Thursday, September 4, 2014

Is CEO Robert Ladd Good For MGT Shareholders?

"I am sure shareholders will be none too pleased to learn how Mr. Ladd is spending his time these days while shareholder value continues to precipitously decline. " June 9, 2014 -- Iroquois Capital Management

Leadership. Stocks are just hopes & dreams without it. At best, this company is a case of a President/CEO who has no idea what he's doing dabbling into an array of business models which don't ever seem to meet shareholder expectations or initial hype. At worst, it's a calculated pump & dump operation that only maintains solvency to finance Mr. Ladd and other managements lifestyle.

Lets take a look at some of the blunders Mr Ladd overseen recently:

Flashback to last year and regulated online poker was supposed to help turn Atlantic City casinos around. In reality more properties are closing than thriving in the area and online poker was never going to change that. But flashback to July of last year and Atlantic City casinos were establishing partnerships with online poker providers:
  • Caesars Entertainment and 888
    (Caesars owns four Atlantic City casinos: Harrahs, Caesars, Showboat, and Bally’s)
  • Boyd Gaming and bwin.party (Boyd Gaming co-owns The Borgata).
  • Golden Nugget and Bally Technologies
  • Trump Taj Mahal and Ultimate Gaming
  • The Tropicana and GameSys
  • Trump Plaza and Betfair
  • Resorts and PokerStars
  • (Source: Online Poker Report July 2, 2013)
AFTER all this - MGT acquired assets from Gioia Systems which included Real Deal Poker - a machine that deals cards with a tracking device so the deal can be audited. Here's CEO Robert Ladd's plans at the time:
 "As U.S. states begin to allow betting on online poker, we expect Real Deal to offer regulators the only way to ensure fairness and allow for full transparency for any card dealt online.  We expect to partner with casinos as they offer online poker to adults in Nevada and New Jersey.  We also plan to license the Real Deal technology to other legal online poker sites that wish to offer their customers a more true-life poker experience." September 4, 2013 - CEO Robert Ladd
Notice CEO Robert Ladd states that they expect to partner Real Deal Poker with casinos .... while two months prior - all the major casinos in New Jersey had already partnered with online poker providers who have their own technology .

Real Deal Poker, which as early as 2010 was never really taken seriously by the poker community but bloggers as late as December 2013 still saw value in Real Deal Poker - all while the New Jersey casino's had already decided on providers in July. We understand MGT shareholders didn't pay a huge sum for this technology, however it shows Ladd's willingness to exaggerate the potential of assets and/or misjudge the potential for that technology. It also shows how MGT acquires assets - only to not really do much with them except spend shareholder money on costs/fees associated with running those assets.

Here's the next example:

MGT Studios is publisher of social games and real money games of skill.
Avcom is a game development studio producing free to play mobile and social casino–style games. Avcom’s assets include physical and intellectual property associated with Mobilevegas and freeawesome.com, as well as a game under development titled “SlotChamp”. (p.8 10-Q)
At the time of publishing this - Avcom's website for MobileVegas (mobileveg.as) was not working. The website revserve.com did have some information about SlotChamp - however the links to the mobile app stores were not working. Freeawesome.com worked, but the company's last blog post was February 2011 and the company hadn't tweeted since August 2011. Essentially the websites looked like ghost towns. Here's what MGT has spent on the aforementioned websites/apps:
Prior to entering into the Avcom Agreement, Avcom had performed certain game development consulting services for the Company for which Avcom received an aggregate of $146 as consideration for such services in 2013.
In the six months ended June 30, 2014 the Company recognized $113 of research and development expense (2013: $nil), attributed to product development costs in MGT Studios. (p.20 10-Q
What has MGT Studio's "partnership" with Avcom done for the company's bottom line?? Nada, zero. What did the company produce for that much money? Is the money actually going to building something because I don't see much? Aside from that, building mobile apps is clearly expensive and trying to make a hit game is probably like trying to write a hit pop-song. Lots try, most fail and the few who succeed get rich. Remember the quote from Iroquois Capital Management at the top - you think Mr. Ladd is working hard at creating a great mobile app company? Doesn't seem like it.

