UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.   20549
 

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2010

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

For the transition period from _____________ to ___________
Commission file number   00-10039
 
NEUMEDIA, 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.)
   
2000 Avenue of the Stars, Suite 410, Los Angeles, CA
90067
(Address of Principal Executive Offices)
(Zip Code)

(310) 601-2500
(Registrant’s Telephone Number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of  “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 a smaller reporting company)
Smaller reporting company  x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

On August 23, 2010, there were 35,674,225 shares of the Registrant’s common stock, par value $0.0001 per share, issued and outstanding.

 
 

 

NEUMEDIA, INC.
Table of Contents
 
     
Page
       
 
PART I - FINANCIAL INFORMATION
   
       
Item 1.
Financial Statements
 
 
 
Consolidated Balance Sheets as of June 30, 2010 (Unaudited) and March 31, 2010
 
1
 
Consolidated Statements of Operations (Unaudited) For the Three Month Periods Ended June 30, 2010 and 2009
 
2
 
Consolidated Statements of Cash Flows (Unaudited) For the Three Month Periods Ended June 30, 2010 and 2009
 
4
 
Notes to the Unaudited Consolidated Financial Statements
 
5
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
29
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
38
Item 4
Controls and Procedures
 
39
       
 
PART II - OTHER INFORMATION
   
       
Item 1.
Legal Proceedings
 
39
Item 1A.
Risk Factors
 
39
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
40
Item 3.
Defaults Upon Senior Securities
 
40
Item 4.
(Removed and Reserved)
 
40
Item 5.
Other Information
 
40
Item 6.
Exhibits
 
40
Signatures    
 
43
 
 

 

PART I - FINANCIAL INFORMATION
 
Item 1.   Financial Statements.
 
 
 
 
NeuMedia, Inc.
(formerly known as Mandalay Media, Inc.)
and Subsidiaries
Unaudited Consolidated Financial Statements
June 30, 2010
 
 

 
 

 

 
Page(s)
   
Consolidated Balance Sheets as of June 30, 2010 (unaudited) and March 31, 2010
1
   
Consolidated Statements of Operations (unaudited) for month periods
 
ended June 30, 2010 and June 30, 2009
2
   
Consolidated Statements of Stockholders’ Equity and Comprehensive Loss (unaudited)
 
for the period ended June 30, 2010
3
   
Consolidated Statements of Cash Flows (unaudited) for month periods ended
 
June 30, 2010 and June 30, 2009
4
   
Notes to Unaudited Consolidated Financial Statements
5-28
 
 
 

 

NeuMedia, Inc. and Subsidiaries
1
Consolidated Balance Sheets
 
 

  
(In thousands, except share amounts)
 
             
   
June 30,
   
March 31,
 
   
2010
   
2010
 
   
unaudited
       
             
ASSETS
           
             
Current assets
           
Cash and cash equivalents
  $ 2,933     $ 640  
Accounts receivable, net of allowances of $244 and $403, respectively
    3,770       4,711  
Prepaid expenses and other current assets
    447       477  
Net current assets of discontinued operations
    -       7,377  
                 
Total current assets
    7,150       13,205  
                 
Property and equipment, net
    547       603  
Intangible assets, net
    8,104       8,195  
Goodwill
    8,155       8,155  
Net non-current assets of discontinued operations
    -       16,623  
                 
TOTAL ASSETS
  $ 23,956     $ 46,781  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Current liabilities
               
Accounts payable
  $ 3,966     $ 4,011  
Accrued license fees
    2,059       1,814  
Accrued compensation
    381       537  
Current portion of long term debt
    -       26,082  
Other current liabilities
    1,696        1,638  
Net current liabilities of discontinued operations
    -       4,625  
                 
Total currrent liabilities
    8,102       38,707  
                 
Long term debt and convertible debt
    3,557       -  
                 
Total liabilities
  $ 11,659     $ 38,707  
                 
Commitments and contingencies (Note 15)
               
                 
Stockholders' equity
               
Preferred stock
               
Series A convertible preferred stock
               
at $0.0001 par value; 100,000 shares authorized,issued and outstanding
               
(liquidation preference of $1,000,000)
    100       100  
Common stock, $0.0001 par value: 100,000,000 shares authorized;
               
35,674,225 issued and outstanding at June 30, 2010;
               
39,776,597 issued and outstanding at March 31, 2010;
    4       4  
Additional paid-in capital
    97,169       95,741  
Accumulated other comprehensive loss
    (238 )     (419 )
Accumulated deficit
    (84,738 )     (87,352 )
                 
Total stockholders' equity
     12,297       8,074  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 23,956     $ 46,781  
 
The accompanying notes are an integral part of these consolidated financial statements

 
 

 
 
NeuMedia, Inc. and Subsidiaries
2
Consolidated Statement of Operations (Unaudited)
 
 


(In thousands, except per share amounts)
 
   
3 Months Ended
   
3 Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
 
             
Net revenues
  $ 2,858     $ 3,777  
                 
                 
Cost of revenues
               
License fees
    586       945  
Other direct cost of revenues
    76       76  
                 
Total cost of revenues
    662        1,021  
                 
                 
Gross profit
    2,196       2,756  
                 
                 
Operating expenses
               
Product development
    1,074       1,104  
Sales and marketing
    596       831  
General and administrative
    1,828       1,873  
Amortization of intangible assets
     17       137  
      -          
Total operating expenses
    3,515       3,945  
                 
                 
Loss from operations
     (1,319 )     (1,189 )
                 
Interest and other income / (expense)
               
Interest income
    1       3  
Interest expense
    (680 )      (661 )
Foreign exchange transaction gain / (loss)
    (157 )     124  
Other income / (expense)
    (187 )     (5 )
                 
Interest and other expense
    (1,023 )     (539 )
                 
                 
Loss from operations before income taxes
    (2,342 )     (1,728 )
                 
Income tax provision
    (68 )     (35 )
                 
Net loss from continuing operations net of taxes
    (2,410 )     (1,763 )
                 
Discontinued operations, net of taxes:
               
Income from discontinued operations net of taxes
    709       802  
Gain on disposal of discontinued operations, net of taxes
    4,315        -  
                 
Net income from discontinued operations, net of taxes
    5,024       802  
                 
                 
Net profit / (loss)
  $ 2,614     $  (961 )
                 
Comprehensive income / (loss)
  $ 2,795     $ (758 )
                 
                 
Basic and diluted net income / (loss) per common share
  $ 0.07     $ (0.02 )
Continuing operations
  $ (0.06 )   $ (0.04 )
Discontinued operations
  $ 0.13     $ 0.02  
                 
Diluted net income / (loss) per common share
  $ 0.06     $ (0.02 )
Continuing operations
  $ (0.06 )   $ (0.04 )
Discontinued operations
  $ 0.12     $ 0.02  
                 
Weighted average common shares outstanding, basic
    39,375       39,808  
basic and diluted
               
                 
Weighted average common shares outstanding, diluted
    40,424       39,908  
 
The accompanying notes are an integral part of these consolidated financial statements

 
 

 

NeuMedia, Inc. and Subsidiaries
3
Consolidated Statements of Stockholders’ Equity and Comprehensive Loss (Unaudited)
 

                                 
Accumulated
                   
                           
Additional
   
Other
                   
   
Common Stock
   
Preferred Stock
   
Paid-In
   
Comprehensive
   
Accumulated
         
Comprehensive
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Income/(Loss)
   
Deficit
   
Total
   
Loss
 
                                                       
Balance at March 31, 2010
    39,776,597     $ 4       100,000     $ 100     $ 95,741     $ (419 )   $ (87,352 )   $ 8,074        
                                                                       
Net income
                                                    2,614       2,614       2,614  
                                                                         
Foreign currency translation gain/(loss)
                                                181                   181           181  
                                                                         
Stock-based compensation
                                    192                       192          
                                                                         
Stock voided as part of disposal of subsidiary
    (561,798 )                             (197 )                     (197 )        
                                                                         
Stock acquired by company as part of disposal of subsidiary
    (3,540,574 )                             (1,239 )                     (1,239 )        
                                                                         
Issuance of convertible debt and associated warrants
                                    2,500                       2,500          
                                                                         
Repricing of warrants
                                    172                       172          
                                                                         
Comprehensive income
                                                                  $ 2,795  
                                                                         
Balance at June 30, 2010
    35,674,225     $ 4       100,000     $ 100     $ 97,169     $ (238 )   $ (84,738 )   $ 12,297          

The accompanying notes are an integral part of these consolidated financial statements

 
 

 

NeuMedia, Inc. and Subsidiaries
4
Consolidated Statements of Cash Flows (Unaudited)
 
