NeuMedia, Inc. and Subsidiaries
(formerly known as Mandalay Media, Inc.)
NeuMedia, Inc. and Subsidiaries
(formerly known as Mandalay Media, Inc.)
Consolidated Financial Statements
September 30, 2011
Consolidated Balance Sheets
(In thousands, except per share amounts)
| |
|
September 30,
|
|
|
|
|
| |
|
2011
|
|
|
March 31,
|
|
| |
|
(unaudited)
|
|
|
2011
|
|
|
ASSETS
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
572 |
|
|
$ |
845 |
|
|
Accounts receivable, net of allowances of $85 and $96, respectively
|
|
|
2,002 |
|
|
|
2,699 |
|
|
Prepaid expenses and other current assets
|
|
|
350 |
|
|
|
296 |
|
| |
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,924 |
|
|
|
3,840 |
|
| |
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
298 |
|
|
|
388 |
|
|
Intangible assets, net
|
|
|
3,251 |
|
|
|
3,366 |
|
|
Goodwill
|
|
|
6,609 |
|
|
|
6,609 |
|
|
TOTAL ASSETS
|
|
$ |
13,082 |
|
|
$ |
14,203 |
|
| |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
3,737 |
|
|
$ |
3,807 |
|
|
Accrued license fees
|
|
|
1,428 |
|
|
|
1,189 |
|
|
Accrued compensation
|
|
|
193 |
|
|
|
371 |
|
|
Current portion of long term debt
|
|
|
909 |
|
|
|
115 |
|
|
Other current liabilities
|
|
|
1,033 |
|
|
|
1,959 |
|
| |
|
|
|
|
|
|
|
|
|
Total currrent liabilities
|
|
|
7,300 |
|
|
|
7,441 |
|
| |
|
|
|
|
|
|
|
|
|
Long term debt and convertible debt, net of discount of $1,438 and $1,856, respectively
|
|
|
4,562 |
|
|
|
4,144 |
|
|
Total liabilities
|
|
$ |
11,862 |
|
|
$ |
11,585 |
|
| |
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 16)
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock
|
|
|
|
|
|
|
|
|
|
at $0.0001 par value; 100,000 shares authorized, issued and outstanding
|
|
|
|
|
|
|
|
|
|
(liquidation preference of $1,000,000)
|
|
|
100 |
|
|
|
100 |
|
|
Common stock, $0.0001 par value: 100,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
|
41,274,225 issued and outstanding at March 31, 2011;
|
|
|
|
|
|
|
|
|
|
41,771,469 issued and outstanding at September 30, 2011;
|
|
|
4 |
|
|
|
4 |
|
|
Additional paid-in capital
|
|
|
99,798 |
|
|
|
99,541 |
|
|
Accumulated other comprehensive loss
|
|
|
(244 |
) |
|
|
(291 |
) |
|
Accumulated deficit
|
|
|
(98,438 |
) |
|
|
(96,736 |
) |
|
Total stockholders' equity
|
|
|
1,220 |
|
|
|
2,618 |
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$ |
13,082 |
|
|
$ |
14,203 |
|
Consolidated Statements of Operations (unaudited)
| |
|
3 Months Ended
|
|
|
3 Months Ended
|
|
|
6 Months Ended
|
|
|
6 Months Ended
|
|
| |
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
| |
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Net revenues
|
|
$ |
1,938 |
|
|
$ |
2,077 |
|
|
$ |
3,831 |
|
|
$ |
4,936 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License fees
|
|
|
660 |
|
|
|
988 |
|
|
|
1,151 |
|
|
|
1,575 |
|
|
Other direct cost of revenues
|
|
|
58 |
|
|
|
97 |
|
|
|
115 |
|
|
|
172 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
718 |
|
|
|
1,085 |
|
|
|
1,266 |
|
|
|
1,747 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,220 |
|
|
|
992 |
|
|
|
2,565 |
|
|
|
3,189 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
484 |
|
|
|
1,060 |
|
|
|
1,149 |
|
|
|
2,134 |
|
|
Sales and marketing
|
|
|
222 |
|
|
|
453 |
|
|
|
456 |
|
|
|
1,049 |
|
|
General and administrative
|
|
|
1,200 |
|
|
|
1,120 |
|
|
|
2,116 |
|
|
|
2,949 |
|
|
Amortization of intangible assets
|
|
|
- |
|
|
|
19 |
|
|
|
- |
|
|
|
36 |
|
|
Total operating expenses
|
|
|
1,906 |
|
|
|
2,652 |
|
|
|
3,721 |
|
|
|
6,168 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(686 |
) |
|
|
(1,660 |
) |
|
|
(1,156 |
) |
|
|
(2,979 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income / (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income/ (expense)
|
|
|
(377 |
) |
|
|
(360 |
) |
|
|
(745 |
) |
|
|
(1,039 |
) |
|
Foreign exchange transaction gain / (loss)
|
|
|
(31 |
) |
|
|
(13 |
) |
|
|
17 |
|
|
|
(170 |
) |
|
Other income / (expense)
|
|
|
163 |
|
|
|
(154 |
) |
|
|
213 |
|
|
|
(342 |
) |
|
Interest and other expense
|
|
|
(245 |
) |
|
|
(527 |
) |
|
|
(515 |
) |
|
|
(1,551 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations before income taxes
