Mandalay Media, Inc. (the “Company”), formerly Mediavest, Inc. (“Mediavest”) was originally incorporated in the state of Delaware on November 6, 1998 under the name eB2B Commerce, Inc. On April 27, 2000, it merged into DynamicWeb Enterprises Inc., a New Jersey corporation, the surviving company, and changed its name to eB2B Commerce, Inc. On April 13, 2005, the Company changed its name to Mediavest, Inc. Through January 26, 2005, the Company and its former subsidiaries were engaged in providing business-to-business transaction management services designed to simplify trading between buyers and suppliers. The Company was inactive from January 26, 2005 through its merger with Twistbox Entertainment, Inc., February 12, 2009 (Note 6). On September 14, 2008, Mandalay Media, Inc. was incorporated by Mediavest in the state of Delaware.
On November 7, 2008, Mediavest merged into its wholly-owned, newly formed subsidiary, Mandalay Media, with Mandalay Media as the surviving corporation. Mandalay Media issued: (1) one new share of common stock in exchange for each share of Mediavest’s outstanding common stock and (2) one new share of preferred stock in exchange for each share of Mediavest’s outstanding preferred stock as of November 7, 2008. Mandalay Media’s preferred and common stock assumed the same status and par value as Mediavest’s and acceded to all the rights, acquired all the assets and assumed all of the liabilities of Mediavest.
On February 12, 2009, Mandalay Media completed a merger with Twistbox Entertainment, Inc. (“Twistbox”) through an exchange of all outstanding capital stock of Twistbox for 10,180 shares of common stock of the Company and the Company’s assumption of all the outstanding options of Twistbox’s 2006 Stock Incentive Plan by the issuance of options to purchases 2,463 shares of common stock of the Company, including 2,145 vested and 319 unvested options.
After the Merger, Twistbox became a wholly owned subsidiary of the Company, and the company’s only active subsidiary.
Twistbox Entertainment Inc. (formerly known as The WAAT Corporation) is incorporated in the State of Delaware.
Twistbox is a global publisher and distributor of branded entertainment content, including images, video, TV programming and games, for Third Generation (3G) mobile networks. Twistbox publishes and distributes its content in a number of countries. Since operations began in 2003, Twistbox has developed an intellectual property portfolio that includes mobile rights to global brands and content from leading film, television and lifestyle content publishing companies. Twistbox has built a proprietary mobile publishing platform that includes: tools that automate handset portability for the distribution of images and video; a mobile games development suite that automates the porting of mobile games and applications to multiple handsets; and a content standards and ratings system globally adopted by major wireless carriers to assist with the responsible deployment of age-verified content. Twistbox has distribution agreements with many of the largest mobile operators in the world.
Twistbox is headquartered in the Los Angeles area and has offices in Europe and South America that provide local sales and marketing support for both mobile operators and third party distribution in their respective regions.
| Mandalay Media, Inc. and Subsidiaries | |
Notes to Unaudited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
On October 23, 2008 the Company completed an 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 Ltd. (“Fierce”).
In consideration for the shares, and subject to adjustment as set forth in the Stock Purchase Agreement, the aggregate purchase price (the “Purchase Price”) consisted of: (a) $5,375 in cash (the “Cash Consideration”); (b) 4,500 fully paid shares of Common Stock (the “Stock Consideration”); (c) a secured promissory note in the aggregate original principal amount of $5,375 (the “AMV Note”); and (d) additional earn-out amounts, if any, if the Acquired Companies achieve certain targeted earnings for each of the periods from October 1, 2008 to March 31, 2009, April 1, 2009 to March 31, 2010, and April 1, 2010 to September 30, 2010, as determined in accordance with the Agreement. The Purchase Price was subject to certain adjustments based on the working capital of AMV, to be determined initially within 75 days of the closing, and subsequently within 60 days following June 30, 2009. Any such adjustment of the Purchase Price will be made first by means of an adjustment to the principal sum due under the AMV Note, as set forth in the Stock Purchase Agreement. An initial adjustment of $443 was made subsequent to closing, and has been added to the AMV Note. The initial period earn-out was recognized in the year ended March 31, 2009 and was added to the amount of consideration for the acquisition, as described in Note 6.
AMV is a leading mobile media and marketing company delivering games and lifestyle content directly to consumers in the United Kingdom, Australia, South Africa and various other European countries. AMV markets its well established branded services through a unique Customer Relationship Management (“CRM”) platform that drives revenue through mobile internet, print and TV advertising. AMV is headquartered in Marlow, outside of London in the United Kingdom.
| 2. | Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission. In the opinion of management, the accompanying consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, which the Company believes are necessary for a fair statement of the Company’s financial position as of June 30, 2009 and its results of operations for the three months ended June 30, 2009 and 2008, respectively. These consolidated financial statements are not necessarily indicative of the results to be expected for the entire year. The consolidated balance sheet presented as of March 31, 2009 has been derived from the audited consolidated financial statements as of that date, and the consolidated balance sheet presented as of June 30, 2009 has been derived from the unaudited consolidated financial statements as of that date.
Principles of Consolidation
| Mandalay Media, Inc. and Subsidiaries | |
Notes to Unaudited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
The consolidated financial statements include the accounts of the Company and our wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.
Revenue Recognition
The Company’s revenues are derived primarily by licensing material and software in the form of products (Image Galleries, Wallpapers, video, WAP Site access, Mobile TV) and mobile games. License arrangements with the end user can be on a perpetual or subscription basis.
A perpetual license gives an end user the right to use the product, image or game on the registered handset on a perpetual basis. A subscription license gives an end user the right to use the product, image or game on the registered handset for a limited period of time, ranging from a few days to as long as one month.
The Company either markets and distributes its products directly to consumers, or distributes products through mobile telecommunications service providers (“carriers”), in which case the carrier markets the product, images or games to end users. License fees for perpetual and subscription licenses are usually billed upon download of the product, image or game by the end user. In the case of subscriber licenses, many subscriber agreements provide for automatic renewal until the subscriber opts-out, while others provide opt-in renewal. In either case, subsequent billings for subscription licenses are generally billed monthly. The Company applies the provisions of Statement of Position 97-2, Software Revenue Recognition, as amended by Statement of Position 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions, to all transactions.
Revenues are recognized from the Company’s products, images and games when persuasive evidence of an arrangement exists, the product, image or game has been delivered, the fee is fixed or determinable, and the collection of the resulting receivable is probable. For both perpetual and subscription licenses, management considers a license agreement to be evidence of an arrangement with a carrier or aggregator and a “clickwrap” agreement to be evidence of an arrangement with an end user. For these licenses, the Company defines delivery as the download of the product, image or game by the end user.
The Company estimates revenues from carriers in the current period when reasonable estimates of these amounts can be made. Most carriers only provide detailed sales transaction data on a one to two month lag. Estimated revenue is treated as unbilled receivables until the detailed reporting is received and the revenues can be billed. Some carriers provide reliable interim preliminary reporting and others report sales data within a reasonable time frame following the end of each month, both of which allow the Company to make reasonable estimates of revenues and therefore to recognize revenues during the reporting period when the end user licenses the product, image or game. Determination of the appropriate amount of revenue recognized involves judgments and estimates that the Company believes are reasonable, but it is possible that actual results may differ from the Company’s estimates. The Company’s estimates for revenues include consideration of factors such as preliminary sales data, carrier-specific historical sales trends, volume of activity on company monitored sites, seasonality, time elapsed from launch of services or product lines, the age of games and the expected impact of newly launched games, successful introduction of new handsets, growth of 3G subscribers by carrier, promotions during the period and economic trends. When the Company receives the final carrier reports, to the extent not received within a reasonable time frame following the end of each month, the Company records any differences between estimated revenues and actual revenues in the reporting period when the Company determines the actual amounts. Revenues earned from certain carriers may not be reasonably estimated. If the Company is unable to reasonably estimate the amount of revenues to be recognized in the current period, the Company recognizes revenues upon the receipt of a carrier revenue report and when the Company’s portion of licensed revenues are fixed or determinable and collection is probable. To monitor the reliability of the Company’s estimates, management, where possible, reviews the revenues by country by carrier and by product line on a regular basis to identify unusual trends such as differential adoption rates by carriers or the introduction of new handsets. If the Company deems a carrier not to be creditworthy, the Company defers all revenues from the arrangement until the Company receives payment and all other revenue recognition criteria have been met.
