Business Context and Reporting Period
Company: NeuMedia, Inc. (formerly Mandalay Media, Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: March 31, 2011
Business Overview: NeuMedia operates primarily through its subsidiary, Twistbox Entertainment, Inc., a global publisher and distributor of mobile entertainment content and services. The company distributes content (games, video, images) via mobile network operators ("on-deck") and direct-to-consumer channels ("off-deck") in over 28 countries. During the fiscal year, the company divested its AMV Holding Limited subsidiary, which is now reported as discontinued operations.
Key Financial Metrics
| Metric (in thousands) | Year Ended Mar 31, 2011 | Year Ended Mar 31, 2010 |
|---|---|---|
| Revenues | $9,186 | $14,037 |
| Gross Profit | $5,976 | $10,849 |
| Gross Margin | 65.1% | 77.3% |
| Operating Loss | $(11,474) | $(42,479) |
| Net Loss (Continuing Ops) | $(14,408) | $(44,187) |
| Net Loss (Total) | $(9,384) | $(42,483) |
| Cash and Equivalents | $845 | $640 |
| Total Assets | $14,203 | $46,781 |
| Total Liabilities | $11,585 | $38,707 |
| Working Capital | $(3,601) | $(25,502) |
Debt Structure: The company holds $2.5 million in Senior Secured Convertible Notes (due 2013) and a $3.5 million Amended ValueAct Note (due 2013). Total long-term debt is approximately $4.1 million.
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased 35% to $9.2 million, driven by a strategic decision to curtail game development for carrier sales, loss of on-deck placement with US carriers, and a challenging European sales environment.
- Discontinued Operations: The company sold its AMV Holding Limited subsidiary in June 2010. This resulted in a $4.2 million gain on disposal, which significantly reduced the reported Net Loss for the year.
- Impairment Charges: The company recorded a $6.0 million impairment charge for goodwill and intangible assets in 2011, a significant decrease from the $38.4 million charge in 2010. This reduction is attributed to the prior year's massive write-downs and the disposal of AMV assets.
- Liability Reduction: Total liabilities dropped from $38.7 million to $11.6 million, primarily due to the restructuring of the ValueAct Note and the release of debt associated with the AMV disposal.
- Operating Expenses: SG&A expenses decreased to $11.4 million from $14.4 million due to headcount reductions, lower stock-based compensation, and reduced legal fees.
Guidance, Outlook, and Risks
Management Commentary: Management expects to continue incurring losses as it implements initiatives to grow the business. The company is focusing on restructuring, reducing operating expenses, and settling payables with stock. Future liquidity depends on raising additional equity capital or strategic acquisitions.
Going Concern: The independent auditor has raised substantial doubt about the company's ability to continue as a going concern due to recurring losses, negative cash flows from operations, and negative working capital.
Key Risks:
- Internal Controls: Management identified material weaknesses in internal controls over financial reporting, specifically regarding the maintenance of corporate records and the financial close process.
- Liquidity: The company has limited cash ($0.8 million) and relies on future financing or equity issuance to fund operations.
- Carrier Dependence: A single customer accounted for 49% of gross revenues in 2011. Loss of major carrier relationships could materially reduce revenues.
- Intellectual Property: The company faces litigation regarding content license agreements (e.g., GMCI) and risks associated with the expiration of content licenses.
Investor Verification Checklist
- Going Concern Status: Verify the company's ability to secure additional financing given the auditor's "substantial doubt" qualification and negative working capital.
- Debt Covenants: Review the terms of the Senior Secured Convertible Notes and the Amended ValueAct Note, specifically regarding interest payment options (PIK) and conversion features.
- Internal Control Remediation: Assess the progress of remediation plans for the identified material weaknesses in financial reporting controls.
- Customer Concentration: Monitor the stability of the relationship with the single customer representing 49% of revenue.
- Legal Contingencies: Track the status of the GMCI litigation and the potential liability for minimum royalty guarantees.
- Subsequent Events: Review the non-binding letter of intent to acquire Digital Turbine LLC and the appointment of an interim CEO, noting the transaction is contingent on a $10 million financing.