chief Financial Officer,evaluated the effectiveness of the design and operation of the Company’sdisclosure controls and procedures (as such term is defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934), as amended (the “ExchangeAct”), as of the end of the period covered by this report. Based upon thatevaluation, the Company’s Chief Executive Officer and the Chief FinancialOfficer concluded that the Company’s disclosure controls and procedures wereeffective as of the end of the period covered by this report for theinformation required to be disclosed by the Company in the reports it files orsubmits under the Exchange Act, as amended, to be recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms.

 

*Changes in internalcontrol over financial 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)and 15d-15(f) under the Exchange Act) during the fiscal quarter ended June 30, 2010that have materially affected, or are reasonably likely to materially affect,the Company’s internal control over financial reporting.

 

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**PART II.  OTHERINFORMATION**

 

**Item 1.****             ****Legal proceedings**

 

None.

 

**Item 1A.****          ****Riskfactors**

 

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

 

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**Item 2.              Unregisteredsales of equity securities anduse of proceeds**

 

Inthe three months ended June 30, 2010 no shares of common stock were issued.

 

**Item 3.              Defaultsupon senior securities**

 

None.

 

**Item 4.              [Removedand Reserved]**

 

**Item 5.              Otherinformation**

 

None

 

**Item 6.              Exhibits**

 
| 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 |

 

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SIGNATURE

 

Inaccordance with the requirements of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|           | MGT Capital Investments,  Inc. |
|----------------|--------------------------------|
|           |                           |   |
|           |                           |   |
|           | By:                            | /s/ TIM PATERSON-BROWN |
|           |                           | Tim Paterson-Brown |
|           |                           | Chief Executive Officer |
|           |                           |   |
|           |                           |   |
|           | By:                            | /s/ ALLAN ROWLEY |
|           |                           | Allan Rowley |
|           |                           | Chief Financial Officer |
|           |                           |   |
|           |                           |   |
| August 5, 2010 |                           |   |

 

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