Filing summary
Registrant and period: Mandalay Digital Group, Inc. (formerly NeuMedia, Inc.), not Digital Turbine, Inc., filed this Form 10-Q for the quarter ended December 31, 2012, its fiscal third quarter. Amounts below are in thousands of dollars unless noted.
Financial performance and position
| Metric | Three months ended Dec. 31, 2012 | Nine months ended Dec. 31, 2012 | Comparable 2011 period |
|---|---|---|---|
| Revenue | $2,049 | $4,252 | $1,957 quarter; $5,788 nine months |
| Gross profit / margin | $1,122 / 54.7% | $2,277 / 53.5% | $1,167 / 59.6% quarter; $3,731 / 64.5% nine months |
| Operating loss | $(3,579) | $(9,064) | $(6,115) quarter; $(7,271) nine months |
| Net loss | $(4,214) | $(10,742) | $(6,878) quarter; $(8,580) nine months |
| Basic and diluted loss per share | $(0.05) | $(0.12) | $(0.16) quarter; $(0.21) nine months |
| Operating cash flow | Not provided for quarter | $(5,862) | $(487) nine months |
- Quarterly revenue increased 5%, while nine-month revenue declined 27% year over year. Nine-month operating loss widened 25% and net loss widened 25%.
- Cash and cash equivalents fell to $1,641 from $8,799 at March 31, 2012. Nine-month investing cash flow was $(3,357), including $3,416 of cash used for the Logia acquisition; financing provided $2,000 from share issuance. Cash decreased by $7,158 overall.
- At December 31, current assets were $4,585 and current liabilities $8,779, implying negative working capital of about $4,194. Total liabilities were $11,331; reported current and long-term debt were $2,826 and $1,750, respectively. A further $802 contingent acquisition liability was reported separately.
- The company reported 87.4 million common shares outstanding at December 31, and 92.2 million as of February 8, 2013. Weighted-average shares increased substantially year over year.
Business developments and changes
- The September 2012 Logia acquisition added mobile content and application-management businesses and the Ignite platform. The company paid $3,750 cash and issued stock valued at $788 at closing; up to a further $1,000 in cash and stock is contingent on milestones. Acquisition accounting and intangible-asset valuations remained preliminary.
- Logia contributed $1,780 of revenue and $187 of net income from acquisition through December 31. Digital Turbine revenue began in the fourth quarter of fiscal 2013, after the reported nine-month period.
- Quarterly service revenue rose to $1,193 from $461, primarily reflecting Logia; nine-month services revenue rose to $1,902 from $930. Nine-month games revenue fell 63%, other content fell 61%, and advertising fell 22%. Management cited reduced investment in new games, loss of U.S. carrier placement, smartphone adoption and carrier outsourcing; it said the company was no longer selling mobile advertising.
- Gross margin contracted, partly because Logia’s service business brought higher direct operating costs and acquired-intangible amortization. Nine-month general and administrative expense rose 7%, with management citing stock compensation, additional management and consulting personnel, and Logia.
Outlook, risks and unusual items
- Liquidity warning: Management stated existing cash would not fund planned operations for the next 12 months and that additional financing would be needed. Financing may be unavailable or dilutive; failure to raise funds could require substantial expense reductions and threaten the business’s viability.
- In January and February 2013, the company completed equity financings totaling $550,000, issuing 785,714 shares and warrants for 196,429 shares at a $0.70 exercise price, subject to adjustment. This provides some funding but does not resolve the stated liquidity risk.
- Senior secured convertible debt was classified as current in part; approximately $2,902 of principal and accrued interest was convertible at $0.15 per share. The filing describes extensions of an interest payment deadline, including a February 8 extension through February 15, 2013. The senior debt is secured by substantially all company and subsidiary assets.
- No quantified formal revenue or earnings guidance was provided. Management expected operating expenses to grow in absolute dollars if revenue grows, and identified growth drivers as integration of Logia and Digital Turbine, product launches and expansion of carrier relationships. It also noted seasonality and dependence on carrier distribution, placement and reporting.
- Controls and procedures were deemed ineffective at December 31 because of material weaknesses, including insufficient secondary review of financial reporting and inadequate maintenance of signed corporate records and contracts. Management described remediation plans, with completion targeted by September 30, 2013.
- Legal matters include an unresolved Sirocco contract dispute and a settlement with GS Wise/Bridco for 240,569 shares. The filing also disclosed a review of valuation reports relating to about 22 million restricted shares; any financial impact was not estimable, and no liability was recorded.
- Other risks include customer concentration, international operations and foreign-exchange exposure, acquisition integration and impairment risk, and dilution from equity compensation and financing. Two customers represented approximately 35.2% and 16% of gross receivables at December 31.
Investor verification priorities
- Confirm post-quarter cash, financing proceeds, cash burn and the company’s ability to fund operations for the next 12 months.
- Review debt maturities, payment extensions, security interests, conversion terms and potential share dilution.
- Track Logia integration, milestone earn-outs, final purchase-price allocation, and whether Digital Turbine and Ignite generate the expected revenue.
- Assess whether revenue mix, carrier relationships and declining legacy content sales support a sustainable improvement in margins and cash flow.
- Monitor remediation of material weaknesses, the restricted-stock valuation review and outcomes of the disclosed legal matters.
- Reconcile operating cash flow: the cash-flow statement reports $(5,862) for the nine months, while the MD&A separately refers to $7.2 million of net cash used; the filing text does not clearly reconcile these figures.