UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d)
of
the Securities Exchange Act of 1934
Date
of Report (Date of earliest event reported): February 12,
2008
MANDALAY
MEDIA, INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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00-10039
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22-2267658
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(State
or other jurisdiction
of
incorporation)
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(Commission
File Number)
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(IRS
Employer
Identification
No.)
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2121
Avenue of the Stars, Suite 2550
Los
Angeles, CA 90067
(Address
of principal executive offices and zip code)
Registrant’s
telephone number, including area code: (310) 601-2500
Check
the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see
General
Instruction A.2. below):
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¨
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Written
communications pursuant to Rule 425 under the Securities Act (17
CFR
230.425)
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Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
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¨
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Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17
CFR
240.14d-2(b))
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¨
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Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17
CFR
240.13e-4(c))
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Safe
Harbor Statement under the Private Securities Litigation Reform Act of
1995
Information
included in this Current Report on Form 8-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”). This information may involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of Mandalay Media, Inc., a Delaware
corporation (“Mandalay” or the “Registrant”), and Twistbox Entertainment, Inc.,
a Delaware corporation (“Twistbox” and together with Mandalay, the “Companies”),
to be materially different from future results, performance or achievements
expressed or implied by any forward-looking statements. Forward-looking
statements, which involve assumptions and describe future plans, strategies
and
expectations of the Companies, 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.
The actual results of the Companies could differ materially from those expressed
or implied by the forward-looking statements as a result of various factors.
Except as required by applicable laws, Mandalay undertakes 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.
Unless
the context otherwise indicates, the use of the terms “we,” “our” or “us” refers
to the business and operations of Mandalay Media, Inc. through its sole
operating and wholly-owned subsidiary, Twistbox Entertainment,
Inc.
Item
1.01 Entry into a Material Definitive Agreement.
As
reported on our Current Report on Form 8-K filed with the Securities and
Exchange Commission (the “Commission”) on January 2, 2008, which is incorporated
herein by reference, on December 31, 2007, Mandalay entered into an Agreement
and Plan of Merger (the “Original Merger Agreement”) with Twistbox Acquisition,
Inc., a Delaware corporation and a wholly-owned subsidiary of Mandalay (“Merger
Sub”), Twistbox, and Adi McAbian and Spark Capital, L.P. as representatives of
the stockholders of Twistbox (the “Stockholder Representatives”), pursuant to
which Merger Sub would merge with and into Twistbox, with Twistbox as the
surviving corporation through an exchange of capital stock of Twistbox for
common stock of Mandalay (the “Merger”).
On
February 12, 2008, Mandalay, Merger Sub, Twistbox and the Stockholder
Representatives entered into an Amendment to Agreement and Plan of Merger (the
“Amendment”), which amended certain provisions of the Original Merger Agreement.
Pursuant to the Amendment, each outstanding Twistbox option (a “Twistbox
Option”) to purchase shares of common stock, $0.001 par value per share, of
Twistbox (“Twistbox Common Stock”) issued pursuant to Twistbox’s 2006 Stock
Incentive Plan (the “Twistbox 2006 Plan”) was assumed by Mandalay upon the
consummation of the Merger, 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 common stock of Mandalay, $0.0001 par value per share
(“Mandalay Common Stock”), issuable upon exercise of each such 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. The merger
consideration was also amended to consist of up to an aggregate of 12,325,000
shares of Mandalay Common Stock (the “Merger Consideration”), 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 318,722 shares of Mandalay
Common Stock required for the assumption of the unvested Twistbox Options.
All
other terms of the Original Merger Agreement remained the same and in effect.
The Merger was completed on February 12, 2008. A copy of the Amendment is
attached hereto as Exhibit 2.2 and incorporated herein by reference.
In
connection with the Merger, Mandalay guaranteed part of Twistbox’s outstanding
debt owed to ValueAct SmallCap Master Fund L.P. (“ValueAct”), and in connection
therewith issued ValueAct two warrants to purchase shares of Mandalay Common
Stock, as fully described below in Item 2.03 of this Current Report on Form
8-K,
which is incorporated herein by reference.
Item
2.01 Completion of Acquisition or Disposition of Assets.
SUMMARY
OF THE MERGER
Mandalay
entered into an Agreement and Plan of Merger on December 31, 2007, as
subsequently amended by the Amendment dated February 12, 2008 (the “Merger
Agreement”), with Merger Sub, Twistbox, and the Stockholder Representatives,
pursuant to which Merger Sub would merge with and into Twistbox, with Twistbox
as the surviving corporation. The Merger was completed on February 12,
2008.
Pursuant
to the Merger Agreement, upon the completion of the Merger, each outstanding
share of Twistbox Common Stock, 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,” and together with Twistbox Common Stock, the “Twistbox Capital 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 Twistbox Option issued pursuant to
the
Twistbox 2006 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 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 318,722 shares of Mandalay Common Stock required for
the
assumption of the unvested Twistbox Options. In exchange for the grant
of piggy-back registration rights, Mandalay intends to enter into lock-up
agreements with certain of our stockholders holding, in the aggregate,
9,466,720 shares
of Mandalay Common Stock issued or issuable as part of the Merger
Consideration pursuant to which all of such shares, and all other shares of
Mandalay Common Stock or securities exercisable for or convertible into Mandalay
Common Stock currently held or to be acquired in the future by such
stockholders, will be subject to an 18-month lock-up
period commencing as of on February 12, 2008, during which time their
shares shall not be sold or otherwise transferred without the prior written
consent of Mandalay. 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.
Effective
as of the closing of the Merger (the “Closing”), Ian Aaron and Adi McAbian were
appointed to our board of directors (the “Board of Directors”).
SUMMARY
DESCRIPTION OF BUSINESS
Historical
Operations of Mandalay Media, Inc.
Mandalay
Media, Inc. 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, we 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 the company (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.
Immediately
prior to the Closing, Mandalay was a public shell company with no operations,
and controlled by its stockholder, Trinad Capital Master Fund, L.P (“Trinad
Capital Master Fund”).
Current
Operations of our Sole Operating and Wholly-Owned Subsidiary, Twistbox
Entertainment, Inc. and its Subsidiaries
Overview
Twistbox
Entertainment, Inc. 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.
Twistbox began operations in 2003. Since that time, 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 rendering and provisioning
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
is headquartered in the Los Angeles area and has offices in London, Paris,
Stockholm, Dortmund, Moscow and Mexico City that provide local sales and
marketing support for both mobile operators and third party distribution in
their respective regions.
Lines
of Business
Twistbox
operates under three lines of business that include general entertainment,
games
and late night (with mature themes) programming.
General
Entertainment
The
general entertainment category that includes mobile content, games and mobile
marketing programs targets 18 to 35 year olds and is focused on Hollywood,
lifestyle and glamour. Twistbox has launched services that include Latin Twist,
a mobile portal focused on celebrity news, gossip and Telenovelas targeting
the
U.S. Hispanic and Latin American markets with leading local and national brands
from companies such as Editorial Televisa. Twistbox also has an exclusive global
agreement with CardPlayer Media LLC, the leading magazine publisher for poker
news and entertainment that incorporates extensive tournament coverage, results,
schedules and exclusive interviews with players and celebrities. Twistbox has
taken a partnership approach to this category by providing mobile site creation,
content localization, game development, integrated mobile marketing campaigns
and global distribution.
Games
Twistbox
Games, Twistbox’s related entity, develops, publishes and aggregates mobile
games and applications. Twistbox has developed and published more than 250
branded and casual games across a number of genres including action, casino,
puzzle and strategy. Twistbox Games’ portfolio is based on third party licensed
brands as well as its own original brands and intellectual property and includes
works for leading publishers such as Sony, EA, Square Enix, Taito, Namco,
i-Play, PopCap and many others. This division provides services including
award-winning development, universal handset porting and quality assurance
based
on its proprietary RapidPort™ development platform. Through unique applications
that include in-game advertising and promotions, a play-for-prizes platform
with
fulfillment and in-game billing services and carrier class content download
platform Nitro CDP™, Twistbox Games has taken a value-added approach that has
allowed it to secure agreements and preferred on-deck placement with leading
mobile operators that collectively represent over one billion
subscribers.
Late
Night Entertainment
Twistbox
distributes mature programming to the 18 to 35 year old demographic under its
separate wholly-owned subsidiary, WAAT Media Corp. (“WAAT Media”). This
programming is directed towards male audiences and includes extreme sports,
comedy, glamour and adult content from leading brands such as Playboy, Havoc,
Penthouse and Vivid. Within this late night category, approximately 38% of
the
programming is age-verified, while 62% is within each territory’s local
broadcast standards. WAAT Media has developed a proprietary content standards
matrix and a suite of tools and best practices for the responsible deployment
of
age-verified mobile programming. The “WAAT Media Wireless Content Standards
Rating Matrix©”,
developed in conjunction with the top six mobile operators in the UK, has been
globally adopted by major mobile carriers including Vodafone, Orange, O2,
Telefonica and Hutchinson 3G, among others, to support the “on-deck” deployment
of age-verified mobile entertainment. Through its brands and its commitment
to
content standards and best practices, Twistbox has secured on-deck distribution
in over 40 countries and exclusive carrier relationships for the late night
and
age-verified categories with more than 20 operators in markets that include
the
U.S., the United Kingdom, Mexico, Greece, Netherlands, Hungary, Spain and
Portuga1.
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 mobile TV content and portal management.
Twistbox currently has on-deck agreements with more than 100 mobile operators
including Vodafone, T-Mobile, Verizon, Cingular, 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. Through these
relationships, Twistbox currently reaches over one billion mobile subscribers
worldwide. Its currently deployed programming includes over 300 Wireless
Application Protocol (“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 video, images, games, videos and text 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. To date, Twistbox’s on-line content and magazine publishing partners
generate in excess of 20 million unique page views per day.
Technology
Twistbox’s
proprietary portfolio of technology encompasses platforms and tools that enhance
the delivery, management and quality of Twistbox’s programming.
