Digital Turbine, Inc. — Filing Summary
Filing identity: The supplied 10-Q is for Mandalay Digital Group, Inc. (formerly NeuMedia, Inc.), not a standalone filing by Digital Turbine, Inc. Mandalay acquired certain Digital Turbine Group, LLC assets on December 28, 2011. The reporting period ended December 31, 2011: the three and nine months ended that date. Amounts below are in thousands of dollars unless noted.
Business context and reporting period
Mandalay’s continuing operations were principally Twistbox, a mobile content, services, and technology business serving carriers and other distribution partners. The company acquired Digital Turbine assets for 50,000 shares, valued at approximately $31,000, and described the platform as supporting mobile content search, discovery, billing, and delivery. The filing says the acquired software and other assets were expensed as research and development; it does not provide separately identifiable revenue from the acquired assets.
The company changed its name to Mandalay Digital Group, Inc. on February 6, 2012, after the quarter ended and before the filing.
Financial results and position
| Metric | Three months ended Dec. 31, 2011 | Three months ended Dec. 31, 2010 | Nine months ended Dec. 31, 2011 | Nine months ended Dec. 31, 2010 |
|---|---|---|---|---|
| Revenue | $1,957 | $2,048 | $5,788 | $6,983 |
| Gross profit | $1,167 | $790 | $3,731 | $3,977 |
| Gross margin | 59.6% | 38.5% | 64.5% | 57.0% |
| Operating loss | $(6,115) | $(8,100) | $(7,271) | $(11,081) |
| Net loss | $(6,878) | $(8,491) | $(8,580) | $(8,131) |
- Revenue and mix: Revenue declined 4% year over year for the quarter and 17% for the nine-month period. Quarterly services revenue rose to $461 from $149, while games and other content revenue declined. Advertising increased to $516 from $372 in the quarter.
- Costs and margins: Quarterly cost of revenue fell to $790 from $1,258, primarily alongside lower license fees. Gross profit and reported gross margin improved in the quarter and nine-month comparison. However, the MD&A narrative says current-quarter margins were lower than the prior-year quarter, contradicting the margin figures in the filing.
- Operating costs and earnings: Quarterly operating expenses were $7,282, including $6,648 of general and administrative expense, versus $8,890 in the prior-year quarter. The company attributed the G&A increase in part to consulting and professional costs, including stock compensation. The quarter included substantial stock issuance expense: among other items, $2,196 for vested restricted shares issued to a director and $2,532 for shares issued to consultants. The prior-year comparison included a $6,028 impairment charge, absent in the current period. Quarterly net loss narrowed; nine-month net loss increased, in part because the prior-year period included income and a disposal gain from discontinued operations.
- Cash flow: Nine-month operating cash use was $487, compared with $1,119 in the prior-year period. Investing cash use was $10, versus $1,607. Financing provided $6,989, including $7,000 of new convertible notes. Cash increased to $7,406 from $845 at March 31, 2011.
- Liquidity and debt: At December 31, current assets were $9,727 and current liabilities $20,546. Total liabilities were $37,326, and stockholders’ deficit was $17,532. Debt and convertible debt had a balance-sheet carrying value of $5,904, net of discounts; the company also reported $26,104 of derivative liabilities related to warrants and embedded conversion options. The new $7,000 convertible note bears 3% interest and is due upon the earlier of a qualifying equity financing or one year after issuance; conversion terms include a $0.50 minimum price.
- Customer concentration: One customer accounted for 43% of nine-month gross revenue and 49% of gross accounts receivable at December 31, 2011.
Changes, outlook, risks, and unusual items
- Management said it had reduced personnel and overhead, curtailed investment in on-carrier games, and shifted efforts toward technology and distribution models addressing the move from carrier portals to off-deck storefronts. It cited that market shift as a key factor in lower content revenue.
- The notes state that losses, negative operating cash flow, and current liabilities exceeding current assets raise substantial doubt about the company’s ability to continue as a going concern. Management cited the $7 million financing, payable settlements, lower royalty payments, expense reductions, and plans to raise further capital. It said available cash should support operations for the foreseeable future if sales and expense trends do not change, but gave no assurance that planned actions or additional financing would be achieved. No formal financial guidance is provided.
- The $7 million financing generated significant Level 3 derivative valuations. Derivative liabilities were measured using a Black-Scholes model and highly sensitive assumptions, including 175% volatility; changes in fair value affected reported expense and balance-sheet liabilities.
- A settlement with General Media Communications resolved a content-license dispute for $300 payable over 30 months; $290 was accrued at December 31, 2011. The litigation disclosure elsewhere says the settlement was agreed on December 22, 2012, an apparent date inconsistency given the reporting chronology.
- Management reported disclosure controls and procedures were effective and no material change in internal control over financial reporting during the quarter. It reported no material change in risk factors from the prior annual and quarterly filings.
Important facts for investors to verify
- Confirm the correct reporting entity and the scope, accounting, and subsequent contribution of the Digital Turbine asset acquisition.
- Reconcile the filing’s conflicting quarterly gross-margin commentary and its inconsistent settlement date.
- Verify the reported loss per share: the financial statement text contains a quarterly figure rendered as $(.016), while the MD&A reports $(0.16).
- Reconcile management’s stated $17.5 million negative working capital with the balance-sheet figures, which imply current liabilities exceeded current assets by $10.819 million.
- Assess the going-concern risk, refinancing and equity-raising needs, note conversion and dilution terms, and the valuation assumptions behind $26.104 million of derivative liabilities.
- Monitor customer concentration, carrier-reported revenue estimates, and the continuing shift from carrier portals to off-deck distribution.