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

FORM 10-Q/A
(Amendment No. 1)

(Mark One)

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

For the quarterly period ended September 30, 2008

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

For the transition period from _____________ to ___________
Commission file number   00-10039

MANDALAY MEDIA, INC.
(Exact name of Registrant as Specified in Its Charter)

Delaware
22-2267658
(State or other jurisdiction of incorporation or organization )
(I.R.S. Employer Identification No.)
   
2121 Avenue of the Stars, Suite 2550, Los Angeles, CA
90067
(Address of principal executive offices)
(Zip Code)

(310) 601-2500
(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   ¨         No  ¨

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

Large Accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨
(do not check if a smaller reporting company)
Smaller reporting company  x
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨      No   x

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes   x     No   ¨
 
On November 13, 2008, there were 38,591,945 shares of the Registrant’s common stock, par value $0.0001 per share, issued and outstanding.
 

 

EXPLANATORY NOTE

This Amendment No. 1 on Form 10-Q/A (this “Amendment”) is filed by Mandalay Media, Inc. (the “Registrant”) to amend the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, as originally filed with the Securities and Exchange Commission (the “Commission”) on November 14, 2008 (the “Form 10-Q”).  The purpose of this Amendment is to add the unaudited interim financial statements for the quarter ended September 30, 2007 of Twistbox Entertainment, Inc., the Registrant’s wholly-owned subsidiary and to add Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations as it relates to these unaudited interim financial statements per request of the Commission in a letter to the Registrant dated July 15, 2009. No other material changes were made to the Form 10-Q.
 
Part I - Financial Information
 
Item 1. Financial Statements
 

 
Page(s)
   
Consolidated Balance Sheets for the Successor as of September 30, 2008 (Unaudited) and March 31, 2008 (Audited)
1
   
Consolidated Statements of Operations (Unaudited) for the Successor’s three and six months  ended September 30, 2008 and September 30, 2007; and Predecessor’s three and six months ended September 30, 2007
2
   
Consolidated Statements of the Successor’s Stockholders’ Equity and Comprehensive Loss (Unaudited) for the six months ended September 30, 2008
3
   
Consolidated Statements of Cash Flows (Unaudited) for the Successor’s six months ended  September 30, 2008 and September 30, 2007; and Predecessor’s six months ended September 30, 2007
4
   
Notes to Unaudited Consolidated Financial Statements
5-28
 

 
(In thousands, except share amounts)

   
Successor
 
   
September 30,
   
March 31,
 
   
2008
   
2008
 
   
(Unaudited)
       
             
ASSETS
           
             
Current Assets
           
Cash and cash equivalents
  $ 7,122     $ 10,936  
Accounts receivable, net of allowances
    6,203       6,162  
Prepaid expenses and other current assets
    648       531  
                 
Total current assets
    13,973       17,629  
                 
Property and equipment, net
    993       1,037  
Other long-term assets
    206       301  
Intangible assets, net
    19,303       19,780  
Goodwill
    61,436       61,377  
TOTAL ASSETS
  $ 95,911     $ 100,124  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Current liabilities
               
Accounts payable
  $ 4,325     $ 2,399  
Accrued license fees
    2,813       3,833  
Accrued compensation
    746       688  
Current portion of long term debt
    254       248  
Other current liabilities
    2,001       2,087  
Total currrent liabilities
    10,139       9,255  
                 
Accrued license fees, long term portion
    668       1,337  
Long term debt, net of current portion
    16,483       16,483  
Total liabilities
  $ 27,290       27,075  
                 
Commitments and contingencies (Note 15)
               
                 
Stockholders equity
               
Preferred stock, 1,000 shares authorized Series A Convertible Preferred Stock, 100,000 shares; authorized at $0.0001 par value; 100,000 shares issued and outstanding
    100       100  
Common stock, $0.0001 par value: 100,000,000 shares authorized; 32,449,449 issued and outstanding at September 30, 2008;  32,149,089 issued and outstanding at March 31, 2008;
    3       3  
Additional paid-in capital
    78,220       76,154  
Accumulated other comprehensive income/(loss)
    (55 )     61  
Accumulated deficit
    (9,647 )     (3,269 )
Total stockholders' equity
    68,621       73,049  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 95,911     $ 100,124  
 

 
Mandalay Media, Inc. and Subsidiaries
2
Consolidated Statement of Operations (Unaudited)
 
 
 
(In thousands, except per share amounts)

   
Successor
   
Predecessor
 
   
3 Months Ended
   
3 Months Ended
   
6 Months Ended
   
6 Months Ended
   
3 Months Ended
   
6 Months Ended
 
   
September 30
   
September 30
   
September 30
   
September 30
   
September 30
   
September 30
 
   
2008
   
2007
   
2008
   
2007
   
2007
   
2007
 
                                     
Revenues
  $ 5,003     $ -     $ 10,349     $ -     $ 3,356     $ 7,064  
                                                 
Cost of revenues
                                               
License fees
    1,785       -       3,934       -       1,549       3,218  
Other direct cost of revenues
    102       -       204       -       100       269  
Total cost of revenues
    1,887       -       4,138       -       1,649       3,487  
Gross profit
    3,116       -       6,211       -       1,707       3,577  
                                                 
