Business context and reporting period
Mandalay Digital Group, Inc. (the registrant in this filing; not Digital Turbine, Inc.) filed this Form 10-K for the fiscal year ended March 31, 2013. The filing is an annual report, not a quarterly report; the supplied “2012 Q4” period label does not match the reporting period. The company provided mobile content, storefront, application-management, billing and related services to mobile operators, OEMs and publishers through businesses including Twistbox, Digital Turbine and Logia.
In September 2012, the company acquired Logia. Its April 12, 2013 acquisition of MIA occurred after year-end and is a subsequent event, not part of fiscal 2013 operating results. The company described its strategy as combining these businesses and products into a broader mobile-services platform.
Financial results and condition
Amounts below are in U.S. dollars; financial statement figures are generally in thousands.
| Metric | FY ended March 31, 2013 | FY ended March 31, 2012 |
|---|---|---|
| Revenue | $6.025 million | $7.230 million |
| Gross profit / margin | $3.414 million / 56.7% | $4.357 million / 60.3% |
| Operating loss | $12.380 million | $16.971 million |
| Net loss | $14.161 million | $30.707 million |
| Basic and diluted loss per share | $0.80 | $3.11 |
| Net cash used in operating activities | $6.865 million | $1.829 million |
| Net cash used in investing activities | $3.369 million | $0.017 million |
| Net cash provided by financing activities | $2.550 million | $9.700 million |
Services revenue grew 203% to $3.681 million, while games revenue fell 56% to $190,000, other content revenue fell 58% to $1.603 million, and advertising revenue fell 69% to $551,000. Management attributed the services increase primarily to Logia and Ignite; content and advertising declines reflected, among other things, a difficult European market, reduced U.S. carrier placement and a decision to limit new game development. Gross margin declined as the revenue mix and direct traffic and advertising costs changed.
At March 31, 2013, cash and cash equivalents were $1.149 million, current assets $3.992 million, current liabilities $9.655 million, total assets $12.485 million and total liabilities $11.748 million. Working capital was negative $5.7 million, compared with positive $4.1 million a year earlier. Reported current and long-term debt totaled approximately $5.029 million, excluding the separate $841,000 Logia contingent acquisition liability. The filing says cash resources were insufficient to fund planned operations for the next 12 months without additional financing. The audited cash-flow statement reports operating cash use of $6.865 million; elsewhere, MD&A describes $7.6 million as net cash used, while the statement reports a $7.650 million decrease in cash for the year.
Material changes versus the prior year
- Revenue declined 17%, while gross profit fell 22% and gross margin decreased 3.6 percentage points.
- Operating loss improved by $4.591 million and net loss by $16.546 million. Lower impairment and financing-related charges contributed to the improvement; the company remained substantially loss-making.
- Cash fell from $8.799 million to $1.149 million, as operating cash outflows and the Logia acquisition used funds. Equity financing provided $2.550 million in fiscal 2013; there were no proceeds from new convertible debt reported that year.
- Current liabilities increased and debt shifted substantially into the current portion. Management cited acquisition-related contingent liabilities and debt classifications among the changes.
- Goodwill impairment was $1.119 million, versus $2.969 million in fiscal 2012. No intangible-asset impairment was recorded in fiscal 2013, compared with $2.319 million in the prior year.
Outlook, risks, contingencies and unusual items
- Liquidity and going concern: The auditor highlighted recurring operating losses, negative operating cash flows and current liabilities exceeding current assets as conditions raising substantial doubt about the company’s ability to continue as a going concern. The company said further financing would be needed; availability and terms were uncertain. The financial statements contain no adjustments for a possible inability to continue as a going concern.
- Debt maturity: The $2.5 million senior secured convertible notes bore 10% interest and were secured by a first lien on substantially all company and subsidiary assets. Their original June 21, 2013 maturity was extended, ultimately to July 9, 2013; the company and noteholders were discussing a further extension or other arrangement. The Taja note also remained outstanding and convertible under its terms.
- Management outlook: No numerical revenue or earnings guidance is provided. The company expected to begin generating revenue from Digital Turbine assets and MIA in the quarter ending June 30, 2013, and expected operating expenses to rise in absolute dollars if revenue grew. It stated that profitability depended on revenue growth and controlling the costs of expansion.
- Concentration and execution risks: Three customers represented 33%, 9% and 22% of fiscal 2013 gross revenue. Logia’s largest customer, Cellcom, accounted for more than half of Logia revenue. The company also cited dependence on carrier relationships, content licenses, billing partners, product adoption and successful integration of acquisitions.
- Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at March 31, 2013 because of material weaknesses in financial close, consolidation, staffing and review of acquired entities. Remediation efforts were underway, with implementation expected during fiscal 2014.
- Acquisition and financing items: Logia’s purchase-price allocation was preliminary; contingent consideration could total $1 million if milestones are met. A $533,000 stock deposit for a pending music-asset purchase could be expensed if the transaction was not completed. The subsequent MIA purchase price was AUD$7 million, including cash, shares and a secured 6% note.
- Legal matters: A California contract dispute involving Sirocco remained unresolved. Another contract dispute was settled for 48,114 shares. A third-party notice in an Israeli class action alleged Logia involvement in phone-call overages; management considered liability remote and did not accrue a reserve.
- Other investor considerations: A 1-for-5 reverse stock split took effect April 12, 2013, and the stock began trading on the Nasdaq Capital Market in June 2013. Convertible notes, warrants and future equity issuance could materially dilute shareholders. Management did not anticipate paying dividends.
Important facts for investors to verify
- Confirm the company’s available cash, near-term operating cash needs, and financing obtained after the filing date; assess the going-concern warning and the subsequent status of the senior secured notes.
- Reconcile the MD&A reference to $7.6 million of cash use with the cash-flow statement’s $6.865 million operating outflow and $7.650 million net decrease in cash.
- Review actual post-year-end revenue, cash contribution and integration progress for Logia, Digital Turbine and MIA, including whether expected June 2013-quarter revenue was achieved.
- Assess customer concentration, particularly the reported 33% share of consolidated revenue from one customer and Logia’s dependence on Cellcom.
- Check progress in remediating the disclosed material weaknesses and whether later filings report any financial-statement errors or control improvements.
- Verify final Logia acquisition accounting, earn-out outcomes, the status of the pending music-asset transaction and any resulting expense or dilution.
- Review subsequent financing terms, share and warrant issuance, and the fully diluted share count following the reverse split.