· Renux™
- Twistbox’s
carrier class content management, publishing and distribution platform developed
internally for the development, integration, deployment and marketing of
mobile
programming. Renux value added WAP services include comprehensive advertising,
ad auction, search and web based promotional tools.
· RapidPort™
- -
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.
· Nitro-CDP™
- an
internally developed content download and delivery platform allowing for
real-time content upload, editing, rating and deployment, and merchandising,
while maintaining carrier-grade security, reliability and
scalability.
· CMX
Wrapper™ - developed
internally by Twistbox, enables mobile operators to integrate additional and
complimentary functionality (“try before you buy”) into existing mobile games
and applications without the need to alter the original code or involve the
original developer.
· Play
for Prizes - Competition goes mobile® - The
Twistbox Games For-Prizes platform enables skill-based multiplayer tournaments
for prizes with the ability to integrate unique in game promotions through
carrier-specific campaigns in cooperation with sponsors and
advertisers.
· WAAT
Media Content Standards Rating Matrix - WAAT
Media has developed a proprietary and copyrighted content standards matrix
widely known as the “WAAT Media Wireless Content Standards Ratings Matrix©”. It
is the globally-accepted content ratings system for age-verified mobile
programming that encompasses explicitness and is available to Mobile operators
and content providers through a licensing program on a royalty-free
basis.
Revenue
Model
Twistbox’s
primary revenue model is based on a per-download or subscription charge for
image galleries, video clips, games, WAP site access, mobile TV and other
content. In addition to its mobile content offerings, Twistbox generates, or
intends to generate, revenues from selective advertising and permission-based
marketing, where appropriate, to its target demographic. Twistbox receives
payment directly from the mobile operators and from third-party service
providers. The network operators typically receive between 40% to 50% of the
retail purchase price in the on-deck environment. The remainder, the net
revenue, is shared with Twistbox’s content providers, with the licensor
typically receiving between 20% to 50%.
INDUSTRY
OVERVIEW
Overview
The
wireless entertainment market has emerged as a result of the rapid growth and
significant technological advancement in the wireless communications industry.
Wireless carriers are launching new data services, including video clips, games,
ring tones and images, to drive revenues and take advantage of advanced wireless
networks and next generation mobile phones. The growth in the wireless
entertainment market has been positively influenced by a number of key factors
and trends that are expected to continue in the near future, including the
following factors set out below.
Growth
in Wireless Subscribers
The
number of global wireless subscribers has surpassed 1.0 billion and subscriber
growth is expected to continue as wireless communications increase in emerging
markets, including China and India. According to iSuppli, a provider of market
analysis, the number of global wireless subscribers is expected to grow from
approximately 2.6 billion in 2006 to over 4.0 billion in 2010 with most of
this
growth occurring in markets outside the U.S., Western Europe and
Japan.
Deployment
of Advanced Wireless Networks
Wireless
carriers are deploying high-speed, next-generation digital networks to enhance
wireless voice and data transmission. These advanced networks have enabled
the
provisioning and billing of data applications and have increased the ability
of
wireless subscribers to quickly download large amounts of data, including
games.
Availability
of Mobile Phones with Multimedia Capabilities
Annual
mobile phone sales grew from 482.5 million units in 2001 to 561.0 million units
in 2004 and are expected to grow to 767.0 million units in 2009, according
to
The ARC Group, a provider of market research and analysis. In recent years,
the
mobile phone has evolved from a voice-only device to a personal data and voice
communications device that enables access to wireless content and data services.
Mobile phone manufacturers are competing for consumers by designing
next-generation mobile phones with enhanced features including built-in digital
cameras, color screens, music and data connectivity. Manufacturers are also
embedding application environments such as BREW and Java into mobile phones
to
enable multimedia applications. The ARC Group estimates that sales of
BREW-enabled mobile phones are expected to grow from 11.6 million units in
2003
to 75.6 million units in 2008, and sales of Java-enabled mobile phones are
expected to grow from 95.5 million units in 2003 to 594.9 million units in
2008,
collectively representing approximately 97% of all mobile phones to be sold
in
2008. We believe that the availability of these next-generation mobile phones
is
driving demand for wireless entertainment applications that take advantage
of
these advanced multimedia capabilities.
Demand
for Wireless Entertainment
Wireless
carriers are increasingly launching and promoting wireless entertainment
applications to differentiate their services and drive revenues. The delivery
of
video clips, games, ring tones, images, and other entertainment content to
subscribers enables wireless carriers to leverage both the increasing installed
base of next-generation mobile phones and their investment in high bandwidth
wireless networks. Consumers are downloading and paying for wireless gaming
content offered by the carriers. According to Informa Telecoms and Media, a
market forecast provider in the telecommunications and media markets, worldwide
mobile content sales will climb from $18.8 billion in 2006 to $38.1 billion
in
2010, representing a compound growth rate of 15.2%.
DESCRIPTION
OF OUR BUSINESS
Effective
as of the Closing, Twistbox became Mandalay’s wholly-owned subsidiary. As a
result thereof, the historical business operations of Twistbox will comprise
Mandalay’s principal business operations going forward.
Overview
Twistbox
Entertainment, Inc. 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.
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.
Revenue
Model
Twistbox’s
revenue model is based primarily on a per-download or, alternatively,
subscription charge for video clips, games, WAP sites, and other
content.
In
addition to its mobile content offerings, Twistbox has begun to leverage its
distribution and traffic to generate revenues from WAP advertising where it
manages mobile content portals on an exclusive basis.
Twistbox
typically bills and receives payment directly through mobile operators and
portals that form the majority of its customers. The network operators typically
receive between 40% to 50% of the retail purchase price in the on-deck
environment. The remainder, the net revenue, is shared with Twistbox’s content
providers, with the licensor typically receiving between 20% to 50% of the
net
revenue.
Payment
methods available to end-users include SMS reverse billing and prepayment as
well as the more traditional credit and debit card channels. Twistbox typically
receives payment directly from the mobile operators and portals that constitute
the majority of its customers.
Development
Process
Twistbox
has an active content development program and has experience producing
release-ready applications for the world’s leading wireless formats and
platforms, including J2ME, BREW, DoJa, Windows Mobile, SMS and
Symbian.
Twistbox
intends to acquire additional third-party licenses and to develop new
applications through relationships with outside developers and its in-house
development staff. We believe that these efforts will assure that Twistbox
has a
steady stream of new content to offer its customers and end-users.
Twistbox
Technology and Tools
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 tool that significantly reduces the time
required to “port” a game across a significant number of these
handsets.
Twistbox
works 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.
The market for mobile entertainment should increase dramatically as mobile
operators continue to roll out their next generation service offerings and
we
see increases in bandwidth drive acceptance of handsets and other connected
devices offering improvements in data handling capability, graphics resolution,
and other features. Real-time, operating-system based handsets (smart phones/PDA
phones) were previously available but at high price points, reflecting the
fact
they were high-end devices. As prices decrease in the future, phones should
continue to grow steadily in both penetration and power.
The
availability of mobile content should hasten the adoption of the next generation
of handsets and promote the increase in data traffic required by carriers for
recovery of their investments in 3G licenses and infrastructure.
Twistbox’s
proprietary portfolio of technology encompasses platforms and tools that enhance
the delivery, management and quality of Twistbox’s programming.
Renux™
Renux™
is
Twistbox’s carrier class content management, publishing and distribution
platform developed internally for the development, integration, deployment
and
marketing of mobile programming. The system has been in operation for over
five
years and today supports over 300 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.
RapidPort™
RapidPort™
is Twistbox’s software suite that enables the development and porting of mobile
games and applications to over 1,000 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).
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 US 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.
WAAT
Media Wireless Content Standards Rating Matrix©
First
developed in 2003, and refined over the last several years, WAAT Media 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’ 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.
Mobile
Rights
Twistbox
has major mobile publishing agreements with leading entertainment companies.
Through such agreements, as well as its own portfolio of intellectual property,
Twistbox has the wireless mobile rights to the following applications and brands
that include but are not limited to:
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Games
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General
Entertainment
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Late
Night
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· Taito
· Sony
· EA
· i-Play
·
PopCap
·
Konami
· Namco
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· Editorial
Televisa
· CardPlayer
Magazine
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· Playboy
· Penthouse
· Girls
Gone
Wild
· Vivid
· Portland
TV
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We
believe that these widely recognized brands attract both mobile operators and
end users. Twistbox intends to exploit the depth and breadth of its intellectual
property in order to continue to grow its revenue and cash flow.
Content
Development
Twistbox
has experience producing release-ready entertainment applications for several
wireless formats and platforms, including J2ME, BREW, WAP 2.0, Symbian and
DoJa.
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. We believe that these efforts will assure that
it
has a steady supply of new content to offer its customers.
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.
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. Through these relationships,
Twistbox currently reaches over one billion mobile subscribers worldwide. Its
currently deployed programming includes over 300 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. To date,
Twistbox’s content partners generate in excess of eight million on-line unique
users per day.
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. Twistbox’s distribution agreements with Vodafone account
for approximately 36% of the company’s current revenue.
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 a growing affiliate sales and marketing team that is localized on a
country-by-country basis. In order to sell to its target base of carrier and
infrastructure customers, Twistbox has built a growing affiliate sales and
marketing team that is localized on a country-by-country basis. As of February
8, 2008, Twistbox had a workforce of approximately 132 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. Twistbox has strengthened its position with the operators
by deploying new services to enhance the category revenue that include age
verification systems, in portal advertising and ad auction services and new
search features to enhance discover. 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 its 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, Player X 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 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’ Copyright Office.
We believe that these trademarks, tradenames and copyright 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.
RISK
FACTORS
You
should carefully consider each of the risks described below and other
information contained in this Current Report on Form 8-K, including our
consolidated financial statements and the related notes. The following risks
and
the risks described elsewhere in this Current Report on Form 8-K, including
in
the section entitled “Management’s Discussion and Analysis of Financial
Condition and Results of Operation,” could materially affect our business,
prospects, financial condition, operating results or cash flow. Additional
risks
and uncertainties not currently known to us or that we currently deem immaterial
may also adversely affect our business. If any of these risks materialize,
the
trading price of our common stock could decline.
