Filing summary
Registrant and period: Mandalay Digital Group, Inc. (the filing identifies Digital Turbine as a subsidiary) filed this Form 10-Q for the quarter and six months ended September 30, 2013. Financial statement amounts below are in thousands of dollars, except per-share data.
Key financial metrics
| Metric | Three months ended Sep. 30, 2013 | Six months ended Sep. 30, 2013 | Prior-year comparable period |
|---|---|---|---|
| Revenue | $6,996 | $12,088 | $912 quarter; $2,203 six months |
| Gross profit / margin | $2,527 / 36.1% | $4,351 / 36.0% | $536 / 58.8%; $1,155 / 52.4% |
| Operating loss | $(3,892) | $(8,045) | $(3,235); $(5,485) |
| Net loss | $(6,222) | $(11,908) | $(3,775); $(6,528) |
| Loss per common share, basic and diluted | $(0.25) | $(0.53) | $(0.22); $(0.38) |
| Operating cash flow | Not provided separately for the quarter | $(3,893) | $(3,294) six months |
Cash and cash equivalents were $7,806 at September 30, 2013, versus $1,149 at March 31, 2013. Current assets were $14,294 and current liabilities $11,036, yielding working capital of approximately $3,258, compared with negative working capital of $5,663 at fiscal year-end. Total assets were $30,515 and total liabilities $11,274.
Reported debt was effectively repaid: the balance sheet shows $10 of current equipment-lease debt and no long-term debt, compared with total current and long-term debt of approximately $5,029 at March 31, 2013. A separate long-term contingent liability was $238. Six-month investing cash flow was approximately $805 used, including acquisition cash flows; financing provided $11,267, including $14,924 from share issuance and $3,657 of debt repayments. Cash increased by $6,658 during the six months.
Material changes versus prior year
- Revenue rose 667% for the quarter and 449% for the six months, largely reflecting the acquisition of MIA in April 2013 and its content and billing businesses. Management attributed $5,431 of quarterly revenue to MIA; MIA reported $9,089 revenue from acquisition date through September 30.
- Revenue mix expanded into music, tones and pictures, and billing. Traditional “Content Other” revenue declined 17% for the six months, which management attributed mainly to reduced purchases through carrier portals.
- Gross margin fell to 36.1% for the quarter and 36.0% for the six months, from 58.8% and 52.4%, respectively. Management cited content-provider license fees and higher amortization of acquired intangible assets.
- Operating expenses increased 70% for the quarter and 87% for the six months. Product development and sales and marketing grew with the expanded business; management also cited acquisition-related costs, added personnel, and stock-based compensation.
- Net losses widened, with six-month interest and other expense increasing to $3,279 from $954. The period included an $811 derivative-liability fair-value loss, a $442 debt-extinguishment loss, and a $603 gain from revaluing the contingent acquisition liability.
- Equity issuance and debt conversion substantially increased shares outstanding: 31,272,447 common shares were outstanding at September 30, versus 18,467,894 at March 31. The filing reports 31,272,447 shares outstanding as of November 1.
Outlook, risks and unusual items
- Outlook: Management said existing cash was expected to fund planned operations for at least the next 12 months, while acknowledging future needs could change and additional financing might be required. No quantified revenue or earnings guidance was provided. Plans included integrating MIA’s Sphere platform with Digital Turbine products, expanding DT Pay, and bringing IQ and Ignite products to market. Management anticipated operating expenses could rise as the business grows and described possible seasonal effects.
- Liquidity and financing: The company has incurred losses and negative operating cash flows since inception. Management said cash needs depend on improving cash flow and possible operational restructuring; additional financing may not be available on acceptable terms and equity financing could dilute shareholders. The prior-year audit opinion included a going-concern emphasis-of-matter paragraph.
- Customer and execution risks: Two customers represented approximately 39% and 22% of gross receivables at September 30 and 37% and 29% of six-month gross revenue. MIA purchase-price allocations and acquired goodwill and intangible values remained provisional and could change materially. Management reported no impairment indicators for the period.
- Contingencies: A supplier lawsuit and a third-party notice related to a class action in Israel were disclosed. Management considered the latter claim without merit and potential liability remote; no liability was accrued. The filing states other claims are not expected to be material and were not accrued.
- Controls: Management concluded disclosure controls were ineffective at September 30 because of a material weakness: significant accounting and reporting work lacked adequate secondary review. Planned remediation included hiring a CFO and formalizing review and reporting processes; hiring was expected during fiscal 2014.
- Other unusual item: Product development expense included a $533 charge for stock previously recorded as a deposit for a content acquisition.
Most important facts for investors to verify
- How much of the sharp revenue increase is recurring and attributable to MIA, versus the legacy business, and whether the acquired operations can sustain margins.
- Whether the company’s stated expectation of at least 12 months of liquidity is supported by its operating cash burn, working-capital needs, and acquisition and integration costs.
- The dilution and terms associated with the share offerings, debt conversions, warrants, and acquisition consideration; the filing cites $14.924 million of six-month share proceeds in the cash-flow statement while MD&A refers to approximately $16 million raised.
- Final MIA purchase accounting, including goodwill, acquired intangibles, and related amortization, and any resulting effects on earnings or impairment risk.
- Progress in remediating the material weakness in financial reporting controls and whether customer concentration or the disclosed litigation creates further exposure.