UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
 
(Mark One)
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended March 31, 2009
or

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE   SECURITIES EXCHANGE ACT OF 1934

Commission File Number 00-10039
 
MANDALAY MEDIA, INC.
 
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
22-2267658
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer Identification No.)

2121 Avenue of the Stars, Suite 2550, Los Angeles, CA
 
90067
(Address of Principal Executive Offices)
 
(Zip Code)

(310) 601-2500
(Issuer’s Telephone Number, Including Area Code)
 
Securities registered pursuant to Section 12(b) of the Act: None
 
Securities registered under Section 12(g) of the Exchange Act:
 
Common Stock, Par Value $0.0001 Per Share
(Title of Class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes   ¨         No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes   ¨         No  x
 
Indicate by check mark whether the registrant : (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes   x         No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   ¨         No  ¨
 
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of a “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.   (Check One)

¨ Large Accelerated Filer
¨ Accelerated Filer
   
¨ Non-accelerated Filer (do not check if smaller reporting company)
x Smaller Reporting Company

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      
 
Yes  ¨          No   x
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold on the OTC Bulletin Board on September 30, 2008 was $77,878,678.
 
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act subsequent to the distribution of securities under a plan confirmed by a court. Yes   x          No  ¨
 
As of July 14, 2009, the Issuer had 39,653,125 shares of its common stock, $0.0001 par value per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

 

 
 
Mandalay Media, Inc.

ANNUAL REPORT ON FORM 10-K
FOR THE PERIOD ENDED MARCH 31, 2009

TABLE OF CONTENTS

PART I
      3
         
ITEM 1.
 
BUSINESS
 
  3
         
ITEM 1A.
 
RISK FACTORS
 
  8
         
ITEM 2.
 
PROPERTIES
 
  23
         
ITEM 3.
 
LEGAL PROCEEDINGS
 
  23
         
ITEM 4.
 
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  23
         
PART II
      23
         
ITEM 5.
 
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
  23
         
ITEM 6.
 
SELECTED FINANCIAL DATA
 
  25
         
ITEM 7.
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
  25
         
ITEM 7A.
 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
  39
         
ITEM 8.
 
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
  39
         
ITEM 9.
 
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
  39
         
ITEM 9A(T).
 
CONTROLS AND PROCEDURES
 
  40
         
ITEM 9B.
 
OTHER INFORMATION
 
  40
         
PART III
      40
         
ITEM 10.
 
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
  40
         
ITEM 11.
 
EXECUTIVE COMPENSATION
 
  43
         
ITEM 12.
 
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
  45
         
ITEM 13.
 
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
  48
         
ITEM 14.
 
PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
  49
         
ITEM 15.
  
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
  
  50

 
2

 
 
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
 
Information included in this Annual Report on Form 10-K may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical facts included in this Annual Report on Form 10-K regarding our strategy, future operations, future financial position, projected expenses, prospects and plans and objectives of management are forward-looking statements. These statements may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from our future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology. Forward-looking statements are based on assumptions that may be incorrect, and there can be no assurance that any projections or other expectations included in any forward-looking statements will come to pass. Our actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various factors, including the risk factors described in greater detail in the section entitled “Risk Factors.” Except as required by applicable laws, we undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.
 
PART I
 
ITEM 1. BUSINESS
 
Historical Operations of Mandalay Media, Inc.
 
Mandalay Media, Inc, (“Mandalay” or the “Company” ) was originally incorporated in the State of Delaware on November 6, 1998 under the name eB2B Commerce, Inc. On April 27, 2000, Mandalay merged into DynamicWeb Enterprises Inc., a New Jersey corporation, and changed its name to eB2B Commerce, Inc. On April 13, 2005, Mandalay changed its name to Mediavest, Inc. On November 7, 2007, through a merger, the Company reincorporated in the State of Delaware under the name Mandalay Media, Inc.
 
On October 27, 2004, and as amended on December 17, 2004, Mandalay 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”). Under the Plan of Reorganization, as completed on January 26, 2005: (1) Mandalay’s net operating assets and liabilities were transferred to the holders of the secured notes in satisfaction of the principal and accrued interest thereon; (2) $400,000 were transferred to a liquidation trust and used to pay administrative costs and certain preferred creditors; (3) $100,000 were retained by Mandalay to fund the expenses of remaining public; (4) 3.5% of the new common stock of Mandalay (140,000 shares) was issued to the holders of record of Mandalay’s preferred stock in settlement of their liquidation preferences; (5) 3.5% of the new common stock of Mandalay (140,000 shares) was issued to common stockholders of record as of January 26, 2005 in exchange for all of the outstanding shares of the common stock of the company; and (6) 93% of the new common stock of Mandalay (3,720,000 shares) was issued to the sponsor of the Plan of Reorganization in exchange for $500,000 in cash. Through January 26, 2005, Mandalay and its subsidiaries were engaged in providing business-to-business transaction management services designed to simplify trading between buyers and suppliers.
 
Prior to February 12, 2008, Mandalay was a public shell company with no operations, and controlled by its significant stockholder, Trinad Capital Master Fund, L.P.

Our Current Operations
 
Twistbox Entertainment, Inc.

On February 12, 2008, Mandalay completed its acquisition of Twistbox Entertainment, Inc. pursuant to an Agreement and Plan of Merger entered into on December 31, 2007, as subsequently amended by the Amendment to Agreement and Plan of Merger dated February 12, 2008, with Twistbox Acquisition, Inc., a Delaware corporation and a wholly-owned subsidiary of Mandalay (“Merger Sub”), Twistbox Entertainment, Inc. (“Twistbox”), and Adi McAbian and Spark Capital, L.P., as representatives of the stockholders of Twistbox, as part of which Merger Sub merged with and into Twistbox, with Twistbox as the surviving corporation (the “Merger”). Following the Merger, Twistbox became the sole operating subsidiary of Mandalay until the acquisition of AMV Holding Limited, a United Kingdom private limited company (“AMV”) on October 23, 2008 as described below.

Twistbox is a global publisher and distributor of entertainment content primarily focused on video and games for Third Generation (3G) mobile networks. Twistbox publishes its content in over 40 countries with distribution representing more than one billion subscribers. Operating since 2003, Twistbox has developed an intellectual property portfolio unique to its 18 to 40 year old target demographic (18 to 40) that includes worldwide or territory exclusive mobile rights to content from leading film, television and lifestyle media 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 over 1,500 handsets; and a content standards and ratings system globally adopted by major wireless carriers to assist with the responsible deployment of age-verified programming and services. Twistbox has leveraged its brand portfolio and platform to secure “direct” distribution agreements with the leading mobile operators throughout Europe, North America and Latin America, including, among others, Vodafone, Telefonica, Orange, Hutchinson 3G, O2 Verizon, Sprint and Orange.
 
Twistbox maintains distribution agreements with leading mobile network operators throughout the North American, European, Latin America and Asia-Pacific regions that include Verizon, Virgin Mobile, T-Mobile, Telefonica, America Movil, Hutchinson 3G, O2 and Orange.  Twistbox maintains a worldwide distribution agreement with Vodafone. Through this relationship, in certain markets Twistbox serves as Vodafone’s exclusive supplier and aggregator of late night content, a portion of which is age-verified.  Twistbox has similar exclusive agreements with other operators in selected territories for both Late Night and Play for Prizes mobile games categories.

Twistbox’s intellectual property encompasses over 75 worldwide exclusive, territory exclusive or non-exclusive content licensing agreements that cover its lifestyle, late night and casual games programming and services.  Twistbox’s content portfolio is distributed via mobile applications and services that include more than 350 WAP sites, 250 games and 66 mobile TV channels.
 
In addition to its content publishing business through mobile operators, Twistbox operates a suite of Direct to Consumer services including text and video chat and web2mobile marketing services of video, images and games that are promoted through on-line, print, and TV advertising.  Payments for the Company’s Direct to Consumer services are through integration with Premium Short Message Service (Premium SMS) billing aggregators and credit card processing companies.

 
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Twistbox target customers are the highly-mobile, digitally-aware 18 to 40 year old demographic. This group is a leading consumer of new mobile handsets and represents more than 50% of mobile content consumption revenue globally.  In addition, this group is very focused on consumer lifestyle brands and is much sought after by advertisers.
 
Revenue Model
 
Twistbox’s revenue model includes pay per-download and a growing base of recurring subscription services.  Video services include daily, weekly and monthly subscriptions to access a specific WAP site or suite of mobile TV channels.  Twistbox’s Play for Prizes tournament games revenue model is based on a monthly recurring subscription per game although, a subscriber can elect for a higher priced one-time payment.
 
Collectively, Twistbox’s mobile content sites generate in excess of 500 million advertising impressions monthly.  In turn, Twistbox has begun to leverage its distribution and traffic to generate revenues from WAP advertising on mobile content portals that Twistbox manages on an exclusive basis.
 
Twistbox bills and receives payment directly through mobile operators and billing aggregators that form the majority of its revenue. Twistbox receives between 40% to 60% of the billings from the mobile operator or billing aggregator, which it recognizes as its Gross Revenue.  Twistbox’s Cost of Goods Sold represents license fees paid to content providers, which currently averages approximately 30%.
 
Content and Game Development
 
Twistbox’s production activities currently address over 1,500 handsets, including models manufactured by Nokia, Motorola, Samsung and Sony Ericsson. Twistbox has created an automated handset abstraction and publishing tools that significantly reduces the time required to “port” and publish games and mobile services  across a significant number of these handsets.
 
Twistbox develops games and applications that work with a number of languages, platforms, and formats, including J2ME, BREW, DoJa, and Symbian, and localizes its releases in the EFIGS languages (English, French, Italian, German and Spanish). It is actively involved in a number of technical initiatives aimed at enhancing its titles with value-added features, such as multi-player functionality, 3D graphics, and location-based features. In addition to mobile video clips, games, WAP sites, and other entertainment applications, Twistbox is currently focusing its development and licensing activities on complementary applications such as in game advertising, TV-SMS campaigns, play-for-prizes and multi-player games.

Twistbox intends to acquire additional third-party licenses and to develop new applications through relationships with third-party developers as well as its in-house development staff to assure that it has a steady supply of new content to offer its customers.  The Company believes that the market for mobile entertainment should continue to increase as mobile operators continue to roll out their next generation service offerings and advanced handets offering improvements in data handling capability, graphics resolution and other features.
  
Publishing
 
Renux™ is Twistbox’s carrier class content management and publishing platform developed internally for the deployment and marketing of mobile content and applications. The system has been in operation for over five years and today supports over 350 WAP sites, more than 66 mobile TV channels and 250 games in 18 languages. The Renux™ content management system stores image and video content formatted for 1.5G to up to 3G devices, and incorporates a comprehensive metadata format that categorizes the content for handset recognition, programming, marketing and reporting. Twistbox maintains content hosting facilities in Los Angeles, Washington, D.C. and Frankfurt that support the distribution of content to mobile network operators globally.
 
RapidPort™
 
RapidPort™ is Twistbox’s software suite that enables the development and porting of mobile games and applications to over 1,500 different handsets from leading manufacturers including Nokia, Motorola, Samsung and Sony Ericsson. Twistbox has created an automated handset abstraction tool that significantly reduces the time required to “port” a game across a significant number of these handsets. The RapidPort™ development platform supports a broad number of wireless device formats including J2ME, BREW, DoJa and Symbian, and provides localization in over 18 languages. Twistbox Games has recently enhanced RapidPort™ to include new technology designed to enhance titles with value-added features, such as in-game advertising, multi-player and play for prizes functionality, 3D graphics and location-based services (LBS).

 
4

 
 
Nitro-CDP™
 
Nitro-CDP™ is an internally developed content download and delivery platform for mobile network operators, portals and content publishers. The Nitro-CDP™ platform allows for real-time content upload, editing, rating and deployment, and merchandising, while maintaining carrier-grade security, reliability and scalability. The platform enables mobile network operators to effectively manage millions of mobile download transactions across multiple channels and categories. Nitro-CDP™ also provides innovative cross-promotional tools, including purchase history-based up-sales and advertising, an individual “My Downloads” area for each consumer and peer-to-peer recommendations.
 
CMX Wrapper™
 
The CMX Wrapper™ technology, developed internally by Twistbox, enables mobile operators to integrate additional and complimentary functionality into existing mobile games and applications without the need to alter the original code or involve the original developer. This value-added functionality includes support for in-game promotions and billing, and “try before you buy” and “refer a friend” functionality.
 
Play for Prizes - Competition Goes Mobile ®
 
The Twistbox Games For-Prizes Network, currently deployed by major mobile operators across the U.S. such as AT&T Wireless and Verizon, offers several genres of games in which players compete in daily and weekly skill-based multiplayer tournaments to win prizes. Subscribers can compete in both daily head-to-head and weekly progressive tournaments. The Twistbox Games For-Prizes platform enables unique in-game promotions through carrier-specific campaigns in cooperation with sponsors and advertisers.  On July 25, 2008, Twistbox filed with the United States Patent and Trademark Office a patent application for the Improvements In Skill-Based Electronic Gaming Tournament Play having Serial Number 12/180,405.
 
WAAT Media Wireless Content Standards Rating Matrix ©
 
First developed in 2003, and refined over the last several years, Twistbox has developed a proprietary content standards matrix widely known as the “WAAT Media Wireless Content Standards Ratings Matrix©” (the “Ratings Matrix”). The Ratings Matrix has been filed with the Library of Congress’s Copyright Office. It is the globally-accepted content ratings system for age-verified mobile programming that encompasses language, violence and explicitness. The system is licensed on a royalty-free basis by the world’s leading mobile carriers and leading content providers and is the basis for the United Kingdom’s Code of Practice. The Ratings Matrix currently supports 33 ratings levels and incorporates a suite of content validation tools and industry best practices that takes into account country-by-country carrier programming requirements and local broadcast standards.
 
Distribution
 
Twistbox distributes its programming and services through on-deck relationships with mobile carriers and off-deck relationships with third-party aggregation, connectivity and billing providers.
 
On-Deck
 
Twistbox’s on-deck services include the programming and provisioning of games and games aggregation, images, videos and mobileTV content and portal management. Twistbox currently has on-deck agreements with more than 100 mobile operators including Vodafone, T-Mobile, Verizon, AT&T, Orange, O2, Virgin Mobile, Telefonica and MTS in over 40 countries. Through these on-deck agreements, Twistbox relies on the carriers for both marketing and billing. Twistbox currently reaches over one billion mobile subscribers worldwide through these relationships. Its currently deployed programming includes over 350 WAP sites, 250 games and 66 mobile TV channels.
 
Off-Deck
 
Twistbox has recently deployed off-deck services that include the programming and distribution of games, images, videos, chat services and mobile marketing campaigns. Twistbox manages the campaigns directly and maintains billing and connectivity agreements with leading service providers in each territory. In addition, Twistbox has built and implemented a “Web-to-Mobile” affiliate program that allows for the cross-marketing and sales of mobile content from Web storefronts of its various programming partners and their affiliates.
 
Mobile Operators (Carriers)
 
Twistbox currently has a large number of distribution agreements with mobile operators and portals in Europe, the U.S., Japan and Latin America. Twistbox currently has distribution agreements with more than 100 single territory operators in 40 countries. Twistbox continues to sign new operators on a quarterly basis and, in the near term, intends to extend its distribution base into Eastern Europe and South America. The strength and coverage of these relationships is of paramount importance and the ability to support and service them is a vital component in route to the consumer.

 
5

 
 
Affiliates Program
 
Twistbox has also established an Affiliates Program to market and sell its content “off-deck,” that is, through a direct-to-consumer online portal that end users can access directly from their PCs or phones. We believe that this channel offers an attractive secondary outlet for consumers wishing to peruse and purchase content in an environment less limiting and restrictive than an operator’s “walled garden.”
 
Sales and Marketing
 
In order to sell to its target base of carrier and infrastructure customers, Twistbox has built an affiliate sales and marketing team that is localized on a country-by-country basis.  As of March 31, 2009, Twistbox had a workforce of approximately 154 employees
 
Competition
 
While many mobile marketing companies sell a diversified portfolio of content from ring tones to wall papers and kids programming to adult, Twistbox has taken a more focused and disciplined approach. Twistbox focuses on programming and platforms where it can manage categories on an exclusive or semi-exclusive basis for a mobile operator. Target markets include Age Verified Programming, Play4Prizes or areas in which Twistbox has exclusive rights to the top one or two brands in a genre.
 
In the area of mature themed mobile entertainment, Twistbox is a leading provider of content and services. The industry trend has been for leading operators to focus on fewer partners and often assign a company to manage the category. We believe that Twistbox’s responsible reputation and the Ratings Matrix combined with its publishing platform and leading brands that maximize revenue positions it to manage the age-verified category for operators globally.
 
Twistbox competes with a number of other companies in the mobile games publishing industry, including Arvato, Minick, Jamba, Buongiorno, Mobile Streams, Glu Mobile, ZED Group and Gameloft. Brands such as Playboy have sought to create their own direct distribution arrangements with network operators. To the extent that such firms continue to seek such relationships, they will compete directly with Twistbox in their respective content segments. While Twistbox competes with many of the leading publishers, its core business is providing services and platforms for operators and publishers to enhance revenues. In turn, through the management of an operator’s download platform, providing a cross carrier Play4Prizes infrastructure or facilitating in game advertising or billing, Twistbox has become a strategic value added partner to both the mobile operator and publishing communities.
 
Direct-to-consumer (D2C) Web portals may have an adverse impact on Twistbox’s business, as these portals may not strike distribution arrangements with Twistbox. Additionally, wireless device manufacturers such as Nokia, Sony Ericsson and Motorola may choose to pursue their own content strategies.
 
We believe that the principal competitive factors in the market for mobile games and other content include carrier relationships, access to compelling content, quality and reliability of content delivery, availability of talented content developers and skilled technical personnel, and financial stability.
 
Trademarks, Tradenames, Patent and Copyrights
 
Twistbox has used, registered and applied to register certain trademarks and service marks to distinguish its products, technologies and services from those of its competitors in the United States and in foreign countries. Twistbox also has a copyright known as the “WAAT Media Wireless Content Standards Ratings Matrix©”, which has been filed with the Library of Congress’s Copyright Office. On July 25, 2008, Twistbox filed with the United States Patent and Trademark Office a patent application for the Improvements In Skill-Based Electronic Gaming Tournament Play having Serial Number 12/180,405. We believe that these trademarks, tradenames, patent and copyrights are important to its business. The loss of some of Twistbox’s intellectual property might have a negative impact on its financial results and operations.

AMV Holding Limited

On October 23, 2008, Mandalay 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”. The aggregate purchase price (subject to adjustments as provided in the stock purchase agreement) for the Shares consisted of (i) $5,375,000 in cash; (ii) 4,500,000 shares of common stock, par value $0.0001 per share; (iii) a secured promissory note in the aggregate principal amount of $5,375,000 (the “AMV Note”); and (iv) additional earn-out amounts, if any, based on certain targeted earnings as set forth in the stock purchase agreement.