Operating expenses
                                               
Product development
    1,800       -       3,567       -       2,301       4,792  
Sales and marketing
    1,004       -       2,283       -       1,202       2,554  
General and administrative
    2,559       544       5,372       911       1,144       2,320  
Amortization of intangible assets
    137       -       274       -       60       90  
Total operating expenses
    5,500       544       11,496       911       4,707       9,756  
Loss from operations
    (2,384 )     (544 )     (5,285 )     (911 )     (3,000 )     (6,179 )
                                                 
Interest and other income/(expense)
                                               
Interest income
    44       89       121       165       90       100  
Interest (expense)
    (468 )     -       (952 )     -       (271 )     (326 )
Foreign exchange transaction gain (loss)
    (57 )     -       73       -       36       104  
Other (expense)
    (102 )     -       (187 )     -       (50 )     (252 )
Interest and other income/(expense)
    (583 )     89       (945 )     165       (195 )     (374 )
Loss before income taxes
    (2,967 )     (455 )     (6,230 )     (746 )     (3,195 )     (6,553 )
Income tax provision
    (74 )     1       (148 )     1       (2 )     -  
                                                 
Net Loss attributable to Common Shareholders
  $ (3,041 )   $ (454 )   $ (6,378 )   $ (745 )   $ (3,197 )   $ (6,553 )
Basic and Diluted net loss per common share
  $ (0.09 )   $ (0.02 )   $ (0.20 )   $ (0.04 )   $ (0.41 )   $ (0.84 )
                                                 
Weighted average common shares outstanding, basic and diluted
    32,423       20,480       32,377       18,588       7,786       7,786  
 
The accompanying notes are an integral part of these consolidated financial statements
 
 
 

 
 
Mandalay Media, Inc. and Subsidiaries
3
Consolidated Statements of Stockholders’ Equity and Comprehensive Loss
(Unaudited)
 
 
 
(In thousands, except share amounts)

                                 
Accumulated
                   
                           
Additional
   
Other
                   
   
Common Stock
   
Preferred Stock
   
Paid-In
   
Comprehensive
   
Accumulated
         
Comprehensive
 
Successor
 
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Income/(Loss)
   
Deficit
   
Total
   
Loss
 
                                                       
Balance at March 31, 2008
    32,149,089     $ 3       100,000     $ 100     $ 76,154     $ 61     $ (3,269 )   $ 73,049        
                                                                       
Net Loss
                                                    (3,337 )     (3,337 )     (3,337 )
Issuance of common stock in satisfaction of amount payable
    25,000       0                       100                       100          
Issuance of common stock on cashless exercise of warrants
    241,688       0                                               0          
Foreign currency translation gain/(loss)
                                      (10 )             (10 )     (10 )
Deferred stock-based compensation
                                    1,222                       1,222          
                                                                         
                                                                         
Comprehensive loss
                                                                  $ (3,347 )
                                                                         
                                                                         
                                                                         
Balance at June 30, 2008
    32,415,777     $ 3       100,000     $ 100     $ 77,476     $ 51     $ (6,606 )   $ 71,024          
                                                                         
Net Loss
                                                    (3,041 )     (3,041 )     (3,041 )
Issuance of common stock on cashless exercise of warrants
    33,672       0                                               0          
Foreign currency translation gain/(loss)
                                      (106 )             (106 )     (106 )
Deferred stock-based compensation
                                    744                       744          
                                                                         
                                                                         
Comprehensive loss
                                                                  $ (3,147 )
                                                                         
                                                                         
                                                                         
Balance at September 30, 2008
    32,449,449     $ 3       100,000     $ 100     $ 78,220     $ (55 )   $ (9,647 )   $ 68,621          
 
The accompanying notes are an integral part of these consolidated financial statements
 
 

 
 
Mandalay Media, Inc. and Subsidiaries
4
Consolidated Statements of Cash Flows (Unaudited)
 
 
 
(In thousands)

   
Successor
   
Predecessor
 
   
6 Months Ended
   
6 Months Ended
   
6 Months Ended
 
   
September 30,
   
September 30,
   
September 30,
 
   
2008
   
2007
   
2007
 
Cash flows from operating activities
                 
Net loss
  $ (6,378 )   $ (745 )   $ (6,553 )
Adjustments to reconcile net loss to net cash used in operating activities:
                       
Depreciation and amortization
    642       -       212  
Allowance for doubtful accounts
    (45 )     -       22  
Stock-based compensation
    1,966       -       58  
(Increase) / decrease in assets:
                       
Accounts receivable
    4       -       1,018  
Prepaid expenses and other
    (22 )     (9 )     (987 )
Increase / (decrease) in liabilities:
                       
Accounts payable
    2,022       223       (163 )
Accrued license fees
    (1,020 )     -       (2,169 )
Accrued compensation
    58       -       283  
Other liabilities
    (750 )     -       -  
Accrued expenses
                    813  
                         