The companies other venture under this business segment is MGTPlay.com
On December 4, 2013, the Company entered into a Strategic Alliance Agreement with M2P Entertainment GmbH, a German corporation (“M2P”). Pursuant to the terms of the Strategic Alliance Agreement, the Company will advance certain expenses to M2P Americas and the Company and M2P will provide network and human resources support to M2P Americas. (p.9 10-Q)
What is MGTPlay.com? It's simply a skin of M2P Entertainment GmbH's website: de.m2p.com. Additionally a visit to the MGTPlay Twitter account show no tweets since June 2014 and the account only has 10 tweets total, all happening in about 1 weeks period of time. (And don't think those followers are real, for $5 - $10 on Fiverr and other sites you can acquire as many twitter followers you want). The company now includes a link to MGTPlay.com in the company description that appears on financial blurbs. However, the website is essentially a skin and the company has spent only 1 week trying to promote MGTPlay on one of the worlds largest social media platforms. Now you know why shareholders are questioning what CEO Robert Ladd is doing in his free time.

Also notice a pattern of 'ghost town' websites & assets is following this company, and it continues ...

DFS Agreement is a partnership between MGT's FanThrowdown and daily fantasy players Nicholas Dunham (1ucror) and Charles Chon (Conida). These are two high-stake fantasy game players, who hardcore daily fantasy game players will recognize - but the casual or average player will not.
In exchange for expert promotional and site design services and subject to receipt of the applicable deliveries by the Consultant the Company agreed to provide the following compensation to the Consultant:

Each month, MGT shall issue to the Consultant 5,000 shares of MGT Restricted Common Stock, payable monthly in arrears. For the three and six month periods ended June 30, 2014, the Company has expensed $24 for the services.

Additionally, on the date hereof, , the Company agreed to issue to the Consultant a warrant to purchase 100,000 shares of common stock, which will vest immediately upon issuance. The warrant was valued at $80 utilizing the Black-Scholes Option pricing model based on 75% volatility rate. For the three and six months ended June 30, 2014, the Company expensed $34 relating to the warrant. (p.14-15 10-Q)
When I last checked FanThrowdown's website (September 3, 2014 at 2:26pm PST) the only games on the site that seemed to have any players were games priced under .25 cents. In fact, a 1 cent tournament where the top 100 contestants got paid only had 58 entries with about 1 1/2 hour until first pitch.  The site did not have NFL games on the site yet, and the 1st NFL game starts the following day. A scan of rival FanDuel & DraftKings show multiple players signing up for games that cost as much as $200. Both websites had College Football matches being played Thursday night (let alone NFL, MLB, PGA .. ect). The company twitter hasn't tweeted since August 14, 2014 and we're on the doorstep of the hottest season for daily sports. FanThrowdown is a virtual ghost town today and doesn't contribute to the bottom line. Looks like MGT's decision to hire some consultants hasn't yielded any positive results and FanThrowdown joins Real Deal Poker and MGT Studio's as another ghost town website/asset.

Did MGT Overpay For FanThrowdown? You bet MGT overpaid! They paid $2.5m for a 65% stake in FanThrowdown last August. Now FanThrowdown can only fill the micro-stake games and doesn't have NFL daily fantasy contests 1 day before the NFL season stats - proving that daily fantasy sports sites can bust as quick as they can go boom.
On April 7, 2014, the Company closed on an Asset Purchase Agreement (“Agreement”) with CardRunners Gaming, Inc. to acquire business assets and intellectual property related to DraftDay.com for cash consideration of $600 and stock consideration of $190, consisting of 95,166 shares of Company’s Common Stock at $2.00 per share (valued on the date of close).  (p.17 10-Q)
For those of you without a calculator handy .... that's $790,000 for 100% of DraftDay and $2.5m for 65% of FanThrowdown which appears almost dead. Scroll up to the top of the post and read what Iroquois Capital Management said about Ladd. Do you think Robert Ladd, based on his track record, will build DraftDay into a highly profitable asset for MGT shareholders? Fast forward 1 year and Robert Ladd will likely deteriorate DraftDay's value, much like he did with FanThrowdown and every other assets I've described above.

Lastly - MGT's slot machine patents.
Guys, I am no lawyer or judge. I learned years ago as America was glued to the O.J. Simpson case that just about anything can happen in court. Additionally, considering this matter will likely be in the hands of attorneys - Robert Ladd's ability to screw this up go down. But trying to predict an outcome would be like betting on picking this years Super Bowl winner correctly. It's gambling. Which is fitting for MGT shareholders considering the attempts management has made to win in those markets but lost. It's also clear lawyers don't come cheap:
Selling, general and administrative expenses were $165 (2013: $205), attributed to legal fees, consulting costs and amortization of the intellectual property assets. (p.20 10-Q)
Additionally, royalty payments won't come soon even if there's some kind of miracle swift act of justice. Companies will fight paying a royalty payment tooth-and-nail so don't expect any kind of big payoff soon. In the meantime, you are trusting Robert Ladd and other management to generate some positive gross margins from DraftDay in order to fund the business considering what is listed above is D.O.A. At best, several rounds of dilution will occur before MGT wins some kind of judgement in court and actually collects a check from anyone. You might sell your entire portfolio and move to a private island in Jamaica by the time MGT ever collects a royalty check. Robert Ladd knows this is his ace up his sleeve - and can buy him time to infinity with investors because court cases always drag on. Until then, you need to trust him running the existing & future assets of this company.