 

      
(In thousands)
 
   
3 Months Ended
   
3 Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
 
Cash flows from operating activities
           
Net income / (loss)
  $ 2,614     $ (961 )
Adjustments to reconcile net loss to net cash
               
 used in operating activities:
               
Gain on disposal of discontinued operations, net of taxes, net of
               
Impact of foreign currency translation
    (4,315 )     -  
Depreciation and amortization
    347       425  
Allowance for doubtful accounts
    (159 )     -  
Stock-based compensation
    192       483  
Warrants issued as compensation for services
    172          
(Increase) / decrease in assets, net of effect of disposal of subsidiary:
         
Accounts receivable
    2,056       4  
Prepaid expenses and other current assets
    (40 )     164  
Increase / (decrease) in liabilities, net of effet of disposal of subsidiary:
         
Accounts payable
    (3,022 )     (1,058 )
Accrued license fees
    245       106  
Accrued compensation
    (156 )     124  
Other liabilities and other items
    1,715       (1,144 )
                 
Net cash used in operating activities
    (351 )     (1,857 )
                 
Cash flows from investing activities
               
                 
Purchase of property and equipment
    (57 )     (129 )
Transaction costs
    (548 )     -  
Cash remaining with disposed subsidiary
    (641 )     -  
                 
Net cash used in investing activities
    (1,246 )     (129 )
                 
Cash flows from financing activities
               
                 
Proceeds from new Senior Note
    2,500       -  
                 
Net cash provided by financing activities
    2,500       -  
                 
Effect of exchange rate changes on cash and cash equivalents
    139       304  
                 
Net increase / (decrease) in cash and cash equivalents
    1,042       (1,681 )
                 
Cash and cash equivalents, beginning of period
    1,891       5,927  
                 
Cash and cash equivalents, end of period
  $ 2,933     $ 4,246  
                 
Supplemental disclosure of cash flow information:
               
                 
Taxes paid
    68       39  
 
The accompanying notes are an integral part of these consolidated financial statements

 
 

 
 
NeuMedia, Inc. and Subsidiaries
5
Notes to Unaudited Consolidated Financial Statements
 
(all numbers in thousands except per share amounts)
 

 
1.
Organization

NeuMedia, Inc. (“we”, “us”, “our”, the “Company” or “NeuMedia”), formerly Mandalay Media, Inc. (“Mandalay Media”) and formerly Mediavest, Inc. (“Mediavest”), was originally incorporated in the state of Delaware on November 6, 1998 under the name eB2B Commerce, Inc. On April 27, 2000, it merged into DynamicWeb Enterprises Inc., a New Jersey corporation, the surviving company, and changed its name to eB2B Commerce, Inc. On April 13, 2005, the Company changed its name to Mediavest, Inc.  Through January 26, 2005, the Company and its former subsidiaries were engaged in providing business-to-business transaction management services designed to simplify trading between buyers and suppliers. The Company was inactive from January 26, 2005 until its merger with Twistbox Entertainment, Inc., on February 12, 2008.  On September 14, 2007, Mediavest was re-incorporated in the state of Delaware as Mandalay Media, Inc.

On November 7, 2007, Mediavest merged into its wholly-owned, newly formed subsidiary, Mandalay Media, with Mandalay Media as the surviving corporation. Mandalay Media issued: (1) one new share of common stock in exchange for each share of Mediavest’s outstanding common stock and (2) one new share of preferred stock in exchange for each share of Mediavest’s outstanding preferred stock as of November 7, 2007. Mandalay Media’s preferred and common stock had the same status and par value as the respective stock of Mediavest and Mandalay Media acceded to all the rights, acquired all the assets and assumed all of the liabilities of Mediavest.

On February 12, 2008, Mandalay Media completed a merger (the “Merger”) with Twistbox Entertainment, Inc. (“Twistbox”) through an exchange of all outstanding capital stock of Twistbox for 10,180 shares of common stock of the Company. In connection with the Merger, the Company assumed of all the outstanding options under Twistbox’s Stock Incentive Plan by the issuance of options to purchase 2,464 shares of common stock of the Company, including 2,145 vested and 319 unvested options.

After the Merger, Twistbox became a wholly-owned subsidiary of the Company, and the Company’s only active subsidiary. Twistbox Entertainment, Inc. (formerly known as The WAAT Corporation) was incorporated in the State of Delaware.

Twistbox is a global publisher and distributor of branded and non-branded entertainment content, including images, video, and games for all mobile platforms and third generation (3G) and pre-fourth generation mobile networks.  Twistbox publishes and distributes its content in a number of countries.  Since operations began in 2003, Twistbox has developed an intellectual property portfolio that includes mobile rights to global brands and content from leading film, television and lifestyle content publishing companies. Twistbox has built a proprietary mobile publishing platform that includes: tools that automate handset portability for the distribution of images and video; a mobile games development suite that automates the porting of mobile games and applications to multiple handsets; and a content standards and ratings system globally adopted by major wireless carriers to assist with the responsible deployment of age-verified content.  Twistbox has distribution agreements with many of the largest mobile operators in the world.

Twistbox is headquartered in the Los Angeles area and has offices in Europe and South America that provide local sales and marketing support for both mobile operators and third party distribution in their respective regions.

 
 

 

NeuMedia, Inc. and Subsidiaries
6
Notes to Unaudited Consolidated Financial Statements
 
(all numbers in thousands except per share amounts)
 

On October 23, 2008, the Company completed an acquisition of 100% of the issued and outstanding share capital of AMV Holding Limited, a United Kingdom private limited company (“AMV”), and 80% of the issued and outstanding share capital of Fierce Media Ltd (“Fierce”).

In consideration for the shares of AMV and Fierce, and subject to adjustment as set forth in the Stock Purchase Agreement (“Stock Purchase Agreement”), the aggregate purchase price (the “Purchase Price”) consisted of: (a) $5,375 in cash (the “Cash Consideration”); (b) 4,500 fully paid shares of common stock (the “Stock Consideration”); (c) a secured promissory note in the aggregate original principal amount of $5,375 (the “AMV Note”); and (d) additional earn-out amounts, if any, if the acquired companies achieved certain targeted earnings for each of the periods from October 1, 2008 to March 31, 2009, April 1, 2009 to March 31, 2010, and April 1, 2010 to September 30, 2010, as determined in accordance with the Stock Purchase Agreement. The Purchase Price was subject to certain adjustments based on the working capital of AMV, to be determined initially within 75 days of the closing, and subsequently within 60 days following June 30, 2009. Any such adjustment of the Purchase Price would be made first by means of an adjustment to the principal sum due under the AMV Note, as set forth in the Stock Purchase Agreement. An initial adjustment of $443 was made subsequent to closing, and was added to the AMV Note. The initial period earn-out was recognized in the year ended March 31, 2009 and was added to the amount of consideration for the acquisition, as described in Note 7.

AMV is a leading mobile media and marketing company delivering games and lifestyle content directly to consumers in the United Kingdom, Australia, South Africa and various other European countries. AMV markets its well established branded services through a unique Customer Relationship Management platform that drives revenue through mobile internet, print and TV advertising. AMV is headquartered in Marlow, outside of London in the United Kingdom.

On May 10, 2010, an administrator was appointed over AMV in the UK, at the request of the Company’s senior debt holder. As from that date, AMV and its subsidiaries are considered to be a discontinued operation.

On May 11, 2010, Mandalay Media merged into its wholly-owned, newly formed subsidiary, NeuMedia Inc. (“NeuMedia”), with NeuMedia as the surviving corporation. NeuMedia issued: (1) one new share of common stock in exchange for each share of outstanding common stock of Mandalay Media and (2) one new share of preferred stock in exchange for each share outstanding preferred stock of Mandalay Media as of May 11, 2010. Preferred and common stock of NeuMedia had the same status and par value as the respective stock of Mandalay Media and NeuMedia acceded to all the rights, acquired all the assets and assumed all of the liabilities of Mandalay Media.
 
On June 21, 2010, the Company signed and closed an agreement whereby ValueAct and the AMV Founders, acting through a newly formed company (“NewCo”), acquired the operating subsidiaries of AMV (the “Assets”) in exchange for the release of $23,231 of secured indebtedness (the “Sale”), comprising of a release of all amounts due and payable under the AMV Note and all of the amounts due and payable under the ValueAct Note except for $3,500 in principal. The Company retained all assets and liabilities of Twistbox and the Company other than the Assets.

