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MANDALAY DIGITAL GROUP, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1993, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The following discussion should be read in conjunction with, and is qualified in its entirety by, the Financial Statements and the Notes thereto included in this Quarterly Report on Form 10-Q. This discussion contains certain forward-looking statements that involve substantial risks and uncertainties. When used in this Quarterly Report on Form 10-Q, the words "anticipate," "believe," "estimate," "expect", "will", "seeks", "should", "could", "would", "may" and similar expressions, as they relate to our management or us, are intended to identify such forward-looking statements. Our actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements as a result of a variety of factors including those set forth under "Risk Factors" in our Annual Report on Form 10-K, as amended, for the year ended March 31, 2014. Historical operating results are not necessarily indicative of the trends in operating results for any future period. We do not undertake any obligation to update any forward-looking statements made in this Report. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on known results and trends at the time they are made, to anticipate future results or trends. Unless the context otherwise indicates, the use of the terms "we," "our", "us", "Mandalay Digital" or the "Company" refer to the business and operations of Mandalay Digital Group, Inc. through its operating and wholly-owned subsidiaries, Digital Turbine, Inc. ("DT USA"), Digital Turbine (EMEA) Ltd. ("DT EMEA") (formerly MDG Logia Holdings Ltd), Digital Turbine Australia Pty Ltd ("DT APAC"), and Digital Turbine Singapore Pte Ltd ("DT Singapore"), collectively "DT", as well as its recently sold subsidiary, Twistbox Entertainment, Inc. ("Twistbox"). Mandalay Digital Group, Inc., through DT, provides end to end mobile content solutions for wireless carriers and Original Equipment Manufacturers (OEMs) globally to enable them to better monetize their subscribers. The Company's product offerings include: mobile application management through DT Ignite, user experience and discovery through DT IQ, white labeled mobile storefront, and content management solutions through DT Content and mobile payments with direct operator billing through DT Pay. With global headquarters in Los Angeles, and offices throughout the U.S., Asia Pacific and EMEA, Mandalay Digital's solutions are available worldwide. Historical Operations of Mandalay Digital Group, Inc. Mandalay Digital was originally incorporated in the State of Delaware on November 6, 1998 under the name eB2B Commerce, Inc. On April 27, 2000, the Company merged into DynamicWeb Enterprises, Inc., and changed its name to eB2B Commerce, Inc. On April 13, 2005, the Company changed its name to Mediavest, Inc. On November 7, 2007, the Company reincorporated in the State of Delaware under the name Mandalay Media, Inc. On May 12, 2010, the Company changed its name to NeuMedia, Inc. 25 -------------------------------------------------------------------------------- Table of Contents On February 6, 2012, the Company merged with a wholly-owned, newly-formed subsidiary, changing its name to Mandalay Digital Group, Inc. On October 27, 2004, and as amended on December 17, 2004, the Company filed a plan for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the "Plan of Reorganization"). The Plan of Reorganization was completed on January 26, 2005. Through January 26, 2005, the Company and its subsidiaries were engaged in providing business-to-business transaction management services designed to simplify trading between buyers and suppliers. From 2005 to February 12, 2008, the Company was a public shell company with no operations, and controlled by its significant stockholder, Trinad Capital Master Fund, L.P. From February 12, 2008 to October 23, 2008, our sole operations were those of our wholly-owned subsidiary, Twistbox Entertainment, Inc. In October 2008, we acquired AMV Holding Limited and its subsidiaries, a mobile media and marketing company. On June 21, 2010, we sold AMV Holding Limited and its subsidiaries. On February 13, 2014, we disposed of the Twistbox subsidiary, and as such it is no longer reflected as part of our continuing operations in this Report. In December 2011, the Company, through its wholly owned subsidiary Digital Turbine, Inc. ("DT"), purchased the assets of Digital Turbine LLC. The Company subsequently re-branded the assets "DT IQ". Since the acquisition of the DT IQ product into DT, and subsequent acquisitions of DT EMEA and DT APAC the Company has acquired, rebranded, enhanced and commercialized products which include DT Ignite, DT Pay, and DT Content. SUMMARY OF THE TWISTBOX MERGER The Company entered into an Agreement and