Unless
the context otherwise indicates, the use of the terms “we,” “our” or “us” refers
to the business and operations of Mandalay Media, Inc. through its sole
operating and wholly-owned subsidiary, Twistbox Entertainment, Inc.
Risks
Related to Our Business
Twistbox
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:
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maintain
our current, and develop new, wireless carrier relationships, in
both the
international and domestic markets;
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maintain
and expand our current, and develop new, relationships with third-party
branded and non-branded content owners;
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retain
or improve our current revenue-sharing arrangements with carriers
and
third-party content owners;
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maintain
and enhance our own brands;
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continue
to develop new high-quality products and services that achieve significant
market acceptance;
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continue
to port existing products to new mobile handsets;
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continue
to develop and upgrade our technology;
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continue
to enhance our information processing systems;
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increase
the number of end users of our products and services;
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maintain
and grow our non-carrier, or “off-deck,” distribution, including through
our third-party direct-to-consumer distributors;
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expand
our development capacity in countries with lower costs;
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execute
our business and marketing strategies successfully;
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respond
to competitive developments; and
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attract,
integrate, retain and motivate qualified
personnel.
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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.
In
addition to other risk factors discussed in this section, factors that may
contribute to the variability of our quarterly results include:
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the
number of new products and services released by us and our
competitors;
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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;
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the
popularity of new products and services, and products and services
released in prior periods;
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changes
in prominence of deck placement for our leading products and those
of our
competitors;
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the
expiration of existing content licenses;
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the
timing of charges related to impairments of goodwill, intangible
assets,
royalties and minimum guarantees;
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changes
in pricing policies by us, our competitors or our carriers and other
distributors;
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changes
in the mix of original and licensed content, which have varying gross
margins;
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the
timing of successful mobile handset
launches;
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the
seasonality of our industry;
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fluctuations
in the size and rate of growth of overall consumer demand for mobile
products and services and related content;
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strategic
decisions by us or our competitors, such as acquisitions, divestitures,
spin-offs, joint ventures, strategic investments or changes in business
strategy;
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our
success in entering new geographic markets;
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foreign
exchange fluctuations;
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accounting
rules governing recognition of revenue;
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the
timing of compensation expense associated with equity compensation
grants;
and
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decisions
by us to incur additional expenses, such as increases in marketing
or
research and development.
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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. 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 include Arvato,
Minick, Jamba, Buongiorno, Mobile Streams, Glu Mobile, Player X and
Gameloft.
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:
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significantly
greater revenues and financial
resources;
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stronger
brand and consumer recognition regionally or worldwide;
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the
capacity to leverage their marketing expenditures across a broader
portfolio of mobile and non-mobile products;
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more
substantial intellectual property of their own from which they can
develop
products and services without having to pay royalties;
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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;
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greater
resources to make acquisitions;
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lower
labor and development costs; and
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broader
global distribution and presence.
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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 distribute our products and
services and thus to generate 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.
Our
future success 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 majority 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.
Many
other factors outside our control could impair our ability to generate revenues
through a given carrier, including the following:
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the
carrier’s preference for our competitors’ products and services rather
than ours;
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the
carrier’s decision not to include or highlight our products and services
on the deck of its mobile handsets;
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the
carrier’s decision to discontinue the sale of some or all of products and
services;
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the
carrier’s decision to offer similar products and services to its
subscribers without charge or at reduced prices;
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the
carrier’s decision to require market development funds from publishers
like us;
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the
carrier’s decision to restrict or alter subscription or other terms for
downloading our products and services;
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a
failure of the carrier’s merchandising, provisioning or billing
systems;
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the
carrier’s decision to offer its own competing products and
services;
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the
carrier’s decision to transition to different platforms and revenue
models; and
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consolidation
among carriers.
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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,
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 and initially adopted, a subsequent
shift in our carriers or the entertainment preferences of end users could cause
a decline in the popularity of our offerings that could materially reduce our
revenues and harm our business, operating results and financial condition.
Inferior
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.
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.
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:
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develop
and improve our operational, financial and management
controls;
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enhance
our reporting systems and procedures;
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recruit,
train and retain highly skilled personnel;
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maintain
our quality standards; and
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maintain
branded content owner, wireless carrier and end-user
satisfaction.
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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 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 Charismatix, 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.
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:
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challenges
caused by distance, language and cultural differences;
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multiple
and conflicting laws and regulations, including complications due
to
unexpected changes in these laws and regulations;
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the
burdens of complying with a wide variety of foreign laws and
regulations;
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higher
costs associated with doing business internationally;
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difficulties
in staffing and managing international operations;
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greater
fluctuations in sales to end users and through carriers in developing
countries, including longer payment cycles and greater difficulty
collecting accounts receivable;
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protectionist
laws and business practices that favor local businesses in some
countries;
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foreign
tax consequences;
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foreign
exchange controls that might prevent us from repatriating income
earned in
countries outside the United
States;
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price
controls;
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the
servicing of regions by many different carriers;
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imposition
of public sector controls;
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political,
economic and social instability;
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restrictions
on the export or import of technology;
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trade
and tariff restrictions;
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variations
in tariffs, quotas, taxes and other market barriers;
and
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difficulties
in enforcing intellectual property rights in countries other than
the
United States.
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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.
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 sought 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.
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 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 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.
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
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.
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.
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.
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 fails 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.
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, following the
Merger, 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:
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quarterly
variations in our revenues and operating
expenses;
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developments
in the financial markets, and the worldwide or regional
economies;
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announcements
of innovations or new products or services by us or our
competitors;
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fluctuations
in merchant credit card interest
rates;
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significant
sales of our common stock or other securities in the open market;
and
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changes
in accounting principles.
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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.
Future
sales of shares by our stockholders could cause the market price of our common
stock to drop significantly, even if our business is performing.
Upon
completion of the Merger, we will have outstanding 32,048,365 shares of common
stock. In
exchange for the grant of piggy-back registration rights, Mandalay intends
to
enter into lock-up agreements with certain of our new stockholders and
optionholders as of the Merger holding, in the aggregate, 10,566,720 shares
of our common stock or securities exercisable for or convertible into our
common stock, and certain of our directors, officers, and principal
stockholders prior to the Merger holding, an
additional 16,200,000 shares of our common stock or securities exercisable
for
our common stock pursuant to which all of such shares and all other shares
of
our common stock or securities exercisable for or convertible into our common
stock held by such stockholders and option holders will be subject to an
18-month lock-up period beginning on February 12, 2008, during which
time their shares shall not be sold or otherwise transferred without the prior
written consent of Mandalay. As these restrictions on transfer end, the
market price of our stock could drop significantly if the holders of such shares
sell them or are perceived by the market as intending to sell them. This decline
in our stock price could occur even if our business is otherwise doing well.
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.
“Penny
stock” rules may restrict the market for our common stock.
Our
common stock is subject to rules promulgated by the Commission relating to
“penny stocks,” which apply to companies whose shares are not traded on a
national stock exchange or on NASDAQ, trade at less than $5.00 per share, or
who
do not meet certain other financial requirements specified by the Commission.
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.
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 December 31, 2008. 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 Commission,
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.
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 now that the Merger is completed.
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 88% 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.
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 will be 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, will make
some activities more difficult, time-consuming and costly and may also 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 will need to 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.
The
Sarbanes-Oxley Act will make it more difficult and more expensive for us to
maintain directors’ and officers’ liability insurance, and we may be required 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.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You
should read the following discussion and analysis in conjunction with our
consolidated financial
statements and related notes included elsewhere in this Current Report on Form
8-K. This discussion contains forward-looking statements that involve risks,
uncertainties and assumptions. Our actual results may differ materially from
those anticipated in these forward-looking statements as a result of a variety
of factors, including those set forth under “Risk Factors” beginning on page 15
and elsewhere in this filing.
Overview
Our
operations are currently conducted through our sole operating and wholly-owned
subsidiary, Twistbox Entertainment, Inc. Unless
the context otherwise indicates, the use of the terms “we,” “our” or “us” refers
to the business and operations of Mandalay Media, Inc. through 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.
Strategies
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 we have created
the requisite development and porting technology and have achieved the scale
to
operate at this level. We also believe that leveraging our 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.
Twistbox
started its business as The WAAT Corp. in 2003. A global agreement was signed
with Vodafone plc that year. In 2005, the company was reconstituted with its
founding shareholders. In September 2006, we reorganized the corporate
structure, with The WAAT Corp. being merged into Twistbox Entertainment Inc.,
and separate divisions created for the games and late night businesses. We
acquired Charismatix in February 2006, a developer and distributor of games,
based in Germany. The acquisition gave us access to unique technology developed
by Charismatix, provided a games development studio, and deepened our
relationship with our primary European customer. We acquired the mobile games
assets from InfoSpace in January 2007. This acquisition provided a games studio
in San Mateo, California, as well as a unique multi-player gaming platform
(Play
for Prizes),
additional valuable content licenses, and increased access to U.S. based
wireless carriers.
These
acquisitions:
| · |
broadened
our capabilities and expanded our distribution
network;
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expanded
and deepened our management capacity and capability to conduct business
globally;
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enabled
us to compete for licenses on a broader scale because of enhanced
distribution and production
capabilities;
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provided
access to unique technologies that enable us to develop and offer
content
across multiple handsets and systems in a cost effective manner;
and
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provided
complementary technical production and testing capabilities that
enabled
the combined companies to create products superior to those developed
by
either separately.
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We
believe that these acquisitions, together with our internal growth, have
significantly enhanced our attractiveness to wireless carriers and branded
content owners, allowing us to pursue our ongoing strategy.