AMV is a 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 including Bling, Phonebar and GameZone through a unique Customer Relationship Management (CRM) platform that drives revenue through mobile internet, print and TV advertising.

 
6

 

Revenue Model
 
AMV operates a direct-to-consumer marketing model for distribution of its mobile content portfolio, ranging from Java Games to Videos. AMV’s revenue model relies on its efficient and effective management of marketing distribution channels such as print advertising, mobile internet advertising (i.e., WAP affiliates, Google Mobile, Yahoo, etc.), web advertising and traditional television advertising.  It also utilizes its proprietary CRM platform for sending promotions to its existing customer database. AMV relies on the margin it generates from this marketing activity for the majority of its revenues. Revenues are also derived from on-going billing relationships with consumers, primarily via content subscription services.  In its interactive division, revenues are derived from consumers’ usage of mobile chat, flirt and dating services, through mobile-based billing aggregators.
 
Revenues are generated from billing of consumers through mobile network charging, which is typically via the use of Premium SMS, or WAP-based billing (e.g., Pay-For-It).
 
Development Process
 
AMV’s customized proprietary mobile platform enables AMV to serve all current content types including wallpapers, ringtones, videos and games. The platform is regularly enhanced to process new and larger formats of content, and to enable AMV to connect to new geographic markets. Other key areas of development include new business models, system adaptations to regulatory and commercial changes in-market and greater CRM capabilities and efficiencies.

AMV is developing its mobile and interactive platforms to support the next generation of mobile services which will incorporate wider xHTML browsing support, more complex application handle, for example, widgets and a complete end-to-end CRM solution to ensure the best possible user experience. With these developments, AMV expects to further optimize its revenue generating potential. Additionally, AMV is developing new forms of social networking products and services to allow users to interact using SMS text, WAP or WEB-based technologies within a unique branded proposition.
 
AMV Technology and Tools
 
AMV’s proprietary portfolio of technology encompasses platforms and tools that enhance the delivery, management and quality of AMV’s products and services.

CRM Platform.  AMV’s internally developed Customer Relationship Management (CRM) platform captures valuable subscriber data including subscriber opt-in preferences, carrier specifications and handset models. The CRM platform helps manage key site localization factors such as:
 
 
·
Regional Regulations for CRM
 
·
User Opt in Mechanic (Tick box / soft opt in)
 
·
Age Verification Status of Carrier
 
·
Content restrictions in market

MobGains™
MobileGains is an in-house mobile Internet advertising network enabling AMV to target new customers via direct advertising relationships with major publishers.  This platform allows end-to-end advertisement creation and syndication to better target consumers’ tastes and thereby enhance results.
 
Content Development

 AMV has developed its own consumer facing mobile brands. These brands include BLiNG, PhoneBar and Game Zone.  Having its own brands, AMV is able to market its content and services through its own destinations without relying heavily on third party brand licenses.  AMV markets a wide range of products and services through its destinations including polyphonic tones, real tones, animations, videos, wallpapers and games, as well as various chat and text services.
 
Distribution
 
AMV distributes its products and services through off-deck relationships with third-party aggregation, connectivity and billing providers primarily servicing end-users located in the United Kingdom, South Africa, Australia and Sweden.

AMV utilizes several marketing methods to drive traffic to these destinations and AMV has focused aggressively on monetizing mobile search via major mobile search engines such as Google and Yahoo, and mobile operators like Vodafone and Orange.

Access to, or discovery of, AMV’s products and services is generally via:

 
7

 

 
·
Search links via WAP advertising (e.g. Google)
 
·
Advertisements in print with a call-to-action to send MO keyword to a shortcode
 
·
Advertisements in promotional broadcasts

Its integrated CRM platform enables the use of mobile, print, television and on-line advertising to maximize its return on investment.
 
Sales, Marketing and Distribution
 
As of March 31, 2009, AMV had a workforce of approximately 42 employees whose responsibilities include all sales, marketing and content distribution functions.
 
Competition
 
The direct-to-consumer market is crowded with many competitors operating their own mobile content offerings, including companies such as Red Circle (recently acquired by Zamano plc), Playphone, Inc, Mobile Messenger Pty, Ltd., Jamba (a subsidiary of News Corp), Zero9 S.p.A.and Flycell Inc. There has been a trend in certain key markets such as the United Kingdom and South Africa for the large incumbent providers to be side-lined by smaller, more innovative and niche-focused specialists, a trend from which AMV has largely benefited. Nevertheless, the market remains very competitive and we see several opportunities for consolidation particularly among the larger “incumbent” providers.
 
Providers whose marketing expertise extends only to more traditional media such as print and television are beginning to see their revenues adversely impacted as on-line and mobile distribution advertising becomes the standard. As one of the earliest entrants in mobile internet advertising, AMV has excelled in adapting its direct-to-consumer business model to address new channels and audiences. Despite the competitive nature of the business, AMV seed significant potential to expand its operations over the next 3-5 years as distribution of mobile internet advertising inventory becomes the dominant advertising mode for direct-to-consumer mobile products and services.  Based on industry predictions, it is widely accepted that the mobile based search business will exceed traditional web based search (i.e., Google, Yahoo, etc.) within the next ten years.

Further regulation by market regulators, government agencies and mobile network operators that seek to restrict current marketing or billing practices (i.e., rules governing subscription-based services) will result in an ongoing challenge faced by all companies in the direct-to-consumer mobile sector.
 
We believe that the principal competitive advantages we have in the direct-to-consumer market is our strength in the management of mobile internet and web-based advertising distribution across multiple regions, building mobile operator billing connectivity across all active markets, maintaining close regulatory and carrier relationships, nurturing the mobile consumer and providing a wide array of niche and targeted content with effective CRM to optimize ongoing revenues. We are committed to remain at the forefront of new technologies and services available for wireless device users, and making an investment in future business models to ensure AMV continues to adapt and grow.
 
Trademarks, Tradenames and Copyrights

AMV has established common law trademarks in Bling, MobiGains and MobileGains.

ITEM 1A. RISK FACTORS
 
Unless the context otherwise indicates, the use of the terms “we,” “our” “us” or the “Company” refer to the business and operations of Mandalay Media, Inc. (“Mandalay”) through its operating and wholly-owned subsidiaries, Twistbox Entertainment, Inc. (“Twistbox”) and AMV Holding Limited, a United Kingdom private limited company (“AMV”).

 
8

 
 
Risks Related to Our Business
 
The Company has a history of net losses, may incur substantial net losses in the future and may not achieve profitability.  
 
We expect to continue to increase expenses as we implement initiatives designed to continue to grow our business, including, among other things, the development and marketing of new products and services, further international and domestic expansion, expansion of our infrastructure, development of systems and processes, acquisition of content, and general and administrative expenses associated with being a public company. If our revenues do not increase to offset these expected increases in operating expenses, we will continue to incur significant losses and will not become profitable. Our revenue growth in recent periods should not be considered indicative of our future performance. In fact, in future periods, our revenues could decline. Accordingly, we may not be able to achieve profitability in the future.
 
We have a limited operating history in an emerging market, which may make it difficult to evaluate our business.  
 
We have only a limited history of generating revenues, and the future revenue potential of our business in this emerging market is uncertain. As a result of our short operating history, we have limited financial data that can be used to evaluate our business. Any evaluation of our business and our prospects must be considered in light of our limited operating history and the risks and uncertainties encountered by companies in our stage of development. As an early stage company in the emerging mobile entertainment industry, we face increased risks, uncertainties, expenses and difficulties. To address these risks and uncertainties, we must do the following:
 
 
·
maintain our current, and develop new, wireless carrier relationships, in both the international and domestic markets;
 
 
 
 
·
maintain and expand our current, and develop new, relationships with third-party branded and non-branded content owners;
 
 
 
 
·
retain or improve our current revenue-sharing arrangements with carriers and third-party content owners;
 
 
 
 
·
maintain and enhance our own brands;
 
 
 
 
·
continue to develop new high-quality products and services that achieve significant market acceptance;
 
 
 
 
·
continue to port existing products to new mobile handsets;
 
 
 
 
·
continue to develop and upgrade our technology;
 
 
 
 
·
continue to enhance our information processing systems;
 
 
·
increase the number of end users of our products and services;
 
 
 
 
·
maintain and grow our non-carrier, or “off-deck,” distribution, including through our third-party direct-to-consumer distributors;
 
 
 
 
·
expand our development capacity in countries with lower costs;
 
 
 
 
·
execute our business and marketing strategies successfully;
 
 
 
 
·
respond to competitive developments; and
 
 
 
 
·
attract, integrate, retain and motivate qualified personnel.

We may be unable to accomplish one or more of these objectives, which could cause our business to suffer. In addition, accomplishing many of these efforts might be very expensive, which could adversely impact our operating results and financial condition.
 
Our financial results could vary significantly from quarter to quarter and are difficult to predict.  
 
Our revenues and operating results could vary significantly from quarter to quarter because of a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. In addition, we may not be able to predict our future revenues or results of operations. We base our current and future expense levels on our internal operating plans and sales forecasts, and our operating costs are to a large extent fixed. As a result, we may not be able to reduce our costs sufficiently to compensate for an unexpected shortfall in revenues, and even a small shortfall in revenues could disproportionately and adversely affect financial results for that quarter. Individual products and services, and carrier relationships, represent meaningful portions of our revenues and net loss in any quarter. We may incur significant or unanticipated expenses when licenses are renewed. In addition, some payments from carriers that we recognize as revenue on a cash basis may be delayed unpredictably.

 
9

 
 
In addition to other risk factors discussed in this section, factors that may contribute to the variability of our quarterly results include:
 
 
·
the number of new products and services released by us and our competitors;
 
 
 
 
·
the timing of release of new products and services by us and our competitors, particularly those that may represent a significant portion of revenues in a period;
 
 
 
 
·
the popularity of new products and services, and products and services released in prior periods;
 
 
 
 
·
changes in prominence of deck placement for our leading products and those of our competitors;
 
 
 
 
·
the expiration of existing content licenses;
 
 
 
 
·
the timing of charges related to impairments of goodwill, intangible assets, royalties and minimum guarantees;
 
 
 
 
·
changes in pricing policies by us, our competitors or our carriers and other distributors;
 
 
 
 
·
changes in the mix of original and licensed content, which have varying gross margins;
 
 
 
 
·
the timing of successful mobile handset launches;
 
 
 
 
·
the seasonality of our industry;
 
 
 
 
·
fluctuations in the size and rate of growth of overall consumer demand for mobile products and services and related content;
 
 
 
·
strategic decisions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments or changes in business strategy;
 
 
 
 
·
our success in entering new geographic markets;
 
 
 
 
·
foreign exchange fluctuations;
 
 
 
 
·
accounting rules governing recognition of revenue;
     
 
·
general economic, political and market conditions and trends;
 
 
 
 
·
the timing of compensation expense associated with equity compensation grants; and
 
 
 
 
·
decisions by us to incur additional expenses, such as increases in marketing or research and development.

As a result of these and other factors, our operating results may not meet the expectations of investors or public market analysts who choose to follow our company. Our failure to meet market expectations would likely result in decreases in the trading price of our common stock.
 
The markets in which we operate are highly competitive, and many of our competitors have significantly greater resources than we do.  
 
The development, distribution and sale of mobile products and services is a highly competitive business. We compete for end users primarily on the basis of “on-deck” or “off-deck” positioning, brand, quality and price. We compete for wireless carriers for “on-deck” placement based on these factors, as well as historical performance, technical know-how, perception of sales potential and relationships with licensors of brands and other intellectual property. We compete for content and brand licensors based on royalty and other economic terms, perceptions of development quality, porting abilities, speed of execution, distribution breadth and relationships with carriers. We also compete for experienced and talented employees.
 
Our primary competitors for the on-deck distribution channels include Arvato, Minick, Jamba, Buongiorno, Mobile Streams, Glu Mobile, Player X and Gameloft, and for end-users via our direct-to-consumer off-deck distribution channels they include Red Circle (recently acquired by Zamano plc), Playphone, Inc, Mobile Messenger Pty Ltd, Jamba (a subsidiary of News Corp), Zero9 S.p.A. and Flycell Inc.  In the future, likely competitors include major media companies, traditional video game publishers, platform developers, content aggregators, mobile software providers and independent mobile game publishers. Carriers may also decide to develop, internally or through a managed third-party developer, and distribute their own products and services. If carriers enter the wireless market as publishers, they might refuse to distribute some or all of our products and services or might deny us access to all or part of their networks.

Some of our competitors’ and our potential competitors’ advantages over us, either globally or in particular geographic markets, include the following:

 
10

 
 
 
·
significantly greater revenues and financial resources;
 
 
 
 
·
stronger brand and consumer recognition regionally or worldwide;
 
 
 
 
·
the capacity to leverage their marketing expenditures across a broader portfolio of mobile and non-mobile products;
 
 
 
 
·
more substantial intellectual property of their own from which they can develop products and services without having to pay royalties;
 
 
 
 
·
pre-existing relationships with brand owners or carriers that afford them access to intellectual property while blocking the access of competitors to that same intellectual property;
 
 
 
 
·
greater resources to make acquisitions;
 
 
 
 
·
lower labor and development costs; and
 
 
 
 
·
broader global distribution and presence.
  
If we are unable to compete effectively or we are not as successful as our competitors in our target markets, our sales could decline, our margins could decline and we could lose market share, any of which would materially harm our business, operating results and financial condition.
 
Failure to renew our existing brand and content licenses on favorable terms or at all and to obtain additional licenses would impair our ability to introduce new products and services or to continue to offer our products and services based on third-party content.  
 
Revenues are derived from our products and services based on or incorporating brands or other intellectual property licensed from third parties. Any of our licensors could decide not to renew our existing license or not to license additional intellectual property and instead license to our competitors or develop and publish its own products or other applications, competing with us in the marketplace. Several of these licensors already provide intellectual property for other platforms, and may have significant experience and development resources available to them should they decide to compete with us rather than license to us.
 
We have both exclusive and non-exclusive licenses and both licenses that are global and licenses that are limited to specific geographies. Our licenses generally have terms that range from two to five years. We may be unable to renew these licenses or to renew them on terms favorable to us, and we may be unable to secure alternatives in a timely manner. Failure to maintain or renew our existing licenses or to obtain additional licenses would impair our ability to introduce new products and services or to continue to offer our current products or services, which would materially harm our business, operating results and financial condition. Some of our existing licenses impose, and licenses that we obtain in the future might impose, development, distribution and marketing obligations on us. If we breach our obligations, our licensors might have the right to terminate the license which would harm our business, operating results and financial condition.
 
Even if we are successful in gaining new licenses or extending existing licenses, we may fail to anticipate the entertainment preferences of our end users when making choices about which brands or other content to license. If the entertainment preferences of end users shift to content or brands owned or developed by companies with which we do not have relationships, we may be unable to establish and maintain successful relationships with these developers and owners, which would materially harm our business, operating results and financial condition. In addition, some rights are licensed from licensors that have or may develop financial difficulties, and may enter into bankruptcy protection under U.S. federal law or the laws of other countries. If any of our licensors files for bankruptcy, our licenses might be impaired or voided, which could materially harm our business, operating results and financial condition.
 
We currently rely on wireless carriers to market and distributes some of our products and services and thus to generate some of our revenues. The loss of or a change in any of these significant carrier relationships could cause us to lose access to their subscribers and thus materially reduce our revenues.  
 
The future success of our “on-deck” business is highly dependent upon maintaining successful relationships with the wireless carriers with which we currently work and establishing new carrier relationships in geographies where we have not yet established a significant presence. A significant portion of our revenue is derived from a very limited number of carriers. We expect that we will continue to generate a substantial portion of our revenues through distribution relationships with a limited number of carriers for the foreseeable future. Our failure to maintain our relationships with these carriers would materially reduce our revenues and thus harm our business, operating results and financial condition.

We have both exclusive and non-exclusive carrier agreements. Typically, carrier agreements have a term of one or two years with automatic renewal provisions upon expiration of the initial term, absent a contrary notice from either party. In addition, some carrier agreements provide that the carrier can terminate the agreement early and, in some instances, at any time without cause, which could give them the ability to renegotiate economic or other terms. The agreements generally do not obligate the carriers to market or distribute any of our products or services. In many of these agreements, we warrant that our products do not violate community standards, do not contain libelous content, do not contain material defects or viruses, and do not violate third-party intellectual property rights and we indemnify the carrier for any breach of a third party’s intellectual property. In addition, many of our agreements allow the carrier to set the retail price without adjustment to the negotiated revenue split. If one of these carriers sets the retail price below historic pricing models, the total revenues received from these carriers will be significantly reduced.

 
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Many other factors outside our control could impair our ability to generate revenues through a given carrier, including the following:
 
 
·
the carrier’s preference for our competitors’ products and services rather than ours;
 
 
 
 
·
the carrier’s decision not to include or highlight our products and services on the deck of its mobile handsets;
 
 
 
 
·
the carrier’s decision to discontinue the sale of some or all of products and services;
 
 
 
 
·
the carrier’s decision to offer similar products and services to its subscribers without charge or at reduced prices;
 
 
 
 
·
the carrier’s decision to require market development funds from publishers like us;
 
 
 
 
·
the carrier’s decision to restrict or alter subscription or other terms for downloading our products and services;
 
 
 
 
·
a failure of the carrier’s merchandising, provisioning or billing systems;
 
 
 
 
·
the carrier’s decision to offer its own competing products and services;
 
 
 
 
·
the carrier’s decision to transition to different platforms and revenue models; and
 
 
 
 
·
consolidation among carriers.

If any of our carriers decides not to market or distribute our products and services or decides to terminate, not renew or modify the terms of its agreement with us or if there is consolidation among carriers generally, we may be unable to replace the affected agreement with acceptable alternatives, causing us to lose access to that carrier’s subscribers and the revenues they afford us, which could materially harm our business, operating results and financial condition.
 
End user tastes are continually changing and are often unpredictable; if we fail to develop and publish new products and services that achieve market acceptance, our sales would suffer.  
 
Our business depends on developing and publishing new products and services that wireless carriers distribute and end users will buy. We must continue to invest significant resources in licensing efforts, research and development, marketing and regional expansion to enhance our offering of new products and services, and we must make decisions about these matters well in advance of product release in order to implement them in a timely manner. Our success depends, in part, on unpredictable and volatile factors beyond our control, including end-user preferences, competing products and services and the availability of other entertainment activities. If our products and services are not responsive to the requirements of our carriers or the entertainment preferences of end users, are not marketed effectively through our direct-to-consumer operations, or they are not brought to market in a timely and effective manner, our business, operating results and financial condition would be harmed. Even if our products and services are successfully introduced, marketed effectively and initially adopted, a subsequent shift in our carriers, the entertainment preferences of end users, or our relationship with third-party billing aggregators could cause a decline in the popularity of, or access to, our offerings could materially reduce our revenues and harm our business, operating results and financial condition.
 