Net cash used in operating activities
    (3,523 )     (531 )     (7,466 )
                         
Cash flows from investing activities
                       
                         
Purchase of property and equipment
    (120 )     -       (261 )
Transaction costs related to merger with Twistbox
    (59 )     -          
Repayment of advance to related party
                    36  
                         
Net cash used in investing activities
    (179 )     -       (225 )
                         
Cash flows from financing activities
                       
                         
Proceeds from the sale of common stock
    -       2,493          
Proceeds from the sale of preferred stock
    -       -       3,000  
Proceeds from the issuance of debt, net of costs
                    16,480  
Repayment of debt
    -       -       (1,759 )
                         
Net cash provided by financing activities
    -       2,493       17,721  
                         
Effect of exchange rate changes on cash and cash equivalents
    (112 )     -       65  
                         
Net increase/(decrease) in cash and cash equivalents
    (3,814 )     1,962       10,095  
                         
Cash and cash equivalents, beginning of period
    10,936       5,418       631  
                         
Cash and cash equivalents, end of period
  $ 7,122     $ 7,380     $ 10,726  
                         
Supplemental disclosure of cash flow information:
                       
                         
Interest paid
    -       -       315  
Taxes paid
    (148 )     -       -  
 
The accompanying notes are an integral part of these consolidated financial statements
 
 

 
 
Mandalay Media, Inc. and Subsidiaries
5
Notes to Unaudited Consolidated Financial Statements
 
(all numbers in thousands except per share amounts)
 
1.
Organization

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

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

On February 12, 2008, Mandalay completed a merger (the “Merger”) with Twistbox Entertainment, Inc. (Twistbox) through an exchange of all outstanding capital stock of Twistbox for 10,180 shares of common stock of the Company. In connection with the Merger, the Company assumed of all the outstanding options under Twistbox’s Stock Incentive Plan by the issuance of options to purchases 2,463 shares of common stock of the Company, including 2,145 vested and 319 unvested options.

After the Merger, Twistbox became a wholly-owned subsidiary of the Company, and the company’s only active subsidiary.

Twistbox Entertainment Inc. (formerly known as The WAAT Corporation) is incorporated in the State of Delaware.

Twistbox is considered the Predecessor entity and therefore, the accompanying consolidated statements of operations and cash flows are presented for two periods: Predecessor and Successor, which relate to the period preceding the February 12, 2008 transaction and the period succeeding that date, respectively. The Company refers to the operations of Mandalay Media, Inc.  and subsidiaries for both the Predecessor and Successor periods.

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

 
Mandalay Media, Inc. and Subsidiaries
6
Notes to Unaudited Consolidated Financial Statements
 
(all numbers in thousands except per share amounts)
 
Twistbox is headquartered in the Los Angeles area and has offices in Europe and South America that provide local sales and marketing support for both mobile operators and third party distribution in their respective regions.

2.
Summary of Significant Accounting Policies

Basis of Presentation
The accompanying consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K/T, filed with the Securities and Exchange Commission. In the opinion of management, the accompanying consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, which the Company believes are necessary for a fair statement of the Company’s financial position as of September 30, 2008 and its results of operations for Successor’s three months and the six months ended September 30, 2008 and 2007, and the Predecessor’s three and six months ended September 30, 2007.  These consolidated financial statements are not necessarily indicative of the results to be expected for the entire year. The consolidated balance sheet presented as of September 30, 2008 has been derived from the unaudited consolidated financial statements as of that date, and the consolidated balance sheet presented as of March 31, 2008 has been derived from the audited consolidated financial statements as of that date.
 
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and our wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.

Revenue Recognition
Twistbox’s 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. Twistbox distributes its products primarily through mobile telecommunications service providers (“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. Twistbox applies the provisions of Statement of Position 97-2, Software Revenue Recognition, as amended by Statement of Position 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions, to all transactions.
 

 
Mandalay Media, Inc. and Subsidiaries
7
Notes to Unaudited Consolidated Financial Statements
 
(all numbers in thousands except per share amounts)
 
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, Twistbox defines delivery as the download of the product, image or game by the end user. Twistbox estimates revenues from carriers in the current period when reasonable estimates of these amounts can be made. Most carriers only provide detailed sales transaction data on a one to two month lag. Estimated revenue is treated as unbilled receivables until the detailed reporting is received and the revenues can be billed. Some carriers provide reliable interim preliminary reporting and others report sales data within a reasonable time frame following the end of each month, both of which allow Twistbox 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 Twistbox believes are reasonable, but it is possible that actual results may differ from Twistbox’s estimates, and those differences may be material. Twistbox’s estimates for revenues include consideration of factors such as preliminary sales data, carrier-specific historical sales trends, volume of activity on company monitored sites, seasonality, time elapsed from launch of services or product lines, the age of games and the expected impact of newly launched games, successful introduction of new handsets, growth of 3G subscribers by carrier, promotions during the period and economic trends. When Twistbox receives the final carrier reports, to the extent not received within a reasonable time frame following the end of each month, Twistbox  records any differences between estimated revenues and actual revenues in the reporting period when Twistbox determines the actual amounts. Revenues earned from certain carriers may not be reasonably estimated. If Twistbox is unable to reasonably estimate the amount of revenues to be recognized in the current period, Twistbox recognizes revenues upon the receipt of a carrier revenue report and when Twistbox’s portion of licensed revenues are fixed or determinable and collection is probable. To monitor the reliability of Twistbox’s estimates, management, where possible, reviews the revenues by country by carrier and by product line on a regular basis to identify unusual trends such as differential adoption rates by carriers or the introduction of new handsets. If Twistbox deems a carrier not to be creditworthy, Twistbox defers all revenues from the arrangement until Twistbox receives 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, Twistbox recognizes as revenues the amount the carrier reports as payable upon the sale of Twistbox’s products, images or games. Twistbox has evaluated its carrier agreements and has determined that it is not the principal when selling its products, images or games through carriers. Key indicators that it evaluated to reach this determination include:
 