Revenues
We
generate the vast majority of our revenues from mobile phone carriers that
market and distribute our content. These carriers generally charge a one-time
purchase fee or a monthly subscription fee on their subscribers’ phone bills
when the subscribers download our games to their mobile phones. The carriers
perform the billing and collection functions and generally remit to us a
contractual percentage of their collected fee for each game. We recognize as
revenues the percentage of the fees due to us from the carrier. End users may
also initiate the purchase of our games through various Internet portal sites
or
through other delivery mechanisms, with carriers or third parties being
responsible for billing, collecting and remitting to us a portion of their
fees.
To date, our international revenues have been much more significant than our
domestic revenues.
Cost
of Revenues
Our
cost
of revenues 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.
Gross
Margin
Our
gross
margin is determined principally by the mix of content that we deliver. 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 primarily include product development expenses, sales and
marketing expenses and general and administrative expenses. They have in the
past also included a charge for taxes associated with our major customer. 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. During 2006, as a result of our
acquisition of Charismatix, and again in 2007 with the acquisition of the mobile
games division of InfoSpace, we substantially increased our ability to develop
games internally. As a result, we have not generally incurred significant
expenses for external development. Games development may encompass development
of a game from concept through deployment or adaption 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. Our
sales
and marketing expenses 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 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.
Amortization
of Intangible Assets. We
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 record intangible assets on
our
balance sheet based upon their fair value at the time they are acquired. We
determine the fair value of the intangible assets using a contribution approach.
We amortize the amortizable intangible assets using the straight-line method
over their estimated useful lives of three to five years.
Interest
Income and Interest Expense
Interest
income represents interest earned, primarily on money market accounts placed
with our bank. Interest income was substantially higher in fiscal 2007 due
to
cash invested following our Series B private placement in May 2006. In fiscal
2006 interest expense was primarily connected to advances from an associated
company, PowerSports Video Productions CCT, Inc. In fiscal 2007, interest
expense primarily related to a facility provided by our bank to fund the
acquisition of the mobile games division of InfoSpace. In April 2007, we raised
$3.0 million by issuing 436,680 shares of Series B1 Preferred Stock at $6.87
per
share. In July 2007, we entered into a debt financing agreement in the form
of a
Senior Secured Note amounting to $16.5 million payable at 30 months. These
financing arrangements will result in both interest income and interest expense
being higher in fiscal 2008. The level of net interest expense will depend
on
our use of cash in the future.
Accounting
for Income Taxes
We
are
subject to tax in the United States as well as other tax jurisdictions or
countries in which we conduct business. Earnings from our non-U.S. activities
are subject to local country income tax and may be subject to current United
States income tax depending on whether these earnings are subject to U.S. income
tax based upon U.S. anti-deferral rules, such as Subpart F of the Internal
Revenue Code of 1986, as amended, or the Code. In addition, some revenues
generated outside of the United States may be subject to withholding taxes.
In
some cases, these withholding taxes may be deductible on a current basis or
may
be available as a credit to offset future income taxes depending on a variety
of
factors. We record a valuation allowance to reduce any deferred tax asset to
the
amount that is more likely than not to be realized. We consider historical
levels of income, expectations and risks associated with estimates of future
taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for a valuation allowance. If we were to determine that
we
would be able to realize deferred tax assets in the future in excess of the
net
recorded amount, we would record an adjustment to the deferred tax asset
valuation allowance. Such an adjustment would increase our income in the period
the determination is made. Historically, we have incurred operating losses
and
have generated significant net operating loss carryforwards. At September 30,
2007, we had net operating loss carryforwards of approximately $17.0 million
federal and state tax purposes. These carryforwards will begin to expire in
2019. Our ability to use our net operating loss carryforwards to offset any
future taxable income may be subject to restrictions attributable to equity
transactions that result in changes of ownership as defined by section 382
of
the Code.
Critical
Accounting Policies and Estimates
Our
consolidated financial statements are prepared in accordance with United States
generally accepted accounting principles, or GAAP. These accounting principles
require us to make certain estimates and judgments that can affect the reported
amounts of assets and liabilities as of the dates of the consolidated financial
statements, the disclosure of contingencies as of the dates of the consolidated
financial statements, and the reported amounts of revenues and expenses during
the periods presented. Although we believe that our estimates and judgments
are
reasonable under the circumstances existing at the time these estimates and
judgments are made, actual results may differ from those estimates, which could
affect our consolidated financial statements. We believe the following to be
critical accounting policies because they are important to the portrayal of
our
financial condition or results of operations and they require critical
management estimates and judgments about matters that are
uncertain:
·
revenue
recognition;
·
license
fees;
·
goodwill;
·
software
development costs;
·
stock-based
compensation; and
·
income
taxes.
Revenue
Recognition
Our
revenues are derived primarily by licensing material and software products
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.
We distribute our products primarily through mobile telecommunications service
providers, or carriers, which market the product, images or games to end users.
License fees for perpetual and subscription licenses are usually billed by
the
carrier 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 the others provide opt-in renewal. In
either case, subsequent billings for subscription licenses are generally billed
monthly. We apply the provisions of Statement of Position 97-2, Software
Revenue Recognition,
as
amended by Statement of Position 98-9, Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions,
to all
transactions.
Revenues
are recognized from our 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
signed license agreement to be evidence of an arrangement with a carrier and
a
“clickwrap” agreement to be evidence of an arrangement with an end user. For
these licenses, we define delivery as the download of the product, image or
game
by the end user. We estimate 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. 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
us 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 we believe are reasonable, but it is possible that actual
results may differ from our estimates. We estimate 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 we receive the final carrier reports, to the
extent not received within a reasonable time frame following the end of each
month, we record any differences between estimated revenues and actual revenues
in the reporting period when we determine the actual amounts. Revenues earned
from certain carriers may not be reasonably estimated. If we are unable to
reasonably estimate the amount of revenues to be recognized in the current
period, we recognize revenues upon the receipt of a carrier revenue report
and
when a portion of licensed revenues are fixed or determinable and collection
is
probable. To monitor the reliability of our 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 we deem that a carrier is
not
creditworthy, we defer all revenues from the arrangement until we receive
payment and all other revenue recognition criteria have been met.
In
accordance with Emerging Issues Task Force, or EITF Issue No. 99-19,
Reporting
Revenue Gross
as a Principal Versus Net as an Agent,
we
recognize as revenue the amount the carrier reports as payable upon the sale
of
our products, images or games. We have evaluated our carrier agreements and
have
determined that it is not the principal when selling our 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 games 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 us a fixed percentage of their revenues or a fixed
fee for
each
game;
|
|
|
· |
carriers
generally must approve the price of our games in advance of their
sale to
subscribers, and our more significant carriers generally have the
ability
to set the ultimate price charged to their subscribers;
and
|
|
|
· |
we
have limited risks, including no inventory risk and limited credit
risk.
|
License
Fees
Our
license fees expense consist of fees that we pay to branded content owners
for
the use of their intellectual property, including trademarks and copyright.
We
do not generally pay advances to licensors, and license fees are expensed as
incurred. Where we acquire the rights for unlimited use of content either in
perpetuity or for a specific period, we treat the cost as a prepayment and
amortize it against revenue over its anticipated life. Minimum guarantees are
required under certain content provider contracts and are expensed when paid.
We
regularly evaluate remaining liabilities under contracts subject to minimum
guarantees and where recoupability of the guarantees is subject to doubt,
recognizes the relevant liability and record an impairment charge immediately.
This
evaluation considers multiple factors, including the term of the agreement,
forecasted revenue, forecasted demand for that content, and launch plans. As
a
result, we recorded a minimum guaranteed liability of approximately $6.0 million
as of March 31, 2007. The impairments that we recorded were related to license
agreements entered into prior to June 2006 and contained significant and in
some
cases escalating regular guarantee payments to secure a long term contract
for
the brand. Subsequent to that time we have not entered into contracts with
significant future guaranteed payments. We classify minimum royalty payment
obligations as current liabilities to the extent they are contractually due
within the next twelve months.
Goodwill
In
accordance with SFAS No. 142, Goodwill
and Other Intangible Assets
(“SFAS
No. 142”), we do not amortize goodwill or other intangible assets with
indefinite lives but rather test them for impairment. SFAS No. 142 requires
us
to perform an impairment review of our goodwill balance at least annually,
which
we do as of December 31 each year, and also whenever events or changes in
circumstances indicate that the carrying amount of these assets may not be
recoverable. In our impairment review, we look at two of our reporting
units—Twistbox Games Germany and the United States — since none of our goodwill
is attributable to other areas. We compare the fair value of each unit to its
carrying value, including goodwill. The primary methods used to determine the
fair values for SFAS No. 142 impairment purposes were the discounted cash flow
and market methods. To date, no unit’s carrying value has exceeded its fair
value, and thus we have taken no goodwill impairment charges. Application of
the
goodwill impairment test requires judgment, including the identification of
the
reporting units, the assigning of assets and liabilities to reporting units,
the
assigning of goodwill to reporting units and the determining of the fair value
of each reporting unit. Significant judgments and assumptions include the
forecast of future operating results used in the preparation of the estimated
future cash flows, including forecasted revenues and costs, timing of overall
market growth and our percentage of that market, discount rates and growth
rates
in terminal values. The market comparable approach estimates the fair value
of a
company by applying to that company market multiples of publicly traded firms
in
similar lines of business. The use of the market comparable approach requires
judgments regarding the comparability of companies with lines of business
similar to ours. This process is particularly difficult in a situation where
no
similar public companies exist. The factors used in the selection of comparable
companies include growth characteristics as measured by revenue or other
financial metrics, margin characteristics; product-defined markets served,
customer defined markets served, the size of a company as measured by financial
metrics such as revenue or market capitalization, the competitive position
of a
company, such as whether it is a market leader in terms of indicators such
as
market share, and company-specific issues that suggest appropriateness or
inappropriateness of a particular company as a comparable. We weighted the
income and market comparable valuations equally as we did not believe that
either method was more appropriate. Further, the total gross value calculated
under each method was not materially different and therefore if the weighting
were different we do not believe that this would significantly impact our
conclusion. If different comparable companies had been used, the market
multiples and resulting estimates of the fair value of our stock would also
have
been different. Changes in these estimates and assumptions could materially
affect the determination of fair value for each reporting unit, which could
trigger impairment.