Plan of Merger on December 31, 2007, as subsequently amended by the Amendment to Agreement and Plan of Merger dated February 12, 2008 (the "Merger Agreement"), with Twistbox Acquisition, Inc., a Delaware corporation and a wholly-owned subsidiary of the Company ("Merger Sub"), Twistbox Entertainment, Inc. ("Twistbox"), and Adi McAbian and Spark Capital, L.P., as representatives of the stockholders of Twistbox, pursuant to which Merger Sub merged with and into Twistbox, with Twistbox as the surviving corporation (the "Merger"). The Merger was completed on February 12, 2008. On February 13, 2014, we sold all of the operating subsidiaries of Twistbox. SUMMARY OF THE AMV ACQUISITION On October 23, 2008, the Company consummated the acquisition of 100% of the issued and outstanding share capital of AMV Holding Limited, a United Kingdom private limited company ("AMV") and 80% of the issued and outstanding share capital of Fierce Media Limited, United Kingdom private limited company (collectively the "Shares"). The acquisition of AMV is referred to herein as the "AMV Acquisition". On June 21, 2010, we sold all of the operating subsidiaries of AMV. SUMMARY OF THE DIGITAL TURBINE (DT USA) ACQUISITION On December 28, 2011, the Company entered into a Share Purchase Agreement to acquire the assets of Digital Turbine LLC ("Seller") into its newly formed wholly owned subsidiary, Digital Turbine, Inc. The Company purchased the assets sold by the Seller with 10,000 shares of common stock of the Company, with a fair value of $30,500 on the date of grant. 26 -------------------------------------------------------------------------------- Table of Contents SUMMARY OF THE LOGIA (DT EMEA) ACQUISITION On September 13, 2012, the Company acquired subsidiaries and certain assets of Logia Group, Ltd. ("Logia"). As a part of the transaction, the Company, through its wholly owned subsidiary, Digital Turbine (EMEA) Ltd ("DT EMEA"), acquired all of the capital stock of three operating subsidiaries of Logia (Logia Content Development and Management Ltd. ("Logia Content"), Volas Entertainment Ltd. ("Volas") and Mail Bit Logia (2008) Ltd. ("Mail Bit"), (collectively, the "Targets")). In addition, the Company acquired the assets comprising the "LogiaDeck" software from LogiaDeck Ltd., which the Company has rebranded "DT Ignite", and certain operator and other contracts related to the business of the Targets that were entered into by Logia and Volas. The purpose of the DT EMEA acquisition was an effort to not only build on the Company's current distribution network, but to enhance its mobile content infrastructure with DT Ignite. DT Ignite is an application management platform that enables mobile operators and OEMs to control, manage and monetize the applications that are installed on mobile devices. In addition, DT Ignite allows mobile operators and OEMS to obtain a new advertising revenue stream from pre and post installations. SUMMARY OF MIA (DT APAC) ACQUISITION On April 12, 2013, the Company, through its indirect wholly owned subsidiary Digital Turbine Group Pty Ltd ("DT APAC"), acquired all of the issued and outstanding stock of Mirror Image International Holdings Pty Ltd ("MIAH"). MIAH owns direct or indirect subsidiaries Mirror Image Access (Australia) Pty Ltd (MIA), MIA Technology Australia Pty Ltd (MIATA) and MIA Technology IP Pty Ltd (together "MIA"). DT APAC is a leading mobile solutions provider based in Australia. DT APAC has extensive content licenses with major brands, as well as a proprietary content management and billing integration system ("Sphere"). DT APAC through an Application Programming Interface (API), enhances experiences on connected devices by enabling the delivery of content and applications to multiple devices, across any network, in any format, effectively integrating the infrastructure of mobile operators to content publishers to facilitate mobile commerce ("DT Content"). DT Content uses the Sphere platform enabling carriers, media companies and brands to work together. Company Overview Since the acquisition of the DT IQ product into DT, and the subsequent acquisitions of DT EMEA and DT APAC, the Company has acquired, rebranded, enhanced and commercialized products which include DT Ignite, DT Pay, and DT Content. DT provides end to end mobile content solutions for wireless carriers and Original Equipment Manufacturers (OEMs) globally to enable them to better monetize their subscribers. The Company's product offerings include: mobile application management through our product, DT Ignite, user experience and discovery through our product, DT IQ, white labeled mobile storefront, and content management solutions through our product, DT Content, and management and mobile payments with direct operator billing through our product, DT Pay. We enable mobile content distribution and monetization serving mobile operators, OEMs, mobile