Inferior on-deck placement would likely adversely impact our revenues and thus our operating results and financial condition.  
 
Wireless carriers provide a limited selection of products that are accessible to their subscribers through a deck on their mobile handsets. The inherent limitation on the volume of products available on the deck is a function of the limited screen size of handsets and carriers’ perceptions of the depth of menus and numbers of choices end users will generally utilize. Carriers typically provide one or more top level menus highlighting products that are recent top sellers or are of particular interest to the subscriber, that the carrier believes will become top sellers or that the carrier otherwise chooses to feature, in addition to a link to a menu of additional products sorted by genre. We believe that deck placement on the top level or featured menu or toward the top of genre-specific or other menus, rather than lower down or in sub-menus, is likely to result in products achieving a greater degree of commercial success. If carriers choose to give our products less favorable deck placement, our products may be less successful than we anticipate, our revenues may decline and our business, operating results and financial condition may be materially harmed.
 
If we are unsuccessful in establishing and increasing awareness of our brand and recognition of our products and services or if we incur excessive expenses promoting and maintaining our brand or our products and services, our potential revenues could be limited, our costs could increase and our operating results and financial condition could be harmed.

 
12

 
 
We believe that establishing and maintaining our brand is critical to retaining and expanding our existing relationships with wireless carriers and content licensors, as well as developing new relationships. Promotion of the Company’s brands will depend on our success in providing high-quality products and services. Similarly, recognition of our products and services by end users will depend on our ability to develop engaging products and quality services to maintain existing, and attract new, business relationships and end users. However, our success will also depend, in part, on the services and efforts of third parties, over which we have little or no control. For instance, if our carriers fail to provide high levels of service, our end users’ ability to access our products and services may be interrupted, which may adversely affect our brand. If end users, branded content owners and carriers do not perceive our offerings as high-quality or if we introduce new products and services that are not favorably received by our end users and carriers, then we may be unsuccessful in building brand recognition and brand loyalty in the marketplace. In addition, globalizing and extending our brand and recognition of our products and services will be costly and will involve extensive management time to execute successfully. Further, the markets in which we operate are highly competitive and some of our competitors already have substantially more brand name recognition and greater marketing resources than we do. If we fail to increase brand awareness and consumer recognition of our products and services, our potential revenues could be limited, our costs could increase and our business, operating results and financial condition could suffer.

We currently rely on the current state of the law in certain territories where we operate our “off-deck” direct-to-consumer business and any adverse change in such laws may significantly adversely impact our revenues and thus our operating results and financial condition.
 
Decisions that regulators or governing bodies make with regard to the provision and marketing of mobile content and/or billing can have significant impact on the revenues generate in that market. Although most of AMV's markets are mature with regulation clearly defined and implemented, there remains the potential for regulatory changes that would have adverse consequences on the business and subsequently AMV’s revenue.  For example, in Australia, the introduction of a strict double-opt-in process for consumers purchasing mobile content is expected to flatten the domestic mobile content market by 70%. Notwithstanding similar regulation in both of AMV's largest markets, the UK and South Africa, to date there has been relatively little adverse impact on the business.

If we are unsuccessful in expanding the distribution of our “off-deck” direct-to-consumer products and services, our potential revenues could be limited and our operating results and financial condition could be harmed.
 
As mature markets tend to flatten, they can deliver more challenging levels of margin growth. This is especially the case where regulation is introduced (despite the fact that the sector is still young). To compensate for such trends, AMV will continue to make its products and services available in new geographic markets and target launches in markets that it believes are best suited for its direct-to-consumer business.

We currently rely on third-party billing aggregators to provide end-users with access to some of our products and services through premium short message system (Premium SMS) technologies. The loss of, or a change in, any of these significant third-party relationships or the use of Premium SMS technologies could reduce the number of transactions initiated by these end-users and thus materially reduce our revenues.
 
AMV’s business is dependent upon billing aggregators that use premium short message system (Premium SMS) technologies to deliver and bill for AMV’s products and services. If AMV were to lose one or more of these relationships, or if there is a material change or limitation in the use of Premium SMS technologies, AMV would experience a significant reduction in the number of transactions initiated by end-users and thus material reduction in our revenues.

We rely on our current understanding of regional regulatory requirements pertaining to the marketing, advertising and promotion of our “off-deck” direct- to-consumer products and services and any adverse change in such regulations, or a finding that we did not properly understand such regulations, may significantly impact our ability to market, advertise and promote our products and services thereby adversely impact our revenues and thus our operating results and financial condition.
 
AMV’s business relies extensively on marketing, advertising and promoting its products and services requiring it to have an understanding of the local laws and regulations governing its business.  In the event that AMV has relied on inaccurate information or advice, and engages in marketing, advertising or promotional activities that are not permitted, AMV may be subject to penalties, restricted from engaging in further activities or altogether prohibited from offering its products and services in a particular territory, all or any of which will adversely impact our revenues and thus our operating results and financial condition.

 
13

 

Our business and growth may suffer if we are unable to hire and retain key personnel, who are in high demand.  

We depend on the continued contributions of our domestic and international senior management and other key personnel. The loss of the services of any of our executive officers or other key employees could harm our business. All of our executive officers and key employees are under short term employment agreements which means, that their future employment with the Company is uncertain. We do maintain a key-person life insurance policy on some of our officers or other employees, but the continuation of such insurance coverage is uncertain.
 
Our future success also depends on our ability to identify, attract and retain highly skilled technical, managerial, finance, marketing and creative personnel. We face intense competition for qualified individuals from numerous technology, marketing and mobile entertainment companies. In addition, competition for qualified personnel is particularly intense in the Los Angeles area, where our headquarters are located. Further, two of our principal overseas operations are based in the United Kingdom and Germany, areas that, similar to our headquarters region, have high costs of living and consequently high compensation standards and/or intense demand for qualified individuals which may require us to incur significant costs to attract them. We may be unable to attract and retain suitably qualified individuals who are capable of meeting our growing creative, operational and managerial requirements, or may be required to pay increased compensation in order to do so. If we are unable to attract and retain the qualified personnel we need to succeed, our business would suffer.
 
Volatility or lack of performance in our stock price may also affect our ability to attract and retain our key employees. Many of our senior management personnel and other key employees have become, or will soon become, vested in a substantial amount of stock or stock options. Employees may be more likely to leave us if the shares they own or the shares underlying their options have significantly appreciated in value relative to the original purchase prices of the shares or the exercise prices of the options, or if the exercise prices of the options that they hold are significantly above the market price of our common stock. If we are unable to retain our employees, our business, operating results and financial condition would be harmed.
 
Growth may place significant demands on our management and our infrastructure.
 
We operate in an emerging market and have experienced, and may continue to experience, growth in our business through internal growth and acquisitions. This growth has placed, and may continue to place, significant demands on our management and our operational and financial infrastructure. Continued growth could strain our ability to:
 
 
·
develop and improve our operational, financial and management controls;
 
 
 
 
·
enhance our reporting systems and procedures;
 
 
 
 
·
recruit, train and retain highly skilled personnel;
 
 
 
 
·
maintain our quality standards; and
 
 
 
 
·
maintain branded content owner, wireless carrier and end-user satisfaction.

Managing our growth will require significant expenditures and allocation of valuable management resources. If we fail to achieve the necessary level of efficiency in our organization as it grows, our business, operating results and financial condition would be harmed.
 
The acquisition of other companies, businesses or technologies could result in operating difficulties, dilution and other harmful consequences.  
 
We have made acquisitions and, although we have no present understandings, commitments or agreements to do so, we may pursue further acquisitions, any of which could be material to our business, operating results and financial condition. Future acquisitions could divert management’s time and focus from operating our business. In addition, integrating an acquired company, business or technology is risky and may result in unforeseen operating difficulties and expenditures. We may also raise additional capital for the acquisition of, or investment in, companies, technologies, products or assets that complement our business. Future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, including our common stock, or the incurrence of debt, contingent liabilities, amortization expenses or acquired in-process research and development expenses, any of which could harm our financial condition and operating results. Future acquisitions may also require us to obtain additional financing, which may not be available on favorable terms or at all.
 
International acquisitions involve risks related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries.
 
Some or all of these issues may result from our acquisition of the Germany based mobile games development and publishing company Charismatix Ltd & Co KG (now known as Twistbox Games Ltd & Co KG) in May 2006 and the U.S. based mobile games studio from Infospace, Inc. in January 2007. If the anticipated benefits of these or future acquisitions do not materialize, we experience difficulties integrating Twistbox Games, the games studio or businesses acquired in the future, or other unanticipated problems arise, our business, operating results and financial condition may be harmed.
 
In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill and other intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our earnings based on this impairment assessment process, which could harm our operating results.
 
The effects of the recession in the United States and general downturn in the global economy, including financial market disruptions, could have an adverse impact on our business, operating results or financial condition.
 
Our operating results also may be affected by uncertain or changing economic conditions such as the challenges that are currently affecting economic conditions in the United States. If global economic and market conditions, or economic conditions in the United States or other key markets, remain uncertain or persist, spread, or deteriorate further, we may experience material impacts on our business, operating results, and financial condition in a number of ways including negatively affecting our profitability and causing our stock price to decline.
 

 
14

 
 
We face added business, political, regulatory, operational, financial and economic risks as a result of our international operations and distribution, any of which could increase our costs and hinder our growth.  
 
We expect international sales to continue to be an important component of our revenues. Risks affecting our international operations include:
 
 
·
challenges caused by distance, language and cultural differences;
 
 
 
 
·
multiple and conflicting laws and regulations, including complications due to unexpected changes in these laws and regulations;
 
 
 
 
·
the burdens of complying with a wide variety of foreign laws and regulations;
 
 
 
 
·
higher costs associated with doing business internationally;
 
 
 
 
·
difficulties in staffing and managing international operations;
 
 
 
 
·
greater fluctuations in sales to end users and through carriers in developing countries, including longer payment cycles and greater difficulty collecting accounts receivable;
 
 
 
 
·
protectionist laws and business practices that favor local businesses in some countries;
 
 
 
 
·
foreign tax consequences;
 
 
·
foreign exchange controls that might prevent us from repatriating income earned in countries outside the United States;
 
 
 
 
·
price controls;
 
 
 
 
·
the servicing of regions by many different carriers;
 
 
 
 
·
imposition of public sector controls;
 
 
 
 
·
political, economic and social instability;
 
 
 
 
·
restrictions on the export or import of technology;
 
 
 
 
·
trade and tariff restrictions;
 
 
 
 
·
variations in tariffs, quotas, taxes and other market barriers; and
 
 
 
 
·
difficulties in enforcing intellectual property rights in countries other than the United States.
 
In addition, developing user interfaces that are compatible with other languages or cultures can be expensive. As a result, our ongoing international expansion efforts may be more costly than we expect. Further, expansion into developing countries subjects us to the effects of regional instability, civil unrest and hostilities, and could adversely affect us by disrupting communications and making travel more difficult. These risks could harm our international expansion efforts, which, in turn, could materially and adversely affect our business, operating results and financial condition.
 
If we fail to deliver our products and services at the same time as new mobile handset models are commercially introduced, our sales may suffer.  
 
Our business is dependent, in part, on the commercial introduction of new handset models with enhanced features, including larger, higher resolution color screens, improved audio quality, and greater processing power, memory, battery life and storage. We do not control the timing of these handset launches. Some new handsets are sold by carriers with certain products or other applications pre-loaded, and many end users who download our products or use our services do so after they purchase their new handsets to experience the new features of those handsets. Some handset manufacturers give us access to their handsets prior to commercial release. If one or more major handset manufacturers were to cease to provide us access to new handset models prior to commercial release, we might be unable to introduce compatible versions of our products and services for those handsets in coordination with their commercial release, and we might not be able to make compatible versions for a substantial period following their commercial release. If, because of launch delays, we miss the opportunity to sell products and services when new handsets are shipped or our end users upgrade to a new handset, or if we miss the key holiday selling period, either because the introduction of a new handset is delayed or we do not deploy our products and services in time for the holiday selling season, our revenues would likely decline and our business, operating results and financial condition would likely suffer.

 
15

 
 
Wireless carriers generally control the price charged for our products and services and the billing and collection for sales and could make decisions detrimental to us.  
 
Wireless carriers generally control the price charged for our products and services either by approving or establishing the price of the offering charged to their subscribers. Some of our carrier agreements also restrict our ability to change prices. In cases where carrier approval is required, approvals may not be granted in a timely manner or at all. A failure or delay in obtaining these approvals, the prices established by the carriers for our offerings, or changes in these prices could adversely affect market acceptance of our offerings. Similarly, for the significant minority of our carriers, when we make changes to a pricing plan (the wholesale price and the corresponding suggested retail price based on our negotiated revenue-sharing arrangement), adjustments to the actual retail price charged to end users may not be made in a timely manner or at all (even though our wholesale price was reduced). A failure or delay by these carriers in adjusting the retail price for our offerings, could adversely affect sales volume and our revenues for those offerings.
 
Carriers and other distributors also control billings and collections for our products and services, either directly or through third-party service providers. If our carriers or their third-party service providers cause material inaccuracies when providing billing and collection services to us, our revenues may be less than anticipated or may be subject to refund at the discretion of the carrier. This could harm our business, operating results and financial condition.

We may be unable to develop and introduce in a timely way new products or services, and our products and services may have defects, which could harm our brand.  
 
The planned timing and introduction of new products and services are subject to risks and uncertainties. Unexpected technical, operational, deployment, distribution or other problems could delay or prevent the introduction of new products and services, which could result in a loss of, or delay in, revenues or damage to our reputation and brand. If any of our products or services is introduced with defects, errors or failures, we could experience decreased sales, loss of end users, damage to our carrier relationships and damage to our reputation and brand. Our attractiveness to branded content licensors might also be reduced. In addition, new products and services may not achieve sufficient market acceptance to offset the costs of development, particularly when the introduction of a product or service is substantially later than a planned “day-and-date” launch, which could materially harm our business, operating results and financial condition.
 
If we fail to maintain and enhance our capabilities for porting our offerings to a broad array of mobile handsets, our attractiveness to wireless carriers and branded content owners will be impaired, and our sales could suffer.
 
Once developed, a product or application may be required to be ported to, or converted into separate versions for, more than 1,000 different handset models, many with different technological requirements. These include handsets with various combinations of underlying technologies, user interfaces, keypad layouts, screen resolutions, sound capabilities and other carrier-specific customizations. If we fail to maintain or enhance our porting capabilities, our sales could suffer, branded content owners might choose not to grant us licenses and carriers might choose not to give our products and services desirable deck placement or not to give our products and services placement on their decks at all.
 
Changes to our design and development processes to address new features or functions of handsets or networks might cause inefficiencies in our porting process or might result in more labor intensive porting processes. In addition, we anticipate that in the future we will be required to port existing and new products and applications to a broader array of handsets. If we utilize more labor intensive porting processes, our margins could be significantly reduced and it might take us longer to port our products and applications to an equivalent number of handsets. This, in turn, could harm our business, operating results and financial condition.
 
If we do not adequately protect our intellectual property rights, it may be possible for third parties to obtain and improperly use our intellectual property and our competitive position may be adversely affected.  
 
Our intellectual property is an essential element of our business. We rely on a combination of copyright, trademark, trade secret and other intellectual property laws and restrictions on disclosure to protect our intellectual property rights. To date, we have not obtained patent protection. Consequently, we will not be able to protect our technologies from independent invention by third parties. Despite our efforts to protect our intellectual property rights, unauthorized parties may attempt to copy or otherwise to obtain and use our technology and software. Monitoring unauthorized use of our technology and software is difficult and costly, and we cannot be certain that the steps we have taken will prevent piracy and other unauthorized distribution and use of our technology and software, particularly internationally where the laws may not protect our intellectual property rights as fully as in the United States. In the future, we may have to resort to litigation to enforce our intellectual property rights, which could result in substantial costs and diversion of our management and resources.

In addition, although we require third parties to sign agreements not to disclose or improperly use our intellectual property, it may still be possible for third parties to obtain and improperly use our intellectual properties without our consent. This could harm our business, operating results and financial condition.

 
16

 
 
Third parties may sue us for intellectual property infringement, which, if successful, may disrupt our business and could require us to pay significant damage awards.  
 
Third parties may sue us for intellectual property infringement or initiate proceedings to invalidate our intellectual property, either of which, if successful, could disrupt the conduct of our business, cause us to pay significant damage awards or require us to pay licensing fees. In the event of a successful claim against us, we might be enjoined from using our licensed intellectual property, we might incur significant licensing fees and we might be forced to develop alternative technologies. Our failure or inability to develop non-infringing technology or software or to license the infringed or similar technology or software on a timely basis could force us to withdraw products and services from the market or prevent us from introducing new products and services. In addition, even if we are able to license the infringed or similar technology or software, license fees could be substantial and the terms of these licenses could be burdensome, which might adversely affect our operating results. We might also incur substantial expenses in defending against third-party infringement claims, regardless of their merit. Successful infringement or licensing claims against us might result in substantial monetary liabilities and might materially disrupt the conduct of our business.
 
Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property infringement, damages caused by malicious software and other losses.  
 
In the ordinary course of our business, most of our agreements with carriers and other distributors include indemnification provisions. In these provisions, we agree to indemnify them for losses suffered or incurred in connection with our products and services, including as a result of intellectual property infringement and damages caused by viruses, worms and other malicious software. The term of these indemnity provisions is generally perpetual after execution of the corresponding license agreement, and the maximum potential amount of future payments we could be required to make under these indemnification provisions is generally unlimited. Large future indemnity payments could harm our business, operating results and financial condition.
 
As a result of a majority of our revenues from on-deck distribution channels currently being derived from a limited number of wireless carriers, if any one of these carriers were unable to fulfill its payment obligations, our financial condition and results of operations would suffer.
 
If any of our primary carriers is unable to fulfill its payment obligations to us under our carrier agreements with them, our revenues attributable to on-deck distribution could decline significantly and our financial condition will be harmed.
 
We may need to raise additional capital to grow our business, and we may not be able to raise capital on terms acceptable to us or at all.  
 
The operation of our business and our efforts to grow our business will further require significant cash outlays and commitments. If our cash, cash equivalents and short-term investments balances and any cash generated from operations are not sufficient to meet our cash requirements, we will need to seek additional capital, potentially through debt or equity financings, to fund our growth. We may not be able to raise needed cash on terms acceptable to us or at all. Financings, if available, may be on terms that are dilutive or potentially dilutive to our stockholders, and the prices at which new investors would be willing to purchase our securities may be lower than the fair market value of our common stock. The holders of new securities may also receive rights, preferences or privileges that are senior to those of existing holders of our common stock. If new sources of financing are required but are insufficient or unavailable, we would be required to modify our growth and operating plans to the extent of available funding, which would harm our ability to grow our business.
 
We face risks associated with currency exchange rate fluctuations.  
 