|
|
|
(931 |
) |
|
|
(2,187 |
) |
|
|
(1,671 |
) |
|
|
(4,530 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
(0 |
) |
|
|
(65 |
) |
|
|
(31 |
) |
|
|
(133 |
) |
|
Net loss from continuing operations net of taxes
|
|
|
(931 |
) |
|
|
(2,252 |
) |
|
|
(1,702 |
) |
|
|
(4,663 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations net of taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
709 |
|
|
Gain on disposal of discontinued operations, net of taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,315 |
|
|
Net income from discontinued operations, net of taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,024 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
$ |
(931 |
) |
|
$ |
(2,252 |
) |
|
$ |
(1,702 |
) |
|
$ |
361 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss)/income
|
|
$ |
(990 |
) |
|
$ |
(2,296 |
) |
|
$ |
(1,655 |
) |
|
$ |
499 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income / (loss) per common share
|
|
$ |
(0.02 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.04 |
) |
|
$ |
0.01 |
|
|
Continuing operations
|
|
$ |
(0.02 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.12 |
) |
|
Discontinued operations
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
0.13 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic and diluted
|
|
|
41,771 |
|
|
|
35,957 |
|
|
|
41,725 |
|
|
|
37,655 |
|
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
|
|
| |
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income/(Loss)
|
|
|
Deficit
|
|
|
Total
|
|
|
Loss
|
|
|
Balance at March 31, 2011
|
|
|
41,274,225 |
|
|
$ |
4 |
|
|
|
100,000 |
|
|
$ |
100 |
|
|
$ |
99,541 |
|
|
$ |
(291 |
) |
|
$ |
(96,736 |
) |
|
$ |
2,618 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(771 |
) |
|
|
(771 |
) |
|
|
(771 |
) |
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106 |
|
|
|
|
|
|
|
106 |
|
|
|
106 |
|
|
Issuance of common stock as part of compensation
|
|
|
347,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
69 |
|
|
|
|
|
|
Issuance of warrants to vendor for services rendered
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
|
|
|
Stock issued for services
|
|
|
150,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82 |
|
|
|
|
|
|
|
|
|
|
|
82 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(665 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2011
|
|
|
41,771,469 |
|
|
$ |
4 |
|
|
|
100,000 |
|
|
$ |
100 |
|
|
$ |
99,707 |
|
|
$ |
(185 |
) |
|
$ |
(97,507 |
) |
|
$ |
2,119 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(931 |
) |
|
|
(931 |
) |
|
|
(931 |
) |
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59 |
) |
|
|
|
|
|
|
(59 |
) |
|
|
(59 |
) |
|
Issuance of warrants to vendor for services rendered
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
69 |
|
|
|
|
|
|
Stock issued for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
22 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(990 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2011
|
|
|
41,771,469 |
|
|
$ |
4 |
|
|
|
100,000 |
|
|
$ |
100 |
|
|
$ |
99,798 |
|
|
$ |
(244 |
) |
|
$ |
(98,438 |
) |
|
$ |
1,220 |
|
|
|
|
|
Consolidated Statements of Cash Flows (unaudited)
| |
|
6 Months Ended
September 30,
2011
|
|
|
6 Months Ended
September 30,
2010
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
$ |
(1,702 |
) |
|
$ |
361 |
|
|
Adjustments to reconcile net income/(loss) to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Gain on disposal of discontinued operations, net of taxes, net of impact of foreign currency translation
|
|
|
- |
|
|
|
(4,315 |
) |
|
Depreciation and amortization
|
|
|
209 |
|
|
|
567 |
|
|
Amortization of debt discount
|
|
|
418 |
|
|
|
- |
|
|
Allowance for doubtful accounts
|
|
|
(11 |
) |
|
|
(288 |
) |
|
Stock-based compensation
|
|
|
69 |
|
|
|
411 |
|
|
Warrants issued for services
|
|
|
84 |
|
|
|
172 |
|
|
Stock issued for services
|
|
|
104 |
|
|
|
- |
|
|
(Increase) / decrease in assets, net of effect of disposal of subsidiary:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
708 |
|
|
|
2,900 |
|
|
Prepaid expenses and other current assets
|
|
|
(54 |
) |
|
|
(12 |