 
wireless subscribers directly contract with the carriers, which have most of the service interaction and are generally viewed as the primary obligor by the subscribers;
 
carriers generally have significant control over the types of content that they offer to their subscribers;
 
carriers are directly responsible for billing and collecting fees from their subscribers, including the resolution of billing disputes;
 
carriers generally pay Twistbox a fixed percentage of their revenues or a fixed fee for each game;
 

 
Mandalay Media, Inc. and Subsidiaries
8
Notes to Unaudited Consolidated Financial Statements
 
(all numbers in thousands except per share amounts)
 
 
carriers generally must approve the price of Twistbox’s content in advance of their sale to subscribers, and Twistbox’s more significant carriers generally have the ability to set the ultimate price charged to their subscribers; and
 
Twistbox has limited risks, including no inventory risk and limited credit risk

While not a significant portion of revenue, in some instances revenue is earned by delivering a product or service directly to the end user of that product or service. In those cases Twistbox records as revenue the amount billed to that end user and recognizes the revenue when persuasive evidence of an arrangement exists, the product, image or game has been delivered, the fee is fixed or determinable, and the collection of the resulting receivable is probable.

Net Income (Loss) per Common Share

Basic income (loss) per common share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period plus dilutive common stock equivalents, using the treasury stock method. Potentially dilutive shares from stock options and warrants and the conversion of the Series A preferred stock for the three months ended September 30, 2008 and September 30, 2007 consisted of 2,300 and 2,316 shares, respectively, and for the six months ended September 30, 2008 and 2007 consisted of 3,695 and 1,627, respectively, and were not included in the computation of diluted loss per share as they were anti-dilutive in each period.

Comprehensive Income/(Loss)
Comprehensive income/(loss) consists of two components, net income/(loss) and other comprehensive income/(loss). Other comprehensive income/(loss) refers to gains and losses that under generally accepted accounting principles are recorded as an element of stockholders’ equity but are excluded from net income/(loss). The Company’s other comprehensive income/(loss) currently includes only foreign currency translation adjustments. Total comprehensive loss for the successor for the six and three months ended September 30, 2008 was $6,494 and $3,147, respectively. Total comprehensive loss for the predecessor for the six and three months ended September 30, 2007 was $6,455 & $3,207, respectively.

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

Content Provider Licenses

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

 
Mandalay Media, Inc. and Subsidiaries
9
Notes to Unaudited Consolidated Financial Statements
 
(all numbers in thousands except per share amounts)
 
The Company’s contracts with some licensors include minimum guaranteed royalty payments, which are payable regardless of the ultimate volume of sales to end users. Each quarter, the Company evaluates the realization of its royalties as well as any unrecognized guarantees not yet paid to determine amounts that it deems unlikely to be realized through product sales. The Company uses estimates of revenues, and share of the relevant licensor to evaluate the future realization of future royalties and guarantees. This evaluation considers multiple factors, including the term of the agreement, forecasted demand, product life cycle status, product development plans, and current and anticipated sales levels, as well as other qualitative factors. To the extent that this evaluation indicates that the remaining future guaranteed royalty payments are not recoverable, the Company records an impairment charge to cost of revenues and a liability in the period that impairment is indicated.

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

Software Development Costs
The Company applies the principles of Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed (“SFAS No. 86”). SFAS No. 86 requires that software development costs incurred in conjunction with product development be charged to research and development expense until technological feasibility is established. Thereafter, until the product is released for sale, software development costs must be capitalized and reported at the lower of unamortized cost or net realizable value of the related product.

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

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

Advertising Expenses
The Company expenses the production costs of advertising, including direct response advertising, the first time the advertising takes place. Advertising expense for the Successor was $139 and $64 for the three months ended September 30, 2008 and 2007, respectively and $563 and $64 for the six months ended September 30, 2008 and 2007, respectively.  Advertising expense for the Predecessor was $69 for the three months ended September 30, 2007 and $76 for the six months ended September 30, 2007.
 