 
 

 
 
NeuMedia, Inc. and Subsidiaries
7
Notes to Unaudited Consolidated Financial Statements
 
(all numbers in thousands except per share amounts)
 

 
2.
Summary of Significant Accounting Policies

Basis of Presentation
The accompanying consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission. In the opinion of management, the accompanying consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, which the Company believes are necessary for a fair statement of the Company’s financial position as of June 30, 2010 and its results of operations for the three months ended June 30, 2010 and 2009, respectively. These consolidated financial statements are not necessarily indicative of the results to be expected for the entire year. The consolidated balance sheet presented as of June 30, 2010 has been derived from the unaudited consolidated financial statements as of that date, and the consolidated balance sheet presented as of March 31, 2010 has been derived from the audited consolidated financial statements as of that date.
 
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and our wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. Discontinued operations have been treated in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)  205-20, Discontinued Operations.

Revenue Recognition
The Company’s revenues are derived primarily by licensing material and software in the form of products (Image Galleries, Wallpapers, video, WAP Site access, Mobile TV) and mobile games. License arrangements with the end user can be on a perpetual or subscription basis.

A perpetual license gives an end user the right to use the product, image or game on the registered handset on a perpetual basis. A subscription license gives an end user the right to use the product, image or game on the registered handset for a limited period of time, ranging from a few days to as long as one month.

The Company either markets and distributes its products directly to consumers, or distributes products through mobile telecommunications service providers (“carriers”), in which case the carrier markets the product, images or games to end users. License fees for perpetual and subscription licenses are usually billed upon download of the product, image or game by the end user. In the case of subscriber licenses, many subscriber agreements provide for automatic renewal until the subscriber opts-out, while others provide opt-in renewal. In either case, subsequent billings for subscription licenses are generally billed monthly. The Company applies the provisions of FASB ASC 985-605, Software Revenue Recognition, to all transactions.

Revenues are recognized from the Company’s products, images and games when persuasive evidence of an arrangement exists, the product, image or game has been delivered, the fee is fixed or determinable, and the collection of the resulting receivable is probable. For both perpetual and subscription licenses, management considers a license agreement to be evidence of an arrangement with a carrier or aggregator and a “clickwrap” agreement to be evidence of an arrangement with an end user. For these licenses, the Company defines delivery as the download of the product, image or game by the end user.

 
 

 

NeuMedia, Inc. and Subsidiaries
8
Notes to Unaudited Consolidated Financial Statements
 
(all numbers in thousands except per share amounts)
 

The Company estimates revenues from carriers in the current period when reasonable estimates of these amounts can be made. Most carriers only provide detailed sales transaction data on a one to two month lag. Estimated revenue is treated as unbilled receivables until the detailed reporting is received and the revenues can be billed. Some carriers provide reliable interim preliminary reporting and others report sales data within a reasonable time frame following the end of each month, both of which allow the Company to make reasonable estimates of revenues and therefore to recognize revenues during the reporting period when the end user licenses the product, image or game. Determination of the appropriate amount of revenue recognized involves judgments and estimates that the Company believes are reasonable, but it is possible that actual results may differ from the Company’s estimates. The Company’s estimates for revenues include consideration of factors such as preliminary sales data, carrier-specific historical sales trends, volume of activity on company monitored sites, seasonality, time elapsed from launch of services or product lines, the age of games and the expected impact of newly launched games, successful introduction of new handsets, growth of 3G subscribers by carrier, promotions during the period and economic trends. When the Company receives the final carrier reports, to the extent not received within a reasonable time frame following the end of each month, the Company records any differences between estimated revenues and actual revenues in the reporting period when the Company determines the actual amounts. Revenues earned from certain carriers may not be reasonably estimated. If the Company is unable to reasonably estimate the amount of revenues to be recognized in the current period, the Company recognizes revenues upon the receipt of a carrier revenue report and when the Company’s portion of licensed revenues are fixed or determinable and collection is probable. To monitor the reliability of the Company’s estimates, management, where possible, reviews the revenues by country, by carrier and by product line on a regular basis to identify unusual trends such as differential adoption rates by carriers or the introduction of new handsets. If the Company deems a carrier not to be creditworthy, the Company defers all revenues from the arrangement until the Company receives payment and all other revenue recognition criteria have been met.

In accordance with FASB ASC 605-45, Reporting Revenue Gross as a Principal Versus Net as an Agent, the Company recognizes as revenues the amount the carrier reports as payable upon the sale of the Company’s products, images or games. The Company has evaluated its carrier agreements and has determined that it is not the principal when selling its products, images or games through carriers. Key indicators that it evaluated to reach this determination include:
 
 
wireless subscribers directly contract with the carriers, which have most of the service interaction and are generally viewed as the primary obligor by the subscribers;
 
carriers generally have significant control over the types of content that they offer to their subscribers;
 
carriers are directly responsible for billing and collecting fees from their subscribers, including the resolution of billing disputes;
 
carriers generally pay the Company a fixed percentage of their revenues or a fixed fee for each game;
 
carriers generally must approve the price of the Company’s content in advance of their sale to subscribers, and the Company’s more significant carriers generally have the ability to set the ultimate price charged to their subscribers; and
 
the Company has limited risks, including no inventory risk and limited credit risk.
 
 
 

 

NeuMedia, Inc. and Subsidiaries
9
Notes to Unaudited Consolidated Financial Statements
 
(all numbers in thousands except per share amounts)
 

For direct to consumer business, revenue is earned by delivering a product or service directly to the end user of that product or service. In those cases, the Company records as revenue the amount billed to that end user and recognizes the revenue when persuasive evidence of an arrangement exists, the product, image or game has been delivered, the fee is fixed or determinable, and the collection of the resulting receivable is probable. Substantially all of our discontinued operations represents direct to consumer business.

Net (Income/Loss) per Common Share

Basic loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period plus dilutive common stock equivalents, using the treasury stock method. Potentially dilutive shares from stock options and warrants and the conversion of the Series A preferred stock were as follows:

   
3 Months Ended
   
3 Months Ended
 
   
June 30
   
June 30
 
   
2010
   
2009
 
             
Potentially dilutive shares
    9,700       100  

These shares were not included in the computation of diluted loss per share as they were anti-dilutive in each period.

Comprehensive Income/Loss
Comprehensive income consists of two components, net income and other comprehensive income/loss. Other comprehensive income/loss refers to gains and losses that under generally accepted accounting principles are recorded as an element of stockholders’ equity but are excluded from net income/loss. The Company’s other comprehensive income/loss currently includes only foreign currency translation adjustments.

Cash and Cash Equivalents
The Company considers all highly liquid short-term investments purchased with a maturity of three months or less to be cash equivalents.

Content Provider Licenses

Content Provider License Fees and Minimum Guarantees
The Company’s royalty expenses consist of fees that it pays to branded content owners for the use of their intellectual property in the development of the Company’s games and other content, and other expenses directly incurred in earning revenue. Royalty-based obligations are either accrued as incurred and subsequently paid, or in the case of longer term content acquisitions, paid in advance and capitalized on our balance sheet as prepaid royalties. These royalty-based obligations are expensed to cost of revenues either at the applicable contractual rate related to that revenue or over the estimated life of the prepaid royalties. Advanced license payments that are not recoupable against future royalties are capitalized and amortized over the lesser of the estimated life of the branded title or the term of the license agreement.

 
 

 

NeuMedia, Inc. and Subsidiaries
10
Notes to Unaudited Consolidated Financial Statements
 
(all numbers in thousands except per share amounts)
 

The Company’s contracts with some licensors include minimum guaranteed royalty payments, which are payable regardless of the ultimate volume of sales to end users. Each quarter, the Company evaluates the realization of its royalties as well as any unrecognized guarantees not yet paid to determine amounts that it deems unlikely to be realized through product sales. The Company uses estimates of revenues, and share of the relevant licensor to evaluate the future realization of future royalties and guarantees. This evaluation considers multiple factors, including the term of the agreement, forecasted demand, product life cycle status, product development plans, and current and anticipated sales levels, as well as other qualitative factors. To the extent that this evaluation indicates that the remaining future guaranteed royalty payments are not recoverable, the Company records an impairment charge to cost of revenues and a liability in the period that impairment is indicated.

Content Acquired
Amounts paid to third party content providers as part of an agreement to make content available to the Company for a term or in perpetuity, without a revenue share, have been capitalized and are included in the balance sheet as prepaid expenses.  These balances will be expensed over the estimated life of the material acquired.

Software Development Costs
The Company applies the principles of FASB ASC 985-20, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed (“ASC 985-20”). ASC 985-20 requires that software development costs incurred in conjunction with product development be charged to research and development expense until technological feasibility is established. Thereafter, until the product is released for sale, software development costs must be capitalized and reported at the lower of unamortized cost or net realizable value of the related product.