| Mandalay Media, Inc. and Subsidiaries | |
Notes to Unaudited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
In accordance with Emerging Issues Task Force, or EITF Issue No. 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent, the Company recognizes as revenues the amount the carrier reports as payable upon the sale of the Company’s products, images or games. The Company has evaluated its carrier agreements and has determined that it is not the principal when selling its products, images or games through carriers. Key indicators that it evaluated to reach this determination include:
| • | wireless subscribers directly contract with the carriers, which have most of the service interaction and are generally viewed as the primary obligor by the subscribers; |
| • | carriers generally have significant control over the types of content that they offer to their subscribers; |
| • | carriers are directly responsible for billing and collecting fees from their subscribers, including the resolution of billing disputes; |
| • | carriers generally pay the Company a fixed percentage of their revenues or a fixed fee for each game; |
| • | carriers generally must approve the price of the Company’s content in advance of their sale to subscribers, and the Company’s more significant carriers generally have the ability to set the ultimate price charged to their subscribers; and |
| • | The Company has limited risks, including no inventory risk and limited credit risk. |
For direct to consumer business, revenue is earned by delivering a product or service directly to the end user of that product or service. In those cases the Company records as revenue the amount billed to that end user and recognizes the revenue when persuasive evidence of an arrangement exists, the product, image or game has been delivered, the fee is fixed or determinable, and the collection of the resulting receivable is probable.
Net Loss per Common Share
Basic loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period plus dilutive common stock equivalents, using the treasury stock method. Potentially dilutive shares from stock options and warrants and the conversion of the Series A preferred stock for the periods ended June 30, 2009 and June 30, 2008 consisted of 100 and 5,060 shares, respectively, and were not included in the computation of diluted loss per share as they were anti-dilutive in each period.
Comprehensive Loss
Comprehensive loss consists of two components, net loss and other comprehensive loss. Other comprehensive loss refers to gains and losses that under generally accepted accounting principles are recorded as an element of stockholders’ equity but are excluded from net loss. The Company’s other comprehensive loss currently includes only foreign currency translation adjustments.
| Mandalay Media, Inc. and Subsidiaries | |
Notes to Unaudited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
Cash and Cash Equivalents
The Company considers all highly liquid short-term investments purchased with a maturity of three months or less to be cash equivalents.
Content Provider Licenses
Content Provider License Fees and Minimum Guarantees
The Company’s royalty expenses consist of fees that it pays to branded content owners for the use of their intellectual property in the development of the Company’s games and other content, and other expenses directly incurred in earning revenue. Royalty-based obligations are either accrued as incurred and subsequently paid, or in the case of longer term content acquisitions, paid in advance and capitalized on our balance sheet as prepaid royalties. These royalty-based obligations are expensed to cost of revenues either at the applicable contractual rate related to that revenue or over the estimated life of the prepaid royalties. Advanced license payments that are not recoupable against future royalties are capitalized and amortized over the lesser of the estimated life of the branded title or the term of the license agreement.
The Company’s contracts with some licensors include minimum guaranteed royalty payments, which are payable regardless of the ultimate volume of sales to end users. Each quarter, the Company evaluates the realization of its royalties as well as any unrecognized guarantees not yet paid to determine amounts that it deems unlikely to be realized through product sales. The Company uses estimates of revenues, and share of the relevant licensor to evaluate the future realization of future royalties and guarantees. This evaluation considers multiple factors, including the term of the agreement, forecasted demand, product life cycle status, product development plans, and current and anticipated sales levels, as well as other qualitative factors. To the extent that this evaluation indicates that the remaining future guaranteed royalty payments are not recoverable, the Company records an impairment charge to cost of revenues and a liability in the period that impairment is indicated.
Content Acquired
Amounts paid to third party content providers as part of an agreement to make content available to the Company for a term or in perpetuity, without a revenue share, have been capitalized and are included in the balance sheet as prepaid expenses. These balances will be expensed over the estimated life of the material acquired.
Software Development Costs
The Company applies the principles of Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed (“SFAS No. 86”). SFAS No. 86 requires that software development costs incurred in conjunction with product development be charged to research and development expense until technological feasibility is established. Thereafter, until the product is released for sale, software development costs must be capitalized and reported at the lower of unamortized cost or net realizable value of the related product.
The Company has adopted the “tested working model” approach to establishing technological feasibility for its products and games. Under this approach, the Company does not consider a product or game in development to have passed the technological feasibility milestone until the Company has completed a model of the product or game that contains essentially all the functionality and features of the final game and has tested the model to ensure that it works as expected. To date, the Company has not incurred significant costs between the establishment of technological feasibility and the release of a product or game for sale; thus, the Company has expensed all software development costs as incurred. The Company considers the following factors in determining whether costs can be capitalized: the emerging nature of the mobile market; the gradual evolution of the wireless carrier platforms and mobile phones for which it develops products and games; the lack of pre-orders or sales history for its products and games; the uncertainty regarding a product’s or game’s revenue-generating potential; its lack of control over the carrier distribution channel resulting in uncertainty as to when, if ever, a product or game will be available for sale; and its historical practice of canceling products and games at any stage of the development process.
| Mandalay Media, Inc. and Subsidiaries | |
Notes to Unaudited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
Product Development Costs
The Company charges costs related to research, design and development of products to product development expense as incurred. The types of costs included in product development expenses include salaries, contractor fees and allocated facilities costs.
Advertising Expenses
The Company expenses the production costs of advertising, including direct response advertising, the first time the advertising takes place. Direct response advertising is expensed immediately since there is a very limited ongoing return. Advertising expense was $2,339 and $424 in the three months ended June 30, 2009 and 2008, respectively. Advertising costs are expensed as incurred.
Restructuring
The Company accounts for costs associated with employee terminations and other exit activities in accordance with Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The Company records employee termination benefits as an operating expense when it communicates the benefit arrangement to the employee and it requires no significant future services, other than a minimum retention period, from the employee to earn the termination benefits.
Fair Value of Financial Instruments
As of June 30, 2009 and March 31, 2009, the carrying value of cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued license fees, accrued compensation and other current liabilities approximates fair value due to the short-term nature of such instruments. The carrying value of current portion of long-term debt approximates fair value as the related interest rates approximate rates currently available to the Company.
Foreign Currency Translation.
The Company uses the United States dollar for financial reporting purposes. Assets and liabilities of foreign operations are translated using current rates of exchange prevailing at the balance sheet date. Equity accounts have been translated at their historical exchange rates when the capital transaction occurred. Statement of Operations amounts are translated at average rates in effect for the reporting period. The foreign currency translation adjustment gain/(loss) of $424 and ($10) in the periods ended June 30, 2009 and 2008, respectively, has been reported as a component of comprehensive loss in the consolidated statement of stockholders equity and comprehensive loss. Translation gains or losses are shown as a separate component of retained earnings.
| Mandalay Media, Inc. and Subsidiaries | |
Notes to Unaudited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
Concentrations of Credit Risk.
Financial instruments which potentially subject us to concentration of credit risk consist principally of cash and cash equivalents, and accounts receivable. We have placed cash and cash equivalents with a single high credit-quality institution. As of June 30, 2009, we did not have any long-term marketable securities. The Company’s sales are made either directly to consumers, with the billings performed by and the receivable due from industry aggregators; or directly to the large national Mobile Phone Operators in the countries that we operate. We have a significant level of business and resulting significant accounts receivable balance with one operator and a small number of aggregators, and therefore have a high concentration of credit risk with those entities. We perform ongoing credit evaluations of our customers and maintain an allowance for potential credit losses. As of June 30, 2009, our two largest customers represented approximately 17% and 15% of our gross accounts receivable outstanding. These customers accounted for 12% and 19%, respectively, of our gross sales in the three months ended June 30, 2009. At June 30, 2008 our largest customer represented approximately 25% of our gross accounts receivable outstanding; and this customer accounted for 40% of our gross sales in the three months ended March 31, 2008.
Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of the related assets. Estimated useful lives are 8 to 10 years for leasehold improvements and 5 years for other assets.
