Mandalay Digital Group, Inc. (now associated with Digital Turbine)
Business context and period: This Form 10-Q covers the quarter and nine months ended December 31, 2013. The registrant is Mandalay Digital Group, Inc.; Digital Turbine was a subsidiary and a core part of its mobile-content and carrier-solutions business. Results include MIA, acquired in April 2013, and reflect the company’s expansion through acquisitions.
Financial performance
Amounts below are in millions of U.S. dollars, except per-share data and where noted.
| Metric | Three months ended Dec. 31, 2013 | Three months ended Dec. 31, 2012 | Nine months ended Dec. 31, 2013 | Nine months ended Dec. 31, 2012 |
|---|---|---|---|---|
| Revenue | $7.03 | $2.05 | $19.12 | $4.25 |
| Gross profit / margin | $2.05 / 29.2% | $1.12 / 54.8% | $6.41 / 33.5% | $2.28 / 53.6% |
| Operating loss | $(4.19) | $(3.58) | $(12.23) | $(9.06) |
| Net loss | $(4.18) | $(4.21) | $(16.08) | $(10.74) |
| Basic and diluted loss per share | $(0.13) | $(0.24) | $(0.63) | $(0.62) |
- Quarterly revenue rose 243% year over year; nine-month revenue rose 350%. Growth primarily reflects the acquisitions, particularly MIA, rather than solely organic growth.
- Gross margin declined substantially as revenue mix shifted and license-fee costs increased. For the quarter, $5.8 million of revenue was attributed to MIA.
- Operating expenses were $6.24 million for the quarter and $18.64 million for nine months. Nine-month product development expense included a $0.53 million charge related to stock previously classified as a content-acquisition deposit.
- Cash used in operations was $6.91 million for nine months, compared with $5.86 million in the prior-year period. Investing activities used $0.84 million; financing activities provided $11.27 million, including $14.92 million net proceeds from share issuance and $3.66 million of debt repayments.
- At December 31, cash was $4.66 million; current assets were $11.43 million and current liabilities $10.75 million, yielding positive working capital of about $0.68 million. At March 31, 2013, working capital was negative by about $5.66 million.
- Total liabilities were $10.99 million, including $6 thousand of equipment-lease debt, no reported long-term debt, and a $0.24 million discounted contingent liability. The company reported $16.26 million of stockholders’ equity.
Material changes and notable items
- Compared with the prior-year periods, revenue and gross profit increased with the expanded business, but gross margins compressed and nine-month operating and net losses widened. Quarterly net loss was slightly lower, while quarterly loss per share improved partly alongside a 76% increase in weighted-average shares.
- The company acquired MIA in April 2013 for cash, a convertible note, and shares; its results contributed $14.89 million of revenue from acquisition through December 31. MIA purchase-price allocations and related goodwill and intangible values remained provisional and could change materially.
- Equity financing and debt conversion materially changed the capital structure: common shares issued increased to 32.1 million from 19.2 million at March 31, 2013. The company also issued substantial equity in financing and acquisition transactions.
- The filing says management expected existing cash to fund planned operations for at least 12 months, while warning that additional financing might be needed if cash is insufficient; future debt or equity financing could restrict operations or dilute shareholders. The filing also notes a prior-year auditor’s going-concern emphasis.
Outlook, risks, and contingencies
- No numerical revenue, earnings, or cash-flow guidance is provided. Management described anticipated growth from mobile-content demand, carrier and publisher relationships, and products including Ignite, IQ, Marketplace, and Pay. It expected operating expenses to rise if the business grows.
- Key business risks include dependence on mobile carriers and a concentrated customer base, changes in carrier promotion or portal placement, revenue-estimation judgments, content royalties and revenue mix, seasonality, acquisition integration, and the need for financing. Two customers represented 51.6% and 14.9% of gross receivables; three customers generated 40.6%, 23.2%, and 10.8% of nine-month revenue.
- Management found disclosure controls ineffective at December 31, 2013 because of material weaknesses in financial close and reporting, including insufficient secondary review. Planned remediation included ERP implementation and stronger review and reporting procedures, targeted for completion by fiscal year-end March 31, 2014.
- Legal matters include a supplier dispute and a third-party notice connected to an Israeli class action alleging involvement in phone-call overages. Management said it considered liability in the latter matter remote and did not accrue a liability; it also believed other claims would not be material.
- On February 13, 2014, after quarter-end, the company sold wholly owned subsidiary Twistbox and said the transaction was not material to the financial statements.
Investor verification priorities
- Confirm how much reported revenue growth is attributable to acquisitions, especially MIA, and assess organic growth and customer concentration.
- Reconcile gross-margin deterioration with product mix, license costs, and the filing’s differing nine-month license-fee figures: $11.228 million in the financial statements versus $11.288 million in the MD&A table.
- Assess cash burn, working-capital needs, and the basis for management’s 12-month liquidity expectation, given $4.66 million of cash and nine-month operating cash outflow of $6.91 million.
- Review dilution and remaining potential share issuance, including equity-plan awards, acquisition consideration, and financing instruments.
- Track completion of the stated internal-control remediation, final MIA purchase accounting, and any developments in legal matters or the Twistbox sale.