device distributors, and end consumers. Our software is sold as both licensed software and software as a service ("SaaS"). Our software permits mobile carriers, advertising aggregation companies, application developers and third-party publishers to provide application installation, portal management, user interface, content development and billing technology that enables the ecosystem required for the global distribution of mobile applications and content. Our platforms provide our customers with the tools to implement an intuitive user experience and storefront, enabling the discovery, purchase and download of mobile applications and content. Our integrated solutions address the mobile ecosystem spanning mobile optimized websites, mobile applications, mobile merchandising and content management, mobile messaging, mobile advertising, mobile billing and predictive analytics. Our solutions empower our customers to better participate in the mobile advertising revenue cycle, drive loyalty, generate revenues and re-engineer business processes to capture the advantages of their mobile-enabled customer base. Our predictive analytics capabilities allow our customers to recommend applications and content to their end-customer based upon the consumers' tastes and preferences. 27 -------------------------------------------------------------------------------- Table of Contents DT Ignite is a mobile application management software that is pre-installed on devices to enable mobile operators and OEMs to control, manage and monetize the applications that are installed on mobile devices. DT Ignite allows mobile operators to customize the out-of-the-box experience for customers and monetize their homescreens via Cost-Per-Install or CPI arrangements with third party application developers. Applications can be installed silently or with notification, on first boot or later in the lifecycle of the device, allowing mobile operators and OEMs to participate in a new advertising revenue stream. The Company has launched DT Ignite with operators in North America, Europe, Asia Pacific and Israel. DT IQ Search is a User Experience and User Interface that enables customers to search and discover content from various sources including social media, search engines, and applications. IQ App Drawer organizes your applications for you by category, as well as providing more traditional alphabetical and search based methods. IQ App Drawer and DT IQ Search monetize content through increased content sales and leveraging its recommendation engine to recommend the right applications to the right consumers through its cost-per-install or CPI commercial model. DT Content is one of the Company's primary revenue generating products. DT Content can be sold as an application storefront that manages the retailing of mobile content including features such as merchandizing, product placements, reporting, pricing, promotions, and distribution of digital goods. DT Content also includes the distribution and licensing of content across multiple content categories including music, applications, wallpapers, eBooks, and games. DT Content is deployed with many operators across multiple countries including Australia, Israel, Turkey, Indonesia, Philippines, Italy, India and Germany. DT Pay is an Application Programming Interface (API) that integrates billing infrastructure between mobile operators and content publishers to facilitate mobile commerce. Increasingly, mobile content publishers want to go directly to consumers to sell their content rather than sell through traditional distributors such as Google Play or Apple Application Store. DT Pay allows publishers and carriers to monetize those applications by allowing the content to be billed directly to the consumer via their carrier billing. DT Pay has been launched in both Australia and Italy. Mandalay Digital's divestiture of Twistbox Entertainment in the fiscal 2014 fourth quarter is reflected as discontinued operations in this Report. All periods presented have been revised to reflect this presentation. Unless otherwise noted, all discussions in this Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations relate to continuing operations. RESULTS OF OPERATIONS (in thousands) Three Months Three Months Ended Ended June 30 June 30 % of 2014 2013 Change Revenues $ 5,554 $ 4,783 16.1 % Cost of revenues 4,140 3,117 32.1 % Gross profit 1,414 1,666 -15.1 % SG&A 6,094 5,763 5.7 % Operating loss (4,680 ) (4,097 ) 14.2 % Interest expense, net 3 (1,440 ) -100.2 % Foreign exchange transaction gain / (loss) (6 ) 29 -120.7 % Loss on disposal of fixed assets 2 (2 ) -200.0 % Other income / (expense) 9 - 100 % Gain / (loss) on settlement of debt (10 ) - 100 % Loss before income taxes (4,682 ) (5,510 ) -15.0 % Income tax provision (72 ) (87 ) -17.2 % Net loss $ (4,610 ) $ (5,423 ) -15.0 % Loss from operations of discontinued