Goodwill and Indefinite Life Intangible Assets
Goodwill represents the excess of cost over fair value of net assets of businesses acquired. In accordance with Statement of Financial Accounting Standards No. 142 (“SFAS 142”) Goodwill and Other Intangible Assets, the value assigned to goodwill and indefinite lived intangible assets, including trademarks and tradenames, is not amortized to expense, but rather they are evaluated at least on an annual basis to determine if there are potential impairments. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the implied fair value of the reporting unit goodwill is less than the carrying value. If the fair value of an indefinite lived intangible (such as trademarks and trade names) is less than its carrying amount, an impairment loss is recorded. Fair value is determined based on discounted cash flows, market multiples or appraised values, as appropriate. Discounted cash flow analysis requires assumptions about the timing and amount of future cash inflows and outflows, risk, the cost of capital, and terminal values. Each of these factors can significantly affect the value of the intangible asset. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management’s judgment. Any changes in key assumptions about the Company’s businesses and their prospects, or changes in market conditions, could result in an impairment charge. Some of the more significant estimates and assumptions inherent in the intangible asset valuation process include: the timing and amount of projected future cash flows; the discount rate selected to measure the risks inherent in the future cash flows; and the assessment of the asset’s life cycle and the competitive trends impacting the asset, including consideration of any technical, legal or regulatory trends.
In the year ended March 31, 2009, the Company determined that there was an impairment of goodwill, amounting to $27,844. In performing the related valuation analysis the Company used various valuation methodologies including probability weighted discounted cash flows, comparable transaction analysis, and market capitalization and comparable company multiple comparison. The impairment is detailed in Note 6 below.
| Mandalay Media, Inc. and Subsidiaries | |
Notes to Unaudited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
Long-lived assets, including purchased intangible assets with finite lives are amortized using the straight-line method over their useful lives ranging from three to ten years and are reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
In the year ended March 31, 2009, the Company determined that there was an impairment of intangible assets, amounting to $3,940. In performing the related valuation analysis the Company used various valuation methodologies including probability weighted discounted cash flows, comparable transaction analysis, and market capitalization and comparable company multiple comparison. The impairment is detailed in Note 6 below.
Intangible assets subject to amortization primarily consist of customer lists, license agreements and software that have been acquired. The intangible asset values assigned to the identified assets for each acquisition were generally determined based upon the expected discounted aggregate cash flows to be derived over the estimated useful life. The method of amortizing the intangible asset values are based upon the Company’s historical experience. The Company reviews the recoverability of its finite-lived intangible assets for recoverability whenever events or circumstances indicated that the carrying amount of an asset may not be recoverable. Recoverability is assessed by comparison to associated undiscounted cash flows.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (“SFAS No. 109”), which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in its financial statements or tax returns. Under SFAS No. 109, the Company determines deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of assets and liabilities along with net operating losses, if it is more likely than not the tax benefits will be realized using the enacted tax rates in effect for the year in which it expects the differences to reverse. To the extent a deferred tax asset cannot be recognized, a valuation allowance is established if necessary.
We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement 109 (“FIN 48”) on January 1, 2009. FIN 48 did not impact the Company’s financial position or results of operations at the date of adoption. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. FIN 48 prescribes that a company should use a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax positions that meet the “more-likely-than-not” recognition threshold should be measured as the largest amount of the tax benefits, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement in the financial statements. We recognize interest and penalties related to income tax matters as a component of the provision for income taxes. We do not currently anticipate that the total amount of unrecognized tax benefits will significantly change within the next 12 months.
| Mandalay Media, Inc. and Subsidiaries | |
Notes to Unaudited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
Stock-based compensation.
We have applied Statement of Financial Accounting Standards No. 123(R) Share-Based Payment (“SFAS 123R”) and accordingly, we record stock-based compensation expense for all of our stock-based awards.
Under SFAS 123R, we estimate the fair value of stock options granted using the Black-Scholes option pricing model. The fair value for awards that are expected to vest is then amortized on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. The amount of expense recognized represents the expense associated with the stock options we expect to ultimately vest based upon an estimated rate of forfeitures; this rate of forfeitures is updated as necessary and any adjustments needed to recognize the fair value of options that actually vest or are forfeited are recorded.
The Black-Scholes option pricing model, used to estimate the fair value of an award, requires the input of subjective assumptions, including the expected volatility of our common stock and an option’s expected life. As a result, the financial statements include amounts that are based upon our best estimates and judgments relating to the expenses recognized for stock-based compensation.
Preferred Stock
The Company applies the guidance enumerated in Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS 150”), and EITF Topic D-98, Classification and Measurement of Redeemable Securities, when determining the classification and measurement of preferred stock. Preferred shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value in accordance with SFAS 150. All other issuances of preferred stock are subject to the classification and measurement principles of EITF Topic D-98. Accordingly, the Company classifies conditionally redeemable preferred shares (if any), which includes preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control, as temporary equity. At all other times, the Company classifies its preferred shares in stockholders’ equity.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent asset and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. The most significant estimates relate to revenues for periods not yet reported by Carriers, liabilities recorded for future minimum guarantee payments under content licenses, accounts receivable allowances, and stock-based compensation expense.
Recent Accounting Pronouncements
In April 2009, the Financial Accounting Standards Board (“FASB”) issued three related FASB Staff Positions: (i) FSP FAS No. 115-2 and FAS No. 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP FAS 115-2 and FAS 124-2”); (ii) FSP FAS No. 107-1 and Accounting Principles Board Opinion (“APB”) No. 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP FAS 107-1 and APB 28-1”), and; (iii) FSP FAS No. 157-4, Determining the Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP FAS 157-4”), which are effective for interim and annual reporting periods ending after June 15, 2009. FSP FAS 115-2 and FAS 124-2 amend the other-than-temporary impairment guidance in generally accepted accounting principles (“GAAP”) for debt securities to modify the requirement for recognizing other-than-temporary impairments, change the existing impairment model and modify the presentation and frequency of related disclosures. FSP FAS 107-1 and APB 28-1 require disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. FSP FAS 157-4 provides additional guidance for estimating fair value in the current economic environment and reemphasizes that the objective of a fair value measurement remains an exit price. If we were to conclude that there has been a significant decrease in the volume and level of activity of the asset or liability in relation to normal market activities, quoted market values may not be representative of fair value and we may conclude that a change in valuation technique or the use of multiple valuation techniques may be appropriate in accordance with SFAS No. 157. The impact of the adoption of these three Staff Positions was not significant to our consolidated financial statements.
| Mandalay Media, Inc. and Subsidiaries | |
Notes to Unaudited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
In April 2009, the FASB issued FSP SFAS No. 141R-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies. FSP SFAS 141R-1 amends the guidance in SFAS 141R relating to the initial recognition and measurement, subsequent measurement and accounting and disclosures of assets and liabilities arising from contingencies in a business combination. FSP SFAS 141R is effective for fiscal years beginning after December 15, 2008. We adopted FSP SFAS 141R as of the beginning of fiscal 2010. We will apply the requirements of FSP FAS 141R-1 prospectively to any future acquisitions.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS 165”), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The provisions of SFAS 165 are effective for interim and annual reporting periods ending after June 15, 2009. The impact of the adoption of SFAS 165 was not significant to our consolidated financial statements.
In June 2009, the FASB approved the FASB Accounting Standards Codification (“Codification”), which launched on July 1, 2009, and will be effective for financial statements for interim or annual reporting periods ending after September 15, 2009. The Codification is not expected to change GAAP, but will combine all authoritative standards into a comprehensive, topically organized online database. After the Codification launch on July 1, 2009 only one level of authoritative GAAP exists, other than guidance issued by the SEC. All other accounting literature excluded from the Codification will be considered non-authoritative. We are currently evaluating the potential effect on the financial statements.
The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles, which contemplates continuation of the Company as a going concern. One of the Company’s operating subsidiaries, Twistbox, has sustained substantial operating losses since commencement of operations. The Company has also incurred negative cash flows from operating activities and the majority of the Company’s assets are intangible assets and goodwill, which have been subject to impairment in the current year.
| Mandalay Media, Inc. and Subsidiaries | |
Notes to Unaudited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
In addition, Twistbox has a significant amount of debt, in the form of a secured note, as detailed in Note 8. The Company has guaranteed 50% of this debt, and the Company is subject to certain covenants. The debt and the operation of covenants has been restructured subsequent to June 30, 2009, as described in Note 15.
The realization of a major portion of the assets in the accompanying consolidated balance sheet is dependent upon continued operations of the Company, which is in turn dependent on reaching a positive cash flow position while maintaining adequate liquidity.