The Company has adopted the “tested working model” approach to establishing technological feasibility for its products and games. Under this approach, the Company does not consider a product or game in development to have passed the technological feasibility milestone until the Company has completed a model of the product or game that contains essentially all the functionality and features of the final game and has tested the model to ensure that it works as expected. To date, the Company has not incurred significant costs between the establishment of technological feasibility and the release of a product or game for sale; thus, the Company has expensed all software development costs as incurred. The Company considers the following factors in determining whether costs can be capitalized: the emerging nature of the mobile market; the gradual evolution of the wireless carrier platforms and mobile phones for which it develops products and games; the lack of pre-orders or sales history for its products and games; the uncertainty regarding a product’s or game’s revenue-generating potential; its lack of control over the carrier distribution channel resulting in uncertainty as to when, if ever, a product or game will be available for sale; and its historical practice of canceling products and games at any stage of the development process.

Product Development Costs
The Company charges costs related to research, design and development of products to product development expense as incurred. The types of costs included in product development expenses include salaries, contractor fees and allocated facilities costs.

 
 

 

NeuMedia, Inc. and Subsidiaries
11
Notes to Unaudited Consolidated Financial Statements
 
(all numbers in thousands except per share amounts)
 

Advertising Expenses
The Company expenses the production costs of advertising, including direct response advertising, the first time the advertising takes place. Advertising expense for continuing operations was $12 and $39 in the periods ended June 30, 2010 and 2009, respectively. Advertising expense for discontinued operations was $956 and $2,300 in the periods ended June 30, 2010 and 2009, respectively.

Restructuring
The Company accounts for costs associated with employee terminations and other exit activities in accordance with FASB ASC 420-10, Accounting for Costs Associated with Exit or Disposal Activities. The Company records employee termination benefits as an operating expense when it communicates the benefit arrangement to the employee and it requires no significant future services, other than a minimum retention period, from the employee to earn the termination benefits.

Fair Value of Financial Instruments
As of June 30, 2010 and March 31, 2010, the carrying value of cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued license fees, accrued compensation and other current liabilities approximates fair value due to the short-term nature of such instruments. The carrying value of current portion of long-term debt approximates fair value as the related interest rates approximate rates currently available to the Company.

Foreign Currency Translation
The Company uses the United States dollar for financial reporting purposes.  Assets and liabilities of foreign operations are translated using current rates of exchange prevailing at the balance sheet date. Equity accounts have been translated at their historical exchange rates when the capital transaction occurred.  Statement of Operations amounts are translated at average rates in effect for the reporting period. The foreign currency translation adjustment gain of $181 in the period ended June 30, 2010 and the foreign currency translation adjustment gain of $74 in the period ended June 30, 2009 have been reported as a component of comprehensive income/loss in the consolidated statements of stockholders’ equity and comprehensive income/loss. Translation gains or losses are shown as a separate component of stockholders’ equity.

Concentrations of Credit Risk
Financial instruments which potentially subject us to concentration of credit risk consist principally of cash and cash equivalents, and accounts receivable. We have placed cash and cash equivalents with a single high credit-quality institution. Most of our sales are made directly to large national Mobile Phone Operators in the countries that we operate. We have a significant level of business and resulting significant accounts receivable balance with one operator and therefore have a high concentration of credit risk with that operator. We perform ongoing credit evaluations of our customers and maintain an allowance for potential credit losses. As of June 30, 2010, one major customer represented approximately 36% of our gross accounts receivable outstanding. This customer accounted for 36% of our gross accounts receivable outstanding as of March 31, 2010. The customer accounted for 52% of our gross revenues in the period ended June 30, 2010; and 41% based on support provided in the period ended June 30, 2009.

Property and Equipment
Property and equipment is stated at cost.  Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of the related assets. Estimated useful lives are 8 to 10 years for leasehold improvements and 5 years for other assets.

 
 

 

NeuMedia, Inc. and Subsidiaries
12
Notes to Unaudited Consolidated Financial Statements
 
(all numbers in thousands except per share amounts)
 

Goodwill and Indefinite Life Intangible Assets
Goodwill represents the excess of cost over fair value of net assets of businesses acquired. In accordance with FASB ASC 350-20 Goodwill and Other Intangible Assets, the value assigned to goodwill and indefinite lived intangible assets, including trademarks and tradenames, is not amortized to expense, but rather they are evaluated at least on an annual basis to determine if there are potential impairments. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the implied fair value of the reporting unit goodwill is less than the carrying value. If the fair value of an indefinite lived intangible (such as trademarks and trade names) is less than its carrying amount, an impairment loss is recorded. Fair value is determined based on discounted cash flows, market multiples or appraised values, as appropriate. Discounted cash flow analysis requires assumptions about the timing and amount of future cash inflows and outflows, risk, the cost of capital, and terminal values. Each of these factors can significantly affect the value of the intangible asset. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management’s judgment. Any changes in key assumptions about the Company’s businesses and their prospects, or changes in market conditions, could result in an impairment charge. Some of the more significant estimates and assumptions inherent in the intangible asset valuation process include: the timing and amount of projected future cash flows; the discount rate selected to measure the risks inherent in the future cash flows; and the assessment of the asset’s life cycle and the competitive trends impacting the asset, including consideration of any technical, legal or regulatory trends.

Impairment of Long-Lived Assets and Finite Life Intangibles

Long-lived assets, including intangible assets subject to amortization, primarily consist of customer lists, license agreements and software that have been acquired, and are amortized using the straight-line method over their useful lives ranging from three to ten years and are reviewed for impairment in accordance with FASB ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Income Taxes
The Company accounts for income taxes in accordance with FASB ASC 740-10, Accounting for Income Taxes (“ASC 740-10”), which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in its financial statements or tax returns. Under ASC 740-10, the Company determines deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of assets and liabilities along with net operating losses, if it is more likely than not the tax benefits will be realized using the enacted tax rates in effect for the year in which it expects the differences to reverse.  To the extent a deferred tax asset cannot be recognized, a valuation allowance is established if necessary.

 
 

 

NeuMedia, Inc. and Subsidiaries
13
Notes to Unaudited Consolidated Financial Statements
 
(all numbers in thousands except per share amounts)
 

ASC 740-10 prescribes that a company should use a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax positions that meet the “more-likely-than-not” recognition threshold should be measured as the largest amount of the tax benefits, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement in the financial statements. We recognize interest and penalties related to income tax matters as a component of the provision for income taxes. We do not currently anticipate that the total amount of unrecognized tax benefits will significantly change within the next 12 months.

Stock-based compensation
We have applied FASB ASC 718 Share-Based Payment (“ASC 718”) and accordingly, we record stock-based compensation expense for all of our stock-based awards.

Under ASC 718, we estimate the fair value of stock options granted using the Black-Scholes option pricing model. The fair value for awards that are expected to vest is then amortized on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. The amount of expense recognized represents the expense associated with the stock options we expect to ultimately vest based upon an estimated rate of forfeitures; this rate of forfeitures is updated as necessary and any adjustments needed to recognize the fair value of options that actually vest or are forfeited are recorded.

The Black-Scholes option pricing model, used to estimate the fair value of an award, requires the input of subjective assumptions, including the expected volatility of our common stock, interest rates, dividend rates and an option’s expected life. As a result, the financial statements include amounts that are based upon our best estimates and judgments relating to the expenses recognized for stock-based compensation.

Preferred Stock
The Company applies the guidance enumerated in FASB ASC  480-10, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“ASC 480-10”) when determining the classification and measurement of preferred stock. Preferred shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value in accordance with ASC 480-10. All other issuances of preferred stock are subject to the classification and measurement principles of ASC 480-10. Accordingly, the Company classifies conditionally redeemable preferred shares (if any), which includes preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control, as temporary equity. At all other times, the Company classifies its preferred shares in stockholders’ equity.

Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent asset and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. The most significant estimates relate to revenues for periods not yet reported by Carriers, liabilities recorded for future minimum guarantee payments under content licenses, accounts receivable allowances, and stock-based compensation expense.

Recent Accounting Pronouncements
With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the period ended June 30, 2010, as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2010, that are of significance, or potential significance to the Company.

 
 

 
 
NeuMedia, Inc. and Subsidiaries
14
Notes to Unaudited Consolidated Financial Statements
 
(all numbers in thousands except per share amounts)
 

New Accounting Pronouncements

In September 2009, the FASB issued Update No. 2009-13, (Multiple-Deliverable Revenue Arrangements—)a consensus of the FASB Emerging Issues Task Force (ASU 2009-13). It updates the existing multiple-element revenue arrangements guidance currently included under ASC 605-25, which originated primarily from the guidance in EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (EITF 00-21). The revised guidance primarily provides two significant changes: (1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and (2) eliminates the residual method to allocate the arrangement consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition. ASU 2009-13 will be effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. The adoption of this standard update is not expected to impact the Company’s consolidated financial statements.

