Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended December 31, 2010, for NeuMedia, Inc. (formerly Mandalay Media, Inc.). The Company operates primarily through its subsidiary, Twistbox Entertainment, Inc., a global publisher and distributor of branded and non-branded entertainment content for mobile platforms. During the period, the Company completed the sale of its AMV Holding Limited subsidiary, which is now reported as a discontinued operation. The Company is classified as a smaller reporting company.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Dec 31, 2010 | 9 Months Ended Dec 31, 2010 |
|---|---|---|
| Net Revenues | $2,048 | $6,983 |
| Gross Profit | $790 | $3,977 |
| Gross Margin | 38.5% | 57.0% |
| Net Loss (Continuing Ops) | $(8,491) | $(13,155) |
| Net Loss (Total) | $(8,491) | $(8,131) |
| Cash and Cash Equivalents | $1,683 | $1,683 (Ending Balance) |
| Total Debt (Current + Long Term) | $4,274 | $4,274 (Ending Balance) |
| Working Capital Deficit | $(4,466) | $(4,466) (Ending Balance) |
Material Changes vs. Prior Period
- Revenue Decline: Net revenues decreased 49% year-over-year for the three months ended December 31, 2010 ($2.0M vs. $4.0M) and 38% for the nine-month period ($7.0M vs. $11.3M). This was driven by a strategic shift away from older mobile game formats, the loss of Russian operations, and a strategic shift by a primary carrier partner reducing support for older handsets.
- Impairment Charges: The Company recorded a significant non-cash impairment charge of $6.028 million for the three and nine months ended December 31, 2010, related to goodwill ($1.5M) and intangible assets ($4.5M). No such charge was recorded in the comparable prior year periods.
- Discontinued Operations: The Company sold its AMV subsidiary in June 2010. Consequently, the current period shows no income from discontinued operations, whereas the prior year nine-month period included $2.9M in income and a $4.3M gain on disposal.
- Debt Restructuring: Total liabilities decreased significantly from $38.7M at March 31, 2010, to $13.2M at December 31, 2010, primarily due to the release of $23.2M in secured indebtedness associated with the AMV sale. The Company issued $2.5M in new Senior Secured Convertible Notes.
Outlook, Risks, and Management Commentary
- Liquidity and Going Concern: Management states that the financial statements are prepared assuming the Company will continue as a going concern. However, the Company has incurred negative cash flows and has a working capital deficit of $4.5 million. Future operations depend on generating positive cash flow, restructuring financing, or obtaining additional capital.
- Strategic Focus: The Company is curating investment in legacy mobile games (JAVA/BREW) to focus on smartphone applications (iPhone, Android, Blackberry) and advertising ecosystems. Management expects to continue reducing personnel and overhead costs to align expenses with current revenue levels.
- Debt Obligations: The Company has approximately $6.3 million in debt (including accrued interest) due within 30 months. Interest payments on the new Senior Secured Notes commence in approximately one year, though the Company has the option to capitalize interest for the first 18 months.
- Customer Concentration: The Company faces high credit risk concentration; one major customer accounted for 49% of gross revenues and 35% of gross accounts receivable as of December 31, 2010.
- Subsequent Events: In February 2011, the Company entered into separation and transition agreements with senior management, which will result in reduced expenses but include separation payments and new stock option issuances impacting the fourth fiscal quarter.
Investor Verification Checklist
- Cash Runway: Verify if the $1.7 million cash balance is sufficient to cover operating losses and debt service obligations until the next financing event or revenue stabilization.
- Debt Covenants: Review the specific covenants of the Amended ValueAct Note and New Senior Secured Notes to ensure compliance with minimum cash balance requirements.
- Revenue Mix: Assess the progress of the transition from legacy mobile content to smartphone apps and advertising revenue to determine if the revenue decline has bottomed out.
- Customer Dependency: Evaluate the risk associated with the single customer representing nearly 50% of revenue and the stability of that carrier relationship.
- Impairment Finalization: Confirm if the $6.0 million impairment charge is final or if further adjustments are expected in the fourth fiscal quarter as noted in the valuation process.