The Company has undertaken a number of specific steps to achieve positive cashflow in the future and to improve liquidity. These actions include the debt restructuring described in Note 15, and the Company has taken further action to reduce its ongoing operating cost base, and has been in discussions with unsecured creditors regarding restructuring of commitments. Other actions include continued increases in revenues by introducing new products and revenue streams, reductions in the cost of revenues, continued expansion into new territories, reviewing additional financing options, and accretive acquisitions. Management believes that actions undertaken as a whole provide the opportunity for the Company to continue as a going concern, although this will be highly dependent on the ability to restructure commitments, and to obtain additional debt and/or equity placements.
| 4. | Balance Sheet Components |
Accounts Receivable
| | | June 30, | | | March 31, | |
| | | 2009 | | | 2009 | |
| | | (unaudited) | | | | |
| | | | | | | |
| Accounts receivable | | $ | 10,908 | | | $ | 10,919 | |
| Less: allowance for doubtful accounts | | $ | (174 | ) | | | (174 | ) |
| | | | | | | | | |
| | | $ | 10,734 | | | $ | 10,745 | |
Accounts receivable includes amounts billed and unbilled as of the respective balance sheet dates. The Company had no significant write-offs or recoveries during the period ended June 30, 2009.
Property and Equipment
| | | June 30, | | | March 31, | |
| | | 2009 | | | 2009 | |
| | | (unaudited) | | | | |
| | | | | | | |
| Equipment | | $ | 1,295 | | | $ | 1,192 | |
| Furniture & fixtures | | | 412 | | | | 386 | |
| Leasehold improvements | | | 140 | | | | 140 | |
| | | | | | | | | |
| | | | 1,847 | | | | 1,718 | |
| Accumulated depreciation | | | (608 | ) | | | (488 | ) |
| | | | | | | | | |
| | | $ | 1,239 | | | $ | 1,230 | |
Depreciation expense for the periods ended June 30, 2009 and 2008 was $120 and $86 respectively.
| Mandalay Media, Inc. and Subsidiaries | |
Notes to Unaudited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
| 5. | Description of Stock Plans |
On September 27, 2007, the stockholders of the Company adopted the 2007 Employee, Director and Consultant Stock Plan (“Plan”). Under the Plan, the Company may grant up to 3,000 shares or equivalents of common stock of the Company as incentive stock options (ISO), non-qualified options (NQO), stock grants or stock-based awards to employees, directors or consultants, except that ISO’s shall only be issued to employees. Generally, ISO’s and NQO’s shall be issued at prices not less than fair market value at the date of issuance, as defined, and for terms ranging up to ten years, as defined. All other terms of grants shall be determined by the board of directors of the Company, subject to the Plan.
On February 12, 2009, the Company amended the Plan to increase the number of shares of our common stock that may be issued under the Plan to 7,000 shares and on March 7, 2009, amended the Plan to increase the maximum number of shares of the Company's common stock with respect to which stock rights may be granted in any fiscal year to 1,100 shares. All other terms of the plan remain in full force and effect.
The following table summarizes options granted for the periods or as of the dates indicated:
| | | Number of | | | Weighted Average | |
| | | Shares | | | Exercise Price | |
| Outstanding at December 31, 2006 | | | - | | | | - | |
| Granted | | | 1,600 | | | $ | 2.64 | |
| Canceled | | | - | | | | - | |
| Exercised | | | - | | | | - | |
| Outstanding at December 31, 2007 | | | 1,600 | | | $ | 2.64 | |
| Granted | | | 2,752 | | | $ | 4.57 | |
| Transferred in from Twistbox | | | 2,462 | | | $ | 0.64 | |
| Canceled | | | (12 | ) | | $ | 0.81 | |
| Outstanding at March 31, 2008 | | | 6,802 | | | $ | 2.70 | |
| Granted | | | 1,860 | | | $ | 2.67 | |
| Canceled | | | (1,702 | ) | | $ | 0.48 | |
| Exercised | | | - | | | $ | 0.48 | |
| Outstanding at March 31, 2009 | | | 6,960 | | | $ | 2.52 | |
| Granted | | | - | | | $ | - | |
| Canceled | | | (5 | ) | | $ | 0.81 | |
| Exercised | | | - | | | $ | - | |
| Outstanding at June 30, 2009 (unaudited) | | | 6,955 | | | | | |
| Exercisable at June 30, 2009 (unaudited) | | | 5,546 | | | $ | 2.30 | |
The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
| | Options Granted Year Ended | | | | Options Tranferred | |
| | March 31, 2009 | | Options Granted | | from Twistbox | |
| Expected life (years) | 6 | | 4 to 6 | | 3 to 7 | |
| Risk-free interest rate | 3.90% to 3.92% | | 2.7% to 3.89% | | 2.03% to 5.03% | |
| Expected volatility | 49.73% to 54.33% | | 70% to 75.2% | | 70% to 75% | |
| Expected dividend yield | 0% | | 0% | | 0% | |
| Mandalay Media, Inc. and Subsidiaries | |
Notes to Unaudited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
The exercise price for options outstanding at June 30, 2009 was as follows:
| | | | Weighted | | | | | | | | | | |
| | | | Average | | | | | | Weighted | | | | |
| | | | Remaining | | | Number | | | Average | | | Aggregate | |
| Range of | | | Contractual Life | | | Outsanding | | | Exercise | | | Intrinsic | |
| Exercise Price | | | (Years) | | | June 30, 2009 | | | Price | | | Value | |
| | $0 - $1.00 | | | | 7.08 | | | | 2,272 | | | $ | 0.64 | | | $ | 617,560 | |
| | $2.00 - $3.00 | | | | 8.74 | | | | 2,950 | | | $ | 2.67 | | | $ | - | |
| | $4.00 - $5.00 | | | | 8.63 | | | | 1,733 | | | $ | 4.75 | | | $ | - | |
| | | | | | 8.17 | | | | 6,955 | | | $ | 2.52 | | | $ | 617,560 | |
The exercise price for options exercisable at June 30, 2008 was as follows:
| | | | Weighted | | | | | | | | | | |
| | | | Average | | | | | | Weighted | | | | |
| | | | Remaining | | | Options | | | Average | | | Aggregate | |
| Range of | | | Contractual Life | | | Exercisable | | | Exercise | | | Intrinsic | |
| Exercise Price | | | (Years) | | | June 30, 2009 | | | Price | | | Value | |
| | $0-$1.00 | | | | 7.06 | | | | 2,191 | | | $ | 0.63 | | | $ | 606,406 | |
| | $2.00-$3.00 | | | | 8.68 | | | | 2,197 | | | $ | 2.66 | | | $ | - | |
| | $4.00 - $5.00 | | | | 8.63 | | | | 1,158 | | | $ | 4.75 | | | $ | - | |
| | | | | | 8.03 | | | | 5,546 | | | $ | 2.30 | | | | 606,406 | |
A summary of the status of the Company’s nonvested shares as of June 30, 2009 pursuant to the Company’s 2007 Employee, Director and Consultant Stock Plan, and changes during the three months ended June 30, 2009 is presented below:
| | | | | | Weighted Average | |
| | | Number of | | | Grant Date | |
| Nonvested shares | | Shares | | | Fair Value | |
| Nonvested at March 31, 2009 | | | 498,767 | | | $ | 0.85 | |
| Granted | | | 229,388 | | | $ | 0.89 | |
| Vested | | | 219,550 | | | $ | 0.86 | |
| Nonvested at March 31, 2009 | | | 508,605 | | | $ | 0.86 | |
| Forfeited | | | (81,333 | ) | | $ | 0.88 | |
As of June 30, 2009, there was $438 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a period of a further 11 months. The total fair value of shares vested during the three months ended June 30, 2009, was $190.
| Mandalay Media, Inc. and Subsidiaries | |
Notes to Unaudited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
Stock-based compensation expense of $500 and 1,222 for the three months ended June 30, 2009 and 2008 respectively, is included primarily in general and administrative expense.
| 6. | Acquisitions/Purchase Price Accounting |
Twistbox Entertainment, Inc. and related entities
On February 12, 2008, the Company completed an acquisition of Twistbox Entertainment, Inc. (“Twistbox”) through an exchange of all outstanding capital stock of Twistbox for 10,180 shares of common stock of the Company and the Company’s assumption of all the outstanding options of Twistbox’s 2006 Stock Incentive Plan by the issuance of options to purchase 2,463 shares of common stock of the Company, including 2,145 vested and 318 unvested options. After the Merger, Twistbox became a wholly-owned subsidiary of the Company.