 
Mandalay Media, Inc. and Subsidiaries
10
Notes to Unaudited Consolidated Financial Statements
 
(all numbers in thousands except per share amounts)
 
Restructuring
The Company accounts for costs associated with employee terminations and other exit activities in accordance with Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The Company records employee termination benefits as an operating expense when it communicates the benefit arrangement to the employee and it requires no significant future services, other than a minimum retention period, from the employee to earn the termination benefits.

Fair Value of Financial Instruments
For certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and other current liabilities, the carrying amounts approximate their fair value due to their relatively short maturity. Based on the borrowing rates available to the Company for loans with similar terms, the carrying value of borrowings outstanding approximates their fair value.

Foreign Currency Translation.
The Company uses the United States dollar for financial reporting purposes.  Assets and liabilities of foreign operations are translated using current rates of exchange prevailing at the balance sheet date. Equity accounts have been translated at their historical exchange rates when the capital transaction occurred.  Statement of Operations amounts are translated at average rates in effect for the reporting period. The foreign currency translation adjustment (loss) for the Successor was ($106) for the three months ended September 30, 2008 and ($116) for the six months ended September 30, 2008.  The foreign currency translation adjustment (loss) for the Predecessor was $(10) for the three months ended September 30, 2007 and $98 for the six months ended September 30, 2007.  The foreign currency translation adjustment (loss) has been reported as a component of comprehensive loss in the consolidated statement of stockholders equity and comprehensive loss. Translation gains or losses are shown as a separate component of retained earnings.

Concentrations of Credit Risk.
Financial instruments which potentially subject us to concentration of credit risk consist principally of cash and cash equivalents, short-term investments, and accounts receivable. We have placed cash and cash equivalents and short-term investments with a single high credit-quality institution. As of September 30, 2008 we did not have any long-term marketable securities. Most of our sales are made directly to large national Mobile Phone Operators in the countries that we operate. We have a significant level of business and resulting significant accounts receivable balance with one operator and therefore have a high concentration of credit risk with that operator. We perform ongoing credit evaluations of our customers and maintain an allowance for potential credit losses. As of September 30, 2008, approximately 27% of our gross accounts receivable outstanding was with one major customer. This customer accounted for 45% of our gross sales in the three months ended September 30, 2008 and 40% in the six months ended September 30, 2008.

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

 
 

 

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

Goodwill
In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”), the Company’s goodwill is not amortized but is tested for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable.

Impairment of Long-Lived Assets and Intangibles
Long-lived assets, including purchased intangible assets with finite lives are amortized using the straight-line method over their useful lives ranging from three to ten years and are reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.  Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (“SFAS No. 109”), which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in its financial statements or tax returns. Under SFAS No. 109, the Company determines deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of assets and liabilities along with net operating losses, if it is more likely than not the tax benefits will be realized using the enacted tax rates in effect for the year in which it expects the differences to reverse.  To the extent a deferred tax asset cannot be recognized, a valuation allowance is established if necessary.

We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement 109 (“FIN 48”) on January 1, 2008. FIN 48 did not impact the Company’s financial position or results of operations at the date of adoption. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. FIN 48 prescribes that a company should use a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax positions that meet the “more-likely-than-not” recognition threshold should be measured as the largest amount of the tax benefits, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement in the financial statements. We recognize interest and penalties related to income tax matters as a component of the provision for income taxes. We do not currently anticipate that the total amount of unrecognized tax benefits will significantly change within the next 12 months.

Stock-based compensation.
We have applied SFAS No. 123(R) Share-Based Payment (“FAS 123R”) and accordingly, we record stock-based compensation expense for all of our stock-based awards.

 
 

 

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

Under FAS 123R, we estimate the fair value of stock options granted using the Black-Scholes option pricing model. The fair value for awards that are expected to vest is then amortized on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. The amount of expense recognized represents the expense associated with the stock options we expect to ultimately vest based upon an estimated rate of forfeitures; this rate of forfeitures is updated as necessary and any adjustments needed to recognize the fair value of options that actually vest or are forfeited are recorded.

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

Preferred Stock

The Company applies the guidance enumerated in SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” and EITF Topic D-98, “Classification and Measurement of Redeemable Securities,” when determining the classification and measurement of preferred stock. Preferred shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value in accordance with SFAS 150. All other issuances of preferred stock are subject to the classification and measurement principles of EITF Topic D-98. Accordingly, the Company classifies conditionally redeemable preferred shares (if any), which includes preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control, as temporary equity. At all other times, the Company classifies its preferred shares in stockholders’ equity.

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

Recent Accounting Pronouncements
 
In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 160, “Noncontrolling Interests in Consolidated Financial Statements”, which is an amendment of Accounting Research Bulletin (“ARB”) No. 51.  This statement clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements.  This statement changes the way the consolidated income statement is presented, thus requiring consolidated net income to be reported at amounts that include the amounts attributable to both parent and the noncontrolling interest.  This statement is effective for the fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  Based on current conditions, the Company does not expect the adoption of SFAS 160 to have a significant impact on its results of operations or financial position.