In February 2010, the FASB issued Accounting Standards Update (ASU) No.2010-09, (“Amendments to Certain Recognition and Disclosure Requirements”) (“ASU 2010-09”), which is included in the FASB Accounting Standards Codification (the "ASC") Topic 855 (Subsequent Events).  ASU 2010-09 clarifies that an SEC filer is required to evaluate subsequent events through the date that the financial statements are issued.  ASU 2010-09 is effective upon the issuance of the final update and had no impact on our financial position, results of operations or cash flows.

Effective January 2010, an amendment to the Consolidation Topic of the Codification (“ASU 810”)  replaced the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity (“VIE”) with a primarily qualitative analysis.  The qualitative analysis is based on identifying the party that has both the power to direct the activities that most significantly impact the VIE’s economic performance (the “power criterion”) and the obligation to absorb losses from or the right to receive benefits of the VIE that could potentially be significant to the VIE (the “losses/benefit criterion”).  The party that meets both these criteria is deemed to have a controlling financial interest.  The party with the controlling financial interest is considered to be the primary beneficiary and as a result is required to consolidate the VIE.  The amendment to ASU 810 had no impact on our financial position, results of operations or cash flows.

In January 2010, the FASB issued ASU 2010-06, (“Improving Disclosures about Fair Value Measurements”) which provides amendments to the FASB ASC Subtopic 820-10 that require new disclosures regarding (i) transfers in and out of Level 1 and Level 2 fair value measurements and (ii) activity in Level 3 fair value measurements. ASU 2010-06 also clarifies existing disclosures regarding (i) the level of asset and liability disaggregation and (ii) fair value measurement inputs and valuation techniques.  The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements.  Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  We are currently evaluating the disclosure impact of adoption on our condensed consolidated financial statements.  
 

 
NeuMedia, Inc. and Subsidiaries
15
Notes to Unaudited Consolidated Financial Statements
 
(all numbers in thousands except per share amounts)
 
 
 
3.
Fair Value Measurements
 
As of June 30, 2010 and March 31, 2010, the carrying value of cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, and accrued expenses approximates fair value due to the short-term nature of such instruments.
 
On April 1, 2009, the Company adopted FASB ASC  820-10, Fair Value Measurements and Disclosures - Measuring Liabilities at Fair Value (“ASC 820-10”). ASC 820-10, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. ASC 820-10 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information.
 
ASC 820-10 establishes a three-level valuation hierarchy of valuation techniques that is based on observable and unobservable inputs. Classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement. The first two inputs are considered observable and the last unobservable, that may be used to measure fair value and include the following:
 
Level 1 - - Quoted prices in active markets for identical assets or liabilities.
 
Level 2 - - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
Level 3 - - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
 
4.
Accounts Receivable
 
 
           
   
June 30,
   
March 31,
 
   
2010
   
2010
 
             
Accounts receivable
  $ 4,016     $ 5,114  
Less: allowance for doubtful accounts
    (244 )     (403 )
Net Accounts receivable of continuing operations
  $ 3,770     $ 4,711  
                 
Net Accounts receivable of discontinued operations
  $ -     $ 5,694  
 
Accounts receivable includes amounts billed and unbilled as of the respective balance sheet dates. The Company had no significant write-offs or recoveries during the quarter ended June 30, 2010 and the fiscal year ended March 31, 2010.
 
 
 

 

NeuMedia, Inc. and Subsidiaries
16
Notes to Unaudited Consolidated Financial Statements
 
(all numbers in thousands except per share amounts)
 
 
5.
Property and Equipment
 
 
           
   
June 30,
   
March 31,
 
   
2010
   
2010
 
             
Equipment
  $ 976     $ 829  
Furniture & fixtures
    266     $ 278  
Leasehold improvements
    140     $ 140  
      1,382     $ 1,247  
Accumulated depreciation
    (835 )   $ (644 )
Net Property and Equipment of continuing operations
  $ 547     $ 603  
                 
Net Property and Equipment of discontinued operations
  $ -     $ 668  
 
Depreciation expense for the periods ended June 30, 2010 and 2009 was $81 and $89, respectively, for continuing operations and $27 and $27 for discontinued operations.
 
 
6.
Description of Stock Plans
 
On September 27, 2007, the stockholders of the Company adopted the 2007 Employee, Director and Consultant Stock Plan (“Plan”). Under the Plan, the Company may grant up to 3,000 shares or equivalents of common stock of the Company as incentive stock options (“ISO”), non-qualified options (“NQO”), stock grants or stock-based awards to employees, directors or consultants, except that ISO’s shall only be issued to employees. Generally, ISO’s and NQO’s shall be issued at prices not less than fair market value at the date of issuance, as defined, and for terms ranging up to ten years, as defined. All other terms of grants shall be determined by the board of directors of the Company, subject to the Plan.
 
On February 12, 2008, the Company amended the Plan to increase the number of shares of our common stock that may be issued under the Plan to 7,000 shares and on March 7, 2008, amended the Plan to increase the maximum number of shares of the Company's common stock with respect to which stock rights may be granted in any fiscal year to 1,100 shares. All other terms of the plan remain in full force and effect.

Option Plans

The following table summarizes options granted for the periods or as of the dates indicated:

   
Number of
   
Weighted Average
 
   
Shares
   
Exercise Price
 
Outstanding at March 31, 2010
    6,187     $ 2.49  
Granted
    -     $ -  
Canceled
    -     $ -  
Exercised
    -     $ -  
Outstanding at June 30, 2010
    6,187     $ 2.49  
Exercisable at June 30, 2010
    6,048     $ 2.50  
 
 
 

 

NeuMedia, Inc. and Subsidiaries
17
Notes to Unaudited Consolidated Financial Statements
 
(all numbers in thousands except per share amounts)

The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:

 
Options Granted
       
 
Year Ended
     
Options Tranferred
 
March 31, 2010
 
Options Granted
 
from Twistbox
Expected life (years)
6
 
4 to 6
 
3 to 7
Risk-free interest rate
3.90% to 3.92%
 
2.7% to 3.89%
 
2.03% to 5.03%
Expected volatility
49.73% to 54.33%
 
70% to 75.2%
 
70% to 75%
Expected dividend yield
0%
 
0%
 
0%

The exercise price for options outstanding at June 30, 2010 were as follows:

   
Weighted
                   
   
Average
         
Weighted
       
   
Remaining
   
Number
   
Average
   
Aggregate
 
Range of
 
Contractual Life
   
Outstanding
   
Exercise
   
Intrinsic
 
Exercise Price
 
(Years)
   
June 30, 2010
   
Price
   
Value
 
                         
$0 - $1.00
    6.08       2,071     $ 0.63     $ -  
$2.00 - $3.00
    7.83       2,617     $ 2.67     $ -  
$4.00 - $5.00
    7.63       1,500     $ 4.75     $ -  
      7.20       6,188     $ 2.49     $ -  

The exercise price for options exercisable at June 30, 2010 were as follows:

   
Weighted
                   
   
Average
         
Weighted
       
   
Remaining
   
Options
   
Average
   
Aggregate
 
Range of
 
Contractual Life
   
Exercisable
   
Exercise
   
Intrinsic
 
Exercise Price
 
(Years)
   
June 30, 2010
   
Price
   
Value
 
                         
$0 - $1.00
    6.07       2,047     $ 0.63     $ -  
$2.00 - $3.00
    7.81       2,501     $ 2.68     $ -  
$4.00 - $5.00
    7.63       1,500     $ 4.75     $ -  
      7.18       6,048     $ 2.50       -  

Option Plans and Stock Plans

Total stock compensation expense is included in the following statements of operations components:

 
 

 

NeuMedia, Inc. and Subsidiaries
18
Notes to Unaudited Consolidated Financial Statements
 
(all numbers in thousands except per share amounts)

   
3 Months Ended
   
3 Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
 
Product development
  $ 2     $ 3  
Sales and marketing
    5       27  
General and administrative
    185       453  
    $ 192     $ 483  

 
7.
Acquisitions/Purchase Price Accounting/Discontinued Operations
 
Acquisition - - AMV Holding Limited and subsidiaries (Discontinued Operation)

On October 23, 2008, the Company completed an acquisition of 100% of AMV Holding Limited, a United Kingdom private limited company (“AMV”) and 80% of Fierce Media Limited. The acquisition was effective on October 1, 2008.