Software
Development Costs
We
apply
the principles of Statement of Financial Accounting Standards No. 86,
Accounting
for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed
(“SFAS
No. 86”). SFAS No. 86 requires that software development costs incurred in
conjunction with product development be charged to research and development
expense until technological feasibility is established. Thereafter, until the
product is released for sale, software development costs must be capitalized
and
reported at the lower of unamortized cost or net realizable value of the related
product. We have adopted the “tested working model” approach to establishing
technological feasibility for our products and games. Under this approach,
we do
not consider a product or game in development to have passed the technological
feasibility milestone until we have a completed a model of the product or game
that contains essentially all the functionality and features of the final game,
and we have tested the model to ensure that it works as expected. To date,
we
have not incurred significant costs between the establishment of technological
feasibility and the release of a product or game for sale. Thus, we have
expensed all software development costs as incurred. We consider 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 as they relate to products and games; the lack of pre-orders
or
sales history for products and games; the uncertainty regarding a product’s or
game’s revenue-generating potential; the 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 the historical practice of canceling
products and games at any stage of the development process.
Stock-Based
Compensation
We
have
adopted the fair value provisions of SFAS No. 123R, Share-Based
Payment
(“SFAS
No. 123R”). SFAS No. 123R requires the recognition of compensation expense,
using a fair-value based method, for costs related to all share based payments
including stock options. SFAS No. 123R requires companies to estimate the fair
value of share-based payment awards on the grant date using an option pricing
model. To value stock option awards, we used the Black-Scholes option pricing
model, which requires, among other inputs, an estimate of the fair value of
the
underlying common stock on the date of grant and assumptions as to volatility
of
our stock over the term of the related options, the expected term of the
options, the risk-free interest rate and the option forfeiture rate. We
determined the assumptions used in this pricing model at each grant date. We
concluded that it was not practicable to calculate the volatility of our share
price since our securities are not publicly traded and therefore there is no
readily determinable market value for our stock. Therefore, we based expected
volatility on the historical volatility of a peer group of publicly traded
entities. We determined the expected term of our options based upon the options’
contractual term, along with expected experience with exercises and post-vesting
cancellations. We based the risk-free rate for the expected term of the option
on the U.S. Treasury Constant Maturity Rate as of the grant date. We determined
the forfeiture rate based upon anticipated experience with option cancellations
since there is little historical experience.
We
recorded total employee non-cash stock-based compensation expense under SFAS
123R of $19,000 in fiscal 2006; $55,000 in fiscal 2007 and $58,000 for the
six
months ended September 30, 2007. We expect that in future periods, stock-based
compensation expense may increase as we issue additional equity-based awards
to
continue to attract and retain key employees. Additionally, SFAS 123R requires
that we recognize compensation expense only for the portion of stock options
that are expected to vest. Our estimated forfeiture rate in fiscal 2007 was
10%.
If the actual number of forfeitures differs from that estimated by management,
we may be required to record adjustments to stock-based compensation expense
in
future periods.
Given
the
absence of an active market for our common stock at the date of grant prior
to
the Merger, our board of directors, the members of which we believe had
extensive business, finance and venture capital experience, was required to
estimate the fair value of our common stock for purposes of determining exercise
prices for the options it granted. Through the first half of 2006, it determined
the estimated fair value of our common stock, based in part on a market
capitalization analysis of comparable public companies and other metrics,
including revenue multiples and price/earning multiples, as well as the
following:
|
|
· |
the
prices for our convertible preferred stock sold to outside investors
in
arms-length transactions;
|
|
|
· |
the
rights, preference and privileges of that convertible preferred stock
relative to those of our common
stock;
|
|
|
· |
our
operating and financial
performance;
|
|
|
· |
the
hiring of key personnel;
|
|
|
· |
the
introduction of new products;
|
|
|
· |
our
stage of development and revenue
growth;
|
|
|
· |
the
fact that the options grants involved illiquid securities in a private
company;
|
|
|
· |
the
risks inherent in the development and expansion of our services;
and
|
|
|
· |
the
likelihood of achieving a liquidity event, such as an initial public
offering or sale of the company, for the shares of common stock underlying
the options given prevailing market
conditions.
|
In
late
2006, we engaged an independent third-party valuation firm, Cerian Technology
Ventures LLC (“Cerian”), to perform valuations of our common stock. We obtained
estimates of the respective then-current fair values of our stock prepared
by
Cerian as of November 13, 2006 and August 31, 2007. These valuations used a
market comparable approach to estimate our aggregate enterprise value at each
valuation date. The market comparable approach estimates the fair value of
a
company by applying to that company market multiples of publicly traded firms
in
similar lines of business. The use of the market comparable approach requires
judgments regarding the comparability of companies with lines of business
similar to ours. If different comparable companies had been used, the market
multiples and resulting estimates of the fair value of our stock would also
have
been different. We allocated the implied enterprise value that we estimated
to
the shares of preferred and common stock using the option-pricing method at
each
valuation date. The option-pricing method involves making assumptions regarding
the anticipated timing of a potential liquidity event, such as an initial public
offering, and estimates of the volatility of our equity securities. The
anticipated timing was based on the plans of our board of directors and
management. Estimating the volatility of the share price of a privately held
company is complex because there is no readily available market for the shares.
Cerian estimated the volatility of our
stock
based on available information on the volatility of stocks of publicly traded
companies in our industry. Had different estimates of volatility and anticipated
timing of a potential liquidity event been used, the allocations between the
shares of preferred and common stock would have been different and would have
resulted in a different value being determined for our common stock as of each
valuation date. Finally, a discount was applied to the valuation of the common
stock for lack of marketability. Based on empirical studies, Cerian used a
factor of 25% for this purpose.
Since
January 15, 2003, we have granted options as listed above. The Cerian valuation
at both valuation dates noted above determined a valuation for our common stock
of $0.59 per share. While there have been placements of preferred stock during
these periods, there have not been any sales of common stock which could be
used
to assist in the determination of valuation of the common stock. From January
15, 2003 to May 15, 2006, stock options were issued at an exercise price of
$0.35. From June 5, 2006 onwards, all stock options were issued with an exercise
price of $0.59, which was based on the two Cerian reports and was equivalent
to
the fair market value of the shares. The first Cerian valuation was available
to
the Board at the time that stock grants were approved with grant dates as from
June 2006 and the valuation was considered to be appropriate for grants from
that time. In addition, at that time the Board also approved grants for certain
employees as of their employment start date, which covered periods prior to
June
2006. The Board determined that the exercise price for these grants should
also
be set at $0.59.
If
we had
made different assumptions and estimates than those described in the paragraphs
above,
the amount of our recognized and to be recognized stock-based compensation
expense, net loss
and
net loss per share amounts could have been materially different. We believe
that
we have used
reasonable methodologies, approaches and assumptions consistent with the
American Institute of Certified Public Accountants Practice Guide, Valuation
of Privately-Held-Company Equity Securities Issued
as Compensation, to
determine the fair value of our common stock.
Income
Taxes
We
account for income taxes in accordance with SFAS No. 109, Accounting
for Income Taxes.
As part
of the process of preparing our consolidated financial statements, we are
required to estimate our income tax benefit (provision) in each of the
jurisdictions in which we operate. This process involves estimating our current
income tax benefit (provision) together with assessing temporary differences
resulting from differing treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are
included within our consolidated balance sheet using the enacted tax rates
in
effect for the year in which we expect the differences to reverse. We record
a
valuation allowance to reduce our deferred tax assets to an amount that more
likely than not will be realized. As of September 30, 2007, our valuation
allowance on our net deferred tax assets was $9.9 million. While we have
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance, in the event
we
were to determine that we would be able to realize our deferred tax assets
in
the future in excess of our net recorded amount, we would need to make an
adjustment to the allowance for the deferred tax asset, which would increase
income in the period that determination was made. We have not provided federal
income taxes on the unremitted earnings of foreign subsidiaries because these
earnings are intended to be reinvested permanently.
Results
of Operations
The
following sections discuss and analyze the changes in the significant line
items
in the historical operations and statements of operations for Twistbox for
the
comparison periods identified. This discussion does not include any historical
information of Mandalay, which was a shell company prior to the
Merger.
Comparison
of the Six Months Ended September 30, 2006 and 2007
Revenues
| |
|
Six
Months Ended
September
30,
|
|
| |
|
2007
|
|
2006
|
|
| |
|
(In
thousands)
|
|
|
Revenues
by type:
|
|
|
|
|
|
|
Games
|
|
$ |
1,917
|
|
$ |
1,248
|
|
|
Other
content
|
|
|
5,147
|
|
|
3,581
|
|
|
Total
|
|
$ |
7,064
|
|
$ |
4,829
|
|
| |
|
|
|
|
|
|
|
|
Percentage
of Revenues by type:
|
|
|
|
|
|
|
|
|
Games
|
|
|
27.1
|
%
|
|
25.8
|
%
|
|
Other
content
|
|
|
72.9
|
%
|
|
74.2
|
%
|
|
Total
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Our
revenues increased $2.3 million, or 46 %, from $ 4.8 million in the six months
ended September 30, 2006 to $ 7.1 million in six months ended September 30,
2007, largely as a result of volume increases, achieved by both increasing
volume with individual carriers and by expanding our base by adding carrier
relationships in territories in which we already operated, and by expanding
into
new territories. Other content includes a broad range of primarily licensed
product delivered in the form of WAP, Video, Wallpaper and more recently Mobile
TV. Other content revenues grew by $1.6 million or 44 % period over period
-
primarily the result of an increase in volume in existing major territories
-
the top eight territories revenues increased by $1.1 million or 35%.