) |
|
Increase / (decrease) in liabilities, net of effect of disposal of subsidiary:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(70 |
) |
|
|
(230 |
) |
|
Accrued license fees
|
|
|
239 |
|
|
|
358 |
|
|
Accrued compensation
|
|
|
(178 |
) |
|
|
(111 |
) |
|
Other liabilities and other items:
|
|
|
(133 |
) |
|
|
(171 |
) |
|
Net cash used in operating activities
|
|
|
(316 |
) |
|
|
(358 |
) |
| |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(4 |
) |
|
|
(121 |
) |
|
Transaction costs
|
|
|
- |
|
|
|
(905 |
) |
|
Cash remaining with disposed subsidiary
|
|
|
- |
|
|
|
(641 |
) |
|
Net cash used in investing activities
|
|
|
(4 |
) |
|
|
(1,667 |
) |
| |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Proceeds from new convertible debt
|
|
|
- |
|
|
|
2,500 |
|
|
Net cash provided by financing activities
|
|
|
- |
|
|
|
2,500 |
|
| |
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
47 |
|
|
|
17 |
|
| |
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(273 |
) |
|
|
492 |
|
| |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
845 |
|
|
|
1,891 |
|
| |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$ |
572 |
|
|
$ |
2,383 |
|
| |
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Taxes paid
|
|
$ |
31 |
|
|
$ |
133 |
|
| |
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$ |
745 |
|
|
$ |
1,041 |
|
|
Notes to unaudited Consolidated Financial Statements
|
| |
|
(all numbers in thousands except per share amounts)
|
NeuMedia, Inc. (“we”, “us”, “our”, the “Company” or “NeuMedia”), formerly Mandalay Media, Inc. (“Mandalay Media”) and formerly Mediavest, Inc. (“Mediavest”), was originally incorporated in the state of Delaware on November 6, 1998 under the name eB2B Commerce, Inc. On April 27, 2000, it merged into DynamicWeb Enterprises Inc., a New Jersey corporation, the surviving company, and changed its name to eB2B Commerce, Inc. On April 13, 2005, the Company changed its name to Mediavest, Inc. Through January 26, 2005, the Company and its former subsidiaries were engaged in providing business-to-business transaction management services designed to simplify trading between buyers and suppliers. The Company was inactive from January 26, 2005 until its merger with Twistbox Entertainment, Inc., February 12, 2008. On September 14, 2007, Mediavest was re-incorporated in the state of Delaware as Mandalay Media, Inc. On May 11, 2010, Mandalay Media merged into its wholly-owned, newly formed subsidiary, NeuMedia Inc. (“NeuMedia”), with NeuMedia as the surviving corporation. NeuMedia issued: (1) one new share of common stock in exchange for each share of Mandalay Media’s outstanding common stock and (2) one new share of preferred stock in exchange for each share of Mandalay Media’s outstanding preferred stock as of May 11, 2010. NeuMedia’s preferred and common stock had the same status and par value as the respective stock of Mandalay Media and NeuMedia acceded to all the rights, acquired all the assets and assumed all of the liabilities of Mandalay Media.
Twistbox is a global publisher and distributor of branded entertainment content and services primarily focused on enabling the development, distribution and billing of content across 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 film, television and lifestyle media companies. Twistbox has built a proprietary mobile publishing platform that includes: tools that automate device management for the distribution and billing of images and video; a mobile games development and distribution platform 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 and service agreements with many of the largest mobile operators in the world.
Twistbox is headquartered in the Los Angeles area and has offices in Europe and South America that provide local sales and marketing support for both mobile operators and third party distribution in their respective regions.
On October 23, 2008 the Company completed an acquisition of 100% of the issued and outstanding share capital of AMV Holding Limited, a United Kingdom private limited company (“AMV”), and 80% of the issued and outstanding share capital of Fierce Media Ltd (“Fierce”).
