Digital Turbine, Inc. / Mandalay Digital Group, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2013, the company’s fiscal first quarter. The registrant named in the filing is Mandalay Digital Group, Inc. (formerly NeuMedia); the filing describes Digital Turbine as one of its operating subsidiaries. Financial statement amounts below are in thousands of U.S. dollars, except per-share data.
Financial performance and position
| Metric | Quarter ended June 30, 2013 | Prior-year quarter / comparison |
|---|---|---|
| Revenue | $5,092 | $1,290; up 295% |
| Gross profit and margin | $1,824; 35.8% | $618; 47.9% |
| Operating expenses | $5,977 | $2,870 |
| Operating loss | $(4,153) | $(2,252) |
| Interest and other expense | $(1,609) net | $(487) net |
| Net loss / loss per share | $(5,686) / $(0.30) | $(2,753) / $(0.16) |
| Operating cash flow | $(1,594) | $(1,590) |
- Revenue growth largely reflects the acquisitions of Logia and MIA; the quarter includes MIA from its April 12 acquisition date. Revenue included $2,155 of billing, $1,906 of music and tones/pictures, $539 of other content, and $492 of services.
- Gross margin fell as revenue mix and costs changed; license fees rose to $2,945 from $614, while direct costs included acquired-intangible amortization. Product development, sales and marketing, and general and administrative expenses also increased substantially.
- Cash was $1,553 at quarter-end, versus $1,149 at March 31. Cash increased $404, including $2,700 from share issuance, offset by $1,594 used in operations and $792 used in investing, primarily the MIA acquisition.
- Current assets were $7,478 and current liabilities $17,338, implying negative working capital of about $9,860. Total liabilities were $19,461. Debt on the balance sheet was approximately $7,763, including $6,481 current and $1,282 long term; a separate contingent acquisition liability was $841.
Material changes and transactions
- MIA was acquired on April 12, 2013 for reported purchase consideration of approximately $8,140, including cash, a convertible seller note and common shares. The acquisition added content, billing and Sphere platform capabilities. MIA contributed $3,658 revenue and $106 net income from acquisition through June 30.
- Logia, acquired in September 2012, contributed $4,017 revenue and $727 net income from acquisition through June 30. Its purchase accounting remained provisional; the company said it expected to finalize the accounting by September 30, 2013.
- Common stock issued for cash generated $2,700 during the quarter. The company also issued shares for MIA consideration and financing costs, and issued shares and warrants in private financings. Outstanding common shares were 20,468,368 at June 30 and 20,508,188 as of August 5.
Outlook, risks and unusual items
- Going concern and funding: Management said existing cash would not fund planned operations for the next 12 months. The company reported operating losses, negative operating cash flow and a working-capital deficit, raising substantial doubt about its ability to continue as a going concern. It expects to seek additional debt or equity financing; availability and terms are uncertain, and equity funding may dilute holders.
- Debt maturities: After quarter-end, senior secured noteholders extended the notes’ maturity to September 9, 2013. On July 11, the MIA seller note was amended: the company repaid AUD 280,000 of principal and AUD 34,200 of interest, extended the remaining AUD 2,000,000 principal, and issued 59,964 shares. The amendment also contains registration and potential price-protection provisions.
- Management outlook: The company cited opportunities to combine its products and acquired platforms, expand billing and content distribution, and pursue synergies. It anticipated higher development and sales-and-marketing spending as products are brought to market. No quantified revenue, earnings or cash-flow guidance was provided.
- Key risks: Two customers represented approximately 31% and 29% of quarterly gross revenue; two customers represented approximately 25% and 26% of gross receivables at June 30. Carrier reporting delays require revenue estimates. Other risks include financing needs, debt repayment, acquisition integration and provisional purchase accounting, margin sensitivity to content royalties, and seasonal or changing carrier-portal demand.
- Controls and litigation: Management concluded disclosure controls were ineffective because of a material weakness in financial close and reporting, including insufficient secondary review. Remediation plans included additional accounting staff and documented review procedures. A California contract dispute remained unresolved; a third-party notice in an Israeli class action alleged involvement in phone overages. Management considered liability in the Israeli matter remote and did not accrue it.
Investor facts to verify
- Near-term liquidity, financing availability, and the status or repayment/refinancing of the senior secured notes and MIA seller note.
- How the company plans to address the going-concern uncertainty and achieve positive operating cash flow.
- Final purchase-price allocations for MIA and Logia, and whether expected acquisition synergies and product integration materialize.
- Customer and carrier concentration, receivable collection, and the reliability of estimated carrier-reported revenue.
- Progress remediating the material weakness and any subsequent changes in control effectiveness.
- Potential dilution from outstanding or newly issued shares, warrants, convertible notes, and the MIA note amendment.