 
 

 

Mandalay Media, Inc. and Subsidiaries
13
Notes to Unaudited Consolidated Financial Statements
 
(all numbers in thousands except per share amounts)
 
In December 2007, the FASB issued SFAS No. 141R (revised 2007), “Business Combinations.”  This statement replaces FASB Statement No. 141, “Business Combinations.” This statement retains the fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This statement defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. This statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company does not expect the adoption of SFAS 141R to have a significant impact on its results of operations or financial position.
 
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB No. 133,” (“SFAS 161”). SFAS 161 is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and hedging activities and their effects on the entity’s financial position, financial performance, and cash flows. SFAS 161 applies to all derivative instruments within the scope of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). SFAS 161 also applies to non-derivative hedging instruments and all hedged items designated and qualifying under SFAS 133. SFAS 161 is effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. SFAS 161 encourages, but does not require, comparative disclosures for periods prior to its initial adoption. The Company does not expect the adoption of SFAS 161 to have a significant impact on its results of operations or financial position.
 
In April 2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3, “Determination of the Useful Life of Intangible Assets”.  FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB Statement No. 142, “Goodwill and Other Intangible Assets”.  This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008.  Early adoption is prohibited.  We are currently evaluating the impact, if any, that FSP 142-3 will have on our consolidated financial statements.

3.
Liquidity
 
The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles, which contemplates continuation of the Company as a going concern.  The Company’s operating subsidiary, Twistbox, has sustained substantial operating losses since commencement of operations.  In addition, the Company has incurred negative cash flows from operating activities and the majority of the Company’s assets are intangible assets and goodwill.
 
In view of these matters, realization of a major portion of the assets in the accompanying consolidated balance sheet is dependent upon continued operations of the Company, which is in turn dependent on the Company reaching a positive cash flow position or obtaining additional financing, while maintaining adequate liquidity.
 
Management believes that actions undertaken to achieve this position provide the opportunity for the Company to continue as a going concern. These actions include the acquisition, debt restructuring and equity placements subsequent to the period end as detailed in Note 15, as well as continued increases in revenues by introducing new products and revenue streams, continued expansion into new territories, reviewing additional financing options, reducing operating costs and accretive acquisitions.
 
 
 

 

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

4.
Balance Sheet Components
 
Accounts Receivable
 
   
September 30,
   
March 31,
 
   
2008
   
2008
 
             
Accounts receivable
  $ 6,326     $ 6,330  
Less: allowance for doubtful accounts
    (123 )     (168 )
    $ 6,203     $ 6,162  
 
Accounts receivable includes amounts billed and unbilled as of the respective balance sheet dates.  During the three months ended September 30, 2008 $11 was provided and $0 was written off against the allowance for the Successor. During the six months ended September 30, 2008, $11 was provided and $56 was written off against the allowance for the Successor.  For the three months ended September 30, 2007 the Predecessor reserved $0 and $0 was written off against the allowance.  For the six months ended September 30, 2007 the Predecessor reserved $22 and $0 was written off the against allowance.
 
Property and Equipment
 
   
September 30,
   
March 31,
 
   
2008
   
2008
 
             
Equipment
  $ 758     $ 654  
Equipment subject to capitalized lease
    81       71  
Furniture & fixtures
    234       228  
Leasehold improvements
    140       140  
      1,213       1,093  
Accumulated depreciation
    (220 )     (56 )
    $ 993     $ 1,037  
 
Depreciation expense for the Successor for the three months ended September 30, 2008 and 2007 was $86 and $0, respectively; and for the six months ended September 30, 2008 and 2007 was $164 and $0, respectively.
 
Depreciation expense for the Predecessor for the three months ended September 30, 2007 was $26 and for the six months ended September 30, 2007 was $101.
 
Capital Lease
Accumulated depreciation associated with the equipment under capital lease noted above was $10 and $72 at September 30, 2008 and March 31, 2008, respectively. The Company has a commitment to pay $5 under these leases during the year ending September 30, 2009. These payments have a net present value of $5.

 
 

 

Mandalay Media, Inc. and Subsidiaries
15
Notes to Unaudited Consolidated Financial Statements
 
(all numbers in thousands except per share amounts)

5.
Description of Stock Plans
 
On September 27, 2007, the stockholders of the Company adopted the 2007 Employee, Director and Consultant Stock Plan (the Plan). Under the Plan, the Company may grant up to 3,000 shares or equivalents of common stock of the Company as incentive stock options (ISO), non-qualified options (NQO), stock grants or stock-based awards to employees, directors or consultants, except that ISO’s shall only be issued to employees. Generally, ISO’s and NQO’s shall be issued at prices not less than fair market value at the date of issuance, as defined, and for terms ranging up to ten years, as defined. All other terms of grants shall be determined by the board of directors of the Company, subject to the Plan.

On February 12, 2008, the Company amended the Plan to increase the number of shares of our common stock that may be issued under the Plan to 7,000 shares and on March 7, 2008, amended the Plan to increase the maximum number of shares of the Company's common stock with respect to which stock rights may be granted in any fiscal year to 1,100 shares. All other terms of the Plan remain in full force and effect.