We currently transact a significant portion of our revenues in foreign currencies. Conducting business in currencies other than U.S. Dollars subjects us to fluctuations in currency exchange rates that could have a negative impact on our reported operating results. Fluctuations in the value of the U.S. Dollar relative to other currencies impact our revenues, cost of revenues and operating margins and result in foreign currency transaction gains and losses. To date, we have not engaged in exchange rate hedging activities. Even if we were to implement hedging strategies to mitigate this risk, these strategies might not eliminate our exposure to foreign exchange rate fluctuations and would involve costs and risks of their own, such as ongoing management time and expertise, external costs to implement the strategies and potential accounting implications.
 
Our business in countries with a history of corruption and transactions with foreign governments, including with government owned or controlled wireless carriers, increase the risks associated with our international activities.
 
As we operate and sell internationally, we are subject to the U.S. Foreign Corrupt Practices Act, or the FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by the United States and other business entities for the purpose of obtaining or retaining business. We have operations, deal with carriers and make sales in countries known to experience corruption, particularly certain emerging countries in Eastern Europe and Latin America, and further international expansion may involve more of these countries. Our activities in these countries create the risk of unauthorized payments or offers of payments by one of our employees, consultants, sales agents or distributors that could be in violation of various laws including the FCPA, even though these parties are not always subject to our control. We have attempted to implement safeguards to discourage these practices by our employees, consultants, sales agents and distributors. However, our existing safeguards and any future improvements may prove to be less than effective, and our employees, consultants, sales agents or distributors may engage in conduct for which we might be held responsible. Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition.

 
17

 
 
Changes to financial accounting standards could make it more expensive to issue stock options to employees, which would increase compensation costs and might cause us to change our business practices.  
 
We prepare our financial statements to conform with accounting principles generally accepted in the United States. These accounting principles are subject to interpretation by the Financial Accounting Standards Board, or FASB, the Securities and Exchange Commission (“SEC” or the “Commission”) and various other bodies. A change in those principles could have a significant effect on our reported results and might affect our reporting of transactions completed before a change is announced. For example, we have used stock options as a fundamental component of our employee compensation packages. We believe that stock options directly motivate our employees to maximize long-term stockholder value and, through the use of vesting, encourage employees to remain in our employ. Several regulatory agencies and entities have made regulatory changes that could make it more difficult or expensive for us to grant stock options to employees. We may, as a result of these changes, incur increased compensation costs, change our equity compensation strategy or find it difficult to attract, retain and motivate employees, any of which could materially and adversely affect our business, operating results and financial condition.
 
We may be liable for the content we make available through our products and services with mature themes.
 
Because some of our products and services contain content with mature themes, we may be subject to obscenity or other legal claims by third parties. Our business, financial condition and operating results could be harmed if we were found liable for this content. Implementing measures to reduce our exposure to this liability may require us to take steps that would substantially limit the attractiveness of our products and services and/or its availability in various geographic areas, which would negatively impact our ability to generate revenue. Furthermore, our insurance may not adequately protect us against all of these types of claims.
 
Government regulation of our content with mature themes could restrict our ability to make some of our content available in certain jurisdictions.
 
Our business is regulated by governmental authorities in the countries in which we operate. Because of our international operations, we must comply with diverse and evolving regulations. The governments of some countries have sought to limit the influence of other cultures by restricting the distribution of products deemed to represent foreign or “immoral” influences. Regulation aimed at limiting minors’ access to content with mature themes could also increase our cost of operations and introduce technological challenges, such as by requiring development and implementation of age verification systems. As a result, government regulation of our adult content could have a material adverse effect on our business, financial condition or results of operations.

Government regulation of our marketing methods could restrict our ability to adequately advertise and promote our content and services available in certain jurisdictions.
 
Our business is regulated by governmental authorities in the countries in which we operate. Because of our international operations, we must comply with diverse and evolving regulations. The governments of some countries have sought to regulate the methods and manner in which certain of our products and services may be marketed to potential end-users.  Regulation aimed at prohibiting, limiting or restricting various forms of advertising and promotion we use to market our products and services could also increase our cost of operations or preclude the ability to offer our products and services altogether. As a result, government regulation of our marketing efforts could have a material adverse effect on our business, financial condition or results of operations.
 
Negative publicity, lawsuits or boycotts by opponents of content with mature themes could adversely affect our operating performance and discourage investors from investing in our publicly traded securities.
 
We could become a target of negative publicity, lawsuits or boycotts by one or more advocacy groups who oppose the distribution of adult-oriented entertainment. These groups have mounted negative publicity campaigns, filed lawsuits and encouraged boycotts against companies whose businesses involve adult-oriented entertainment. To the extent our content with mature themes is viewed as adult-oriented entertainment, the costs of defending against any such negative publicity, lawsuits or boycotts could be significant, could hurt our finances and could discourage investors from investing in our publicly traded securities. To date, we have not been a target of any of these advocacy groups. As a provider of content with mature themes, we cannot assure you that we may not become a target in the future.

 
18

 
 
Risks Relating to Our Industry
 
Wireless communications technologies are changing rapidly, and we may not be successful in working with these new technologies.  
 
Wireless network and mobile handset technologies are undergoing rapid innovation. New handsets with more advanced processors and supporting advanced programming languages continue to be introduced. In addition, networks that enable enhanced features are being developed and deployed. We have no control over the demand for, or success of, these products or technologies. If we fail to anticipate and adapt to these and other technological changes, the available channels for our products and services may be limited and our market share and our operating results may suffer. Our future success will depend on our ability to adapt to rapidly changing technologies and develop products and services to accommodate evolving industry standards with improved performance and reliability. In addition, the widespread adoption of networking or telecommunications technologies or other technological changes could require substantial expenditures to modify or adapt our products and services.
 
Technology changes in the wireless industry require us to anticipate, sometimes years in advance, which technologies we must implement and take advantage of in order to make our products and services, and other mobile entertainment products, competitive in the market. Therefore, we usually start our product development with a range of technical development goals that we hope to be able to achieve. We may not be able to achieve these goals, or our competition may be able to achieve them more quickly and effectively than we can. In either case, our products and services may be technologically inferior to those of our competitors, less appealing to end users, or both. If we cannot achieve our technology goals within our original development schedule, then we may delay their release until these technology goals can be achieved, which may delay or reduce our revenues, increase our development expenses and harm our reputation. Alternatively, we may increase the resources employed in research and development in an attempt either to preserve our product launch schedule or to keep up with our competition, which would increase our development expenses. In either case, our business, operating results and financial condition could be materially harmed.
 
The complexity of and incompatibilities among mobile handsets may require us to use additional resources for the development of our products and services.  
 
To reach large numbers of wireless subscribers, mobile entertainment publishers like us must support numerous mobile handsets and technologies. However, keeping pace with the rapid innovation of handset technologies together with the continuous introduction of new, and often incompatible, handset models by wireless carriers requires us to make significant investments in research and development, including personnel, technologies and equipment. In the future, we may be required to make substantial investments in our development if the number of different types of handset models continues to proliferate. In addition, as more advanced handsets are introduced that enable more complex, feature rich products and services, we anticipate that our development costs will increase, which could increase the risks associated with one or more of our products or services and could materially harm our operating results and financial condition.
 
If wireless subscribers do not continue to use their mobile handsets to access mobile entertainment and other applications, our business growth and future revenues may be adversely affected.  
 
We operate in a developing industry. Our success depends on growth in the number of wireless subscribers who use their handsets to access data services and, in particular, entertainment applications of the type we develop and distribute. New or different mobile entertainment applications developed by our current or future competitors may be preferred by subscribers to our offerings. In addition, other mobile platforms may become widespread, and end users may choose to switch to these platforms. If the market for our products and services does not continue to grow or we are unable to acquire new end users, our business growth and future revenues could be adversely affected. If end users switch their entertainment spending away from the kinds of offerings that we publish, or switch to platforms or distribution where we do not have comparative strengths, our revenues would likely decline and our business, operating results and financial condition would suffer.
 
Our industry is subject to risks generally associated with the entertainment industry, any of which could significantly harm our operating results.
 
Our business is subject to risks that are generally associated with the entertainment industry, many of which are beyond our control. These risks could negatively impact our operating results and include: the popularity, price and timing of release of our offerings and mobile handsets on which they are accessed; economic conditions that adversely affect discretionary consumer spending; changes in consumer demographics; the availability and popularity of other forms of entertainment; and critical reviews and public tastes and preferences, which may change rapidly and cannot necessarily be predicted.

A shift of technology platform by wireless carriers and mobile handset manufacturers could lengthen the development period for our offerings, increase our costs and cause our offerings to be of lower quality or to be published later than anticipated.  
 
Mobile handsets require multimedia capabilities enabled by technologies capable of running applications such as ours. Our development resources are concentrated in today’s most popular platforms, and we have experience developing applications for these platforms. If one or more of these technologies fall out of favor with handset manufacturers and wireless carriers and there is a rapid shift to a new technology where we do not have development experience or resources, the development period for our products and services may be lengthened, increasing our costs, and the resulting products and services may be of lower quality, and may be published later than anticipated. In such an event, our reputation, business, operating results and financial condition might suffer.

 
19

 
 
System or network failures could reduce our sales, increase costs or result in a loss of end users of our products and services.  
 
Mobile publishers rely on wireless carriers’ networks to deliver products and services to end users and on their or other third parties’ billing systems to track and account for the downloading of such offerings. In certain circumstances, mobile publishers may also rely on their own servers to deliver products on demand to end users through their carriers’ networks. In addition, certain products require access over the mobile internet to our servers in order to enable certain features. Any failure of, or technical problem with, carriers’, third parties’ or our billing systems, delivery systems, information systems or communications networks could result in the inability of end users to download our products, prevent the completion of a billing transaction, or interfere with access to some aspects of our products. If any of these systems fail or if there is an interruption in the supply of power, an earthquake, fire, flood or other natural disaster, or an act of war or terrorism, end users might be unable to access our offerings. For example, from time to time, our carriers have experienced failures with their billing and delivery systems and communication networks, including gateway failures that reduced the provisioning capacity of their branded e-commerce system. Any failure of, or technical problem with, the carriers’, other third parties’ or our systems could cause us to lose end users or revenues or incur substantial repair costs and distract management from operating our business. This, in turn, could harm our business, operating results and financial condition.
 
Our business depends on the growth and maintenance of wireless communications infrastructure.  
 
Our success will depend on the continued growth and maintenance of wireless communications infrastructure in the United States and internationally. This includes deployment and maintenance of reliable next-generation digital networks with the speed, data capacity and security necessary to provide reliable wireless communications services. Wireless communications infrastructure may be unable to support the demands placed on it if the number of subscribers continues to increase, or if existing or future subscribers increase their bandwidth requirements. Wireless communications have experienced a variety of outages and other delays as a result of infrastructure and equipment failures, and could face outages and delays in the future. These outages and delays could reduce the level of wireless communications usage as well as our ability to distribute our products and services successfully. In addition, changes by a wireless carrier to network infrastructure may interfere with downloads and may cause end users to lose functionality. This could harm our business, operating results and financial condition.
 
Future mobile handsets may significantly reduce or eliminate wireless carriers’ control over delivery of our products and services and force us to rely further on alternative sales channels, which, if not successful, could require us to increase our sales and marketing expenses significantly.  
 
A growing number of handset models currently available allow wireless subscribers to browse the internet and, in some cases, download applications from sources other than through a carrier’s on-deck portal. In addition, the development of other application delivery mechanisms such as premium-SMS may enable subscribers to download applications without having to access a carrier’s on-deck portal. Increased use by subscribers of open operating system handsets or premium-SMS delivery systems will enable them to bypass the carriers’ on-deck portal and could reduce the market power of carriers. This could force us to rely further on alternative sales channels and could require us to increase our sales and marketing expenses significantly. Relying on placement of our products and services in the menus of off-deck distributors may result in lower revenues than might otherwise be anticipated. We may be unable to develop and promote our direct website distribution sufficiently to overcome the limitations and disadvantages of off-deck distribution channels. This could harm our business, operating results and financial condition
  
Actual or perceived security vulnerabilities in mobile handsets or wireless networks could adversely affect our revenues.  
 
Maintaining the security of mobile handsets and wireless networks is critical for our business. There are individuals and groups who develop and deploy viruses, worms and other illicit code or malicious software programs that may attack wireless networks and handsets. Security experts have identified computer “worm” programs that target handsets running on certain operating systems. Although these worms have not been widely released and do not present an immediate risk to our business, we believe future threats could lead some end users to seek to reduce or delay future purchases of our products or reduce or delay the use of their handsets. Wireless carriers and handset manufacturers may also increase their expenditures on protecting their wireless networks and mobile phone products from attack, which could delay adoption of new handset models. Any of these activities could adversely affect our revenues and this could harm our business, operating results and financial condition.
 
Changes in government regulation of the media and wireless communications industries may adversely affect our business.  
 
It is possible that a number of laws and regulations may be adopted in the United States and elsewhere that could restrict the media and wireless communications industries, including laws and regulations regarding customer privacy, taxation, content suitability, copyright, distribution and antitrust. Furthermore, the growth and development of the market for electronic commerce may prompt calls for more stringent consumer protection laws that may impose additional burdens on companies such as ours conducting business through wireless carriers. We anticipate that regulation of our industry will increase and that we will be required to devote legal and other resources to address this regulation. Changes in current laws or regulations or the imposition of new laws and regulations in the United States or elsewhere regarding the media and wireless communications industries may lessen the growth of wireless communications services and may materially reduce our ability to increase or maintain sales of our products and services.
 
A number of studies have examined the health effects of mobile phone use, and the results of some of the studies have been interpreted as evidence that mobile phone use causes adverse health effects. The establishment of a link between the use of mobile phone services and health problems, or any media reports suggesting such a link, could increase government regulation of, and reduce demand for, mobile phones and, accordingly, the demand for our products and services, and this could harm our business, operating results and financial condition.

 
20

 

Risks Relating to Our Common Stock
 
There is a limited trading market for our common stock.
 
Although prices for our shares of common stock are quoted on the OTC Bulletin Board (under the symbol MNDL.OB), there is no established public trading market for our common stock, and no assurance can be given that a public trading market will develop or, if developed, that it will be sustained.
 
The liquidity of our common stock will be affected by its limited trading market.
 
Bid and ask prices for shares of our common stock are quoted on the OTC Bulletin Board under the symbol MNDL.OB. There is currently no broadly followed, established trading market for our common stock. While we are hopeful that we will command the interest of a greater number of investors, an established trading market for our shares of common stock may never develop or be maintained. Active trading markets generally result in lower price volatility and more efficient execution of buy and sell orders. The absence of an active trading market reduces the liquidity of our common stock. As a result of the lack of trading activity, the quoted price for our common stock on the OTC Bulletin Board is not necessarily a reliable indicator of its fair market value. Further, if we cease to be quoted, holders of our common stock would find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, our common stock, and the market value of our common stock would likely decline.
 
If and when a trading market for our common stock develops, the market price of our common stock is likely to be highly volatile and subject to wide fluctuations, and you may be unable to resell your shares at or above the current price.
 
The market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to a number of factors that are beyond our control, including announcements of new products or services by our competitors. In addition, the market price of our common stock could be subject to wide fluctuations in response to a variety of factors, including:
  
·
quarterly variations in our revenues and operating expenses;

·
developments in the financial markets, and the worldwide or regional economies;

·
announcements of innovations or new products or services by us or our competitors;

·
fluctuations in merchant credit card interest rates;

·
significant sales of our common stock or other securities in the open market; and

·
changes in accounting principles.

In the past, stockholders have often instituted securities class action litigation after periods of volatility in the market price of a company’s securities. If a stockholder were to file any such class action suit against us, we would incur substantial legal fees and our management’s attention and resources would be diverted from operating our business to respond to the litigation, which could harm our business.
 
The sale of securities by us in any equity or debt financing could result in dilution to our existing stockholders and have a material adverse effect on our earnings.
 
Any sale of common stock by us in a future private placement offering could result in dilution to the existing stockholders as a direct result of our issuance of additional shares of our capital stock. In addition, our business strategy may include expansion through internal growth by acquiring complementary businesses, acquiring or licensing additional brands, or establishing strategic relationships with targeted customers and suppliers. In order to do so, or to finance the cost of our other activities, we may issue additional equity securities that could dilute our stockholders’ stock ownership. We may also assume additional debt and incur impairment losses related to goodwill and other tangible assets if we acquire another company, and this could negatively impact our earnings and results of operations.
 
If securities or industry analysts do not publish research or reports about our business, or if they downgrade their recommendations regarding our common stock, our stock price and trading volume could decline.
 
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If any of the analysts who cover us downgrade our common stock, our common stock price would likely decline. If analysts cease coverage of our Company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our common stock price or trading volume to decline.

 
21

 
 
“Penny stock” rules may restrict the market for our common stock.  
 
Our common stock is subject to rules promulgated by the SEC relating to “penny stocks,” which apply to companies whose shares are not traded on a national stock exchange, trade at less than $5.00 per share, or who do not meet certain other financial requirements specified by the SEC. These rules require brokers who sell “penny stocks” to persons other than established customers and “accredited investors” to complete certain documentation, make suitability inquiries of investors, and provide investors with certain information concerning the risks of trading in such penny stocks. These rules may discourage or restrict the ability of brokers to sell our common stock and may affect the secondary market for our common stock. These rules could also hamper our ability to raise funds in the primary market for our common stock .
 
We do not anticipate paying dividends.  
 
We have never paid cash or other dividends on our common stock. Payment of dividends on our common stock is within the discretion of our Board of Directors and will depend upon our earnings, our capital requirements and financial condition, and other factors deemed relevant by our Board of Directors. However, the earliest our Board of Directors would likely consider a dividend is if we begin to generate excess cash flow.

Our officers, directors and principal stockholders can exert significant influence over us and may make decisions that are not in the best interests of all stockholders.
 
Our officers, directors and principal stockholders (greater than 5% stockholders) collectively beneficially own approximately 71.5% of our outstanding common stock. As a result, this group will be able to affect the outcome of, or exert significant influence over, all matters requiring stockholder approval, including the election and removal of directors and any change in control. In particular, this concentration of ownership of our common stock could have the effect of delaying or preventing a change of control of us or otherwise discouraging or preventing a potential acquirer from attempting to obtain control of us. This, in turn, could have a negative effect on the market price of our common stock. It could also prevent our stockholders from realizing a premium over the market prices for their shares of common stock. Moreover, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders, and, accordingly, this group could cause us to enter into transactions or agreements that we would not otherwise consider.
 
If we fail to maintain an effective system of internal controls, we might not be able to report our financial results accurately or prevent fraud; in that case, our stockholders could lose confidence in our financial reporting, which could negatively impact the price of our stock.  
 
Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. In addition, Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, will require us to evaluate and report on our internal control over financial reporting and have our independent registered public accounting firm attest to our evaluation beginning with our Annual Report on Form 10-K for the year ending March 31, 2010. We are in the process of preparing and implementing an internal plan of action for compliance with Section 404 and strengthening and testing our system of internal controls to provide the basis for our report. The process of implementing our internal controls and complying with Section 404 will be expensive and time consuming, and will require significant attention of management. We cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Even if we conclude, and our independent registered public accounting firm concurs, that our internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, because of its inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements. Failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If we or our independent registered public accounting firm discover a material weakness or a significant deficiency in our internal control, the disclosure of that fact, even if quickly remedied, could reduce the market’s confidence in our financial statements and harm our stock price. In addition, a delay in compliance with Section 404 could subject us to a variety of administrative sanctions, including ineligibility for short form resale registration, action by the SEC, and the inability of registered broker-dealers to make a market in our common stock, which could further reduce our stock price and harm our business.
  
Maintaining and improving our financial controls and the requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified members for our Board of Directors.  
 
As a public company, we are subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act. The requirements of these rules and regulations will increase our legal, accounting and financial compliance costs, make some activities more difficult, time-consuming and costly and may place undue strain on our personnel, systems and resources.
 
The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. This can be difficult to do. For example, we depend on the reports of wireless carriers for information regarding the amount of sales of our products and services and to determine the amount of royalties we owe branded content licensors and the amount of our revenues. These reports may not be timely, and in the past they have contained, and in the future they may contain, errors.
 
In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we expend significant resources and provide significant management oversight. We have a substantial effort ahead of us to implement appropriate processes, document our system of internal control over relevant processes, assess their design, remediate any deficiencies identified and test their operation. As a result, management’s attention may be diverted from other business concerns, which could harm our business, operating results and financial condition. These efforts will also involve substantial accounting-related costs.

 
22

 

The Sarbanes-Oxley Act makes it more difficult and more expensive for us to maintain directors’ and officers’ liability insurance, and we may be required in the future  to accept reduced coverage or incur substantially higher costs to maintain coverage. If we are unable to maintain adequate directors’ and officers’ insurance, our ability to recruit and retain qualified directors, and officers will be significantly curtailed.

ITEM 2. PROPERTIES
 
The principal offices of Mandalay are the offices of Trinad Capital, L.P., located at 2121 Avenue of the Stars, Suite 2550, Los Angeles, California 90067. In March 2007, we entered into a month-to-month lease for such office space with Trinad Management, LLC (“Trinad Management”) for rent in the amount of $8,500 per month.
 
The principal offices of our subsidiary Twistbox are headquartered at 14242 Ventura Boulevard, 3rd Floor, Sherman Oaks, California 91423. On July 1, 2005, The WAAT Corp. (Twistbox’s predecessor-in-interest) entered into a lease for these premises with Berkshire Holdings, LLC at a base rent of $21,000 per month. The term of the lease expires on July 15, 2010. Twistbox also leases property in Dortmund, Germany and Poland, where it has branch operations.

The principal offices of our subsidiary AMV are headquartered at 65 High Street, Marlow Bucks, SL7 1AB, United Kingdom. On December 26, 2008, AMV entered into a lease for these premises with Palmers House at a base annual rent of £18,000. The term of the lease expires on July 31, 2012; however, AMV may terminate the lease on December 25, 2009 upon payment of £2,700.
 
ITEM 3. LEGAL PROCEEDINGS
 
From time to time, we are subject to various claims, complaints and legal actions in the normal course of business. We do not believe we are party to any currently pending litigation, the outcome of which will have a material adverse effect on our operations or financial position. Our failure to obtain necessary license or other rights, or litigation arising out of intellectual property claims, could adversely affect our business.

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 in California Superior Court, LA Superior Court 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's response is due by August 31, 2009. WAAT intends to vigorously defend against this action.  Principals of both parties continue to communicate to find a mutually acceptable resolution.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
None.
 
PART II
 
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUTY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 
 
Market Information
 
As of July 10, 2009, the closing price of our common stock was $0.55.
 
Our common stock is quoted on the OTC Bulletin Board under the symbol “MNDL.OB.” Any investor who purchases our common stock is not likely to find any liquid trading market for our common stock and there can be no assurance that any liquid trading market will develop.
 
The following table reflects the high and low closing quotations of our common stock for periods indicated. The quotations reflect last sale closing price on a daily basis and reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

 
23

 
 
   
High
   
Low
 
             
Year Ended March 31, 2009
           
First quarter
  $ 6.00     $ 2.00  
Second quarter
  $ 2.90     $ 1.50  
Third quarter
  $ 2.39     $ 0.60  
Fourth quarter
  $ 1.75     $ 0.51  
                 
Three Months Ended March 31, 2008*
               
First quarter
  $ 6.50     $ 2.40  
                 
Year Ended December 31, 2007
               
First quarter
  $ 2.50     $ 1.75  
Second quarter
  $ 3.00     $ 1.90  
Third quarter
  $ 4.00     $ 2.25  
Fourth quarter
  $ 4.50     $ 2.30  
 

*     We changed our fiscal year end to March 31, effective March 31, 2008.

    There has never been a public trading market for any of our securities other than our common stock.
 
Holders
 
As of July 14, 2009, there were 528 holders of record of our common stock. There were also an undetermined number of holders who hold their stock in nominee or “street” name.
 
Dividends
 
We have not declared cash dividends on our common stock since our inception and we do not anticipate paying any cash dividends in the foreseeable future.
 
Equity Compensation Plan Information  
 
The following table sets forth information concerning our equity compensation plans as of March 31, 2009.
 
Plan Category
 
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
   
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
   
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
 
                   
Equity compensation plans approved by security holders
    6,960,000     $ 2.52       40,000  
                         
Equity compensation plans not approved by security holders
    0       0       0  
                         
Total
    6,960,000     $ 2.52       40,000  
 
 
Unregistered Sales of Equity Securities
None.

 
24

 


Issuer Purchases of Equity Securities

 
 
 
 
 
 
 
Period
 
 
 
 
 
(a) Total Number of 
Shares (or Units) 
Purchased
   
 
 
 
 
 
(b) Average Price Paid 
per Share (or Unit)
   
 
(c)
Total Number of 
Shares (or Units) 
Purchased as Part of 
Publicly Announced 
Plans or Programs
   
(d)
Maximum Number 
(or Approximate 
Dollar Value) of 
Shares (or Units) 
that May Yet Be 
Purchased Under 
the Plans or 
Programs
 
January 1, 2009- January 31, 2009
 
 -
     -      -      -  
February 1, 2009- February 28, 2009
    -       -       -       -  
March 1, 2009- March 31, 2009
 
62,011(1
  $ 0.88       -       -  
 
(1) These shares were repurchased by the Company in satisfaction of tax liability pursuant to Rule 16b-3 of the Exchange Act.
 
ITEM 6.  SELECTED FINANCIAL DATA

Not applicable as we are a smaller reporting company.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
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 report. This discussion contains certain forward-looking statements that involve substantial risks and uncertainties. When used in this Annual Report on Form 10-K, the words “anticipate,” “believe,” “estimate,” “expect” 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” beginning on page 8 and elsewhere in this filing. Historical operating results are not necessarily indicative of the trends in operating results for any future period.
 
Unless the context otherwise indicates, the use of the terms “we,” “our” “us” or the “Company” refer to the business and operations of Mandalay Media, Inc. (“Mandalay”) through its operating and wholly-owned subsidiaries, Twistbox Entertainment, Inc. (“Twistbox”) and AMV Holding Limited, a United Kingdom private limited company (“AMV”).
 
Historical Operations of Mandalay Media, Inc.
 
Mandalay was originally incorporated in the State of Delaware on November 6, 1998 under the name eB2B Commerce, Inc. On April 27, 2000, Mandalay merged into DynamicWeb Enterprises Inc., a New Jersey corporation, and changed its name to eB2B Commerce, Inc. On April 13, 2005, Mandalay changed its name to Mediavest, Inc. On November 7, 2007, through a merger, the Company reincorporated in the State of Delaware under the name Mandalay Media, Inc.
 
On October 27, 2004, and as amended on December 17, 2004, Mandalay 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”). Under the Plan of Reorganization, as completed on January 26, 2005: (1) Mandalay’s net operating assets and liabilities were transferred to the holders of the secured notes in satisfaction of the principal and accrued interest thereon; (2) $400,000 were transferred to a liquidation trust and used to pay administrative costs and certain preferred creditors; (3) $100,000 were retained by Mandalay to fund the expenses of remaining public; (4) 3.5% of the new common stock of Mandalay (140,000 shares) was issued to the holders of record of Mandalay’s preferred stock in settlement of their liquidation preferences; (5) 3.5% of the new common stock of Mandalay (140,000 shares) was issued to common stockholders of record as of January 26, 2005 in exchange for all of the outstanding shares of the common stock of the company; and (6) 93% of the new common stock of Mandalay (3,720,000 shares) was issued to the sponsor of the Plan of Reorganization in exchange for $500,000 in cash. Through January 26, 2005, Mandalay and its subsidiaries were engaged in providing business-to-business transaction management services designed to simplify trading between buyers and suppliers.
 
Prior to February 12, 2008, Mandalay was a public shell company with no operations, and controlled by its significant stockholder, Trinad Capital Master Fund, L.P.
 
SUMMARY OF THE MERGER
 
Mandalay 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 Mandalay (“Merger Sub”), Twistbox Entertainment, Inc. (“Twistbox”), and Adi McAbian and Spark Captial, L.P., as representatives of the stockholders of Twistbox, pursuant to which Merger Sub would merge with and into Twistbox, with Twistbox as the surviving corporation (the “Merger”). The Merger was completed on February 12, 2008.
 
25

 
Pursuant to the Merger Agreement, upon the completion of the Merger, each outstanding share of Twistbox common stock, $0.001 par value per share, on a fully-converted basis, with the conversion on a one-for-one basis of all issued and outstanding shares of the Series A Convertible Preferred Stock of Twistbox and the Series B Convertible Preferred Stock of Twistbox, each $0.01 par value per share (the “Twistbox Preferred Stock”), converted automatically into and became exchangeable for Mandalay common stock in accordance with certain exchange ratios set forth in the Merger Agreement. In addition, by virtue of the Merger, each outstanding Twistbox option to purchase Twistbox common stock issued pursuant to the Twistbox 2006 Stock Incentive Plan was assumed by Mandalay, subject to the same terms and conditions as were applicable under such plan immediately prior to the Merger, except that (a) the number of shares of Mandalay common stock issuable upon exercise of each Twistbox option was determined by multiplying the number of shares of Twistbox common stock that were subject to such Twistbox option immediately prior to the Merger by 0.72967 (the “Option Conversion Ratio”), rounded down to the nearest whole number; and (b) the per share exercise price for the shares of Mandalay common stock issuable upon exercise of each Twistbox option was determined by dividing the per share exercise price of Twistbox common stock subject to such Twistbox option, as in effect prior to the Merger, by the Option Conversion Ratio, subject to any adjustments required by the Internal Revenue Code. As part of the Merger, Mandalay also assumed all unvested Twistbox options. The merger consideration consisted of an aggregate of up to 12,325,000 shares of Mandalay common stock, which included the conversion of all shares of Twistbox capital stock and the reservation of 2,144,700 shares of Mandalay common stock required for assumption of the vested Twistbox options. Mandalay reserved an additional 318,772 shares of Mandalay common stock required for the assumption of the unvested Twistbox options. All warrants to purchase shares of Twistbox common stock outstanding at the time of the Merger were terminated on or before the effective time of the Merger.
 
Upon the completion of the Merger, all shares of the Twistbox capital stock were no longer outstanding and were automatically canceled and ceased to exist, and each holder of a certificate representing any such shares ceased to have any rights with respect thereto, except the right to receive the applicable merger consideration. Additionally, each share of the Twistbox capital stock held by Twistbox or owned by Merger Sub, Mandalay or any subsidiary of Twistbox or Mandalay immediately prior to the Merger, was canceled and extinguished as of the completion of the Merger without any conversion or payment in respect thereof. Each share of common stock, $0.001 par value per share, of Merger Sub issued and outstanding immediately prior to the Merger was converted upon completion of the Merger into one validly issued, fully paid and non-assessable share of common stock, $0.001 par value per share, of the surviving corporation.

As part of the Merger, Mandalay agreed to guarantee up to $8,250,000 of Twistbox’s outstanding debt to ValueAct SmallCap Master Fund L.P. (“ValueAct”), with certain amendments. On July 30, 2007, Twistbox had entered into a Securities Purchase Agreement by and among Twistbox, the Subsidiary Guarantors (as defined therein) and ValueAct, pursuant to which ValueAct purchased a note in the amount of $16,500,000 (the “ValueAct Note”) and a warrant which entitled ValueAct to purchase from Twistbox up to a total of 2,401,747 shares of Twistbox’s common stock (the “Warrant”).  Twistbox and ValueAct had also entered into a Guarantee and Security Agreement by and among Twistbox, each of the subsidiaries of Twistbox, the Investors, as defined therein, and ValueAct, as collateral agent, pursuant to which the parties agreed that the ValueAct Note would be secured by substantially all of the assets of Twistbox and its subsidiaries. In connection with the Merger, the Warrant was terminated and we issued two warrants in place thereof to ValueAct to purchase shares of our common stock. One of such warrants entitles ValueAct to purchase up to a total of 1,092,622 shares of our common stock at an exercise price of $7.55 per share. The other warrant entitles ValueAct to purchase up to a total of 1,092,621 shares of our common stock at an initial exercise price of $5.00 per share, which, if not exercised in full by February 12, 2009, will be permanently increased to an exercise price of $7.55 per share.  Both warrants expire on July 30, 2011. The terms of the warrants were subsequently modified on October 23, 2008, as set forth below. We also entered into a Guaranty with ValueAct whereby Mandalay agreed to guarantee Twistbox’s payment to ValueAct of up to $8,250,000 of principal under the Note in accordance with the terms, conditions and limitations contained in the ValueAct Note. The financial covenants of the ValueAct Note were also amended,  pursuant to which Twistbox is required maintain a cash balance of not less than $2,500,000 at all times and Mandalay is required to maintain a cash balance of not less than $4,000,000 at all times. These covenants were subsequently amended as set forth below.
 
SUMMARY OF THE AMV ACQUISITION

On October 23, 2008, Mandalay 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”. The aggregate purchase price (subject to adjustments as provided in the stock purchase agreement) for the Shares consisted of (i) $5,375,000 in cash; (ii) 4,500,000 shares of common stock, par value $0.0001 per share; (iii) a secured promissory note in the aggregate principal amount of $5,375,000 (the “AMV Note”); and (iv) additional earn-out amounts, if any, based on certain targeted earnings as set forth in the stock purchase agreement.

 
26

 

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 Mandalay completes an equity financing which results in gross proceeds of over $6,000,000, Mandalay will prepay a portion of the Note in an amount equal to one-third of the excess of the gross proceeds of such financing over $6,000,000. In addition, if within nine months of the issuance date of the AMV  Note, Mandalay completes a financing that results in gross proceeds of over $15,000,000, then Mandalay 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 AMV 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.

In addition, also on October 23, 2008, in connection with the AMV Acquisition, Mandalay, Twistbox and ValueAct entered into a Second Amendment to the ValueAct Note, which among other things, provides for a payment in kind election at the option of Twistbox, modifies the financial covenants set forth in the ValueAct Note to require that Mandalay and Twistbox maintain certain minimum combined cash balances and provides for certain covenants with respect to the indebtedness of Mandalay and its subsidiaries.  Also on October 23, 2008, AMV granted to ValueAct a security interest in its assets to secure the obligations under the ValueAct Note. In addition, Mandalay and ValueAct entered into an allonge to each of those certain warrants issued to ValueAct in connection with the Merger, which, among other things, amended the exercise price of each of the warrants to $4.00 per share.

On October 23, 2008, Mandalay entered into a Securities Purchase Agreement with certain investors identified therein (the “Investors”), pursuant to which Mandalay agreed to sell to the Investors in a private offering an aggregate of 1,685,394 shares of Common Stock and warrants to purchase 842,697 shares of common stock for gross proceeds to Mandalay of $4,500,000. The warrants have a five year term and an exercise price of $2.67 per share. The funds were held in an escrow account pursuant to an Escrow Agreement, dated October 23, 2008 and were released to Mandalay on or about November 8, 2008.

The Merger and the AMV Acquisition both included the issuance of common stock as all or part of the consideration. Based on the trading price of the common stock as of the acquisition dates, the total consideration was approximately $67.5 million for the Merger and approximately $22.2 million for the AMV Acquisition. Subsequent to the Merger and the AMV Acquisition, the average trading price of the Common Stock has decreased significantly. If the decrease in trading price is deemed to “not be temporary in nature”, management expects that an impairment of goodwill and other long lived intangible assets could occur by year end. Other factors affecting management’s estimate of impairment include the current profitability and expected future cash flows from the acquired business.

Overview
 
From February 12, 2008 to October 23, 2008, our operations were those of our wholly-owned subsidiary, Twistbox. 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 over 40 countries representing more than one billion subscribers. Operating since 2003, Twistbox has developed an intellectual property portfolio unique to its target demographic (18 to 35 year old) that includes worldwide exclusive (or territory exclusive) 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 over 1,500 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 leveraged its brand portfolio and platform to secure “direct” distribution agreements with the largest mobile operators in the world, including, among others, AT&T, Hutchinson 3G, O2, MTS, Orange, T-Mobile, Telefonica, Verizon and Vodafone. Twistbox has experienced annual revenue growth in excess of 50% over the past two years and expects to become one of the leading players in the rapidly-growing, multibillion-dollar mobile entertainment market.
 
Twistbox maintains a worldwide distribution agreement with Vodafone. Through this relationship, Twistbox serves as Vodafone’s exclusive supplier of late night content, a portion of which is age-verified. Additionally, Twistbox is one of the select few content aggregators for Vodafone. Twistbox aggregates content from leading entertainment companies and manages distribution of this content to Vodafone. Additionally, Twistbox maintains distribution agreements with other leading mobile network operators throughout the North American, European, and Asia-Pacific regions that include Verizon, Virgin Mobile, T-Mobile, Telefonica, Hutchinson 3G, Three, O2 and Orange.
 
Twistbox’s intellectual property encompasses over 75 worldwide exclusive or territory exclusive content licensing agreements that cover all of its key content genres including lifestyle, glamour, and celebrity news and gossip for U.S. Hispanic and Latin American markets, poker news and information, late night entertainment and casual games.
 
Twistbox currently has content live on more than 100 network operators in 40 countries. Through these relationships, Twistbox can currently reach over one billion mobile subscribers worldwide. Its existing content portfolio includes 300 WAP sites, 250 games and 66 mobile TV channels.
 
In addition to its content publishing business, Twistbox operates a rapidly growing suite of premium short message service (Premium SMS) services that include text and video chat and web2mobile marketing services of video, images and games that are promoted through on-line, magazine and TV affiliates. The Premium SMS infrastructure essentially allows end consumers of Twistbox content to pay for their content purchases directly from their mobile phone bills.
 