component (including gain on disposal of $0 and $3,217) - (263 ) -100.0 % Net loss $ (4,610 ) (5,686 ) -18.9 % Diluted net loss per common share: Continuing operations (0.12 ) (0.29 ) -58.6 % Discontinued operations - (0.01 ) -100.0 % Net loss (0.12 ) (0.30 ) -60.0 % Basic and Diluted weighted average shares outstanding 37,424 18,861 98.4 % 28 -------------------------------------------------------------------------------- Table of Contents Comparison of the Three Months Ended June 30, 2014 and 2013 Revenues Three Months Ended June 30, % of 2014 2013 Change (In thousands) Revenues by type: Content Music $ 1,108 $ 777 42.6 % Content Tones & Pics 1,250 1,129 10.7 % Content Other 326 261 24.9 % Services 242 687 -64.8 % Billing 2,628 1,929 36.2 % Total $ 5,554 $ 4,783 16.1 % Except for Services revenue, the three months ending June 30, 2014 reflects an increase in all revenue types as compared to the three months ending June 30, 2013. The increase is mainly from our DT APAC subsidiary, where the full quarter was not reflected in the period ended June 30, 2013. Additionally, the Billing revenues, which represent third party billing services, were only beginning to ramp in early 2013. Cost of Revenues Three Months Ended June 30, % of 2014 2013 Change (In thousands) Cost of revenues: License fees $ 3,796 $ 2,714 39.9 % Other direct cost of revenues 344 403 -14.6 % Total cost of revenues $ 4,140 $ 3,117 32.8 % Revenues $ 5,554 $ 4,783 16.1 % Gross margin 25.5 % 34.8 % License fees mainly represent costs payable to content providers for use of their intellectual property in the products sold. Cost of revenues have increased somewhat consistently with the increase in revenues. However, due to the change in sales mix, primarily the increase in Billing revenues and decrease in Service revenues, gross margin has decreased from the previous year. Other direct cost of revenues, which consists solely of non-cash amortization of intangible assets, has decreased as a result of the disposal of Twistbox. Operating Expenses Three Months Ended June 30, % of 2014 2013 Change (In thousands) Product development expenses $ 1,959 $ 1,588 23.4 % Sales and marketing expenses 761 373 104.0 % General and administrative expenses 3,374 3,802 -11.3 % Product development expenses have historically included the costs to build, edit and optimize content formats for consumption on a mobile phone. Expenses in this area are primarily a function of personnel. 29 -------------------------------------------------------------------------------- Table of Contents Sales and marketing expenses represent the costs of sales and marketing personnel, and advertising and marketing campaigns. Selling and production costs have increased in conjunction with our increase in revenues, and costs associated with bringing Digital Turbine products to market. General and administrative expenses represent management, finance and support personnel costs in both the parent and subsidiary companies, which include professional and consulting costs, in addition to other costs such as rent, non-cash stock based compensation and depreciation expense. The reduction in general and administrative expense was due mainly to a year -to-year decrease in overall stock compensation and legal expenses, partially offset by an increase in headcount for the periods ended June 30, 2013 and 2014. Other Income and Expenses Three Months Ended June 30, % of 2014 2013 Change (In thousands) Interest and other (expense) $ 3 $ (1,440 ) -100.2 % Foreign exchange transaction gain / (loss) $ (6 ) $ 29 -120.7 % Gain / (loss) on disposal of fixed assets $ 2 $ (2 ) -200.0 % Other income $ 9 $ - 100 % Loss on settlement of debt $ (10 ) $ - 100 % Interest and other expense includes interest income on invested funds and interest expense as incurred by the Company. Other costs include foreign exchange transaction gains and losses. Financial Condition Assets Our current assets totaled $24.4 million and $27.5 million at June 30, 2014 and March 31, 2014, respectively. Total assets were $38.5 million and $45.1 million at June 30, 2014 and March 31, 2014, respectively. The decrease in current assets is primarily due to the decrease in cash for operating expenses. Liabilities and Working Capital At June 30, 2014, our total liabilities were $9.1 million, compared to $12.1 million at March 31, 2014. The change in liabilities was mainly due to the decrease of deferred tax liabilities and accrued license fees of $3.0 million and $0.76 million, offset by the increase in accounts payable, accrued compensation, and other current liabilities of $0.9 million combined. The Company had positive working capital of $15.3 million and $15.6 million at June 30, 2014 and March 31, 2014, respectively, for a difference of $0.3 million. This is mainly comprised of a decrease in cash, offset by a decrease in total current liabilities. |