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

   
Number of
   
Weighted Average
 
   
Shares
   
Exercise Price
 
Outstanding at December 31, 2005
           
Granted
           
Canceled
           
Exercised
           
Outstanding at December 31, 2006
    -       -  
Granted
    1,600,000     $ 2.64  
Canceled
    -       -  
Exercised
    -       -  
Outstanding at December 31, 2007
    1,600,000     $ 2.64  
Granted
    2,751,864     $ 4.57  
Transferred in from Twistbox
    2,462,090     $ 0.64  
Canceled
    (11,855 )   $ 0.81  
Outstanding at March 31, 2008
    6,802,099     $ 2.70  
Granted
    1,860,558     $ 2.67  
Canceled
    (74,692 )   $ 0.48  
Exercised
    (27,050 )   $ 0.48  
Outstanding at September 30, 2008
    8,560,915     $ 2.72  
Exercisable at September 30, 2008
    4,418,144     $ 2.02  

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

   
Options Granted
             
   
Three Months Ended
         
Options tranferred
 
   
September 30, 2008
   
Options Granted
   
from Twistbox
 
Expected life (years)
    4    
4 to 6
   
3 to 7
 
Risk-free interest rate
    3.89    
2.7% to 3.89
 
2.03% to 5.03
Expected volatility
    75.20 %  
70% to 75.2
 
70% to 75
Expected dividend yield
    0 %     0 %     0 %
 
 
 

 

Mandalay Media, Inc. and Subsidiaries
16
Notes to Unaudited Consolidated Financial Statements
 
(all numbers in thousands except per share amounts)

The exercise price for options outstanding at September 30, 2008 was as follows:

       
Weighted
                   
       
Average
         
Weighted
       
       
Remaining
   
Number
   
Average
   
Aggregate
 
 
Range of
   
Contractual Life
   
Outsanding
   
Exercise
   
Intrinsic
 
 
Exercise Price
   
(Years)
   
September 30, 2008
   
Price
   
Value
 
                             
  $ 0 - $1.00       7.84       2,359,053     $ 0.64     $ 4,149,322  
  $ 2.00 - $3.00       9.41       3,450,000     $ 2.66     $ -  
  $ 3.00 - $4.00       -       -     $ -     $ -  
  $ 4.00 - $5.00       9.40       2,751,864     $ 4.57     $ -  
            8.97       8,560,917     $ 2.72     $ 4,149,322  

The exercise price for options exercisable at September 30, 2008 was as follows:

       
Weighted
                   
       
Average
         
Weighted
       
       
Remaining
   
Options
   
Average
   
Aggregate
 
 
Range of
   
Contractual Life
   
Exercisable
   
Exercise
   
Intrinsic
 
 
Exercise Price
   
(Years)
   
September 30, 2008
   
Price
   
Value
 
                             
  $ 0 - $1.00       7.80       2,183,736     $ 0.63     $ 3,863,862  
  $ 2.00 - $3.00       9.32       1,418,708     $ 2.66     $ -  
  $ 3.00 - $4.00       -       -     $ -     $ -  
  $ 4.00 - $5.00       9.39       815,700     $ 4.61     $ -  
            8.58       4,418,144     $ 2.02       3,863,862  

Stock option expense for the Successor was $744 and $64 for the three months ended September 30, 2008 and 2007 respectively; and $1,966 and $64 for the six months ended September 30, 2008 and 2007 respectively.  Stock option expense for the Predecessor was $39 and $58 for the three and six months ended September 30, 2007.  Stock option expense is included primarily in general and administrative expense.

6.
Acquisitions/Purchase Price Accounting
 
Twistbox Entertainment Inc. and related entities

On February 12, 2008, Mandalay completed an acquisition of Twistbox Entertainment, Inc. (Twistbox) through an exchange of all outstanding capital stock of Twistbox for 10,180 shares of common stock of the Company and the Company’s assumption of all the outstanding options of Twistbox’s 2006 Stock Incentive Plan by the issuance of options to purchases 2,463 shares of common stock of the Company, including 2,145 vested and 318 unvested options. After the Merger, Twistbox became a wholly-owned subsidiary of the Company.
 
Twistbox is a global publisher and distributor of branded entertainment content, including images, video, TV programming and games, for Third Generation (3G) mobile networks. It publishes and distributes its content globally and has developed an intellectual property portfolio unique to its target demographic that includes worldwide mobile rights to global brands and content from leading film, television and lifestyle content publishing companies. Twistbox has built a proprietary mobile publishing platform and has leveraged its brand portfolio and platform to secure “direct” distribution agreements with the largest mobile operators in the world. These factors contributed to a purchase price in excess of the fair value of net tangible and intangible assets acquired, and, as a result, the Company recorded goodwill in connection with this transaction.
 