Twistbox is a global publisher and distributor of branded entertainment content, including images, video, TV programming and games, for Third Generation (3G) mobile networks. It publishes and distributes its content globally and has developed an intellectual property portfolio unique to its target demographic that includes worldwide mobile rights to global brands and content from leading film, television and lifestyle content publishing companies. Twistbox has built a proprietary mobile publishing platform and has leveraged its brand portfolio and platform to secure “direct” distribution agreements with the largest mobile operators in the world. These factors contributed to a purchase price in excess of the fair value of net tangible and intangible assets acquired, and, as a result, the Company recorded goodwill in connection with this transaction.
In connection with the Merger, the Company guaranteed up to $8,250 of principal under an existing note of Twistbox in accordance with the terms, conditions and limitations contained in the note. In connection with the guaranty, the Company issued the lender two warrants, one to purchase 1,093 and the other to purchase 1,093 shares of common stock of the Company, exercisable at $7.55 per share, and at $5.00 per share, (increasing to $7.55 per share, if not exercised in full by February 12, 2009), respectively, through July 30, 2011. The warrants have been included as part of the purchase consideration and have been valued using the Black Scholes method, using the stock price at the merger date of $4.75 per share discounted for certain restrictions, a volatility of 70%, and the exercise price and the expected time to vest for each group. These warrants were subsequently amended as described in Note 8.
The purchase consideration was determined to be $67,479, consisting of $66,025 attributed to the common stock and options exchanged and warrants issued, and $1,454 in transaction costs. During the year, a further $59 of transaction costs were recognized, with the result that the purchase consideration was increased to $67,538, with an equivalent increase in Goodwill. The options and warrants were valued using the Black Scholes method, using the stock price at the merger date of $4.75 per share, a volatility of 70%, and in the case of options the exercise price and the expected time to vest for each group. Under the purchase method of accounting, the Company allocated the total purchase price of $67,538 to the net tangible and intangible assets acquired and liabilities assumed based upon their respective estimated fair values as of the acquisition date as follows:
| Mandalay Media, Inc. and Subsidiaries | |
Notes to Unaudited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
| Cash | | $ | 6,679 | |
| Accounts receivable | | | 4,966 | |
| Prepaid expenses and other current assets | | | 1,138 | |
| Property and equipment | | | 1,062 | |
| Other long-term assets | | | 361 | |
| Accounts Payable, accrued license fees and accruals | | | (6,882 | ) |
| Other current liabilities | | | (814 | ) |
| Accrued license fees, long term portion | | | (2,796 | ) |
| Long term debt | | | (16,483 | ) |
| Identified Intangibles | | | 19,905 | |
| Merger related restructuring reserves | | | (1,034 | ) |
| Goodwill | | | 61,436 | |
| | | $ | 67,538 | |
The Merger related restructuring reserves were subsequently reduced by $215, increasing net assets acquired and consequentially reducing goodwill by that amount. As a result, goodwill recognized in the above transaction amounted to $61,221. Goodwill in relation to the acquisition of Twistbox is not expected to be deductible for income tax purposes. Merger related restructuring reserves include reserves for employee severance and for office relocation.
AMV Holding Limited group
On October 23, 2008, the Company completed an acquisition of 100% of AMV Holding Limited, a United Kingdom private limited company (“AMV”) and 80% of Fierce Media Limited. The acquisition was effective on October 1, 2008.
Subject to adjustment as set forth in the Stock Purchase Agreement, the aggregate purchase price (the “Purchase Price”) consisted of: (a) $5,375 in cash (the “Cash Consideration”); (b) 4,500 fully paid and non-assessable shares of Common Stock (the “Stock Consideration”); (c) a secured promissory note in the aggregate original principal amount of $5,375 (the “AMV Note”); and (d) additional earn-out amounts, if any, if the Acquired Companies achieve certain targeted earnings for each of the periods from October 1, 2008 to March 31, 2009, April 1, 2009 to March 31, 2010, and April 1, 2010 to September 30, 2010, as determined in accordance with the Stock Purchase Agreement. The Purchase Price is subject to certain adjustments based on the working capital of AMV, to be determined initially within 75 days of the closing, and subsequently within 60 days following June 30, 2009. Any such adjustment of the Purchase Price will be made first by means of an adjustment to the principal sum due under the AMV Note, as set forth in the Stock Purchase Agreement. The initial adjustment has been determined preliminarily as $443, to be added to the AMV Note.
Prior to closing, each outstanding option to purchase shares of capital stock of AMV (an “AMV Option”) was either exercised in full or terminated. The AMV Note matures on January 30, 2010, and bears interest at an initial rate of 5% per annum, subject to adjustment as provided therein. In the event the Company completes an equity financing that results in gross proceeds of over $6,000, the Company will prepay a portion of the AMV Note in an amount equal to one-third of the excess of the gross proceeds of such financing over $6,000. In addition, if within nine months of the issuance date of the AMV Note, the Company completes a financing that results in gross proceeds of over $15,000, then the Company shall prepay the entire principal amount then outstanding under the AMV Note, plus accrued interest. If within nine months of the issuance date of the Note, the aggregate principal sum then outstanding under the AMV Note plus accrued interest thereon has not been prepaid, then on and after such date, interest shall accrue on the unpaid principal balance of the AMV Note at a rate of 7% per annum. Additionally, in connection with the AMV Note, AMV granted to the Sellers a security interest in its assets. Such security interest is subordinate to the security interest granted to ValueAct Small Cap Master Fund, L.P. (“ValueAct) under the Senior Secured Note, issued by Twistbox Entertainment, Inc., a wholly-owned subsidiary of the Company (“Twistbox”), due January 30, 2010, as amended on February 12, 2008 (the “ValueAct Note”), and as subsequently amended on October 23, 2008. AMV also agreed to guarantee Mandalay Media’s repayment of the AMV Note to the Sellers.
| Mandalay Media, Inc. and Subsidiaries | |
Notes to Unaudited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
The Purchase Price was preliminarily estimated by the Company to be $23,030 consisting of $9,900 attributed to the Stock Consideration issued, $5,375 in cash, $95 in stamp duty, $5,818 under the AMV Note referenced above (inclusive of the working-capital adjustment), $1,098 as an estimate of the initial period earn-out adjustment and $744 in transaction costs. Any further adjustments required under the “working capital adjustment” provision and any further adjustment under the “earn-out” provision of the Stock Purchase Agreement have not yet been determined and therefore have not been included in the preliminary calculation of the purchase price. The shares of the Stock Consideration were valued using the closing stock price at the acquisition date of $2.20 per share. Under the purchase method of accounting, the Company allocated the total Purchase Price of $23,030 to the net tangible and intangible assets acquired and liabilities assumed based upon their respective estimated fair values as of the acquisition date as follows:
| Cash and cash equivalents | | $ | 3,380 | |
| Accounts receivable, net of allowances | | | 9,087 | |
| Prepaid expenses and other current assets | | | 16 | |
| Property and equipment, net | | | 406 | |
| Accounts payable | | | (10,391 | ) |
| Bank overdrafts | | | (1,902 | ) |
| Other current liabilities | | | (1,262 | ) |
| Other long term liabilities | | | (223 | ) |
| Minority interests | | | 95 | |
| Identified intangibles | | | 1,368 | |
| Goodwill | | | 22,456 | |
| | | $ | 23,030 | |
Net assets associated with Fierce Media Limited were insignificant. Goodwill recognized in the above transaction is preliminarily estimated at $22,456. The business acquired is not capital intensive and does not require significant identifiable intangible assets – as a result the greater proportion of consideration has been allocated to goodwill. Goodwill in relation to the acquisition of AMV is not expected to be deductible for US income tax purposes. The preliminary purchase price allocation, including the allocation of goodwill, will be updated as additional information becomes available.
