Digital Turbine, Inc. — Filing Summary
Filing identity and period: The supplied 10-Q is filed by Mandalay Digital Group, Inc. (formerly NeuMedia, Inc.), the parent of Digital Turbine, Inc. It reports the quarter and six months ended September 30, 2012, the second quarter of the company’s fiscal year ending March 31, 2013. Unless otherwise noted, amounts below are in U.S. dollars; financial statement amounts are in millions.
Business context
The company provides mobile content, services, and technology platforms through Twistbox, Digital Turbine, and, following its September 13, 2012 acquisition, Logia. Management described the strategy as combining Logia’s mobile monetization solutions and carrier relationships with Digital Turbine’s user experience and platform. Digital Turbine’s assets had not yet generated revenue; management expected revenue from them by the end of fiscal 2013.
Key financial results
| Metric | Three months ended September 30, 2012 | Six months ended September 30, 2012 | Prior-year comparable period |
|---|---|---|---|
| Revenue | $0.912 million | $2.203 million | $1.938 million; $3.831 million |
| Gross profit / margin | $0.536 million / 58.8% | $1.155 million / 52.4% | $1.220 million / 63.0%; $2.565 million / 67.0% |
| Operating loss | $3.235 million | $5.485 million | $0.686 million; $1.156 million |
| Net loss | $3.775 million | $6.528 million | $0.931 million; $1.702 million |
| Basic and diluted loss per share | $0.04 | $0.08 | $0.02; $0.04 |
Revenue declined 53% for the quarter and 42% for the six-month period. The six-month decline was concentrated in other content and games; services and advertising revenue increased. Management attributed lower games revenue to reduced investment in new carrier games, loss of U.S. carrier placement, and winding down third-party development. It cited smartphone adoption and carrier changes as factors affecting other-content revenue.
Operating expenses were $3.771 million for the quarter and $6.640 million for six months. General and administrative expense rose to $5.591 million for six months from $2.116 million, primarily reflecting management stock compensation, additional management and consulting personnel, and Logia. The filing reports $1.713 million of stock compensation in general and administrative expense for the six-month period. Interest and other expense was $0.954 million for six months.
Cash, liquidity, and debt
- Cash and cash equivalents were $3.137 million at September 30, down from $8.799 million at March 31, 2012.
- Current assets were $5.549 million and current liabilities were $9.429 million, resulting in negative working capital of approximately $3.9 million; the company reported positive working capital of approximately $4.1 million at March 31.
- Net cash used in operating activities was $3.294 million for the six months, compared with $0.317 million provided in the prior-year period. Investing activities used $3.365 million, largely for the Logia acquisition; financing provided $1.000 million from a stock sale. The total decrease in cash was $5.662 million.
- Balance-sheet debt carrying values were $2.543 million current and $1.564 million long-term, excluding a separate $0.758 million discounted contingent acquisition liability. The senior secured notes are secured by substantially all company and subsidiary assets. The filing describes $2.902 million of senior note principal and accrued interest convertible at $0.15 per share, and $1.204 million of Taja note principal and accrued interest convertible at $0.70 per share.
Management stated that available cash would not fund planned operations for the next 12 months and that additional financing would be needed. It warned that financing may not be available on acceptable terms, equity issuance would dilute existing holders, and failure to raise funds could require substantial expense reductions and threaten the business plan and viability.
Acquisition, outlook, and other material matters
- Logia acquisition: Completed September 13 for stated purchase consideration of $4.961 million, including $3.750 million cash and company shares valued at $0.750 million at closing, subject to working-capital adjustments. Up to a further $1.000 million in cash and shares is contingent on milestones. Purchase accounting was preliminary. Acquired operations contributed $0.253 million revenue and $0.025 million net income from acquisition through September 30.
- Management outlook: Management expected Digital Turbine revenue by fiscal year-end and anticipated growth in product development and sales and marketing expenses as the business expands. It also noted possible seasonal revenue patterns and that operating expenses could rise in absolute dollars.
- Equity and potential dilution: Common shares outstanding were 88,496,516 as of October 30, 2012. The company increased authorized common shares to 200 million. Convertible debt, warrants, options, restricted stock, and acquisition earn-out shares may further dilute shareholders. The filing reports 20 million shares reserved under the amended equity plan.
- Stock valuation review: The company was reviewing valuation reports used for approximately 22 million restricted shares issued between December 2011 and May 2012. Potential effects were not estimable, no contingency was recorded, and the filing stated that rescission of grants could have an impact.
- Controls: Management concluded disclosure controls were ineffective at September 30 because of material weaknesses, including insufficient independent review of accounting and financial reporting and deficiencies in maintaining signed contracts and corporate records. Remediation steps were planned for fiscal 2013.
- Legal matters: Subsidiaries faced contract lawsuits brought by Sirocco Mobile and GS Wise/Bridco. Management said the subsidiaries intended to defend the matters; the filing does not provide clear quantified exposure.
- International and integration risks: The filing highlights foreign regulatory, economic, currency, tax, staffing, and enforcement risks, as well as the risk that Logia may not be integrated successfully and that acquired goodwill or intangible assets could be impaired.
Important facts for investors to verify
- Reconcile the MD&A discussion of approximately $5.7 million of cash used with the cash-flow statement’s $3.294 million of operating cash used and $5.662 million total decrease in cash.
- Assess the company’s near-term financing needs, debt maturities and conversion terms, collateral, and potential dilution given management’s warning that cash was insufficient for the next 12 months.
- Track revenue trends by category and the timing and scale of revenue generation from Digital Turbine and Logia.
- Monitor final Logia purchase-price accounting, contingent earn-out milestones, and impairment assumptions for acquired goodwill and intangible assets.
- Follow remediation of the disclosed material weaknesses and the outcome of the restricted-stock valuation review and pending lawsuits.