 
 

 

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

In connection with the Merger, the Company guaranteed up to $8,250 of principal under an existing note of Twistbox in accordance with the terms, conditions and limitations contained in the note. In connection with the guaranty, the Company issued the lender two warrants, one to purchase 1,093 and the other to purchase 1,093 shares of common stock of the Company, exercisable at $7.55 per share, and at $5.00 per share, (increasing to $7.55 per share, if not exercised in full by February 12, 2009), respectively, through July 30, 2011. The warrants have been included as part of the purchase consideration and have been valued using the Black Scholes method, using the stock price at the merger date of $4.75 per share discounted for certain restrictions, a volatility of 70%, and the exercise price and the expected time to vest for each group. These warrants were subsequently amended as described in Note 15.
 
The purchase consideration was determined by an independent valuation to be $67,479, consisting of $66,025 attributed to the common stock and options exchanged and warrants issued, and $1,454 in transaction costs.  During the current quarter, a further $59 of transaction costs have been recognized, with the result that the purchase consideration has been increased to $67,538, with an equivalent increase in Goodwill. The stock and options were valued using the Black Scholes method, using the stock price at the merger date of $4.75 per share, a volatility of 70%, and in the case of options the exercise price and the expected time to vest for each group. Under the purchase method of accounting, the Company allocated the total purchase price of $67,538 to the net tangible and intangible assets acquired and liabilities assumed based upon their respective estimated fair values as of the acquisition date as follows:

Cash
  $ 6,679  
Accounts receivable
    4,966  
Prepaid expenses and other current assets
    1,138  
Property and equipment
    1,062  
Other long-term assets
    361  
Accounts Payable, accrued license fees and accruals
    (6,882 )
Other current liabilities
    (814 )
Accrued license fees, long term portion
    (2,796 )
Long term debt
    (16,483 )
Identified Intangibles
    19,905  
Merger related restructuring reserves
    (1,034 )
Goodwill
    61,436  
    $ 67,538  
 
Goodwill recognized in the above transaction amounted to $61,436. Goodwill in relation to the acquisition of Twistbox is not expected to be deductible for income tax purposes. The preliminary purchase price allocation, including the allocation of goodwill, will continue to be updated as additional information becomes available. Merger related restructuring reserves include reserves for employee severance and for office relocation.

 
 

 

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

Unaudited Pro Forma Summary
 
The following pro forma consolidated amounts give effect to the acquisition of Twistbox by Mandalay Media accounted for by the purchase method of accounting as if it had occurred as at June 1, 2007 and as at April 1, 2007, the beginning of the comparable three month and six month periods.  The pro forma consolidated results are not necessarily indicative of the operating results that would have been achieved had the transaction been in effect as of the beginning of the period presented and should not be construed as being representative of future operating results.

   
3 months ended
   
6 months ended
 
   
September 30, 2007
   
September 30, 2007
 
             
Revenues
  $ 3,356     $ 7,064  
Cost of revenues
    1,649       3,487  
Gross profit/(loss)
    1,707       3,577  
                 
Operating expenses net of interest income and other expense
    5,595       11,353  
Income tax expense
    -       -  
Net loss
    (3,888 )     (7,776 )
                 
Basic and Diluted net loss per common share
  $ (0.19 )   $ (0.42 )

7.
Other Intangible Assets
 
   
September 30,
   
March 31,
 
   
2008
   
2008
 
             
Software
  $ 1,611     $ 1,611  
Trade Name / Trademark
    13,030       13,030  
Customer list
    4,378       4,378  
License agreements
    886       886  
      19,905       19,905  
Accumulated amortization
    (602 )     (125 )
    $ 19,303     $ 19,780  

The Company has included amortization of acquired intangible assets directly attributable to revenue-generating activities in cost of revenues. The Company has included amortization of acquired intangible assets not directly attributable to revenue-generating activities in operating expenses. During the three months ended September 30, 2008 and 2007, the Successor recorded amortization expense in the amount of $102 and $0, respectively, in cost of revenues; and amortization expense in the amount of $137 and $0 respectively in operating expenses. During the six months ended September 30, 2008 and 2007 the Successor recorded amortization expense in the amount of $204 and $0 respectively, in cost of revenues; and amortization expense in the amount of $274 and $0, respectively, in operating expenses.

 
 

 


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

During the three months ended September 30, 2007, the Predecessor recorded amortization expense in the amount of $6 in cost of revenues; and amortization expense in the amount of $24 in operating expenses.  During the six months ended September 30, 2007 the Predecessor recorded amortization expense in the amount of $13 in cost of revenues; and amortization expense in the amount of $47 in operating expenses.

As of September 30, 2008, the total expected future amortization related to intangible assets was as follows:

   
12 Months ended September 30,
       
   
2009
   
2010
   
2011
   
2012
   
2013
   
Thereafter
 
Software
  $ 230     $ 230     $ 230     $ 230     $ 230     $ 315  
Customer List
    547       547       547       547       547       1,298  
License Agreements
    177       177       177       177       65       -  
    $ 954     $ 954     $ 954     $ 954     $ 842     $ 1,613  

8.
Debt
 
   
September 30,
   
March 31,
 
   
2008
   
2008
 
Short Term Debt
           
Capitalized lease liabilities, current portion
  $ 6     $ 20  
Senior secured note, accrued interest
    248       228  
    $ 254     $ 248  

   
September 30,
   
March 31,