Unaudited Pro Forma Summary
| Mandalay Media, Inc. and Subsidiaries | |
Notes to Unaudited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
The following pro forma consolidated amounts give effect to the acquisition of AMV by the Company accounted for by the purchase method of accounting as if it had occurred as at the beginning of each of the period. The pro forma consolidated results are not necessarily indicative of the operating results that would have been achieved had the transaction been in effect as of the beginning of the period presented and should not be construed as being representative of future operating results.
| | | 3 months ended | |
| | | June 30, | |
| | | 2008 | |
| | | | |
| Revenues | | $ | 16,531 | |
| Cost of revenues | | | 7,564 | |
| Gross profit/(loss) | | | 8,967 | |
| | | | | |
| Operating expenses net of interest | | | | |
| income and other expense | | | 10,373 | |
| Income tax expense and minority interests | | | (172 | ) |
| Net loss | | $ | (1,578 | ) |
| | | | | |
| Basic and Diluted net loss per common share | | $ | (0.06 | ) |
| 7. | Other Intangible Assets |
A reconciliation of the changes to the Company's carrying amount of intangible assets for the three months ended June 30, 2009 was as follows:
| Balance at March 31, 2009 | | $ | 16,121 | |
| Amortization | | | (305 | ) |
| Balance at June 30, 2009 | | $ | 15,816 | |
The Company performed its annual review of the fair value of intangible assets in the fourth quarter of fiscal 2009. As a result of the assessment, the Company determined that its net book value exceeded the implied fair value; and recorded an impairment charge of $3,940 to write down intangible assets.
The components of intangible assets as at June 30, 2009 and 2008 were as follows:
| Mandalay Media, Inc. and Subsidiaries | |
Notes to Unaudited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
| | | June 30, | | | March 31, | |
| | | 2009 | | | 2009 | |
| | | (unaudited) | | | | |
| Software | | $ | 1,922 | | | $ | 1,922 | |
| Trade name / Trademark | | | 9,824 | | | | 9,824 | |
| Customer list | | | 4,378 | | | | 4,378 | |
| License agreements | | | 886 | | | | 886 | |
| Non-compete agreements | | | 323 | | | | 323 | |
| | | | 17,333 | | | | 17,333 | |
| Accumulated amortization | | | (1,517 | ) | | | (1,212 | ) |
| | | $ | 15,816 | | | $ | 16,121 | |
The Company has included amortization of acquired intangible assets directly attributable to revenue-generating activities in cost of revenues. The Company has included amortization of acquired intangible assets not directly attributable to revenue-generating activities in operating expenses. During the three months ended June 30, 2009 and 2008 the Company recorded amortization expense in the amount of $128 and $102, respectively, in cost of revenues; and amortization expense in the amount of $177 and $137 respectively in operating expenses.
As of June 30, 2009, the total expected future amortization related to intangible assets was as follows:
| | | 12 Months Ended June 30, | | | | |
| | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | Thereafter | |
Software | | $ | 334 | | | $ | 334 | | | $ | 256 | | | $ | 230 | | | $ | 230 | | | $ | 142 | |
Customer List | | | 547 | | | | 547 | | | | 547 | | | | 547 | | | | 547 | | | | 888 | |
License Agreements | | | 177 | | | | 177 | | | | 177 | | | | 110 | | | | - | | | | - | |
Non-compete agreements | | | 162 | | | | 40 | | | | - | | | | - | | | | - | | | | - | |
| | | $ | 1,220 | | | $ | 1,098 | | | $ | 980 | | | $ | 887 | | | $ | 777 | | | $ | 1,030 | |
| | | June 30, | | | March 31, | |
| | | 2009 | | | 2009 | |
| | (unaudited) | | | | |
Short Term Debt | | | | | | |
Senior secured note, inclusive of accrued interest | | $ | - | | | | 17,351 | |
net of discount of $0 and $247, respectively | | | | | | | | |
Deferred purchase consideration inclusive of accrued interest | | | - | | | | 5,945 | |
| | | $ | - | | | $ | 23,296 | |
| Mandalay Media, Inc. and Subsidiaries | |
Notes to Unaudited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
| | | June 30, | | | March 31, | |
| | | 2009 | | | 2009 | |
| | | (unaudited) | | | | |
| Long Term Debt | | | | | | |
| Senior secured note, inclusive of accrued interest, | | $ | 17,838 | | | $ | - | |
net of discount of $173 and $0, respectively | | | | | | | | |
| Deferred purchase consideration inclusive of accrued interest | | | 6,019 | | | | - | |
| | | $ | 23,857 | | | $ | - | |
In July 2007, Twistbox entered into a debt financing agreement pursuant to the ValueAct Note amounting to $16,500, payable at 30 months. The holder of the ValueAct Note was granted first lien over all of the Company’s assets. The ValueAct Note carries interest of 9% annually for the first year and 10% subsequently, with semi-annual interest only payments. The agreement included certain restrictive covenants. In conjunction with the merger described in Note 6, the Company guaranteed up to $8,250 of the principal; and the restrictive covenants were modified, including a requirement for both Mandalay Media and Twistbox to maintain certain minimum cash balances. In connection with the guaranty, the Company issued the lender warrants to purchase 1,093 and 1,093 shares of common stock of the Company, exercisable at $7.55 per share, and at $5.00 per share, (increasing to $7.55 per share, if not exercised in full by February 12, 2009), respectively, through July 30, 2011. These warrants replaced warrants originally issued by Twistbox in conjunction with the ValueAct Note.
On October 23, 2008, the Company, Twistbox and ValueAct entered into a Second Amendment (the “Second Amendment”) to the ValueAct Note. Among other things, the Second Amendment provides for a payment in kind election, whereby, in lieu of making any cash payments to ValueAct on the following two interest payment dates, Twistbox may elect that the amount of any interest due on such date be added to the principal amount due under the ValueAct Note. That election was made in connection with the first interest payment following the amendment. In addition, ValueAct agreed to amend the ValueAct Note to modify the covenant requiring that the Company and Twistbox maintain certain minimum combined cash balances, during specified periods of time. Lastly, the Second Amendment provides that an event of default may be triggered in the event the Company fails to observe certain covenants as agreed to in the Second Amendment, including a covenant that, until all principal and interest and any other amounts due under the ValueAct Note are paid in full in cash, the Company: (i) will not create, incur, assume or permit to exist certain indebtedness, except for indebtedness in connection with a receivables facility as described in the Second Amendment, which indebtedness would rank pari passu in right of payment on the ValueAct Note, provided, that any receivables used to procure and maintain such receivables facility shall not be subject to any lien of ValueAct during the term of such receivables facility; and (ii) will not, and will not permit any subsidiary to, without the prior consent of ValueAct, prepay any indebtedness incurred in connection with the AMV Note, other than prepayments with proceeds raised in an equity financing as permitted by the AMV Note. Additionally, on October 23, 2008, in connection with the ValueAct Note, as amended, AMV agreed to grant to ValueAct a security interest in its assets, which ranks senior to the security interest granted to the Sellers. AMV also agreed to guarantee Twistbox’s repayment of the ValueAct Note.
As described above, the Company had previously issued to ValueAct two warrants to purchase shares of the Company’s common stock, $0.0001 par value per share (the “Common Stock”). One warrant entitled ValueAct to purchase up to a total of 1,093 shares of Common Stock at an exercise price of $7.55 per share (“$7.55 Warrant”). The other warrant entitled ValueAct to purchase up to a total of 1,093 shares of Common Stock at an initial exercise price of $5.00 per share (“$5.00 Warrant,” and together with the $7.55 Warrant, the “ValueAct Warrants”). On October 23, 2008, the Company and ValueAct entered into an allonge to each of the ValueAct Warrants. Among other things, the exercise price of each of the ValueAct Warrants was amended to be $4.00 per share.
| Mandalay Media, Inc. and Subsidiaries | |
Notes to Unaudited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
Subsequent to June 30, 2009 the Company and ValueAct entered into a further amendment to the ValueAct Note and a further allonge to the $5.00 Warrant. In addition the Company entered into an agreement which extended the maturity date of the deferred purchase consideration. Both agreements aremore fully described in Note 15. As a result, the debt has been re-classified from short-term to long-term.
Minimum future obligations, including interest, under the ValueAct Note are $20,536 during the year ended June 30, 2011 including repayment of the principle.
| 9. | Related Party Transactions |
The Company engages in various business relationships with shareholders and officers and their related entities. The significant relationships are disclosed below.
Mandalay Media, Inc.