27

 
Twistbox’s end-users are the highly-mobile, digitally-aware 18 to 35 year old demographic. This group is a major consumer of digital entertainment services and commands significant amounts of disposable income. In addition, this group is very focused on consumer lifestyle brands and is much sought after by advertisers.

Beginning October 23, 2008, our operations included those of our wholly-owned subsidiary, AMV Holding Limited (“AMV”).  AMV is a 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 including Bling, Phonebar and GameZone through a unique Customer Relationship Management (CRM) platform that drives revenue through mobile internet, print and television advertising.

AMV’s direct-to-consumer “off-deck” distribution channels allow us to market AMV’s products and services directly to end-users using a suite a premium short message service (Premium SMS) codes.  The use of Premium SMS codes allows end-users to pay for AMV products and services directly from their mobile phone bills via a third party billing aggregator versus through the wireless carrier’s billing infrastructure with which the end-user has his/her mobile service.  Through this channel, AMV is not reliant upon the wireless carrier’s “on-deck” portal for discovery and billing thereby giving AMV greater flexibility to reach the end-user.  AMV’s strategy is to expand its international distribution footprint using a defined set of criteria: identifying territories that provide ease of access to market; established mobile billing capabilities; a receptive market and audience to mobile content; and the potential to establish long-term, profitable market share.  AMV currently markets it products and services in the following territories: the United Kingdom, Ireland, Australia, South Africa, The Netherlands, Finland, Sweden, Austria, Switzerland and the Czech Republic.  Launched in 2004, it is headquartered in the United Kingdom.  In 2007, it was recognized as the United Kingdom’s fourth fastest growing technology company by the Micosoft Tech Track 100.  AMV is comprised of three primary lines of business: (i) mobile content services, such as wallpapers, animations, video, games and ringtones; (ii) mobile interactive and community services such as text dating and adult oriented text chatting; and (iii) voice interactive services such as virtual chat, live infotainment services (e.g., horoscopes and psychic readings) and adult oriented voice services.

AMV develops its own consumer brands by extensively marketing its products and services through a variety of media including traditional print, television, internet and mobile internet advertising.   It is also expanding its internet advertising activities through web affiliates, search and targeted landing pages.  AMV also has established partnerships will several web application protocol (WAP) advertising affiliates.  As carriers begin to open their portals for advertising distribution, WAP advertising is becoming a significant distribution channel for AMV advertising.  AMV is well positioned to take advantage of the internet advertising inventory through the use of mobile search and its WAP affiliate relationships.  AMV has established such relationships with Google, Yahoo, Admob, Admoda, 4th Screen, AdInfuse, and many others.  Google has recently confirmed that AMV is one of its 10 largest mobile internet advertisers – globally.

All AMV advertising is produced in-house using a team of highly skilled creative graphic designers.  AMV is one of the largest print advertisers in the United Kingdom and South Africa, and is considered a significant advertiser in several other markets.  AMV has historically spent a significant amount of its working capital on advertising and intends to continue do so in the foreseeable future.

AMV offers a complete suite of mobile entertainment products and services.  In addition to its three primary lines of business, AMV has significant experience in WAP site management — from content sourcing through design, marketing and distribution.  AMV maintains a mobile internet portal of over 200 different sites which are refreshed regularly and AMV is one of the largest direct-to-consumer marketers of Java-based games through its Game Zone and Games Demon brands.  AMV has secured a catalog of more than 2000 Java-based games.   AMV’s end-users are the highly-mobile, digitally-aware 18 to 35 year old demographic. This group is a major consumer of digital entertainment services and commands significant amounts of disposable income.

 
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RESULTS OF OPERATIONS

   
Year ended
   
3 months ended
   
12 months ended
   
Year ended
 
   
March 31,
   
March 31,
   
March 31,
   
December 31,
 
   
2009
   
2008
   
2008
   
2007
 
               
(unaudited)
       
                         
Revenues
  $ 31,256     $ 3,208     $ 3,208     $ -  
Cost of revenues
    11,150       (153 )     (153 )     -  
                                 
Gross profit
    20,106       3,361       3,361       -  
SG&A
    26,555       3,304       5,561       2,521  
Amortization of intangible assets
    628       72       72       -  
Restructuring charges
    -       -       -       -  
Impairment of goodwill
    31,784       -       -       -  
 
                               
Operating income (loss)
    (38,861 )     (15 )     (2,272 )     (2,521 )
Interest expense, net
    (2,161 )     (213 )     104       317  
Other expenses
    (542 )     (54 )     (54 )     -  
 
                               
(Loss) before income taxes
    (41,564 )     (282 )     (2,222 )     (2,204 )
Income taxes (benefit)
    111       (16 )     (16 )     -  
 
                               
(Loss) from continuing operations
    (41,453 )     (298 )     (2,238 )     (2,204 )
(Loss) from discontinued operations, net of taxes
    (147 )     -       -       -  
 
                               
Net (loss)
  $ (41,600 )   $ (298 )   $ (2,238 )   $ (2,204 )
                                 
Basic and Diluted net loss per common share:
                               
 Continuing operations
  $ (1.14 )   $ (0.01 )   $ (0.10 )   $ (0.12 )
 Discontinued opeations
  $ (0.00 )   $ -     $ -     $ -  
 Net loss
  $ (1.15 )   $ (0.01 )   $ (0.10 )   $ (0.12 )
Basic and Diluted weighted average shares outstanding
    36,264       21,628       21,628       18,997  

Comparison of the Year Ended March 31, 2009 and the Year Ended March 31, 2008  

Revenues

   
Year Ended March 31,
 
   
2009
   
2008
 
         
(unaudited)
 
   
(In thousands)
 
             
Revenues by type:
           
             
Games
  $ 5,736     $ 598  
Other content
    25,520       2,610  
                 
Total
    31,256       3,208  

Games revenue includes both licensed and internally developed games for use on mobile phones. Other content includes a broad range of  products delivered in the form of WAP, Video, Wallpaper and Mobile TV.  Revenues in fiscal 2008 includes the revenues of Twistbox subsequent to the Merger, while revenues in fiscal 2009 include the full year of Twistbox and  the six month period for AMV subsequent to the AMV Acquisition.

 
29

 
 
Cost of Revenues

   
Year Ended March 31,
 
   
2009
   
2008
 
         
(unaudited)
 
   
(In thousands)
 
             
Cost of Revenues:
           
             
License Fees
  $ 7,387     $ 1,539  
Impairment of guarantees
    -       (1,745 )
Other direct cost of revenues
    3,763       53  
                 
Total Cost of Revenues
  $ 11,150     $ (153 )
                 
Revenues
  $ 31,256     $ 3,208  
                 
Gross Margin
    64.3 %     N/A  

License fees represent costs payable to content providers for use of their intellectual property in products sold. Other direct cost of revenues includes costs to deliver products, and amortization of the intangibles identified as part of the purchase price accounting and attributed to cost of revenues. Cost of Revenues in fiscal 2008 includes the revenues of Twistbox subsequent to the Merger, while cost of revenues in fiscal 2009 includes the full year of Twistbox and the six month period for AMV subsequent to the AMV Acquisition. The impairment of guarantees in fiscal 2008 represents an adjustment to the impairment charge in the previous year, as the result of re-negotiation of a significant content provider contract.

Operating Expenses

   
Year Ended March 31,
 
   
2009
   
2008
 
         
(unaudited)
 
   
(In thousands)
 
             
Product Development Expenses
  $ 6,981     $ 946  
                 
Sales and Marketing Expenses
    9,236       891  
                 
General and Administrative Expenses
    10,338       3,724  
                 
Amortization of Intangible Assets
    628       72  
                 
Impairment of goodwill and intangible assets
    31,784       -  

Operating expenses in fiscal 2008 includes the full year of general and administrative expenses for Mandalay, and expenses for Twistbox subsequent to the February 2008 Merger; while operating expenses in fiscal 2009 includes the full year of Mandalay and Twistbox and the six month period for AMV subsequent to the AMV Acquisition.
 
Product Development expenses include the costs to develop, edit and make content ready for consumption on a mobile phone. Sales and Marketing Expenses represent the costs of sales and marketing personnel, and advertising and marketing campaigns – advertising has increased significantly with the AMV Acquisition in October 2008 due to the “direct to consumer” nature of that business, with a significant element of direct marketing required to stimulate revenues.   The fiscal 2008 general and administrative expenses represent primarily personnel, professional and consulting costs incurred by Mandalay including stock based compensation, while the fiscal 2009 include the full year of such expenses for Twistbox and the six month period for AMV subsequent to the AMV Acquisition, including management and support personnel costs in both companies and related expenses.
 
Amortization of intangibles represents amortization of the intangibles identified as part of the purchase price accounting related to both acquisitions and attributed to operating expenses.
 
30

 
Impairment of goodwill and intangible assets represents the write down in value of goodwill and intangible assets associated with the acquisitions of Twistbox and AMV. The consideration in the Twistbox acquisitions was entirely stock-based, while the AMV Acquisition was substantially stock-based, and both acquisitions generated significant goodwill since they were not capital intensive companies.  Subsequent to the acquisitions, the Company experienced a significant and continued decline in the market value of its common stock, which resulted in the Company’s market capitalization falling below its net book value. The Company performed its annual impairment review for goodwill and 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; therefore, the Company recorded an impairment charge of $27,844 to write down goodwill and $3,940 to write down intangibles assets. The intangible asset impaired was the valuation associated with the Twistbox trademark/tradename.
 
Other Expenses
 
   
Year Ended March 31,
 
   
2009
   
2008
 
         
(unaudited)
 
   
(In thousands)
 
             
Interest and other income/(expense)
  $ (2,703 )   $ 50  
                 
Loss from discontinued operations, net of taxes
  $ (147 )   $ -  

Interest and other expense in fiscal 2009 consists primarily of net interest expense of $2 million related to the ValueAct Note, and $471,000 of foreign exchange loss mainly due to adverse fluctuations during the year in the value of the Euro and the British pound against the US dollar. In fiscal 2008, interest and other income represents interest income on cash invested by Mandalay.

Comparison of the Year Ended March 31, 2008 and the Year Ended December 31, 2007

Revenues

   
Year Ended
   
Year Ended
 
   
March 31,
   
December 31,
 
   
2008
   
2007
 
   
(unaudited)
       
   
(In thousands)
 
             
Revenues by type:
           
             
Games
  $ 598     $ -  
Other content
    2,610       -  
                 
Total
  3,208       -  

The Company had no operating activities that generated revenue prior to the Merger, and therefore in the year ended December 31, 2007 revenue was zero. Revenues in the year ended March 31, 2008 relate to the revenues of Twistbox subsequent to the Merger. Games revenue includes both licensed and internally developed games for use on mobile phones. Other content includes a broad range of product delivered in the form of WAP, Video, Wallpaper and Mobile TV.
 
31


   
Year Ended
March 31,
   
Year Ended
December 31,
 
   
2008
   
2007
 
   
(unaudited)
       
   
(In thousands)
 
             
Cost of Revenues:
           
             
License Fees
  $ 1,539     $ -  
Impairment of guarantees
    (1,745 )     -  
Other direct cost of revenues
    53       -  
                 
Total Cost of Revenues
  $ (153 )   $ -  
                 
Revenues
    3,208     $ -  
                 
Gross Margin
    N/A       N/A  

The Company had no operating activities that generated revenue , and therefore cost of revenues, prior to the Merger, and therefore in the year ended December 31, 2007 cost of revenue was zero. Cost of revenues in the year ended March 31, 2008 relate to the revenues of Twistbox subsequent to the Merger. License fees represent costs payable to content providers for use of their intellectual property in products sold. Other direct cost of revenues includes costs to deliver products, and amortization of the intangibles identified as part of the purchase price accounting and attributed to cost of revenues. The impairment of guarantees in fiscal 2008 represents an adjustment to the impairment charge in the previous year, as the result of re-negotiation of a significant content provider contract.
 
Operating Expenses
 
   
Year Ended
March 31,
   
Year Ended
December 31,
 
   
2008
   
2007
 
   
(unaudited)
       
   
(In thousands)
 
             
Product Development Expenses
  $ 946     $ -  
                 
Sales and Marketing Expenses
    891       -  
                 
General and Administrative Expenses
    3,724       2,521  
                 
Amortization of Intangible Assets
    72       -  

Operating expenses in the year ended December 31, 2007 consist solely of the general and administrative expenses incurred by Mandalay prior to the acquisition of operating subsidiaries. Fiscal 2008 includes the full year of general and administrative expenses for Mandalay, and expenses for Twistbox subsequent to the Merger.
 
Product Development expenses include the costs to develop, edit and make content ready for consumption on a mobile phone. Sales and Marketing Expenses represent the costs of sales and marketing personnel – in the case of Twistbox this is primarily directed towards “selling in” product to the large mobile phone carriers.  In the year ended December 31, 2007general and administrative expenses represent primarily personnel, professional and consulting costs incurred by Mandalay including stock based compensation, while the fiscal 2008 expense includes Twistbox for the period subsequent to the Merger, including management and support personnel costs and related expenses.
 
Amortization of intangibles represents amortization of the intangibles identified as part of the purchase price accounting related to the Merger and attributed to operating expenses.

 
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Other Expenses

   
Year Ended
March 31,
   
Year Ended
December 31,
 
   
2008
   
2007
 
   
(unaudited)
       
   
(In thousands)
 
             
Interest and other income/(expense)
  $ 50     $ 317  

Interest and other income/(expense) includes interest income on invested funds, interest expense related to the ValueAct Note, and foreign exchange transaction gains and losses.

Liquidity and Capital Resources

   
Year Ended
   
3 Months
   
Year Ended
 
   
March 31,
   
March 31,
   
December 31,
 
   
2009
   
2008
   
2007
 
         
(In thousands)
       
                   
Consolidated Statement of Cash Flows Data:
                 
                   
Capital expenditures
    (219 )     (103 )     -  
Cash flows used in operating activities
    (5,360 )     (2,482 )     (819 )
Cash flows (used in)/ provided by investing activities
    (3,773 )     6,152       (141 )
Cash flows (used in)/ provided by financing activities
    4,300       -       2,473  
 
Cash flows in the periods presented were impacted by ongoing operating losses and the acquisition of the two subsidiaries.
Twistbox has incurred losses and negative cash flows since inception. The primary sources of liquidity have historically been issuance of common and preferred stock, and in the case of Twistbox, borrowings under credit facilities. In the future, we anticipate that our primary sources of liquidity will be cash generated by our operating activities.

Operating Activities

In the year ended December 31, 2007, operating expenses consisted solely of employee compensation and other general and administrative expenses. In the three months ended March 31, 2008, we used $2.5 million of net cash in operating expenses. This primarily related to the net loss of $0.3 million, decreases in accrued license fees and other liabilities of  $2.0 million and $0.1 million respectively, increases in accounts receivable of $1.4 million, partially offset by an increase in accounts payable of $0.4 million and non cash stock based compensation and depreciation and amortization included in the net loss of  $0.3 million and $0.3 million respectively, and increases in other liabilities.
 
In the year ended March 31, 2009,  we used $5.4 million of net cash in operating activities. This primarily related to the net loss of $41.4 million, and decreases in accounts payable and other liabilities amounting to $4.6 million, an increase in prepaid expenses of $0.3 million, offset by the non cash impairment of goodwill of $31.8 million, non cash stock based compensation and depreciation and amortization included in the net loss of $3.1 million and $1.5 million respectively, as well as a decrease in accounts receivable of $4.5 million.
 
Investing Activities

In the year ended December 31, 2007, $141,000 was used in transaction costs leading up to the Merger. The Merger occurred in the three months ended March 31, 2008 and a net $6.2 million was provided through cash in the acquired subsidiary. In the year ended March 31, 2009 a net $3.8 million was used in investing activities - $6.9 million in cash consideration and transaction costs related to the AMV Acquisition, $0.2 in equipment purchases, offset by $3.4 million of cash in the acquired subsidiary.

Financing Activities

Proceeds from issuing common stock represented $2.5 million in the year ended December 31, 2007 and $4.3 million in the year ended March 31, 2009.

 
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The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles, which contemplates the continuation of the Company as a going concern.  The Company’s operating subsidiary, Twistbox, has sustained substantial operating losses since commencement of operations.  In addition, the Company has incurred negative cash flows from operating activities and the majority of the Company’s assets are intangible assets and goodwill.

As of March 31, 2009, the Company had approximately $5.9 million of cash, and the Company is seeking to restructure its debt, in particular debt which becomes payable within 12 months.  The Company’s cash requirements will be dependent on that restructuring, as well as actions taken to improve cashflow. As a result, we may require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If these sources are insufficient to satisfy our cash requirements, we may seek to sell additional debt securities or additional equity securities or to obtain a credit facility. The sale of convertible debt securities or additional equity securities could result in additional dilution to our stockholders. The incurrence of increased indebtedness would result in additional debt service obligations and could result in additional operating and financial covenants that would restrict our operations. In addition, there can be no assurance that any additional financing will be available on acceptable terms, if at all.

Debt obligations include interest payments under the ValueAct Note, payable at the end of the term, in January 2010. As described above, the ValueAct Note was amended during fiscal 2009 such that the Company may elect to add interest to the principal, with the full amount payable at the end of the term. The Company’s operating lease obligations include noncancelable operating leases for the Company’s office facilities in several locations, expiring in various years through 2010. Twistbox has entered into license agreements with various owners of brands and other intellectual property so that we could develop and publish branded products for mobile handsets. Pursuant to some of these agreements, we are required to pay minimum royalties over the term of the agreements regardless of actual sales.

Off-Balance Sheet Arrangements
 
We do not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not have any undisclosed borrowings or debt, and we have not entered into any synthetic leases. We are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Stock Sales and Liquidity
 
On August 3, 2006, we increased our authorized shares of common stock from 19,000,000 to 100,000,000 and authorized and effectuated a 2.5 to 1 stock split of our common stock to increase our outstanding shares from 4,000,000 to 10,000,000. All share and per share amounts have been retroactively adjusted to reflect the effect of the stock split.
 
On September 14, 2006, we sold 2,800,000 units; on October 12, 2006, we sold 3,400,000 units; and on December 26, 2006, we sold 530,000 units. Each unit sold, at a price per unit of $1.00, consisted of one share of our common stock and one warrant to purchase one share of our common stock. We realized net proceeds of $6,057,000 after the costs of the offering. The warrants have an exercise price of $2.00 per share and expire as follows: 2,800,000 warrants expire in September 2008, 3,400,000 warrants expire in October 2008, and 530,000 warrants expired in December 2008.
 