Cost
of Revenues
| |
|
Six
Months Ended
September
30,
|
|
| |
|
2007
|
|
2006
|
|
|
Cost
of Revenues:
|
|
(In
thousands)
|
|
|
License
Fees
|
|
|
3,218
|
|
|
2,512
|
|
|
Other
direct cost of revenues
|
|
|
269
|
|
|
51
|
|
|
Total
Cost of Revenues
|
|
|
3,487
|
|
|
2,563
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
7,064
|
|
|
4,829
|
|
| |
|
|
|
|
|
|
|
|
Gross
Margin
|
|
|
50.6%
|
|
|
46.9%
|
|
Our
cost
of revenues increased $0.9 million, or 36%, from $2.6 million in the six months
ended September 30, 2006 to $3.5 million in the six months ended September
30,
2007. The increase in license fees was largely driven by the increase in
revenues flowing through to increased license fees payable. The average royalty
rate for games decreased due to the 2007 revenues including game revenue from
the InfoSpace acquisition at lower average rates. Other direct cost of revenues
increased as we have introduced new revenue streams which have an element of
fixed costs.
Gross
Margin
Our
gross
margin increased from 46.9% in the six months ended September 30, 2006 to 50.6%
in the six months ended September 30, 2007. This increase was primarily due
to
increased mix of higher margin games revenue, and the impact of the higher
margin InfoSpace games within the games revenue.
Product
Development Expenses
| |
|
|
Six
Months Ended
September
30,
|
|
| |
|
|
2007
|
|
|
2006
|
|
| |
|
|
(In
thousands)
|
|
|
Product
Development Expenses
|
|
$
|
4,792
|
|
$
|
3,310
|
|
|
Percentage
of Revenues
|
|
|
67.8
|
%
|
|
68.5
|
%
|
Our
product development expenses increased $1.5 million, or 45%, from $3.3 million
in the six months ended September 30, 2006 to $4.8 million in the six months
ended September 30, 2007. The increase primarily resulted from a $1.5 million
increase in salaries and benefits due to increases in personnel. The increase
in
these costs and expenses was primarily due to the build up of our development
infrastructure - for games in Germany and Poland as well as the addition of
the
San Mateo development studio with the acquisition of the InfoSpace assets in
January 2007; and for other content we increased our development staff in Los
Angeles.
Sales
and Marketing Expenses
| |
|
|
Six
Months Ended
September
30,
|
|
| |
|
|
2007
|
|
|
2006
|
|
| |
|
|
(In
thousands)
|
|
|
Sales
and Marketing Expenses
|
|
$
|
2,554
|
|
$
|
1,636
|
|
|
Percentage
of Revenues
|
|
|
36.2
|
%
|
|
33.9
|
%
|
Our
sales
and marketing expenses increased $0.9 million, or 56%, from $1.6 million in
the
six months ended September 30, 2006 to $2.6 million in the six months ended
September 30, 2007. The increase resulted from a $1.0 million increase in
salaries and benefits, and $0.3 million increase in rent and allocated
facilities costs, offset by a $0.4 million reduction in expenditures on trade
shows. We increased our sales and marketing staff from 14 at June 30, 2006
to 21
at June 30, 2007. We expanded our staff as we continued to expand into new
territories, which required an on-the-ground account management presence, and
as
we continued to develop a more sophisticated approach to dealing with our
primary customers.
General
and Administrative Expenses
| |
|
|
Six
Months Ended
September
30,
|
|
| |
|
|
2007
|
|
|
2006
|
|
| |
|
|
(In
thousands)
|
|
|
General
and Administrative Expenses
|
|
$
|
2,363
|
|
$
|
1,542
|
|
|
Percentage
of Revenues
|
|
|
33.5
|
%
|
|
31.9
|
%
|
Our
general and administrative expenses increased $0.8 million, or 53%, from $1.5
million in the six months ended September 30, 2006 to $2.4 million in the six
months ended September 30, 2007. The increase was due primarily to an increase
of $0.6 million in salaries and benefits resulting from an increase in
headcount. We increased our general and administrative staff from 15 on June
30,
2006 to 24 on June 30, 2007. As a percentage of revenues, general and
administrative expenses increased from 31.9% in 2006 to 33.5.2% in 2007 due
to
the timing of general and administrative expense increases.
Other
Operating Expenses
Our
amortization of intangible assets increased from $0 in the six months ended
September 30, 2006 to $47,000 in the six months ended September 30, 2007. This
increase was due to the intangible assets acquired from InfoSpace in January
2007.
Other
Expenses
Interest
income decreased from $110,000 in the six months ended September 30, 2006 to
$100,000 in the six months ended September 30, 2007. In 2006, we had excess
funds invested following the Series B preferred stock placement; in 2007 we
had
excess funds invested following the debt financing in July 2007. Interest
expense increased from $29,000 in the six months ended September 30, 2006 to
$326,000 in the six months ended September 30, 2007. The 2006 expense related
to
a loan in place prior to the Series B placement, the 2007 expense represents
2
months of interest on the $16.5 million debt financing completed in late July
2007.
Foreign
exchange transaction gain increased from $15,000 in the six months ended
September 30, 2006 to $104,000 in the six months ended September 30, 2007,
as
the result of the steadily declining value of the US dollar during the six
months ended September 30, 2007 against the major currencies in which we collect
revenues - primarily the Euro and UK pound sterling.
Other
expense increased from $122,000 in the six months ended September 30, 2006
to
$252,000 in the six months ended September 30, 2007. The increase primarily
relates to amortization of transaction costs related to the debt and equity
placements in the period, and an increase in a reserve for payment of VAT
liabilities related to changes in reporting proposed by our largest customer.
Income
Tax Benefit/(Provision)
Income
tax benefit was $6,000 in the six months ended September 30, 2006 - resulting
from a tax refund. There was no benefit/(provision ) in the six months ended
September 30, 2007. Our primary operating entities in the U.S. and Germany
incurred losses for tax purposes in both periods.
Quarterly
Results of Operations
The
following table sets forth unaudited quarterly consolidated statements of
operations data for fiscal
2006 and fiscal 2007 and the six months ended September 30, 2007. We derived
this information from unaudited consolidated financial statements, which
we
prepared on the same basis as our audited consolidated financial statements
contained in this document. In our opinion, these unaudited statements include
all adjustments, consisting only of normal recurring adjustments, that we
consider necessary for a fair statement of that information when read in
conjunction with the consolidated financial statements and related notes
included elsewhere in this document. The operating results for any quarter
should not be considered indicative of results for any future
period.
|
|
|
Fiscal
2006
|
|
Fiscal
2007
|
|
Fiscal
2008
|
|
|
|
|
June
30
|
|
September
30
|
|
December
31
|
|
March
30
|
|
June
30
|
|
September
30
|
|
December
31
|
|
March
30
|
|
June
30
|
|
September
30
|
|
|
Revenues
|
|
$
|
442
|
|
$
|
639
|
|
$
|
1,343
|
|
$
|
2,445
|
|
$
|
2,247
|
|
$
|
2,582
|
|
$
|
3,361
|
|
$
|
3,708
|
|
$
|
3,708
|
|
$
|
3,356
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
Fees
|
|
|
217
|
|
|
372
|
|
|
651
|
|
|
1,232
|
|
|
1,155
|
|
|
1,357
|
|
|
1,866
|
|
|
1,889
|
|
|
1,719
|
|
|
1,499
|
|
|
Impairment
of guarantees
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
6,022
|
|
|
-
|
|
|
-
|
|
|
Other
direct cost of revenues
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1
|
|
|
50
|
|
|
46
|
|
|
15
|
|
|
119
|
|
|
150
|
|
|
Total
cost of revenues
|
|
|
217
|
|
|
372
|
|
|
651
|
|
|
1,232
|
|
|
1,156
|
|
|
1,407
|
|
|
1,912
|
|
|
7,926
|
|
|
1,838
|
|
|
1,649
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit/(Loss)
|
|
|
225
|
|
|
267
|
|
|
692
|
|
|
1,213
|
|
|
1,091
|
|
|
1,175
|
|
|
1,449
|
|
|
(4,218
|
)
|
|
1,870
|
|
|
1,707
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
development
|
|
|
229
|
|
|
410
|
|
|
596
|
|
|
1,619
|
|
|
1,511
|
|
|
1,799
|
|
|
1,987
|
|
|
2,516
|
|
|
2,491
|
|
|
2,301
|
|
|
Sales
and marketing
|
|
|
36
|
|
|
188
|
|
|
313
|
|
|
593
|
|
|
558
|
|
|
1,078
|
|
|
816
|
|
|
1,672
|
|
|
1,352
|
|
|
1,202
|
|
|
General
and administrative
|
|
|
213
|
|
|
40
|
|
|
56
|
|
|
221
|
|
|
516
|
|
|
1,026
|
|
|
735
|
|
|
1,317
|
|
|
1,215
|
|
|
1,148
|
|
|
Amortization
of intangible assets
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
23
|
|
|
24
|
|
|
23
|
|
|
Restructuring charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
-
|
|
|
Total
operating expenses
|
|
|
478
|
|
|
638
|
|
|
965
|
|
|
2,433
|
|
|
2,585
|
|
|
3,903
|
|
|
3,538
|
|
|
5,528
|
|
|
5,082
|
|
|
4,674
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(253
|
)
|
|
(371
|
)
|
|
(273
|
)
|
|
(1,220
|
)
|
|
(1,494
|
)
|
|
(2,728
|
)
|
|
(2,089
|
)
|
|
(9,746
|
)
|
|
(3,212
|
)
|
|
(2,967
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income/(expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
11
|
|
|
39
|
|
|
71
|
|
|
36
|
|
|
23
|
|
|
9
|
|
|
91
|
|
|
Interest
expense
|
|
|
(18
|
)
|
|
(20
|
)
|
|
(28
|
)
|
|
(28
|
)
|
|
(23
|
)
|
|
(6
|
)
|
|
(10
|
)
|
|
(35
|
)
|
|
(54
|
)
|
|
(272
|
)
|
|
Foreign
exchange transaction gain/(loss)
|
|
|
(5
|
)
|
|
-
|
|
|
-
|
|
|
6
|
|
|
(10
|
)
|
|
25
|
|
|
55
|
|
|
54
|
|
|
69
|
|
|
35
|
|
|
Other
income/(expense), net
|
|
|
(5
|
)
|
|
(7
|
)
|
|
(1
|
)
|
|
(32
|
)
|
|
(54
|
)
|
|
(68
|
)
|
|
(94
|
)
|
|
(154
|
)
|
|
(170
|
)
|
|
(82
|
)
|
|
Interest
and other income/(expense)
|
|
|
(28
|
)
|
|
(27
|
)
|
|
(29
|
)
|
|
(43
|
)
|
|
(48
|
)
|
|
22
|
|
|
(13
|
)
|
|
(112
|
)
|
|
(146
|
)
|
|
(228
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(281
|
)
|
|
(398
|
)
|
|
(302
|
)
|
|
(1,263
|
)
|
|
(1,542
|
)
|
|
(2,706
|
)
|
|
(2,102
|
)
|
|
(9,858
|
)
|
|
(3,358
|
)
|
|
(3,195
|
)
|
|
Income
tax benefit/(provision)
|
|
|
-
|
|
|
-
|
|
|
(1
|
)
|
|
-
|
|
|
-
|
|
|
6
|
|
|
(4
|
)
|
|
(21
|
)
|
|
-
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
(281
|
)
|
|
(398
|
)
|
|
(303
|
)
|
|
(1,263
|
)
|
|
(1,542
|
)
|
|
(2,700
|
)
|
|
(2,106
|
)
|
|
(9,879
|
)
|
|
(3,358
|
)
|
|
(3,195
|
)
|
The
following table sets forth our historical results, for the periods indicated,
as
a percentage of our
revenues.
