Submitted by Lisa Bailey as part of our contributors program.
In a sudden press release on Friday after the market close, MGT Capital Investments announced that its majority-owned subsidiary, MGT Gaming, had filed a massive lawsuit against casino companies Caesars Entertainment (NASDAQ: CZR), MGM Resorts (NYSE: MGM), WMS Gaming (NYSE: WMS), Penn National Gaming (NASDAQ: PENN), and Aruze Gaming America. MGT Gaming alleges that these companies infringed on its patent 7,892,088 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 Mississippi.
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 Caesars.
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 December 1.
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 patent ruling 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.