On October 12, 2006, we entered into a Series A Convertible Preferred Stock Purchase Agreement with Trinad Management, LLC (“Trinad Management”). Pursuant to the terms of the agreement, Trinad Management purchased 100,000 shares of our Series A Convertible Preferred Stock, par value $ 0.0001 per share (“Series A Preferred Stock”), for an aggregate purchase price of $100,000. Series A Preferred stockholders are entitled to convert, at their option, all or any shares of the Series A Preferred Stock into the number of fully paid and non-assessable shares of common stock equal to the number obtained by dividing the original purchase price of such Series A Preferred Stock, 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. The fair value of the 100,000 shares of our common stock underlying the Series A Convertible Preferred Stock was $1.425 per share at the date of grant. Since the value was $0.425 lower than the fair value of our common stock on October 12, 2006, the $42,500 intrinsic value of the conversion option resulted in the reduction of stockholders’ equity for the recognition of a preferred stock dividend and an increase to additional paid-in capital.
 
On July 24, 2007, we entered into a Subscription Agreement with certain investors, pursuant to which such investors agreed to subscribe for an aggregate of 5,000,000 shares of our common stock. Each share of common stock was sold at the price of $0.50, for an aggregate purchase price of $2,500,000.

In September, October and December 2007, warrants to purchase 625,000 shares of common stock were exercised in a cashless exchange for 239,000 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.
 
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On November 7, 2007, we entered into non-qualified stock option agreements with certain of our directors and officers pursuant to our 2007 Employee, Director and Consultant Stock Plan, as amended (the “Plan”), whereby we issued options to purchase an aggregate of 1,500,000 shares of our common stock. The directors and officers included James Lefkowitz, President of the Company, Robert Zangrillo, a former director of the Company, and Bruce Stein, a former director of the Company and our former Chief Executive Officer as of March 7, 2008, each of whom was granted an option to purchase 500,000 shares in connection with services provided to the Company. The options have a ten-year term and are exercisable at a price of $2.65 per share. On November 14, 2007, we entered into a non-qualified stock option agreement with Richard Spitz, a director of the Company, whereby we issued an option to purchase 100,000 shares of its common stock.  The options granted to Mr. Spitz have a ten-year term and are exercisable at a price of $2.50 per share. The options for Messrs. Zangrillo, Stein and Spitz become exercisable over a two-year period, with one-third of the options granted vesting immediately upon grant, an additional one-third vesting on the first anniversary thereafter and the remaining one-third on the second anniversary thereafter. The options for Mr. Lefkowitz also become exercisable over a two-year period, with one-third of the options granted vesting immediately upon grant, an additional one-third vesting on June 28, 2008 and the remainder vesting on June 28, 2009. The options were granted pursuant to the exemption from registration permitted under Rule 506 of Regulation D of the Securities Act of 1933, as amended (the “Securities Act”).
 
On January 2, 2008, we granted Mr. Stein additional options to purchase 50,000 shares of our common stock. The options have a ten-year term and are exercisable at a price of $4.65 per share. One-third of the options granted were immediately exercisable upon grant, an additional one-third will vest on November 7, 2008 and the remaining one-third will vest on November 7, 2009. The options were granted pursuant to the exemption from registration permitted under Rule 506 of Regulation D of the Securities Act.
 
As described above, pursuant to the Merger, we issued 10,180,292 shares of Mandalay common stock as part of the merger consideration in connection with the Merger. Such issuance was made pursuant to the exemption from registration permitted under Section 4(2) of the Securities Act.
 
In addition, also in connection with the Merger, on February 12, 2008, we entered into non-qualified stock option agreements with certain of our directors and officers under the Plan whereby we issued options to purchase an aggregate of 1,700,000 shares of our common stock to Ian Aaron, Chief Executive Officer of Twistbox and a director of the Company, Russell Burke, Chief Financial Officer of Twistbox and the Company, David Mandell, Executive Vice-President, General Counsel and Corporate Secretary of Twistbox and Patrick Dodd, Senior Vice of Worldwide Sales and Marketing of Twistbox, each of whom received an option to purchase 600,000 shares, 350,000 shares, 450,000 shares and 300,000 shares, respectively, of our common stock. The options have a ten-year term and are exercisable at a price of $4.75 per share. The options become exercisable over a two-year period, with one-third of the options granted vesting immediately upon grant, an additional one-third vesting on the first anniversary of the date of grant, and the remaining one-third on the second anniversary of the date of grant. The options were granted pursuant to the exemption from registration permitted under Rule 506 of Regulation D of the Securities Act.
 
On March 7, 2008, the Company granted Mr. Stein options to purchase an aggregate of 1,001,864 shares of common stock, pursuant to the 2007 Plan, in connection with an amendment to his employment agreement. The options have a ten-year term and are exercisable at a price of $4.25 per share. The options vest as follows: options to purchase 233,830 shares will vest on March 7, 2009, options to purchase 233,830 shares will vest on March 7, 2010 and Options to purchase the remaining 534,204 shares will vest on March 7, 2011. The options were granted pursuant to the exemption from registration permitted under Rule 506 of Regulation D of the Securities Act.

On April 9, 2008 a former director of the Company exercised warrants to purchase 50,000 shares of common stock in a cashless exchange for 25,000 shares of the Company’s common stock.
 
In April and June 2008, warrants to purchase 350,000 shares of common stock were exercised in a cashless exchange for 217,000 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 1,500,000 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 the remaining one-third vesting on the second anniversary of the date of grant.

On September 29, 2008, the Company granted non-qualified stock options to purchase 350,000 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.

As described above, pursuant to the AMV Acquisition, on October 23, 2008, we entered into a Securities Purchase Agreement with certain investors identified therein, pursuant to which Mandalay agreed to sell to the Investors in a private offering an aggregate of 1,685,394 shares of common stock and warrants to purchase 842,697 shares of common stock for gross proceeds to the Company of $4,500,000. The warrants have a five year term and an exercise price of $2.67 per share. The funds were held in an escrow account pursuant to an Escrow Agreement, dated October 23, 2008 and were released to Mandalay on or about November 8, 2008.
 
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Also as described above, in connection with the AMV Acquisition, on October 23, 2008, Mandalay and ValueAct entered into an allonge to each of those certain warrants issued to ValueAct in connection with the Merger, which, among other things, amended the exercise price of each of the warrants to $4.00 per share.

In October 2008, warrants to purchase 2,300,000 shares of common stock were exercised in a cashless exchange for 286,000 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, certain executive officers of Mandalay, including, among others, Mr. Lefkowitz, Mr. Burke and Mr. Aaronand other senior employees (the "Executives") agreed to reduce their salaries for a period of one year, with the exception of Mr. Aaron who agreed to reduce his salary from August 8, 2008 through February 12, 2010, in exchange for the issuance of shares (the “Shares”) of the Company's common stock. The Board of Directors approved the issuance of the Shares pursuant to the Plan at a purchase price of $0.0001 per share in connection with such salary reductions. The Board of Directors authorized the issuance of an aggregate of 938,697 Shares as of the date each such Executive agrees to the salary reduction (the “Grant Date”). In connection therewith, on March 16, 2009, the Board of Directors granted Mr. Lefkowitz 37,500 Shares, Mr. Burke 48,000 Shares and Mr. Aaron 504,218 Shares. The Shares granted to Mr. Lefkowitz and Mr. Burke and 350,360 of the Shares granted to Mr. Aaron 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. The remainder of Mr. Aaron's shares were fully vested on the Grant Date. All such Shares granted to the Executives may not be sold or transferred for a period of one year from the Grant Date.

Revenues
 
The discussion herein regarding our future operations pertain to the results and operations of Twistbox and AMV. Twistbox has historically generated and expects to continue to generate the vast majority of its revenues from mobile phone carriers that market and distribute its content. These carriers generally charge a one-time purchase fee or a monthly subscription fee on their subscribers’ phone bills when the subscribers download Twistbox’s games to their mobile phones. The carriers perform the billing and collection functions and generally remit to Twistbox a contractual percentage of their collected fee for each game. Twistbox recognizes as revenues the percentage of the fees due to it from the carrier. End users may also initiate the purchase of Twistbox’s games through various Internet portal sites or through other delivery mechanisms, with carriers or third parties being responsible for billing, collecting and remitting to Twistbox a portion of their fees. To date, Twistbox’s international revenues have been much more significant than its domestic revenues.

AMV operates a direct-to-consumer marketing model for distribution of its mobile content portfolio, ranging from Java Games to Videos. AMV’s revenue model relies on its efficient and effective management of marketing distribution channels such as print advertising, mobile internet advertising (i.e., WAP affiliates, Google Mobile, Yahoo, etc.), web advertising and traditional television advertising.  It also utilizes its proprietary CRM platform for sending promotions to its existing customer database. AMV relies on the margin it generates from this marketing activity for the majority of its revenues. Revenues are also derived from on-going billing relationships with consumers, primarily via content subscription services.  In its interactive division, revenues are derived from consumers’ usage of mobile chat, flirt and dating services, through mobile-based billing aggregators.  Revenues are generated from billing of consumers through mobile network charging, which is typically via the use of Premium SMS, or WAP-based billing (e.g., Pay-For-It).
 
We believe that improving quality and greater availability of 2.5 and 3G handsets is in turn encouraging consumer awareness and demand for high quality content on their mobile devices. At the same time, carriers and branded content owners are focusing on a small group of publishers that have the ability to provide high-quality mobile content consistently and port it rapidly and cost-effectively to a wide variety of handsets. Additionally, branded content owners are seeking publishers that have the ability to distribute content globally through relationships with most or all of the major carriers. We believe Twistbox has created the requisite development and porting technology and has achieved the scale to operate at this level. We also believe that leveraging carrier and content owner relationships will allow us to grow our revenues without corresponding percentage growth in our infrastructure and operating costs. Our revenue growth rate will depend significantly on continued growth in the mobile content market and our ability to leverage our distribution and content relationships, as well as to continue to expand. Our ability to attain profitability will be affected by the extent to which we must incur additional expenses to expand our sales, marketing, development, and general and administrative capabilities to grow our business. The largest component of our expenses is personnel costs. Personnel costs consist of salaries, benefits and incentive compensation, including bonuses and stock-based compensation, for our employees. Our operating expenses will continue to grow in absolute dollars, assuming our revenues continue to grow. As a percentage of revenues, we expect these expenses to decrease.
 
Many new mobile handset models are released in the fourth calendar quarter to coincide with the holiday shopping season. Because many end users download our content soon after they purchase new handsets, we may experience seasonal sales increases based on this key holiday selling period. However, due to the time between handset purchases and content purchases, much of this holiday impact may occur in our March quarter. For a variety of reasons, we may experience seasonal sales decreases during the summer, particularly in Europe, which is predominantly reflected in our September quarter. In addition to these possible seasonal patterns, our revenues may be impacted by new or changed carrier deals, and by changes in the manner that our major carrier partners marketing our content on their deck. Initial spikes in revenues as a result of successful launches or campaigns may create further aberrations in our revenue patterns.
 
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Cost of Revenues
 
Twistbox’s cost of revenues historically, and our cost of revenues going forward, consists primarily of royalties that we pay to content owners from which we license brands and other intellectual property. In addition, certain other direct costs such as quality assurance (“QA”) and use of short codes are included in cost of revenues. Our cost of revenues also includes noncash expenses—amortization of certain acquired intangible assets, and any impairment of guarantees. We generally do not pay advance royalties to licensors. Where we acquire rights in perpetuity or for a specific time period without revenue share or additional fees, we record the payments made to content owners as prepaid royalties on our balance sheet when payment is made to the licensor. We recognize royalties in cost of revenues based upon the revenues derived from the relevant game multiplied by the applicable royalty rate. If applicable, we will record an impairment of prepaid royalties or accrue for future guaranteed royalties that are in excess of anticipated recoupment. At each balance sheet date, we perform a detailed review of prepaid royalties and guarantees that considers multiple factors, including forecasted demand, anticipated share for specific content providers, development and launch plans, and current and anticipated sales levels. We expense the costs for development of our content prior to technological feasibility as we incur them throughout the development process, and we include these costs in product development expenses.
 
AMV’s cost of revenues consist of  license fees paid to content owners for use of their intellectual property, and the costs of distributing content via the mobile networks, which may be significant.
 
Gross Margin
 
Our gross margin going forward will be determined principally by the mix of content that we deliver, and the costs of distribution. Our games based on licensed intellectual property require us to pay royalties to the licensor and the royalty rates in our licenses vary significantly. Our own in-house developed games, which are based on our own intellectual property, require no royalty payments to licensors. For late night business, branded content requires royalty payment to the licensors, generally on a revenue share basis, while for acquired content we amortize the cost against revenues, and this will generally result in a lower cost associated with it. There are multiple internal and external factors that affect the mix of revenues between games and late night content, and among licensed, developed and acquired content within those categories, including the overall number of licensed games and developed games available for sale during a particular period, the extent of our and our carriers’ marketing efforts for each type of content, and the deck placement of content on our carriers’ mobile handsets. We believe the success of any individual game during a particular period is affected by the recognizability of the title, its quality, its marketing and media exposure, its overall acceptance by end users and the availability of competitive games. In the case of Play for Prizes games, this is further impacted by its suitability to “tournament” play and the prizes available. For other content, we believe that success is driven by the carrier’s deck placement, the rating of the content, by quality and by brand recognition. If our product mix shifts more to licensed games or games with higher royalty rates, our gross margin would decline. For other content as we increase scale, we believe that we will have the opportunity to move the mix towards higher margin acquired product. Our gross margin is also affected by direct costs such as charges for mobile phone short codes, and QA, and by periodic charges for impairment of intangible assets and of prepaid royalties and guarantees. These charges can cause gross margin variations, particularly from quarter to quarter.
 
Operating Expenses
 
Our operating expenses going forward will primarily include product development expenses, sales and marketing expenses and general and administrative expenses. Our product development expenses consist primarily of salaries and benefits for employees working on creating, developing, editing, programming, porting, quality assurance, carrier certification and deployment of our content, on technologies related to interoperating with our various mobile phone carriers and on our internal platforms, payments to third parties for developing our content, and allocated facilities costs. We devote substantial resources to the development, supporting technologies, porting and quality assurance of our content. We believe that developing games internally through our own development studios allows us to increase operating margins, leverage the technology we have developed and better control game delivery. Games development may encompass development of a game from concept through deployment or adaptation or rebranding of an existing game. For acquired content, typically we will receive content from our licensors which must be edited for mobile phone users, combined with other appropriate content, and packaged for end consumers. The process is made more complex by the need to deliver content on multiple carriers platforms and across a large number of different handsets.
 
Sales and Marketing.   Sales and marketing expenses historically, and our sales and marketing expenses going forward, will consist primarily of salaries, benefits and incentive compensation for sales, business development, project management and marketing personnel, expenses for advertising, trade shows, public relations and other promotional and marketing activities, expenses for general business development activities, travel and entertainment expenses and allocated facilities costs. We expect sales and marketing expenses to increase in absolute terms with the growth of our business and as we further promote our content and expand our carrier network.
  
General and Administrative.  Our general and administrative expenses historically, and going forward, will consist primarily of salaries and benefits for general and administrative personnel, consulting fees, legal, accounting and other professional fees, information technology costs and allocated facilities costs. We expect that general and administrative expenses will increase in absolute terms as we hire additional personnel and incur costs related to the anticipated growth of our business and our operation as a public company. We also expect that these expenses will increase because of the additional costs to comply with the Sarbanes-Oxley Act and related regulation, our efforts to expand our international operations and, in the near term, additional accounting costs related to our operation as a public company.
 
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Amortization of Intangible Assets. We will record amortization of acquired intangible assets that are directly related to revenue-generating activities as part of our cost of revenues and amortization of the remaining acquired intangible assets, such as customer lists and platform, as part of our operating expenses. We will record intangible assets on our balance sheet based upon their fair value at the time they are acquired. We will determine the fair value of the intangible assets using a contribution approach. We will amortize the amortizable intangible assets using the straight-line method over their estimated useful lives of three to five years.
 
Estimates and Assumptions
 
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
 
Income Taxes
 
We provide for deferred income taxes using the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and the tax effect of net operating loss carry-forwards. A valuation allowance has been provided as it is more likely than not that the deferred assets will not be realized.
 
Recent Accounting Pronouncements
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). This statement clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures on fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 157 is not expected to have a material effect on our consolidated results of operations or financial condition.
 
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities, including an amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 permits entities to choose, at specified election dates, to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Unrealized gains and losses shall be reported on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157 “Fair Value Measurements”. We are currently assessing the impact that SFAS No. 159 will have on our financial statements.
 
            In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No. 160”), which is an amendment of Accounting Research Bulletin (“ARB”) No. 51.  This statement clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements.  This statement changes the way the consolidated income statement is presented, thus requiring consolidated net income to be reported at amounts that include the amounts attributable to both parent and the noncontrolling interest.  This statement is effective for the fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  Based on current conditions, we do not expect the adoption of SFAS No. 160 to have a significant impact on our results of operations or financial position.
 
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS No. 141).  This statement replaces FASB Statement No. 141, “Business Combinations.” This statement retains the fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS No. 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This statement defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. This statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We do not expect the adoption of SFAS No. 160 to have a significant impact on our results of operations or financial position.
 
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In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB No. 133,” (“SFAS 161”). SFAS 161 is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and hedging activities and their effects on the entity’s financial position, financial performance, and cash flows. SFAS 161 applies to all derivative instruments within the scope of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). SFAS 161 also applies to non-derivative hedging instruments and all hedged items designated and qualifying under SFAS 133. SFAS 161 is effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. SFAS 161 encourages, but does not require, comparative disclosures for periods prior to its initial adoption. The Company does not expect the adoption of SFAS 161 to have a significant impact on its results of operations or financial position.

In April 2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3, “Determination of the Useful Life of Intangible Assets”.  FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB Statement No. 142, “Goodwill and Other Intangible Assets”.  This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008.  Early adoption is prohibited.  The impact of the adoption of FSP FAS 142-3 on the Company’s results of operations and financial position will depend on the nature and extent of business combinations that it completes, if any, in or after fiscal 2010.
 
Other recently issued accounting pronouncements are not expected to have a significant impact on the companys results of operations or financial position.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate and Credit Risk
 
Our current operations have exposure to interest rate risk that relates primarily to our investment portfolio. All of our current investments are classified as cash equivalents or short-term investments and carried at cost, which approximates market value. We do not currently use or plan to use derivative financial instruments in our investment portfolio. The risk associated with fluctuating interest rates is limited to our investment portfolio, and we do not believe that a 10% change in interest rates would have a significant impact on our interest income, operating results or liquidity.
 
Currently, our cash and cash equivalents are maintained by financial institutions in the United States, Germany, the United Kingdom, Poland, Russia, Argentina and Colombia, and our current deposits are likely in excess of insured limits. We believe that the financial institutions that hold our investments are financially sound and, accordingly, minimal credit risk exists with respect to these investments. Our accounts receivable primarily relate to revenues earned from domestic and international Mobile phone carriers. We perform ongoing credit evaluations of our carriers’ financial condition but generally require no collateral from them. As of March 31, 2009, our two largest customers represented approximately 19% and 13% of our gross accounts receivable outstanding.
 