Subject to adjustment as set forth in the Stock Purchase Agreement, the aggregate purchase price (the “Purchase Price”) consisted of: (a) $5,375 in cash (the “Cash Consideration”); (b) 4,500 fully paid and non-assessable shares of common stock (the “Stock Consideration”); (c) a secured promissory note in the aggregate original principal amount of $5,375 (the “AMV Note”); and (d) additional earn-out amounts, if any, if the acquired companies achieved certain targeted earnings for each of the periods from October 1, 2008 to March 31, 2009, April 1, 2009 to March 31, 2010, and April 1, 2010 to September 30, 2010, as determined in accordance with the Stock Purchase Agreement.
 
Prior to closing, each outstanding option to purchase shares of capital stock of AMV (an “AMV Option”) was either exercised in full or terminated. The AMV Note was scheduled to mature on July 31, 2010, and bore interest at an initial rate of 5% per annum, subject to adjustment as provided therein. In the event the Company completed an equity financing that resulted in gross proceeds of over $6,000, the Company would have been obligated to prepay a portion of the AMV Note in an amount equal to one-third of the excess of the gross proceeds of such financing over $6,000.   Additionally, in connection with the AMV Note, AMV granted to the sellers a security interest in its assets. Such security interest was subordinate to the security interest granted to ValueAct Small Cap Master Fund, L.P. (“ValueAct) under the Senior Secured Note, issued by Twistbox,  due July 31, 2010, as amended on February 12, 2008 (the “ValueAct Note”), and as subsequently amended on October 23, 2008. AMV also agreed to guarantee Mandalay Media’s repayment of the AMV Note to the sellers.

The Purchase Price was preliminarily estimated by the Company to be $23,030 consisting of $9,900 attributed to the Stock Consideration issued, $5,375 in cash, $95 in stamp duty, $5,818 under the AMV Note referenced above (inclusive of the working-capital adjustment), $1,098 as an estimate of the initial period earn-out adjustment and $744 in transaction costs.  Any further  adjustments required under the “working capital adjustment” provision and any further adjustment under the “earn-out” provision of the Stock Purchase Agreement have not yet been determined and therefore have not been included in the preliminary calculation of the purchase price. The shares of the Stock Consideration were valued using the closing stock price at the acquisition date of $2.20 per share. Under the purchase method of accounting, the Company allocated the total Purchase Price of $23,030 to the net tangible and intangible assets acquired and liabilities assumed based upon their respective estimated fair values as of the acquisition date as follows:

 
 

 
 
NeuMedia, Inc. and Subsidiaries
19
Notes to Unaudited Consolidated Financial Statements
 
(all numbers in thousands except per share amounts)

Cash and cash equivalents
  $ 3,380  
Accounts receivable, net of allowances
    9,087  
Prepaid expenses and other current assets
    16  
Property and equipment, net
    406  
Accounts payable
    (10,391 )
Bank overdrafts
    (1,902 )
Other current liabilities
    (1,262 )
Other long term liabilities
    (223 )
Minority interests
    95  
Identified intangibles
    1,368  
Goodwill
    22,456  
    $ 23,030  

Net assets associated with Fierce Media Limited were insignificant. Goodwill recognized in the above transaction was $22,456. The business acquired is not capital intensive and does not require significant identifiable intangible assets – as a result the greater proportion of consideration has been allocated to goodwill.  Goodwill in relation to the acquisition of AMV is not expected to be deductible for US income tax purposes.

At March 31, 2010 AMV has been treated as a discontinued operation, and it was disposed during the period ended June 30, 2010.

Discontinued Operations

The Company had been negotiating a restructuring of debt with its senior debt holder for some time.  These negotiations were finalized on June 21, 2010.  On that date, the Company signed and closed a number of transactions, which included the sale of AMV. Pursuant to the Agreement, ValueAct and the AMV Founders, acting through a newly formed company (“NewCo”), acquired the operating subsidiaries of AMV in exchange for the release of $23,231 of secured indebtedness, which included a release of all amounts due and payable under the AMV Note and all of the amounts due and payable under the ValueAct Note except for $3,500 in principal. In addition, all intercompany balances at that date were cancelled, and all shares of common stock and warrants of the Company held by ValueAct were cancelled. In addition, approximately 3,541 shares of common stock of the Company held by two of the founders of AMV were acquired by the Company. As of June 30, 2010 the Company accrued $300 to a related party pertaining to the sale of  AMV.    
 
In accordance with FASB ASC 205-20, Discontinued Operations, the operating results and net assets and liabilities related to AMV were reclassified as of June 21, 2010 and reported as discontinued operations in the accompanying consolidated financial statements.
 
 
 

 
 
NeuMedia, Inc. and Subsidiaries
20
Notes to Unaudited Consolidated Financial Statements
 
(all numbers in thousands except per share amounts)
 
The following amounts represent the operations of the discontinued unit and have been segregated from continuing operations and reported as discontinued operations as of March 31, 2010 and 2009.
 
             
   
3 Months Ended
   
3 Months Ended
 
   
March 31,
   
March 31,
 
   
2010
   
2009
 
             
 Revenues
    5,132       6,306  
 Cost of revenues
    2,060       1,833  
 Gross profit
    3,072       4,473  
 Operating expenses and other expenses
     2,052       3,400  
 Income from discontinued operations
    1,020       1,073  
 Income tax provision
    (311 )     (271 )
 Income from discontinued operations, net of tax
    709       802  
 
 The following is a summary of assets and liabilities of the discontinued operations as of the disposal date of June 21, 2010 and as at March 31, 2010
 
   
June 21,
   
March 31,
 
   
2010
   
2010
 
             
 Assets
           
 Cash
  $ 641     $ 1,251  
 Working Capital, net of cash
    1,367       1,501  
 Property and Equipment, net
    591       668  
 Goodwill and intangibles
    15,948       15,955  
 Net Assets Sold
  $ 18,547     $ 19,375  
                 
                 
 Direct costs associated with the sale
    1,173          
 Currency translation adjustment
    234          
 Other
    3          
                 
    $ 19,957          
                 
 Consideration
    24,272          
                 
 Gain on sale
  $ 4,315          
 
 
 

 

NeuMedia, Inc. and Subsidiaries
21
Notes to Unaudited Consolidated Financial Statements
 
(all numbers in thousands except per share amounts)
 
 
8.
Other Intangible Assets
 
The Company has included amortization of acquired intangible assets directly attributable to revenue-generating activities in cost of revenues. The Company has included amortization of acquired intangible assets not directly attributable to revenue-generating activities in operating expenses. During the periods ended June 30, 2010 and 2009, the Company recorded amortization expense for continuing operations in the amount of $76 and $76, respectively, in cost of revenues; and amortization expense in the amount of $17 and $137 respectively, in operating expenses. During the periods ended June 30, 2010 and 2009 the Company recorded amortization expense for discontinued operations in the amount of $26 and $26, respectively, in cost of revenues; and amortization expense in the amount of $40 and $40, respectively, in operating expenses.

As of June 30, 2010, the total expected future amortization related to intangible assets for continuing operations was as follows:

   
12 Months Ended June 30,
 
   
2011
   
2012
   
2013
   
2014
   
2015
   
Thereafter
 
Software
  $ 232     $ 232     $ 232     $ 232     $ 136     $ -  
Customer List
    65     $ 65     $ 65     $ 65       65       39  
License Agreements
    71     $ 71       42       -       -       -  
                                                 
    $ 368     $ 368     $ 339     $ 297     $ 201     $ 39  
 
 
9.
Debt
 
   
June 30,
   
March 31,
 
   
2010
   
2010
 
             
Short Term Debt
           
             
Senior secured note, inclusive of accrued interest
           
net of discount of $0 and $40, respectively
  $ -       19,749  
Deferred purchase consideration inclusive of accrued interest
    -       6,333  
    $ -     $ 26,082  
                 
   
June 30,
   
March 31,
 
   
2010
   
2010
 
                 
Long Term Debt
               
                 
Senior secured note, inclusive of accrued interest,
               
net of discount of $2,479 and $0, respectively
  $ 21     $ -  
Secured note, inclusive of accrued interest
    3,510       -  
Other
    27       -  
    $ 3,557     $ -  
 
 
 

 

NeuMedia, Inc. and Subsidiaries
22
Notes to Unaudited Consolidated Financial Statements
 
(all numbers in thousands except per share amounts)

ValueAct Note

In July 2007 Twistbox entered into a debt financing agreement pursuant to the ValueAct Note amounting to $16,500, payable at 30 months. The holder of the ValueAct Note was granted first lien over all of the Company’s assets. The ValueAct Note carried interest of 9% annually for the first year and 10% subsequently, with semi-annual interest only payments. The debt-financing agreement included certain restrictive covenants. In conjunction with the Merger described in Note 7, the Company guaranteed up to $8,250 of the principal; and the restrictive covenants were modified, including a requirement for both Mandalay Media and Twistbox to maintain certain minimum cash balances. In connection with the guaranty, the Company issued the lender warrants to purchase 1,093 and 1,093 shares of common stock of the Company, exercisable at $7.55 per share, and at $5.00 per share, (increasing to $7.55 per share, if not exercised in full by February 12, 2009), respectively, through July 30, 2011. These warrants replaced warrants originally issued by Twistbox in conjunction with the ValueAct Note.
 