On September 14, 2006, the Company entered into a management agreement (“Agreement”) with Trinad Management for five years. Pursuant to the terms of the Agreement, Trinad Management will provide certain management services, including, without limitation, the sourcing, structuring and negotiation of a potential business combination transaction involving the Company in exchange for a fee of $90 per quarter, plus reimbursements of all expenses reasonably incurred in connection with the provision of Agreement. The Agreement expires on September 14, 2011. Either party may terminate with prior written notice. However, if the Company terminates, it shall pay a termination fee of $1,000. For the periods ended June 30, 2009 and 2008, the Company paid management fees under the agreement of $90 and $90 respectively.
Twistbox Entertainment, Inc
Lease of Premises
The Company leases its primary offices in Los Angeles from Berkshire Holdings, LLC, a company with common ownership by officers of Twistbox. Amount paid in connection with this lease was $95 and $95 for the periods ended June 30, 2009 and 2008 respectively.
| 10. | Capital Stock Transactions |
Preferred Stock
On October 3, 2006, the Company designated a Series A Convertible Preferred Stock, par value $.0001 per share (“Series A”). The Series A holders shall be entitled to: (1) vote on an equal per share basis as common, (2) dividends on an if-converted basis and (3) a liquidation preference equal to the greater of $10, per share of Series A (subject to adjustment) or such amount that would have been paid on an if-converted basis. Each Series A holder may treat as a dissolution or winding up of the Company any of the following transactions: a consolidation, merger, sale of substantially all the assets of the company, issuance/sale of common stock of the Company constituting a majority of all shares outstanding and a merger/business combination, each as defined.
| Mandalay Media, Inc. and Subsidiaries | |
Notes to Unaudited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
In addition, the Series A holders may convert, at their discretion, all or any of their Series A shares into the number of common shares equal to the number calculated by dividing the original purchase price of such Series A Preferred, plus the amount of any accumulated, but unpaid dividends, as of the conversion date, by the original purchase price (subject to certain adjustments) in effect at the close of business on the conversion date.
On August 3, 2006, the Company sold 100 shares of the Series A to Trinad Management, LLC (“Trinad Management”), an affiliate of Trinad Capital LP (“Trinad Capital”), one of the Company’s principal shareholders, for an aggregate sale price of $100, $1.00 per share. The Company recognized a one time, non-cash deemed preferred dividend of $43 because the fair value of our common stock at the time of the sale of $1.425 per share, was greater than the conversion price of $1.00 per share.
Common Stock
On August 3, 2006, the Company authorized an increase in their authorized shares of common stock from 19,000 to 100,000 shares.
On August 3, 2006, the Company authorized a 2.5 to 1 stock split of its common stock, increasing its outstanding shares from 4,000 to 10,000. In connection with the split, the Company transferred $6 from additional paid-in capital to common stock. All share and per share amounts have been retroactively adjusted to reflect the effect of the stock split.
On August 3, 2006, the Company granted warrants to purchase 150 and 50 shares of common stock of the Company to its president and a director, respectively. Each warrant is exercisable at $2.50 per share, through August 1, 2009. The warrants were valued at $111 using a Black-Scholes model assuming a risk free interest rate of 4.89%, expected life of two years, and expected volatility of 105.67%.
On September 14, 2006, October 12, 2006 and December 26, 2006, the Company sold 2,800, 3,400 and 530 units, respectively, at $1.00 per unit, for an aggregate proceeds of $ 6,057, net of offering costs of $673. Each unit consisted of one share of common stock of the Company and one warrant. Each warrant is exercisable to purchase one share of common stock of the Company at $2.00 per share, through September, October and December 2009.
On July 24, 2007, the Company sold 5,000 shares of the Company's common stock, at $0.50 per share, for aggregate proceeds of $2,473, net of offering costs of $27.
In September, October and December 2007, warrants to purchase 625 shares of common stock were exercised in a cashless exchange for 239 shares of the Company’s common stock based on the average closing price of the Company’s common stock for the five days prior to the exercise date.
On November 7, 2007, the Company granted non-qualified stock options to purchase 500 shares of common stock of the Company to a director under the Plan. The options have a ten year term and are exercisable at $2.65 per share, with one-third of the options vesting immediately upon grant, one-third vesting on the first anniversary of the date of grant and the one-third on the second anniversary of the date of grant. The options were valued at $772 using a Black-Scholes model assuming a risk free interest rate of 3.89%, expected life of four years, and expected volatility of 75.2%.
| Mandalay Media, Inc. and Subsidiaries | |
Notes to Unaudited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
On November 14, 2007, the Company granted non-qualified stock options to purchase 100 shares of common stock of the Company to a director under the Plan. The options have a ten year term and are exercisable at a price of $2.50 per share, with one-third of the options granted vesting immediately upon grant, one-third vesting on the first anniversary of the date of grant and one-third on the second anniversary of the date of grant. The options were valued at $160 using a Black-Scholes model assuming a risk free interest rate of 3.89%, expected life of four years, and expected volatility of 75.2%.
| Series A preferred stock | | | 100 | |
| Options under the Plan | | | 7,000 | |
| Warrants not under the Plan | | | 100 | |
| Warrants issued with units | | | 6,205 | |
| | | | | |
| | | | 13,405 | |
On February 12, 2008, the Company issued 10,180 shares of common stock in connection with the merger with Twistbox. The Company also assumed all the outstanding options of Twistbox’s 2006 Stock Incentive Plan by the issuance of options to purchases 2,463 shares of common stock of the Company, including 2,144 vested and 319 unvested options; and the Company issued warrants to a lender to Twistbox, to purchase 1,093 and 1,093 shares of common stock of the Company, exercisable at $7.55 per share, and at $5.00 per share, (increasing to $7.55 per share, if not exercised in full by February 12, 2009), respectively, through July 30, 2011.
On April 9, 2008 a former director of the company exercised warrants to purchase 50 shares of common stock in a cashless exchange for 25 shares of the Company’s common stock.
In April and June 2008, warrants to purchase 350 shares of common stock were exercised in a cashless exchange for 217 shares of the Company’s common stock based on the average closing price of the Company’s common stock for the five days prior to the exercise date.
On June 18, 2008, the Company granted non-qualified stock options to purchase 1,500 shares of common stock of the Company to four directors under the Plan. The options have a ten year term and are exercisable at a price of $2.75 per share, with one-third of the options granted vesting immediately upon grant, one-third vesting on the first anniversary of the date of grant and one-third on the second anniversary of the date of grant. The options were valued at $2,403 using a Black-Scholes model assuming a risk free interest rate of 3.89%, expected life of four years, and expected volatility of 75.2%.
On September 29, 2008, the Company granted non-qualified stock options to purchase 350 shares of common stock of the Company to two directors under the Plan. The options have a ten year term and are exercisable at a price of $2.40 per share, with one-third of the options granted vesting immediately upon grant, one-third vesting on the first anniversary of the date of grant and the remaining one-third vesting on the second anniversary of the date of grant. The options were valued at $489 using a Black-Scholes model assuming a risk free interest rate of 3.89%, expected life of four years, and expected volatility of 75.2%.
| Mandalay Media, Inc. and Subsidiaries | |
Notes to Unaudited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
On October 23, 2008, the Company entered into a Securities Purchase Agreement with certain investors, pursuant to which the Company agreed to sell in a private offering an aggregate of 1,685 shares of Common Stock and warrants to purchase 843 shares of Common Stock (the “Warrants”), for gross proceeds to the Company of $4,500. Offering costs were $146. The Warrants have a five year term and an exercise price of $2.67 per share.
In October 2008, warrants to purchase 2,300 shares of common stock were exercised in a cashless exchange for 286 shares of the Company’s common stock based on the average closing price of the Company’s common stock for the five days prior to the exercise date.
On March 16, 2009, the Company approved the issuance of an aggregate of 938,697 shares of common stock pursuant to the Company’s 2007 Employee, Director and Consultant Stock Plan at a purchase price of $0.0001 per share to certain executives of the Company and subsidiary in connection with agreed salary reductions. Certain of the shares granted are subject to forfeiture to the Company if such executive terminates his position with the Company prior to one year from the grant date, and such shares become fully vested one year from the grant date or upon the occurrence of a change-in-control of the Company. All such shares granted to the executives may not be sold or transferred for a period of one year from the Grant Date.
| 11. | Employee Benefit Plans |
The Company has an employee 401(k) savings plan covering full-time eligible employees. These employees may contribute eligible compensation up to the annual IRS limit. The Company does not make matching contributions.
