Submitted by Lisa Bailey as part of our
In a sudden press release on Friday after the market close, MGT
that its majority-owned subsidiary, MGT Gaming, had filed a massive
lawsuit against casino companies Caesars Entertainment (
), MGM Resorts (
), WMS Gaming (
), Penn National Gaming (
), and Aruze Gaming America. MGT Gaming alleges that these
companies infringed on its patent
related to networked slot machines with a shared-display bonusing
event. Top-tier law firm Nixon & Vanderhye filed for MGT Gaming
in the U.S. District Court for the Southern District of
What was most surprising about the lawsuit was its scope. MGT
Capital Investments is a relatively small company of just $17
million in market capitalization yet is suing for a percentage of
the revenue from tens of thousands of slot machines generating
hundreds of dollars in profit per day. The slot machine games
listed in the complaint are instantly recognizable: "Pirate
Battle," "Reel'em In Compete to Win," "Great and Powerful Oz,"
"Battleship," "Clue," and "Paradise Fishing." The lawsuit also
names some of the biggest casinos in the world, including MGM and
Background of the Plaintiff
MGT Capital Investments owns 13 issued and 19 pending patents
with a stated goal of monetizing its intellectual property rights.
Currently the only patent with an announced lawsuit is the slot
machine patent. Medicsight, a wholly-owned subsidiary of MGT
Capital Investments, controls twelve patents related to medical
software and imaging.
Friday's lawsuit shocked the casino industry due to MGT Capital
Investments' sudden entrance into the patent assertion business and
its unusually large lawsuit. Previously engaged in the business of
medical screening, MGT announced in April 2010 that it was cutting
its losses in this division by disposing of its investments in
Medicexchange, XShares, HIP Cricket, and Eurindia through a $1
million sale to Rivera Capital Management.
With several million dollars of debt remaining in December 2010,
Laddcap Value Investors from New York then acquired a 16.7% stake
in MGT Capital Investments. Laddcap was an activist hedge fund run
by Robert B. Ladd, a Chartered Financial Analyst formerly with
Neuberger Berman. After discussions following his investment,
Robert Ladd became the CEO of MGT Capital Investments.
During the past two years, MGT Capital Investments has mended
its bleeding balance sheet, repaid 100% of its debt, and cleaned up
its capital structure with the help of financial institutions like
Chardan and Hudson Bay Capital Management. It has also responded to
NYSE AMEX requests to comply with listing standards that had been
neglected under prior management (failing to have a 2011
shareholder meeting is one example). The company now has no
outstanding issues and $7 million in cash- enough to fund
operations for over five years at its current burn rate.
Most stock charts do not display the historical price of MGT
Capital Investments due to three stock splits, the last of which
occurred in March 2012. In addition, the company's shares have
fluctuated as unprofitable businesses were divested and large debts
were repaid. Currently, the company is debt-free with $7 million in
cash and only 3.0 million shares outstanding (1.1 million of which
are owned by insiders). The company also has no options and minimal
alternative securities: $4.5 million of preferred convertible at
$3.26, 350,000 warrants at $4.00 held by the sellers of the gaming
patent, 3.0 million warrants at $3.85, 454,000 registered warrants
at $3.00, and 421,000 Rule 144 warrants at $3.00 restricted until
MGT Bursts Into the Casino Sector
On May 10, 2012, MGT Capital Investments quietly announced the
acquisition of a gaming patent, thus, foreshadowing the company's
future pivot from a medical software company to an intellectual
property player. Then on Friday, MGT formalized its new business
focus with a large-scale lawsuit announcement against some of the
biggest casino companies in the world.
As mention above, MGT Gaming claims that some of the most
popular slot machine games infringe on its patent: "Pirate Battle,"
"Reel'em In Compete to Win," "Great and Powerful Oz," "Battleship,"
"Clue," and "Paradise Fishing." The maker of the first four games
is WMS Gaming. Paradise Fishing is made by Aruze Gaming, a
subsidiary of a Japanese company, Universal Entertainment Company
(JASDAQ: 6425). The other three defendants in the lawsuit are slot
machine operators: Caesars Entertainment, MGM Resorts and Penn
National Gaming. If the courts rule in favor of MGT Gaming,
settlements could range from a small settlement of a few million
dollars to a double-digit royalty award that could be worth
billions over the course of several years.
According to the American Gaming Association, 63% of all casino
revenues in the United States came from slot machines. In 2011,
recorded casino revenues in the United States totaled $36 billion.
Depending on the court decision, MGT Capital Investments may
receive a significant award. Statistically, a negotiated settlement
out of court is likely. However, a failure to reach a deal with the
gaming industry or a favorable court ruling would be unfortunate,
especially if the casino industry strong-arms the courts (a risk
somewhat mitigated by the Mississippi court versus the "home turf"
of Nevada). To its credit, the recent high-profile
against Samsung in favor of Apple reaffirm that courts do prefer
patents, even if patents are broad in scope or language.
MGT Capital Investments has taken a daring leap into the
high-stakes litigation sector by acquiring intellectual property
and asserting its rights against one of the biggest entertainment
industries in the world: casinos. Although the lawsuit will require
significant time and effort, the reward for shareholders could be a
stock rally in the thousands of percentage points. Although no one
can predict the outcome of a lawsuit filed just last week,
immediate volatility in shares of MGT Capital Investments would not
be surprising due to the news.