|
|
|
Fiscal
2006
|
|
Fiscal
2007
|
|
Fiscal
2008
|
|
|
|
June
30
|
|
September
30
|
|
December
31
|
|
March
30
|
|
June
30
|
|
September
30
|
|
December
31
|
|
March
30
|
|
June
30
|
|
September
30
|
|
|
Revenues
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
Fees
|
|
|
49.1
|
|
|
58.2
|
|
|
48.5
|
|
|
50.4
|
|
|
51.4
|
|
|
52.6
|
|
|
55.5
|
|
|
50.9
|
|
|
46.4
|
|
|
44.7
|
|
|
Impairment
of guarantees
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
162.4
|
|
|
-
|
|
|
-
|
|
|
Other
direct cost of revenues
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
0.0
|
|
|
1.9
|
|
|
1.4
|
|
|
0.4
|
|
|
3.2
|
|
|
4.5
|
|
|
Total
cost of revenues
|
|
|
49.1
|
|
|
58.2
|
|
|
48.5
|
|
|
50.4
|
|
|
51.4
|
|
|
54.5
|
|
|
56.9
|
|
|
213.8
|
|
|
49.6
|
|
|
49.1
|
|
|
Gross
Profit/(Loss)
|
|
|
50.9
|
|
|
41.8
|
|
|
51.5
|
|
|
49.6
|
|
|
48.6
|
|
|
45.5
|
|
|
43.1
|
|
|
(113.8
|
)
|
|
50.4
|
|
|
50.9
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
development
|
|
|
51.8
|
|
|
64.2
|
|
|
44.4
|
|
|
66.2
|
|
|
67.2
|
|
|
69.7
|
|
|
59.1
|
|
|
67.9
|
|
|
67.2
|
|
|
68.6
|
|
|
Sales
and marketing
|
|
|
8.1
|
|
|
29.4
|
|
|
23.3
|
|
|
24.3
|
|
|
24.8
|
|
|
41.8
|
|
|
24.3
|
|
|
45.1
|
|
|
36.5
|
|
|
35.8
|
|
|
General
and administrative
|
|
|
48.2
|
|
|
6.3
|
|
|
4.2
|
|
|
9.0
|
|
|
23.0
|
|
|
39.7
|
|
|
21.9
|
|
|
35.5
|
|
|
32.8
|
|
|
34.2
|
|
|
Amortization
of intangible assets
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
0.6
|
|
|
0.6
|
|
|
0.7
|
|
|
Total
operating expenses
|
|
|
108.1
|
|
|
99.8
|
|
|
71.9
|
|
|
99.5
|
|
|
115.0
|
|
|
151.2
|
|
|
105.3
|
|
|
149.1
|
|
|
137.1
|
|
|
139.3
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(57.2
|
)
|
|
(58.1
|
)
|
|
(20.3
|
)
|
|
(49.9
|
)
|
|
(66.5
|
)
|
|
(105.7
|
)
|
|
(62.2
|
)
|
|
(262.8
|
)
|
|
(86.6
|
)
|
|
(88.4
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income/(expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
0.5
|
|
|
1.7
|
|
|
2.7
|
|
|
1.1
|
|
|
0.6
|
|
|
0.2
|
|
|
2.7
|
|
|
Interest
expense
|
|
|
(4.1
|
)
|
|
(3.1
|
)
|
|
(2.1
|
)
|
|
(1.1
|
)
|
|
(1.0
|
)
|
|
(0.2
|
)
|
|
(0.3
|
)
|
|
(0.9
|
)
|
|
(1.5
|
)
|
|
(8.1
|
)
|
|
Foreign
exchange transaction gain/(loss)
|
|
|
(1.1
|
)
|
|
-
|
|
|
-
|
|
|
0.2
|
|
|
(0.4
|
)
|
|
1.0
|
|
|
1.6
|
|
|
1.5
|
|
|
1.9
|
|
|
1.0
|
|
|
Other
income/(expense), net
|
|
|
(1.1
|
)
|
|
(1.1
|
)
|
|
(0.1
|
)
|
|
(1.3
|
)
|
|
(2.4
|
)
|
|
(2.6
|
)
|
|
(2.8
|
)
|
|
(4.2
|
)
|
|
(4.6
|
)
|
|
(2.4
|
)
|
|
Interest
and other income/(expense)
|
|
|
(6.3
|
)
|
|
(4.2
|
)
|
|
(2.2
|
)
|
|
(1.8
|
)
|
|
(2.1
|
)
|
|
0.9
|
|
|
(0.4
|
)
|
|
(3.0
|
)
|
|
(3.9
|
)
|
|
(6.8
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(63.6
|
)
|
|
(62.3
|
)
|
|
(22.5
|
)
|
|
(51.6
|
)
|
|
(68.6
|
)
|
|
(104.8
|
)
|
|
(62.5
|
)
|
|
(265.9
|
)
|
|
(90.6
|
)
|
|
(95.2
|
)
|
|
Income
tax benefit/(provision)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
-63.6
|
%
|
|
-62.3
|
%
|
|
-22.6
|
%
|
|
-51.6
|
%
|
|
-68.6
|
%
|
|
-104.6
|
%
|
|
-62.7
|
%
|
|
-266.4
|
%
|
|
-90.6
|
%
|
|
-95.2
|
%
|
Our
revenues generally increased as we established and then expanded our carrier
distribution network, by both increasing volume with individual carriers and
by
expanding our base by adding carrier relationships in territories in which
we
already operated; and by expanding into new territories. Revenues from the
March
quarter of fiscal 2006 onwards were favorably impacted by revenues generated
from the Charismatix acquisition in February 2006; and from the March quarter
of
fiscal 2007 by incremental revenues flowing from the InfoSpace acquisition.
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.
Our
cost
of revenues increased over the above periods as a result of increased royalty
payments to licensors and developers caused by increased revenues. However,
our
cost of revenues did not increase sequentially as a percentage of revenues
in
all quarters because of changes in revenue mix, because of the impact of minimum
guarantees (primarily in fiscal 2007) and because of the impairment charge
in
the March quarter of fiscal 2007.
Our
quarterly product development expenses increased over the period as we built
up
our development infrastructure. These expenses increased particularly in the
March quarter of fiscal 2006 with the addition of the development following
the
Charismatix acquisition, and in the March quarter of fiscal 2007 with the
addition of the staff in the San Mateo games development studio acquired from
InfoSpace. The decrease in product development expenses in the September quarter
of fiscal 2008 was due to a reduction in employee costs resulting from a
restructuring initiated in that quarter.
Our
sales
and marketing expenses increased over the period as we created and then built
up
our sales and marketing infrastructure. We added staff and local sales office
as
we expanded into new territories and as we further developed our relationships
with our carrier partners. In the March quarter of fiscal 2007 we significantly
upgraded our staffing with the addition of senior sales and marketing personnel
and the establishment of enhanced sales capabilities in our German subsidiary.
The decrease in the September quarter of fiscal 2008 was due to a reduction
in
employee costs resulting from a restructuring initiated in that
quarter.
Our
general and administrative expenses increased over the period as we built up
our
ability to service the business and created a corporate infrastructure. In
the
September quarter of fiscal 2006, we incurred significant legal expenses related
to a corporate entity restructuring and re-branding under the Twistbox name.
Several members of the executive team were added during fiscal 2007.
Amortization of intangible assets commenced in the March quarter of fiscal
2007
following the acquisition of intangibles from InfoSpace
Liquidity
and Capital Resources
| |
|
|
|
|
|
|
|
Six
Months Ended
|
|
| |
|
|
|
Year
Ended March 31,
|
|
September
30,
|
|
| |
|
|
|
2007
|
|
2006
|
|
2007
|
|
| Consolidated
Statement of Cash Flows Data: |
|
|
|
(In
thousands)
|
|
(In
thousands)
|
|
| |
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
|
|
|
631
|
|
|
553
|
|
|
204
|
|
|
Cash
flows used in operating activities
|
|
|
|
|
|
9,090
|
|
|
1,643
|
|
|
6,670
|
|
|
Cash
flows (used in)/ provided by investing
activities
|
|
|
|
|
|
2,084
|
|
|
780
|
|
|
184
|
|
|
Cash
flows provided by financing activities
|
|
|
|
|
|
10,784
|
|
|
3,286
|
|
|
(16,936
|
)
|
Since
our
inception, we have incurred recurring losses and negative annual cash flows
from
operating activities, and we had an accumulated deficit of $25.4 million as
of
September 30, 2007. Our primary sources of liquidity have historically been
private placements of shares of our preferred stock with aggregate proceeds
of
$15.7 million and borrowings under our credit facilities with aggregate proceeds
of $16.5 million. In the future, we anticipate that our primary sources of
liquidity will be cash generated by our operating activities.