So you wonder how Robert Ladd spends his time these days? You'd be surprised. He's not sweating over any of the issues I've brought up here. Just ask the people that know what he's been up to recently. 

Tuesday, September 2, 2014

MGT Capital Investments Stock On A Wild Ride

For the last year I've been following the developments of MGT Capital Investments (MGT) - mainly because of interest in the daily fantasy sports market, so this article will largely revolve around that segment of the business. However, there's much more going on at MGT than daily fantasy sports and simply investing in MGT because they own (or partly own) 2 daily fantasy sports websites is simply ignoring the business models that are draining cash from the business. But that's for another day & another time. While on the sidelines watching, I've seen current management see these major events happen during the year:

At this point the company's stock was trading under $1.00/share and there were bankruptcy rumors given the cash position the company has. Since then the company has released a 10-Q that did provide more details on DraftDay revenue, but still has a bleak outlook in terms of cash on hand.
On June 30, 2014, MGT’s cash and cash equivalents were $2,425 excluding $138 of restricted cash. The Company continues to exercise discipline with respect to current expense levels, as revenues remain limited. Our cash and cash equivalents have decreased during the six months ended June 30, 2014, primarily due to $2,458 used in operating activities. (p.21 10-Q)
Some investors thesis to invest in MGT has been because of the growth surrounding the daily fantasy sports market - where I worry about the company cash on hand given the company should still be in a growth mode in the daily fantasy sports market. Top daily fantasy sports websites like DraftKings are still in fundraising mode themselves ... certainly the #3 daily fantasy site needs to raise/re-invest money too? Instead the company is counting on DraftDay to finance some of the company's operations until cash is expected to run out next year.
Management believes that the current level of working capital combined with gross margin from DraftDay, along with the At the ATM Agreement, will be sufficient to allow the Company to maintain its operations into June, 2015, at which point the Company may need to seek additional sources of financing. There is no guarantee that additional sources of financing will be available or on terms acceptable to the Company, if at all. (p.22 10-Q
(Bold Emphasis Added By Me) 
Shareholder's with the thesis that daily fantasy sports are going to explode - I'd be a little worried that top competitors aren't relying on gross margins or free cash flow yet ... they are raising $41 million dollars!! Those competitors (DraftKings & FanDuel) already have mobile apps, bigger guarantees, larger prize pools, more players, partnerships with the MLB ... ect ... ect. Now DraftDay will need to use cash that should be re-invested into DraftDay to fund operations at MGT??

Yikes!

Wait until Yahoo, CBS, ESPN or even the NFL themselves decides to build there own site or partner with one of the 2 largest players who have investor money to burn!

Forget all that - daily fantasy sports is a seasonal business. It revolves around football season where all teams play for about 4 months out of the year. Additionally several US states don't allow you to play at all including: Arizona, Iowa, Louisiana, Montana, Washington and the Canadian province of Quebec. So a thesis that fantasy sports will blow up is not analyzing that the market is already inherently limited to certain geographic locations.

Forget all that part II - You are losing either way. If MGT Capital Investments is successful in bleeding cash from DraftDay to support company operations, competitors who are already larger than DraftDay & FanThrowdown combined will surely crush them even further because they are re-investing into the company and MGT is not? Now let's assume MGT is kidding themselves, and investors that they won't need to raise money given they only have 2.4 million in the bank. You lose that way because MGT will likely have to raise money in via shareholder dilution given the company seems a ways from profiting from any other venture it's involved in.

The thesis that buying MGT because you're getting in the daily fantasy sports market 'cheap' doesn't factor in any potential fundraising, or the fact that larger competitors are still in fundraising mode themselves - while MGT is planning on using the free cash to fund operations.

While the short term pops in MGT stock might be spectacular, I believe the long term outlook remains bleak. The company will have to raise funds at some point in the next 12 months - leading me to believe further dilution is ahead. If you believe in MGT long term, waiting for that fundraising round, or the hype of the NFL season to wear off will likely be a better entry point than today's price.