Business context and reporting period
Mandalay Digital Group, Inc. (now identified in the request as Digital Turbine, Inc.) filed this Form 10-Q for the quarter ended September 30, 2014. The company provides mobile content, application-management, discovery, advertising, and billing products to wireless carriers and OEMs. Results below are in U.S. dollars; financial statement amounts are in thousands unless otherwise noted. The filing presents both the three-month quarter and the six months ended September 30, with prior-year comparisons.
Financial performance and liquidity
| Metric | Three months ended Sep. 30, 2014 | Six months ended Sep. 30, 2014 |
|---|---|---|
| Revenue | $5.462 million | $11.016 million |
| Gross profit / margin | $1.801 million / 33.0% | $3.215 million / 29.2% |
| Operating loss | $4.645 million | $9.325 million |
| Net loss | $5.201 million | $9.811 million |
| Net loss per share, basic and diluted | $0.14 | $0.26 |
| Cash used in operating activities | Not separately clear for the quarter in the summarized cash flow statement | $5.479 million |
For the six-month period, revenue declined 4.6% year over year, gross profit fell 20.6%, and operating loss increased from $7.945 million to $9.325 million. Net loss narrowed from $11.908 million, partly because the prior-year period included discontinued-operation losses and higher financing-related expenses. Quarterly revenue fell 19.2% year over year; quarterly net loss improved from $6.222 million, also reflecting the absence of the prior-year discontinued-operation loss.
At September 30, cash and cash equivalents were $16.715 million, down from $21.805 million at March 31. Current assets were $21.687 million and current liabilities $10.044 million, yielding reported positive working capital of approximately $11.6 million. Total liabilities were $10.044 million; the balance sheet reports no contingent liability at quarter-end and no separate outstanding borrowing balance. The company reported no material off-balance-sheet financing arrangements.
Six-month cash flows were $5.479 million used in operations, $5,000 provided by investing activities, and $375,000 provided by financing activities, including proceeds from a warrant exercise. Cash declined by $5.090 million over the period. No material capital expenditures were reported.
Material changes versus the prior comparable period
- Six-month content revenue decreased to $5.232 million from $5.661 million; billing revenue rose to $4.677 million from $4.457 million; advertising revenue increased to $682,000 from $451,000; and services revenue fell to $425,000 from $973,000. Management attributed the overall revenue decline mainly to lower content revenue and described advertising growth as including setup fees and DT Ignite/DT IQ cost-per-install revenue.
- Six-month gross margin contracted to 29.2% from 35.1%. Management attributed the decline to sales mix, including lower services revenue and changes in billing and content revenue. The quarter’s 33.0% margin was higher than the six-month rate, aided by advertising revenue.
- Six-month cost of revenue increased 4.1% despite lower revenue. Operating expenses increased 4.5%; sales and marketing rose 65.5%, while general and administrative expense declined 2.4% and product development increased 3.0%.
- Cash used in operations worsened to $5.479 million from $3.893 million for the prior-year six months. Cash compensation and noncash stock-based compensation remain relevant to interpreting the loss; stock compensation and stock issued for services were significant adjustments in the cash flow reconciliation.
- In April 2014, the company settled disputes related to Logia acquisition contingent consideration, releasing the company from that contingent consideration. It issued 50,000 shares as part of the settlement and recorded an additional $60,000 payable, at its election in cash or shares.
Outlook, commentary, risks, and unusual items
- Management stated that cash resources were expected to fund planned operations for at least the next 12 months. The company was not yet cash-flow positive and expected to rely primarily on cash on hand; additional financing might be needed for acquisitions or licensing, and may not be available on acceptable terms.
- No specific revenue or earnings guidance was provided. Management said revenue depends on content and application sales, CPI advertising, carrier and publisher relationships, billing expansion, and mobile-device sell-through. Seasonal patterns may affect results, and summer softness in Europe may weigh on September-quarter revenue.
- Customer concentration is material: three customers accounted for 58.5%, 14.9%, and 3.5% of six-month revenue, respectively. The same customers represented 41.3%, 12.7%, and 11.5% of receivables at September 30. Revenue is also exposed to demand for devices on which the company’s software is installed, carrier relationships, and changes in carrier promotion or distribution.
- Management and the principal financial officer concluded disclosure controls were ineffective at September 30 due to material weaknesses in the financial close and reporting process, including insufficient accounting systems and technical resources and reliance on manual procedures across entities. Management planned ERP implementation and reassignment of accounting responsibilities, expecting certain remediation during fiscal 2015.
- Subsequent to quarter-end, the company acquired Xyologic assets related to app recommendation, search, discovery, and carrier relationships for $2.5 million cash, including a $375,000 holdback. On November 13, 2014, it agreed to acquire Appia in a merger expected to close in the first quarter of calendar 2015, subject to conditions including a shareholder vote. The filing estimated approximately 19 million shares to be issued, subject to adjustments, and assumption of approximately $10 million of Appia debt.
- An Israeli class action matter involving alleged call and text-message billing overages includes a third-party claim alleging company involvement. Management considered liability remote, believed any exposure would not be material, and recorded no accrual. The appeal was pending. Management also stated other ordinary-course claims were not expected to be material.
- Goodwill increased by $1.472 million following finalization of the DT APAC purchase-price allocation. Management reported no impairment indicators at September 30. Deferred tax assets declined from $3.238 million to $541,000, and deferred tax liabilities declined from $2.987 million to $1.024 million; the filing states a full valuation allowance against net deferred tax assets.
Important facts for investors to verify
- Whether revenue declines, particularly in content and services, persist and whether advertising and billing growth can offset them.
- Cash burn, the assumptions behind management’s statement that liquidity covers at least 12 months, and any financing needs or dilution.
- Progress in remediating the disclosed material weaknesses and whether financial reporting controls become effective.
- Customer and device concentration, including carrier contract changes and the effect of device sell-through on revenue.
- Closing conditions, final share issuance, and assumed debt for the proposed Appia merger, plus integration and funding requirements for the Xyologic acquisition.
- Developments in the Israeli litigation and any change to management’s no-accrual assessment.