Foreign Currency Risk
 
The functional currencies of our United States and German operations are the United States Dollar, or USD, and the Euro, respectively. A significant portion of our business is conducted in currencies other than the USD or the Euro. Our revenues are usually denominated in the functional currency of the carrier. Operating expenses are usually in the local currency of the operating unit, which mitigates a portion of the exposure related to currency fluctuations. Intercompany transactions between our domestic and foreign operations are denominated in either the USD or the Euro. At month-end, foreign currency-denominated accounts receivable and intercompany balances are marked to market and unrealized gains and losses are included in other income (expense), net. Our foreign currency exchange gains and losses have been generated primarily from fluctuations in the Euro and pound sterling versus the USD and in the Euro versus the pound sterling. In the future, we may experience foreign currency exchange losses on our accounts receivable and intercompany receivables and payables. Foreign currency exchange losses could have a material adverse effect on our business, operating results and financial condition.
 
Inflation
 
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we might not be able to offset these higher costs fully through price increases. Our inability or failure to do so could harm our business, operating results and financial condition.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
The financial statements required by Item 8 are submitted in a separate section of this report, beginning on Page F-1, and are incorporated herein and made apart hereof.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

 
39

 
 
ITEM 9A (T) CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Annual Report on Form 10-K, have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
 
Management's assessment of the effectiveness of the Company's internal control over financial reporting as of March 31, 2009 excluded AMV, which was acquired by the Company in October 2008. AMV is a wholly-owned subsidiary of the Company whose total assets represented less than 30% of the consolidated total and net revenues represented less than 40% of consolidated net revenues, respectively, of the Company as of and for the year ended March 31, 2009. Companies are allowed to exclude acquisitions from their assessment of internal control over financial reporting during the first year of acquisition while integrating the acquired company under guidelines established by the SEC.
 
Changes in Controls and Procedures

There were no changes in our internal controls over financial reporting or in other factors identified in connection with the evaluation required by Exchange Act Rules 13a-15(d) or 15d-15(d) that occurred during the fiscal period ended March 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal controls over financial reporting as of March 31, 2009 based on the framework in Internal Control-Integrated Framework, published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Based on our assessment, we have concluded that our internal controls over financial reporting were effective as of March 31, 2009.

This Annual Report on Form 10-K does not include an attestation report by our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only our management’s report in this Annual Report on Form 10-K.
 
ITEM 9B. OTHER INFORMATION
 
None.  
 
PART III
  
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
The following table sets forth our directors and executive officers as of July 13, 2009:

Name
 
Age
 
Position(s)
James Lefkowitz
 
50
 
President
Russell Burke
 
49
 
Chief Financial Officer, and Senior Vice President and Chief Financial Officer of Twistbox
Ian Aaron
 
49
 
President and Chief Executive Officer of Twistbox, Director
David Mandell
 
48
 
Executive Vice President, General Counsel and Corporate Secretary of Twistbox
Adi McAbian
 
35
 
Director
Peter Guber
 
67
 
Co-Chairman
Robert S. Ellin
 
44
 
Co-Chairman
Barry I. Regenstein
 
52
 
Director
Paul Schaeffer
 
61
 
Director
Jay Wolf
 
36
 
Director
Richard Spitz
 
48
 
Director
 
 
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Biographical information for our directors and executive officers are as follows:
 
James Lefkowitz.  Mr. Lefkowitz has been our President since June 2007. He is a 20 year entertainment industry veteran with a wide range of experience in law, business, finance, film and television. Mr. Lefkowitz joined Mandalay from Cantor Fitzgerald (Cantor), where he was managing director of Cantor Entertainment. Prior to Cantor, Mr. Lefkowitz was an agent for eight years at Creative Artists Agency, the premiere talent agency in Hollywood, where he represented actors, writers and directors. He began his career as an attorney at the law firm of Manatt, Phelps, and Phillips in Los Angeles. He subsequently worked for six years as a business affairs executive at Walt Disney Studios and Touchstone Pictures. Mr. Lefkowitz is a graduate of the University of Michigan School of Business Administration and Michigan Law School.
 
Russell Burke.   Mr. Burke has served as our Chief Financial Officer since May 21, 2009 and Senior Vice President and Chief Financial Officer of Twistbox since December 2006 and is responsible for all aspects of Twistbox’s financial infrastructure including reporting and financial systems and information systems. He also has responsibility for strategic planning and for managing investor relationships. Mr. Burke was previously the Managing Director for Australia and New Zealand for Weight Watchers International, Inc, a publicly traded company. He had full responsibility for the company’s operations across those territories, and was a member of the company’s global executive committee. Prior to this, Mr. Burke served as the Senior Vice-President and Chief Financial Officer of Pressplay, a joint venture of Sony Music and Universal Music. He joined Pressplay at the start up stage and was part of a small management team which forged a viable business in the digital music arena. He was responsible for developing all financial systems and oversaw the creation of management and external reporting; as well as international business development. Additionally, he was involved in the acquisition of Pressplay by Roxio, Inc. and the subsequent re-branding and re-launching of the service as Napster. Before joining Pressplay, Mr. Burke held a number of senior financial positions at Sony Music International in Sydney (Australia), New York and London. Mr. Burke began his career with Price Waterhouse (now PricewaterhouseCoopers) in Australia, where over a period of 13 years he worked with a broad range of clients in the Los Angeles, Sydney and Newcastle (Australia) offices of Price Waterhouse, advising on business and compliance matters. Mr. Burke received a B. Comm. from the University of Newcastle (Australia).

Ian Aaron.  Mr. Aaron has been a member of our Board of Directors since February 2008 and has been the President and Chief Executive Officer of Twistbox since January 2006.   He is responsible for Twistbox’s general entertainment, games and late night business units. Mr. Aaron has over 20 years of experience in the fields of international CATV, telecom and mobile distribution and has served on the board of directors of a number of international media and technology-based companies. Prior to joining Twistbox, Mr. Aaron served as President of the TV Guide Television Group of Gemstar - TV Guide International, Inc., a NASDAQ publicly traded company that engages in the development, licensing, marketing, and distribution of products and services for TV guidance and home entertainment needs of TV viewers worldwide. From August 2000 to May 2003, Mr. Aaron served as President, Chief Executive Officer and Director of TVN Entertainment, Inc., which is the largest privately held digital content aggregation, management, distribution and services company in the United States. From October 1994 to August 2000, Mr. Aaron worked in a number of capacities, including as President and Director, with SoftNet Systems, Inc., a broadband internet service provider that was traded publicly on NASDAQ. Mr. Aaron received a B.S. in electrical engineering and a B.S. in communications from the University of Illinois.
 
David Mandell.  Mr. Mandell has served as Executive Vice President, General Counsel and Corporate Secretary of Twistbox since June 2006. Mr. Mandell is responsible for all corporate governance matters for Twistbox, including those related to all foreign and domestic subsidiaries and affiliated companies. Prior to joining Twistbox, Mr. Mandell was Senior Vice President, Business/Legal Affairs of Gemstar-TV Guide International, Inc., a NASDAQ publicly traded company that engages in the development, licensing, marketing, and distribution of products and services for TV guidance and home entertainment needs of TV viewers worldwide. From October 1998 to January 2003, Mr. Mandell served as Vice President, Business/Legal Affairs of Playboy Entertainment Group, Inc., a subsidiary of Playboy Enterprises, Inc., which owns adult film and television properties (Playboy Films, Playboy TV, Spice Networks), related home video imprints, and online content and gaming operations. Mr. Mandell received a B.A. from the University of Florida and a J.D. from the University of Miami School of Law.

Adi McAbian.  Mr. McAbian has served on our Board of Directors since February 2008 and is a co-founder and has been Managing Director of Twistbox since May 2003 . As the Managing Director of Twistbox, Mr. McAbian is responsible for global sales and carrier relationships that span the globe. Mr. McAbian’s background includes experience as an entrepreneur and executive business leader with over 12 years experience as a business development and sales manager in the broadcast television industry. Mr. McAbian is experienced in entertainment and media rights management, licensing negotiation and production, and has previously secured deals with AOL/Time Warner, Discovery Channel, BMG, RAI, Disney, BBC and Universal among others. He has been responsible for facilitating strategic collaborations with over 60 mobile operators worldwide on content standards and minor protection legislation and he has been a frequent speaker, lecturing on adult mobile content business and management issues throughout Europe and the U.S., including conferences organized by iWireless World, Mobile Entertainment Forum, and Informa.
 
Peter Guber.  Mr. Guber has served as Co-Chairman of our Board of Directors since August 2007.  He  is a 30-year veteran of the entertainment industry. His positions previously held include: Former Studio Chief, Columbia Pictures; Founder of Casablanca Record and Filmworks; Founder, and Former Chairman/CEO, PolyGram Filmed Entertainment; Founder and Former Co-owner, Guber-Peters Entertainment Company; Former Chairman and CEO, Sony Pictures Entertainment (SPE). Films directly produced and executive produced by Guber have received more than 50 Academy Award nominations, including four times for Best Picture. Among his personal producing credits are Witches of Eastwick, The Deep, Color Purple, Midnight Express, The Jacket, Missing, Batman and Rain Man, which won the Oscar for best picture. During Mr. Guber’s tenure at SPE, the Motion Picture Group achieved, over four years, an industry-best domestic box office market share averaging 17%. During the same period, Sony Pictures led all competitors with a remarkable total of 120 Academy Award nominations, the highest four-year total ever for a single company. After leaving Sony in 1995, Mr. Guber formed Mandalay Entertainment Group (“Mandalay Entertainment”) as a multimedia entertainment vehicle in motion pictures, television, sports entertainment and new media. Mr. Guber is a full professor at the UCLA School of Theater, Film and Television and has been a member of the faculty for over 30 years. He also can be seen every Sunday morning on the American Movie Channel (AMC), as the co-host of the critically acclaimed show, Sunday Morning Shootout. He received his B.A. from Syracuse University, and both a Masters and Juris Doctor degree in law from New York University and was recruited by Columbia Pictures Corporation from NYU where he pursued an M.B.A. degree. He is a member of the New York and California Bars.

 
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Robert S. Ellin.   Mr. Ellin has been a member of our Board of Directors and our Co-Chairman since February 2005. Mr. Ellin has twenty years of investment and turnaround experience. Mr. Ellin is a partner and co-founder of Trinad, an activist hedge fund focused on micro-cap public companies. Prior to founding Trinad, Mr. Ellin was the founder and President of Atlantis Equities, Inc. (“Atlantis”), a personal investment company. Founded in 1990, Atlantis actively managed an investment portfolio of small capitalization public companies, as well as select private company investments. Mr. Ellin frequently played an active role in its investee companies including board representation, management selection, corporate finance and other advisory services. Through Atlantis and related companies, Mr. Ellin spearheaded investments into ThQ, Inc., Grand Toys, Forward Industries, Inc. and completed a leveraged buyout of S&S Industries, Inc. where he also served as President from 1996 to 1998. Prior to founding Atlantis, Mr. Ellin worked in Institutional Sales at LF Rothschild and prior to that he was the Manager of Retail Operations at Lombard Securities. Mr. Ellin is Chief Executive Officer of Zoo Entertainment, Inc. and President of Noble Medical Technologies, Inc.  Mr. Ellin currently sits on the boards of Command Security Corporation, Lateral Media, Inc., Zoo Entertainment, Inc., Noble Medical Technologies, Inc. and New Motion, Inc. d/b/a Artrinsic, Inc. Mr. Ellin also serves on the Board of Governors at Cedars-Sinai Hospital. Mr. Ellin received his B.A. from Pace University.
 
Barry I. Regenstein.  Mr. Regenstein has served on our Board of Directors since February 2005. Mr. Regenstein is also the President and Chief Financial Officer of Command Security Corporation. Trinad Capital Master Fund, Ltd. is a significant shareholder of Command Security Corporation and Mr. Regenstein has formerly served as a consultant for Trinad Capital Master Fund, Ltd. Mr. Regenstein has over 28 years of experience with 23 years of such experience in the aviation services industry. Mr. Regenstein was formerly Senior Vice President and Chief Financial Officer of Globe Ground North America (previously Hudson General Corporation), and previously served as the company’s Controller and as a Vice President. Prior to joining Hudson General Corporation in 1982, he had been with Coopers & Lybrand in Washington, D.C. since 1978. Mr. Regenstein currently sits of the boards of ProLink Holdings Corporation, Lateral Media, Inc., Zoo Entertainment, Inc. and Command Security Corporation. Mr. Regenstein is a Certified Public Accountant and received his Bachelor of Science in Accounting from the University of Maryland and an M.S. in Taxation from Long Island University.
 
Paul Schaeffer.  Mr. Schaeffer has served on our Board of Directors since August 2007 as Vice-Chairman.  He is Vice Chairman, Chief Operating Officer and Co-Founder of the Mandalay Entertainment. Along with Peter Guber, Mr. Schaeffer is responsible for all aspects of the motion picture and television business, focusing primarily on the corporate and business operations of those entities. Prior to forming Mandalay Entertainment, Mr. Schaeffer was the Executive-Vice President of Sony Pictures Entertainment, overseeing the worldwide corporate operations for SPE including Worldwide Administration, Financial Affairs, Human Resources, Corporate Affairs, Legal Affairs and Corporate Communications. During his tenure, Mr. Schaeffer also had supervisory responsibility for the $105 million rebuilding and renovation of Sony Pictures Studios. Mr. Schaeffer is a member of the Academy of Motion Pictures, Arts, & Sciences. A veteran of 20 years of private law practice, Mr. Schaeffer joined SPE from Armstrong, Hirsch and Levine, where he was a senior partner working with corporate entertainment clients. He spent two years as an accountant with Arthur Young & Company in Philadelphia. He graduated from the University of Pennsylvania Law School and received his accounting degree from Pennsylvania State University.
 
Jay Wolf.  Mr. Wolf has served on our Board of Directors since February 2005.  Mr. Wolf is a partner and co-founder of Trinad. Mr. Wolf has a broad range of investment and operations experience that includes senior and subordinated debt lending, private equity and venture capital investments, mergers and acquisitions and public equity investments. Prior to his work at Trinad, Mr. Wolf served as EVP of Corporate Development for Wolf Group Integrated Communications Ltd. where he was responsible for the company’s acquisition program. Mr. Wolf worked at Canadian Corporate Funding, Ltd., a Toronto-based merchant bank as an analyst in the firm’s senior debt department and subsequently for Trillium Growth Capital, the firm’s venture capital fund. Mr. Wolf is the Secretary of Zoo Entertainment, Inc. and Lateral Media, Inc. and Chairman and Chief Executive Officer of Noble Medical Technologies, Inc.  Mr. Wolf currently sits on the boards of Noble Medical Technologies, Inc., Lateral Media, Inc., Zoo Entertainment, Inc. ProLink Holdings Corporation, Xcorporeal, Inc. and Northstar Systems, Inc. Mr. Wolf is also a member of the Board of Governors at Cedars-Sinai Hospital. Mr. Wolf received his B.A from Dalhousie University.
 
Richard Spitz.   Mr. Spitz has served on our Board of Directors since November 2007.  He is the head of Korn/Ferry International Global Technology Markets where he is in charge of go-to market strategy across all subsectors and regions within the technology market. Mr. Spitz has worked at Korn/Ferry International since May 1996 where he has advised investors and companies on leadership issues, talent management and senior executive recruitment. From August 1987 through May 1996, Mr. Spitz worked at Paul, Hastings, Janofsky and Walker. Mr. Spitz has served on and advises private and public company boards as well as on the Dean’s Special Task Force for New York University Law School. He also currently serves on the Board of Advisors to the Harold Price Center for Entrepreneurial Studies at the Anderson School of Business. Mr. Spitz received a BS from California State University, Northridge, a J.D. from Tulane University Law School and an L.L.M. from New York University Law School.

 
42

 
 
Audit Committee

As of July 14, 2009, the Board of Directors had not established an audit committee. We are exempt from the listing standards for audit committees under Rule 10A-3, Listing Standards Relating to Audit Committees, as promulgated under the Exchange Act. However, for certain purposes of the rules and regulations of the SEC, our Board of Directors is deemed to be our audit committee. Our Board of Directors has determined that Paul Schaeffer is an “audit committee financial expert” within the meaning of the rules and regulations of the SEC. We plan on establishing an audit committee that complies with the standards of Rule 10A-3 in the next 12 months.
 
Nominating Committee

The entire Board of Directors currently operates as our Nominating Committee.
 
Code of Ethics
 
We intend to establish a code of ethics.

Section 16(A) Beneficial Ownership Reporting Compliance
 
Section 16(a) of the Exchange Act requires our officers, directors, and persons owning more than ten percent of a registered class of our equity securities (“ten percent stockholders”) to file reports of ownership and changes of ownership with the SEC. Officers, directors, and ten-percent stockholders are required by the SEC regulations to furnish us with copies of all Section 16(a) reports they file with the SEC. To the best of our knowledge, based solely on review of the copies of such reports and amendments thereto furnished to us, we believe that during our Transition Period ended March 31, 2008, all Section 16(a) filing requirements applicable to our officers, directors, and ten percent stockholders were met except for the following: one Form 4 report was not timely filed by Eugen Barteska as to one transaction, one Form 4 was not timely filed by Guber Family Trust as to one transaction, one Form 4 report was not timely filed by Adi McAbian as to one transaction, one Form 4 report was not timely filed by Ian Aaron as to one transaction, one Form 4 was not timely filed by Peter Guber as to one transaction and one Form 4 report was not timely filed by Bruce Stein as to one transaction.
 
ITEM 11. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE
 
The following table sets forth information concerning the total compensation paid during our fiscal year ended March 31, 2009, our transition period ended March 31, 2008 and our fiscal year ended December 31, 2007 for our principal executive officer and two most highly compensated executive officers:
 
Name and Principal 
Position
 
Year
 
Salary
   
Bonus
   
Stock
Awards
   
Option
Awards
(1)
   
All Other
Compensation
   
Total
 
       
($)
   
($)
   
($)
   
($)
   
($)
   
($)
 
                                         
Bruce Stein, Former Chief Executive Officer(through January 12, 2009)
 
Year ended March 31, 2009
    277,083                   690,388       22,187       989,658  
                                                 
   
The Transition Period Ended March 31, 2008
    68,974                   158,821       7,418       235,213  
                                                 
   
Year ended December 31, 2007
    25,641                   385,931       -       411,572  
                                                 
James Lefkowitz, President
 
Year ended March 31, 2009
    245,313             3,842       257,287       21,626       528,069  
                                                   
   
The Transition Period Ended March 31, 2008
    62,500       -      
-
 
      64,322       3,391-       130,213-  
                                                     
   
Year ended December 31, 2007
    126,923       100,000               295,352       4,730       527,005  
                                                     
Ian Aaron, Chief Executive Officer of Twistbox
 
Year ended March 31, 2009
    132,034               182,130       482,076       23,457       819,697  
                                                     
   
The Transition Period Ended March 31, 2008
    40,385       -       -       467,950       1,944       510,278