On October 23, 2008 in conjunction with the acquisition of AMV, as described in Note 7, the Company entered into a secured promissory note in the aggregate original principal amount of $5,375 (the “AMV Note”). With accrued interest, the balance of this note was $6,433 at June 30, 2010 and $5,945 at March 31, 2010.
 
On October 23, 2008, the Company, Twistbox and ValueAct entered into a Second Amendment (the “Second Amendment”) to the ValueAct Note. Among other things, the Second Amendment provided for a payment in kind election, whereby, in lieu of making any cash payments to ValueAct on the following two interest payment dates, Twistbox had the option to elect that the amount of any interest due on such date be added to the principal amount due under the ValueAct Note. That election was made in connection with the first interest payment following the amendment. In addition, ValueAct agreed to amend the ValueAct Note to modify the covenant requiring that the Company and Twistbox maintain certain minimum combined cash balances, during specified periods of time. Lastly, the Second Amendment provided that an event of default may be triggered in the event the Company fails to observe certain covenants as agreed to in the Second Amendment, including a covenant that, until all principal and interest and any other amounts due under the ValueAct Note are paid in full in cash, the Company: (i) would not create, incur, assume or permit to exist certain indebtedness, except for indebtedness in connection with a receivables facility as described in the Second Amendment, which indebtedness would rank pari passu in right of payment on the ValueAct Note, provided, that any receivables used to procure and maintain such receivables facility would not be subject to any lien of ValueAct during the term of such receivables facility; and (ii) would not, and would not permit any subsidiary to, without the prior consent of ValueAct, prepay any indebtedness incurred in connection with the AMV Note, other than prepayments with proceeds raised in an equity financing as permitted by the AMV Note. Additionally, on October 23, 2008, in connection with the ValueAct Note, as amended, AMV agreed to grant to ValueAct a security interest in its assets, which ranks senior to the security interest granted to the sellers of AMV. AMV also agreed to guarantee Twistbox’s repayment of the ValueAct Note.
 
As described above, the Company had previously issued to ValueAct two warrants to purchase shares of the Company’s common stock. One warrant entitled ValueAct to purchase up to a total of 1,093 shares of common stock at an exercise price of $7.55 per share (“$7.55 Warrant”). The other warrant entitled ValueAct to purchase up to a total of 1,093 shares of common stock at an initial exercise price of $5.00 per share (“$5.00 Warrant,” and together with the $7.55 Warrant, the “ValueAct Warrants”). On October 23, 2008, the Company and ValueAct entered into an allonge to each of the ValueAct Warrants. Among other things, the exercise price of each of the ValueAct Warrants was amended to be $4.00 per share. The price change resulted is an adjustment to the valuation of the warrants and therefore to the debt discount which is amortized over the life of the term of the debt.

 
 

 

NeuMedia, Inc. and Subsidiaries
23
Notes to Unaudited Consolidated Financial Statements
 
(all numbers in thousands except per share amounts)
 
On August 14, 2009, the Company, Twistbox and ValueAct entered into a Third Amendment (the “Third Amendment”) to the ValueAct Note. Among other things, the Third Amendment provided for the due date to be extended to July 31, 2010, an interest rate of 12.5% from the date of the agreement through maturity, an extension of the payment in kind (“PIK”) election through to the interest payment otherwise due in January 2010, and a reduction in the minimum cash covenant to $1 million until January 31, 2010 and $4 million thereafter, subject to certain conditions. There were no other significant changes.
 
As described above, the Company had previously issued to ValueAct warrants to purchase shares of the Company’s common stock. On August 14, 2009, the Company and ValueAct entered into an allonge to the warrant to purchase 1,093 shares of common stock. The exercise price of the Warrant was amended from $4.00 to $1.25 per share, and the termination date of the warrants was amended to July 14, 2010. The impact of the price change of the warrants is immaterial to the consolidated financial statements.

In addition the Company and the sellers of AMV entered into an agreement which extended the maturity date of the AMV Note which represented deferred purchase consideration in relation to the AMV acquisition, until July 31, 2010.

On January 25, 2010, the Company, Twistbox and ValueAct entered into a Waiver to Senior Secured Note (the “Waiver”), pursuant to which ValueAct agreed to waive certain provisions of the ValueAct Note. Pursuant to the Waiver, subject to Twistbox’s compliance with certain conditions set forth in Section 2 of the Waiver (the “Conditions”), certain rights to prepay the ValueAct Note were extended from January 31, 2010 to March 1, 2010. In addition, subject to Twistbox’s compliance with the Conditions, the timing obligation of the Company and Twistbox to comply with the cash covenant set forth in the ValueAct Note was extended to March 1, 2010 and the minimum cash balance which Twistbox and the Company was required to maintain was increased to $1,600.
 
On February 25, 2010, Twistbox received a letter (the “Notice”) from ValueAct alleging certain events of default with respect to the ValueAct Note. The Notice claimed that an event of default had occurred and was continuing under the ValueAct Note as a result of certain alleged defaults. In the Notice, ValueAct reserved its rights and remedies under the loan documents relating to the ValueAct Note. The Notice did not state that ValueAct had elected for the unpaid principal and accrued interest under the ValueAct Note to become due and payable. The Notice claimed that the Waiver, which among other things, had extended certain rights of Twistbox to prepay amounts under the ValueAct Note from January 31, 2010 to March 1, 2010 in order to extend the maturity of remaining amounts due under the ValueAct Note and extended the time period for the Company and Twistbox to comply with the $4,000 minimum cash balance covenant set forth in the ValueAct Note to March 1, 2010, had ceased to be effective as a result of the alleged failure of the Company to comply with the conditions set forth in the Waiver. Under the ValueAct Note, upon the occurrence of an event of default, ValueAct, by written notice to Twistbox, may declare the unpaid principal amount of the ValueAct Note, plus accrued but unpaid interest thereon, to be immediately due and payable. Commencing after the occurrence of an event of default and so long as the default is continuing, the interest rate applicable under the ValueAct Note is to increase an additional 2% per annum. If an event of default had been determined to have occurred and continuing, and ValueAct had declared the unpaid principal amount of the ValueAct Note, plus accrued but unpaid interest thereon, to be immediately due and payable, it may also have exercised its rights pursuant to the Guaranty and Security Agreement and the Debenture to foreclose on the assets of Twistbox and AMV. The Company believed that the events described in the Notice did not constitute defaults or if such events did constitute defaults, that Twistbox was entitled to requisite cure periods which ValueAct had failed to observe and that ValueAct had not properly exercised its rights under the ValueAct Note.  
 
 
 

 

NeuMedia, Inc. and Subsidiaries
24
Notes to Unaudited Consolidated Financial Statements
 
(all numbers in thousands except per share amounts)
 
On May 10, 2010, Twistbox received from ValueAct a Notice of Event of Default and Acceleration (“Acceleration Notice”) in which ValueAct stated that an event of default occurred under the ValueAct Note as a result of Twistbox’s and the Company’s failure to comply with the cash balance covenant under the ValueAct Note and, therefore, ValueAct had accelerated all outstanding amounts payable by Twistbox under the ValueAct Note.  In connection with the Acceleration Notice, ValueAct instituted an administration proceeding in the United Kingdom against AMV.  The Company continued to dispute the timeliness of ValueAct’s claim and contended that the commencement of the administration in the United Kingdom may have been unfounded.  
 
As described in Note 7, in connection with the disposal of AMV on June 21, 2010, all amounts due and payable under the AMV Note were released, and the ValueAct Note was amended and restated in its entirety and reduced to $3.5 million of principal (the “Amended ValueAct Note”).