The income tax provision for the quarter represents foreign withholding taxes paid in jurisdictions outside of the US and income taxes currently payable in foreign jurisdictions, primarily the United Kingdom based on revenue derived in that territory. AMV Limited had taxable income in the quarter which is subject to taxation in the United Kingdom. The effective tax rate used for calculation of the UK tax provision in the quarter was 28% and the difference between the US statutory rate of 35% and the effective rate of (46%) primarily relates to the taxes related to the Company’s UK operations and the increase in the reserve for deferred tax assets for the US operations.
In the United States, as of June 30, 2009, the Company had net operating loss (“NOL”) carry-forwards to reduce future Federal income taxes of approximately $43,100, expiring in various years ranging through 2027. The Company may have had ownership changes, as defined by the Internal Revenue Service, which may subject the NOL's to annual limitations which could reduce or defer the use of the NOL' carry-forwards.
In connection with the acquisitions described in Note 6 above, the Company has recorded goodwill and intangibles which will have differing amortization for book and tax purposes. Goodwill and trademarks, amounting to $65,657 will not be amortized for book purposes, but will be subject to amortization for tax purposes, giving rise to a permanent difference. Other intangible assets, amounting to $7,509 will be amortized over a shorter period for book purposes than tax purposes, giving rise to timing differences. These differences will impact the Company’s NOL carry-forwards in the future.
As of June 30, 2009, realization of the Company's net deferred tax asset of approximately $19,270 was not considered more likely than not and, accordingly, a valuation allowance of $19,270 has been provided. During the three months ended June 30, 2009, the valuation allowance increased by $336.
| Mandalay Media, Inc. and Subsidiaries | |
Notes to Unaudited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
As of June 30, 2009, there were no material changes to either the nature or the amounts of the uncertain tax positions previously determined and disclosed as at March 31, 2009.
The Company adopted the provisions of FIN 48 on January 1, 2009 and there was no difference between the amounts of unrecognized tax benefits recognized in the balance sheet prior to the adoption of FIN 48 and those after the adoption of FIN 48. There were no unrecognized tax benefits not subject to valuation allowance as at June 30, 2009, and March 31, 2009. The Company will classify interest and penalties on any unrecognized tax benefits as a component of the provision for income taxes.
| 13. | Segment and Geographic information |
The Company operates in one reportable segment in which it is a developer and publisher of branded entertainment content for mobile phones. Revenues are attributed to geographic areas based on the country in which the carrier’s principal operations are located. The company attributes its long-lived assets, which primarily consist of property and equipment, to a country primarily based on the physical location of the assets. Goodwill and intangibles are not included in this allocation. The following information sets forth geographic information on our sales and net property and equipment for the period ended June 30, 2009:
| | | North | | | | | | South | | | Other | | | | |
| | | America | | | Europe | | | America | | | Regions | | | Consolidated | |
| Three Months ended June 30, 2009 | | | | | | | | | | | | | | | |
| Net sales to unaffiliated customers | | $ | 1,912 | | | $ | 6,810 | | | $ | 95 | | | $ | 1,266 | | | $ | 10,083 | |
| | | | | | | | | | | | | | | | | | | | | |
| Three Months ended June 30, 2008 | | | | | | | | | | | | | | | | | | | | |
| Net sales to unaffiliated customers | | $ | 592 | | | $ | 4,453 | | | $ | 167 | | | $ | 135 | | | $ | 5,347 | |
| | | | | | | | | | | | | | | | | | | | | |
| Property and equipment, net at June 30, 2009 | | $ | 663 | | | $ | 566 | | | $ | - | | | $ | 10 | | | $ | 1,239 | |
Our largest single customer accounted for 19% of our revenue in the period ended June 30, 2009.
| 14. | Commitments and Contingencies |
Operating Lease Obligations
The Company leases office facilities under noncancelable operating leases expiring in various years through 2011.
Following is a summary of future minimum payments under initial terms of leases at June 30, 2009:
| Mandalay Media, Inc. and Subsidiaries | |
Notes to Unaudited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
| Year Ending June 30 | | | |
| 2010 | | $ | 297 | |
| 2011 | | $ | 96 | |
| Total minimum lease payments | | $ | 393 | |
These amounts do not reflect future escalations for real estate taxes and building operating expenses. Rental expense amounted to $223 for the period ended June 30, 2009.
Minimum Guaranteed Royalties
The Company has entered into license agreements with various owners of brands and other intellectual property so that it could develop and publish branded products for mobile handsets.
Pursuant to some of these agreements, the Company is required to pay minimum royalties over the term of the agreements regardless of actual sales. Future minimum royalty payments for those agreements as of June 30, 2009 were as follows:
| | | Minimum | |
| | | Guaranteed | |
| Year Ending June 30 | | Royalties | |
| 2010 | | $ | 120 | |
| 2011 | | | 120 | |
| Total minimum payments | | $ | 240 | |
Commitments in the above table include guaranteed royalties to licensors that are included as a liability in the Company’s consolidated balance sheet of $240 as of June 30, 2009, because the Company has determined that recoupment is unlikely.
Other Obligations
As of June 30, 2009, the Company was obligated for payments under various distribution agreements, equipment lease agreements, employment contracts and the management agreement described in Note 10 with initial terms greater than one year at June 30, 2009. Annual payments relating to these commitments at June 30, 2009 are as follows:
| Year Ending June 30 | | Commitments | |
| 2010 | | $ | 2,953 | |
| 2011 | | | 1,209 | |
| 2012 | | | 136 | |
| Total minimum payments | | $ | 4,298 | |
Litigation
Twistbox’s wholly owned subsidiary WAAT Media Corp. (“WAAT”) and General Media Communications, Inc. (“GMCI”) are parties to a content license agreement dated May 30, 2006, whereby GMCI granted to WAAT certain exclusive rights to exploit GMCI branded content via mobile devices. GMCI terminated the agreement on January 26, 2009 based on its claim that WAAT failed to cure a material breach pertaining to the non-payment of a minimum royalty guarantee installment in the amount of $485,000. On or about March 16, 2009, GMCI filed a complaint seeking the balance of the minimum guarantee payments due under the agreement in the approximate amount of $4,085,000. WAAT has counter-sued claiming GMCI is not entitled to the claimed amount and that it has breached the agreement by, among other things, failing to promote, market and advertise the mobile services as required under the agreement and by fraudulently inducing WAAT to enter into the agreement based on GMCI’s repeated assurances of its intention to reinvigorate its flagship brand. GMCI has filed a demurrer to the counter-claim. WAAT intends to vigorously defend against this action. Principals of both parties continue to communicate to find a mutually acceptable resolution. The Company has accrued for its estimated liability in this matter.
| Mandalay Media, Inc. and Subsidiaries | |
Notes to Unaudited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
The Company is subject to various claims and legal proceedings arising in the normal course of business. Based on the opinion of the Company’s legal counsel, management believes that the ultimate liability, if any in the aggregate of other claims will not be material to the financial position or results of operations of the Company for any future period; and no liability has been accrued.
Management has evaluated subsequent events through August 14, 2009, the business date that this Quarterly Report on the Form 10-Q was filed with the SEC.
On August 14, 2009, the Company, Twistbox and ValueAct entered into a Third Amendment (the “Third Amendment”) to the ValueAct Note. Among other things, the Third Amendment provides for the due date to be extended to July 31, 2010, an interest rate of 12.5% from the date of the agreement through maturity, an extension of the payment in kind (“PIK”) election through to the interest payment otherwise due in January 2010, and a reduction in the minimum cash covenant to $1 million until January 31, 2010 and $4 million thereafter, subject to certain conditions.
As described in Note 8 above, the Company had previously issued to ValueAct warrants to purchase shares of the Company’s common stock. On August 14, 2009, the Company and ValueAct entered into an allonge to the warrant to purchase 1,093 shares of Common Stock. The exercise price of the Warrant was amended from $4.00 to $1.25 per share. The restructuring of the debt as it relates to the re pricing of the warrants will result in a debt discount, which will be amortized to maturity to interest expense. The other provisions of the debt restructuring will be analyzed in the second quarter for its financial impact on the financial statements.
In addition, the Company and the sellers of AMV Limited entered into an agreement which extended the maturity date of the AMV Note which represents deferred purchase consideration in relation to the AMV Acquisition, until July 31, 2010. The ValueAct Note and the AMV Note have been re-classified as long-term debt.
