Digital Turbine, Inc. — Filing Summary
Important entity and period note: The supplied filing is NeuMedia, Inc.’s Form 10-Q, filed November 14, 2011, for the quarter ended September 30, 2011—not a filing under the Digital Turbine, Inc. name. NeuMedia disclosed a proposed acquisition of Digital Turbine, LLC. Financial amounts below are in thousands of dollars unless otherwise noted.
Business context and reporting period
NeuMedia, formerly Mandalay Media, operated principally through Twistbox, a mobile content and services business. It generated revenue from mobile content, games, platform and development services, and advertising. The quarter ended September 30, 2011 was the second quarter of NeuMedia’s fiscal year ending March 31, 2012. The prior-year comparison includes discontinued AMV operations in the six-month period.
Key financial metrics
| Metric | Three months ended September 30, 2011 | Six months ended September 30, 2011 |
|---|---|---|
| Revenue | $1,938 | $3,831 |
| Gross profit | $1,220 | $2,565 |
| Gross margin | 62.9% | 67.0% |
| Operating loss | $(686) | $(1,156) |
| Net loss | $(931) | $(1,702) |
| Basic and diluted loss per share | $(0.02) | $(0.04) |
| Cash used in operating activities | Quarterly value not clearly stated in the financial statements | $(316) |
At September 30, 2011, cash was $572; current assets were $2,924 and current liabilities were $7,300, giving negative working capital of approximately $4.4 million. Total assets were $13,082 and total liabilities were $11,862. Reported current and long-term debt carrying amounts totaled approximately $5,471, including debt discounts. The company had $1,220 of stockholders’ equity.
Material changes versus prior comparable periods
- Quarterly revenue declined 7% from $2,077 in the prior-year quarter; six-month revenue declined 22% from $4,936.
- Quarterly gross margin rose to 62.9% from 47.7%, which management attributed to better content optimization and prior-year prepaid license-fee amortization. Six-month gross margin was 67.0%, versus 64.6%.
- The quarterly net loss narrowed to $931 from $2,252, alongside lower product development and sales and marketing expenses. For the six-month comparison, NeuMedia reported a $1,702 loss versus $361 income in 2010; the prior-year result included $5,024 of income from discontinued operations, including a disposal gain.
- Cash decreased by $273 during the six months, from $845 to $572. Operating activities used $316; investing activities used $4; there were no financing cash proceeds in the period.
- Current debt increased to $909 from $115, while total liabilities rose to $11,862 from $11,585. Stockholders’ equity fell to $1,220 from $2,618.
Outlook, management commentary, risks and unusual items
- Going concern and liquidity: The filing states that operating losses, negative operating cash flows, and current liabilities exceeding current assets raise substantial doubt about the company’s ability to continue as a going concern. Management cited cost reductions, royalty-payment settlements, equity financing and strategic transactions as actions or plans. It said cash should support operations for the foreseeable future if sales and expense trends do not change, but warned additional financing may be needed and may not be available on acceptable terms.
- Business trends: Management described a market shift from carrier “on-deck” discovery toward off-deck storefronts. It said this affected content revenue and games sales, and that it had curtailed investment in carrier games while reworking products and marketing. Services revenue also declined due to project timing; advertising revenue increased.
- Debt: The notes describe 10% secured debt due June 21, 2013, including senior secured convertible notes with a $0.15-per-share conversion price and a first lien on substantially all company assets. A separate $3.5 million secured note is subordinated. The filing reports $418 of debt-discount amortization as interest and financing cost for the six months.
- Proposed Digital Turbine transaction: A September 30 memorandum of understanding contemplated NeuMedia acquiring Digital Turbine, LLC assets, issuing 50,000 restricted shares to its equity holders, and employing Peter Adderton as CEO. Closing conditions included at least $1 million of equity financing, resolution of a dispute, acquisition of the VAC Note by a third party, conversion of $3 million of note principal into NeuMedia shares at $1.00 per share, and definitive agreements. The filing cautions that the transaction might not proceed on those terms or at all.
- Customer and foreign-exchange exposure: One customer represented 44% of six-month gross revenue and 46% of gross receivables at September 30. NeuMedia disclosed exposure to currency movements and stated that cash deposits were likely above insured limits at several institutions.
- Contingency: In a dispute over a content license, a court ruling limited potential damages to approximately $800, and trial was scheduled for April 16, 2012. The company said it had accrued its estimated liability. It reported no other litigation it believed would have a material adverse effect.
- Management and controls: Peter Adderton was appointed interim CEO effective July 15, 2011. Management concluded disclosure controls were effective at quarter-end and reported no material change in internal control over financial reporting.
The filing provides no formal numerical revenue, earnings or cash-flow guidance.
Important facts for investors to verify
- Confirm the issuer and security being analyzed: this is a NeuMedia 10-Q, and the Digital Turbine transaction was only proposed.
- Check the status and final terms of the contemplated acquisition, including financing, note conversion and closing conditions.
- Assess near-term liquidity, going-concern risk, debt service and the availability and dilution impact of additional financing.
- Review the customer concentration, the carrier-channel shift, and whether revenue and margin trends continued after September 30, 2011.
- Verify the current status and reserve for the content-license litigation and any other material contingencies.