Operating
Activities
In
fiscal
2007, we used $9.1 million of net cash in operating activities as compared
to
$1.6 million in
fiscal
2006. This increase was primarily due to an increase in our net loss of $14.0
million from fiscal 2006 to fiscal 2007, and the increase in net receivables
of
$3.1 million and prepaid expenses by $0.4 million; offset by increases in
accounts payable, accrued license fees and other liabilities of $10.3. The
loss
and the increase in accrued license fees both include the non-cash impact of
the
$6.0 impairment charge recorded in fiscal 2007.
In
the
six months ended September 30, 2007, we used $6.7 million of net cash in
operating activities as compared to $4.5 million in the six months ended
September 30, 2006. This increase was primarily to an increase in our net loss
of $2.3 million, an increase in accrued license fees of $2.2 million, offset
by
a decrease in accounts receivable of $1.0 million , and a decrease in current
liabilities and accrued compensation of $1.1 million.
Investing
Activities
Our
primary investing activities have consisted of purchases of property and
equipment, and the acquisitions of Charismatix in fiscal 2006 and the mobile
games division of InfoSpace in fiscal 2007. Property and equipment purchases
were $0.6 million in fiscal 2006 and $0.6 million in fiscal 2007. The
consideration for the acquisition of Charismatix in fiscal 2006 included $0.3
million in cash, but was offset by $0.2 cash acquired within the business.
The
consideration for the acquisition of the assets from InfoSpace in fiscal 2007
was $1.5 million in cash. In
the
six months ended September 30, 2007, our primary investing activities have
consisted of purchases of property and equipment.
Financing
Activities
In
fiscal
2006, we generated $3.3 million of net cash from financing activities - this
came from a combination of a short term loan from a related party, and the
issuance and sale of $2.5 million of Series A preferred stock. In fiscal 2007,
we generated $10.8 million of net cash from financing activities - $10.3 from
the issuance and sale of Series A and Series B preferred stock, and $1.7 million
from a short term bank facility, offset by a net repayment of short term loans
from a related party of $1.2 million.
In
the
six months ended September 30, 2007, we generated $16.9 million of net cash
from
financing activities - this came from a $3.0 million issuance of Series B-1
preferred stock, and $15.7 from a secured debt facility, net of costs - detailed
under “Contractual Obligations” below. At the same time we repaid $1.7 million
in short term bank loans.
Sufficiency
of Current Cash, Cash Equivalents and Short-Term
Investments
Our
cash,
cash equivalents and short-term investments were $10.7 million as of September
30, 2007. We believe that our cash, cash equivalents and short-term investments
and any cash flow from operations will be sufficient to meet our anticipated
cash needs, including for working capital purposes, capital expenditures and
various contractual obligations, for the next 12 months. We may, however,
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.
Contractual
Obligations
The
following table is a summary of our contractual obligations as of September
30,
2007:
| |
|
Payments
due by period
|
|
|
| |
|
Total
|
|
|
|
1-3
Years
|
|
|
| |
|
(In
thousands)
|
| |
|
|
|
|
|
|
|
|
|
Long-term
debt obligations
|
|
$
|
20,213
|
|
$
|
1,513
|
|
$
|
18,700
|
|
|
Operating
lease obligations
|
|
|
763
|
|
|
301
|
|
|
462
|
|
|
Guaranteed
royalties
|
|
|
7,248
|
|
|
2,615
|
|
|
4,633
|
|
|
Capitalized
leases and other obligations
|
|
|
5,571
|
|
|
3,089
|
|
|
2,482
|
|
Debt
obligations include interest payments on the loan. In July 2007, we borrowed
$16,500,000 from ValueAct, in the form of a Senior Secured Note (“the Note”)
payable at 30 months. ValueAct was granted first lien over all of the company’s
assets. The Note carries interest of 9% annually for the first year and 10%
subsequently, with semi-annual interest only payments. In connection with the
Merger, the debt obligations to ValueAct are guaranteed in part by Mandalay,
as
described in more detail in Item 2.03 below. The agreement includes certain
restrictive covenants, including a requirement to maintain certain levels of
cash by Twistbox and Mandalay. ValueAct was also granted
a
warrant which has been canceled in connection with the Merger and Mandalay
issued ValueAct two new warrants to purchase its common stock. One
warrant 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. The warrants expire on July
30, 2011.
Operating
lease obligations represent noncancelable operating leases for our office
facilities in several locations, expiring in various years through
2010.
We
have
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.
The commitments in the above table include guaranteed royalties to licensors
that are included as a liability in our consolidated balance sheet of $5.3
million as of September 30, 2007 because we have determined that recoupment
is
unlikely.
Capitalized
leases and other obligations include payments to various distribution providers,
technical providers and employees for agreements with initial terms greater
than
one year at September 30, 2007.
On
May
30, 2006, we entered into a distribution agreement pursuant to which we are
required to pay quarterly license fees for the use and distribution of certain
intellectual property. The amount of license fees payable by us is equal to
the
greater of 50% of the net revenues received by us in connection with the use
and
distribution of the intellectual property subject to the agreement and certain
minimum guarantee payments. The term of the agreement expires on December 1,
2009, subject to earlier termination under certain circumstances, and
automatically renews for one two-year period unless prior notice is given by
either party of its intent not to renew the agreement.
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.
Comparison
of the Years Ended March 31, 2006 and 2007
Revenues
| |
|
Year
Ended March 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(In
thousands)
|
|
| |
|
|
|
|
|
|
Games
|
|
$ |
3,162
|
|
$ |
902 |
|
|
Other
content
|
|
|
8,736
|
|
|
3,968
|
|
|
Total
|
|
$ |
11,898
|
|
$ |
4,869
|
|
| |
|
|
|
|
|
|
|
|
Percentage
of Revenues by type:
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Games
|
|
|
26.6
|
%
|
|
18.5
|
%
|
|
Other
content
|
|
|
73.4
|
%
|
|
81.5
|
%
|
|
Total
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Our
revenues increased $7.0 million, or 144%, from $4.9 million in 2006 to $11.9
million in 2007, largely as a result of volume increases, achieved by both
increasing volume with individual carriers and by expanding our base by adding
carrier relationships in territories in which we already operated, and by
expanding into new territories. The fiscal 2006 games revenues include only
two
months related to Charismatix, while fiscal 2007 includes $1.9million related
to
the German subsidiary. Other content includes a broad range of primarily
licensed product delivered in the form of WAP, Video, Wallpaper and more
recently Mobile TV. Other content revenues grew by $4.8 million or 120% year
over year. This was a combination of an increase in volume in existing major
territories - the top eight territories revenues increased by $3.7 milllion
or
101% year over year; and expansion into new territories - which contributed
some
$0.6 million of the growth.
Cost
of Revenues
| |
|
Year
Ended March 31,
|
|
| |
|
2007
|
|
2006
|
|
| |
|
(In
thousands)
|
|
|
Cost
of Revenues:
|
|
|
|
|
|
|
License
Fees
|
|
$ |
6,267
|
|
$ |
2,472
|
|
|
Impairment
of guarantees
|
|
|
6,022
|
|
|
-
|
|
|
Other
direct cost of revenues
|
|
|
112
|
|
|
-
|
|
|
Total
Cost of Revenues
|
|
$ |
12,401
|
|
$ |
2,472
|
|
| |
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
11,898
|
|
$ |
4,869
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Margin
|
|
|
-4.2
|
%
|
|
49.2
|
%
|
Our
cost
of revenues increased $9.9 million, from $2.5 million in fiscal 2006 to $12.4
million in fiscal 2007. Excluding the effect of the impairment of guarantees,
the increase was $3.9 million. The increase in license fees was largely driven
by the increase in revenues flowing through to increased license fees payable.
The impairment charge related to three specific content deals which were entered
into prior to June 2006 and contained significant and in some cases escalating
regular guarantee payments to secure a long term contract for the brand. As
part
of our evaluation of the remaining commitments under these deals and the
recoupability of the guarantees, we recorded a charge for impairment of $6.0
million in the period ended March 31, 2007.
Gross
Margin
Games
revenues include a mix of licensed and internally developed product, while
other
revenues were largely from licensed products in these periods. Excluding the
effect of the impairment charge, margins decreased from 49.2% to 46.4%,
primarily due to the incidence of minimum guarantees in the mix of license
fees
during the course of the year.
Product
Development Expenses
| |
|
Year
Ended March 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(In
thousands)
|
|
|
Product
Development Expenses
|
|
$
|
7,813
|
|
$
|
2,854
|
|
|
Percentage
of Revenues
|
|
|
65.7
|
%
|
|
58.6
|
%
|
Our
product development expenses increased $5.0 million, or 174%, from $2.9 million
in fiscal
2006 to $7.9 million in fiscal 2007. The increase in product development costs
was primarily due to increases in headcount during the period. This was driven
by the acquisition of Charismatix which immediately 20 heads in product
development, and the subsequent build up of our games development capabilities
in Germany, Poland and in the U.S. As we built up our capability in the U.S.,
the headcount increased from 38 in March 2006 to 58 in December 2006. The
acquisition of the InfoSpace mobile games division added a further 10 heads
in
January 2007. Product development expenses included $10,000 of stock-based
compensation expense in fiscal 2006 and $18,000 in fiscal 2007. As a percentage
of revenues, product development expenses increased from 58.6% in fiscal 2006
to
65.7% in fiscal 2007.
Sales
and Marketing Expenses