Senior Secured Convertible Notes

In addition, for purposes of capitalizing the Company, the Company sold and issued $2,500 of Senior Secured Convertible Notes due June 21, 2013 of the Company (the “New Senior Secured Notes”) to certain of the Company’s significant stockholders.  The New Senior Secured Notes have a three year term and bear interest at a rate of 10% per annum payable in arrears semi-annually. Notwithstanding the foregoing, at any time on or prior to the 18th month following the original issue date of the New Senior Secured Notes, the Company may, at its option, in lieu of making any cash payment of interest, elect that the amount of any interest due and payable on any interest payment date on or prior to the 18th month following the original issue date of the New Senior Secured Notes be added to the principal due under the New Senior Secured Notes. The accrued and unpaid principal and interest due on the New Senior Secured Notes are convertible at any time at the election of the holder into shares of common stock of the Company at a conversion price of $0.15 per share, subject to adjustment. The New Senior Secured Notes are secured by a first lien on substantially all of the assets of the Company and its subsidiaries pursuant to the terms of that certain Guarantee and Security Agreement, dated as of June 21, 2010, among Twistbox, the Company, each of the subsidiaries thereof party thereto, the investors party thereto and Trinad Management. The Amended ValueAct Note is subordinated to the New Senior Secured Notes pursuant to the terms of that certain Subordination Agreement, dated as of June 21, 2010, by and between Trinad Fund, and ValueAct, and each of the Company and Twistbox.
 
Each purchaser of a New Senior Secured Note also received a warrant (“Warrant”) to purchase shares of common stock of the Company at an exercise price of $0.25 per share, subject to adjustment.  For each $1 of New Senior Secured Notes purchased, the purchaser received a Warrant to purchase 3.33 shares of common stock of the Company.  Each Warrant has a five year term.
 
The Warrants granted to the New Senior Secured Note holders on June 21, 2010 and conversion feature in the New Senior Secured Notes are not considered derivative instruments since the Warrants and the New Senior Secured Notes have a set conversion price. The Company determined the fair value of the detachable warrants issued in connection with the New Senior Secured Notes to be $1,678, using the Black-Scholes option pricing model and the following assumptions:  expected life of 5 years, a risk free interest rate of 2.05%, a dividend yield of 0% and volatility of 54.62%. In addition, the Company determined the value of the beneficial conversion feature to be $5,833. The combined total discount for the New Senior Secured Notes  is limited to the face value of the New Senior Secured Notes  of $2,500 and is being amortized over the term of the New Senior Secured Notes, using the effective interest method. For the three months ended June 30, 2010, the Company amortized $21 of the aforesaid discounts as interest and financing costs in the accompanying consolidated statements of operations
 
 
 

 

NeuMedia, Inc. and Subsidiaries
25
Notes to Unaudited Consolidated Financial Statements
 
(all numbers in thousands except per share amounts)

At June 30, 2010,  minimum future obligations through June 21, 2013, including interest, under the New Senior Secured and convertible Notes were $8,041 including repayment of the principal.

18 Months Ended June 30,
 
2011
   
2012
   
2013
   
Thereafter
 
$ -     $ 1,312     $ 6,729     $ -  

10.
Related Party Transactions
 
The Company engages in various business relationships with shareholders and officers and their related entities. The significant relationships are disclosed below.
 
On September 14, 2006, the Company entered into a management agreement (“Agreement”) with Trinad Management for five years. Pursuant to the terms of the Agreement, Trinad Management will provide certain management services, including, without limitation, the sourcing, structuring and negotiation of a potential business combination transaction involving the Company in exchange for a fee of $90 per quarter, plus reimbursements of all expenses reasonably incurred in connection with the provision of Agreement. The Agreement expires on September 14, 2011. Either party may terminate with prior written notice. However, if the Company terminates, it shall pay a termination fee of $1,000. For the periods ended June 30, 2010 and 2009, the Company incurred management fees under the agreement of $90 and $90 respectively. In March 2008, the Company entered into a month to month lease for office space with Trinad Management for rent of $9 per month, subsequently reduced to $5 per month.  Rent expense in connection with this lease was $15 and $26, respectively, for the periods ended June 30, 2010 and 2009.
 
11.
Capital Stock Transactions

Preferred Stock

There are 100 shares of Series A Convertible Preferred Stock of the Company authorized, issued and outstanding. The Series A Convertible Preferred Stock  has a par value of $0.0001 per share. The holders of Series A Convertible Preferred Stock are entitled to: (1) vote on an equal per share basis as common stock of the Company, (2) dividends on an as-converted basis and (3) a liquidation preference equal to the greater of $10 per share of Series A Convertible Preferred Stock  (subject to adjustment) or such amount that would have been paid on an as-converted basis. The holder of the Series A Convertible Preferred Stock has agreed not to exercise certain rights until such time as the Amended ValueAct Note has been repaid in cash in full.

 
 

 
 
NeuMedia, Inc. and Subsidiaries
26
Notes to Unaudited Consolidated Financial Statements
 
(all numbers in thousands except per share amounts)
 
Common Stock

In September 2009, the Company issued warrants to purchase 1,200 shares of common stock of the Company to a vendor. The warrants are exercisable at $1.25 per share, through September 23, 2014 and were valued at $134 at the time of issue.

In connection with the restructuring described in Note 7, on June 21, 2010, 562 shares of common stock of the Company held by ValueAct were cancelled, and 3,541 shares of common stock of the Company held by certain founders of AMV were acquired by the Company at a price of $0.02 per share. In addition, a total of 2,185 warrants to purchase common stock of the Company held by ValueAct were cancelled.
 
In addition, in connection with the New Senior Secured Notes described in Note 10, on June 21, 2010, each purchaser of a New Senior Secured Note also received a warrant (“Warrant”) to purchase shares of common stock of the Company at an exercise price of $0.25 per share, subject to adjustment.  For each $1 of New Senior Secured Notes purchased, the purchaser received a Warrant to purchase 3.33 shares of common stock of the Company.  Each Warrant has a five year term.
 
12.
Employee Benefit Plans

The Company has an employee 401(k) savings plan covering full-time eligible employees.  These employees may contribute eligible compensation up to the annual IRS limit. The Company does not make matching contributions.

13.
Income Taxes

The income tax provision for the quarter represents foreign withholding taxes related to continuing opeartions paid in jurisdictions outside of the US.  Profit from discontinued operations is disclosed net of taxes – these are income taxes currently payable in foreign jurisdictions, primarily the United Kingdom based on revenue derived in that territory. The discontinued operation had taxable income in the quarter which is subject to taxation in the United Kingdom. The tax provision arising from the gain on disposal of discontinued operations is offset against available tax losses.
 
Management has evaluated and concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements as of June 30, 2010.
 
ASC 740 requires the consideration of a valuation allowance to reflect the likelihood of realization of deferred tax assets.  Significant management judgment is required in determining any valuation allowance recorded against deferred tax assets. The Company adopted the provisions of ASC 740 on January 1, 2008 and there was no difference between the amounts of unrecognized tax benefits recognized in the balance sheet prior to the adoption of ASC 740 and those after the adoption of ASC 740. There were no unrecognized tax benefits not subject to valuation allowance as of June 30, 2010 and March 31, 2010. The Company recognized no interest and penalties on income taxes in its statement of operations for the periods ended June 30, 2010 and 2009.  Management believes that with few exceptions, the Company is no longer subject to income tax examinations by tax authorities for years before March 31, 2004.
 
 
 

 

NeuMedia, Inc. and Subsidiaries
27
Notes to Unaudited Consolidated Financial Statements
 
(all numbers in thousands except per share amounts)

14.
Segment and Geographic information
 
The Company operates in one reportable segment in which it is a developer and publisher of branded and non-branded entertainment content for mobile phones. Revenues are attributed to geographic areas based on the country in which the carrier’s principal operations are located. The Company attributes its long-lived assets, which primarily consist of property and equipment, to a country primarily based on the physical location of the assets. Goodwill and intangibles are not included in this allocation. The following information sets forth geographic information on our sales and net property and equipment for the period ended June 30, 2010:

   
North
         
Other
       
   
America
   
Europe
   
Regions
   
Consolidated
 
                         
Three Months ended June 30, 2010
                       
Net sales to unaffiliated customers
    243       2,160       455     $ 2,858  
                                 
Three Months ended June 30, 2009
                               
Net sales to unaffiliated customers
    806       2,683       287     $ 3,777  
                                 
Property and equipment, net
                               
at June 30, 2010
    468       77       2     $ 547  
 
Our largest customers accounted for 52% of gross revenues in the period ended June 30, 2010; and 39%  in the period ended March 31, 2010.
 
15.
Commitments and Contingencies

Operating Lease Obligations
The Company leases office facilities under noncancelable operating leases expiring in various years through 2012.

Following is a summary of future minimum payments under initial terms of leases at June 30, 2010:

Year Ending June 30,