AMV is a leading mobile media and marketing company delivering games and lifestyle content directly to consumers in the United Kingdom, Australia, South Africa and various other European countries. AMV markets its well established branded services through a unique Customer Relationship Management platform that drives revenue through mobile internet, print and TV advertising. AMV is headquartered in Marlow, outside of London in the United Kingdom.
On May 10, 2010, an administrator was appointed over AMV in the UK, at the request of the Company’s senior debt holder. As from that date, AMV and its subsidiaries are considered to be a discontinued operation. AMV and its subsidiaries were subsequently disposed, as set out in Note 8 below.
On June 21, 2010, the Company signed and closed an agreement whereby ValueAct and the AMV Founders, acting through a newly formed company, acquired the operating subsidiaries of AMV (the “Assets”) in exchange for the release of $23,231 of secured indebtedness, comprising of a release of all amounts due and payable under the AMV Note and all of the amounts due and payable under the ValueAct Note (as defined below) except for $3,500 in principal. The Company retained all assets and liabilities of Twistbox and the Company other than the Assets. See Note 8 for further discussion regarding the discontinued operations.
2. Going Concern
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which contemplate continuation of the Company as a going concern. As reflected in the accompanying consolidated financial statements, the Company has losses from operations and negative cash flows from operations and current liabilities exceed current assets. These conditions raise substantial doubt as to the Company’s ability to continue as a going concern.
In view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying consolidated balance sheet is dependent upon continued operations of the Company, which, in turn, is dependent upon the Company’s ability to continue to raise capital and ultimately generate positive cash flows from operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classifications of liabilities that might be necessary should the Company be unable to continue its existence.
Management has taken or plans to take steps that it believes will be sufficient to provide the Company with the ability to continue in existence, including the following:
|
·
|
settled certain payables for shares of the Company’s common stock
|
|
·
|
entered into settlements with two strategic partners that allow the Company to reduce royalty payments
|
|
·
|
reducing ongoing operating expenses
|
|
·
|
raising additional equity capital
|
| |
3.
|
Summary of Significant Accounting Policies
|
Basis of Presentation
The financial statements have been prepared in accordance with GAAP and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for quarterly and annual financial statements. The financial statements, in the opinion of management, include all adjustments necessary for a fair statement of the results of operations, financial position and cash flows for each period presented.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and our wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. Discontinued operations have been treated in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 205-20, Discontinued Operations.
Revenue Recognition
The Company’s revenues are derived primarily by licensing material and software in the form of products (Image Galleries, Wallpapers, video, WAP Site access, Mobile TV), developing and maintaining carrier platforms, mobile advertising, and mobile games. License arrangements with the end user can be on a perpetual or subscription basis.
A perpetual license gives an end user the right to use the product, image or game on the registered handset on a perpetual basis. A subscription license gives an end user the right to use the product, image or game on the registered handset for a limited period of time, ranging from a few days to as long as one month.
The Company either markets and distributes its products directly to consumers, or distributes products through mobile telecommunications service providers (“carriers”), in which case the carrier markets the product, images or games to end users. License fees for perpetual and subscription licenses are usually billed upon download of the product, image or game by the end user. In the case of subscription licenses, many subscriber agreements provide for automatic renewal until the subscriber opts-out, while others provide opt-in renewal. In either case, subsequent billings for subscription licenses are generally billed monthly. The Company applies the provisions of FASB ASC 985-605, Software Revenue Recognition, to all transactions.
Revenues are recognized from the Company’s products, images and games when persuasive evidence of an arrangement exists, the product, image or game has been delivered, the fee is fixed or determinable, and the collection of the resulting receivable is probable. For both perpetual and subscription licenses, management considers a license agreement to be evidence of an arrangement with a carrier or aggregator and a “clickwrap” agreement to be evidence of an arrangement with an end user. For these licenses, the Company defines delivery as the download of the product, image or game by the end user.
The Company estimates revenues from carriers in the current period when reasonable estimates of these amounts can be made. Most carriers only provide detailed sales transaction data on a one to two month lag. Estimated revenue is treated as unbilled receivables until the detailed reporting is received and the revenues can be billed. Some carriers provide reliable interim preliminary reporting and others report sales data within a reasonable time frame following the end of each month, both of which allow the Company to make reasonable estimates of revenues and therefore to recognize revenues during the reporting period when the end user licenses the product, image or game. Determination of the appropriate amount of revenue recognized involves judgments and estimates that the Company believes are reasonable, but it is possible that actual results may differ from the Company’s estimates. The Company’s estimates for revenues include consideration of factors such as preliminary sales data, carrier-specific historical sales trends, volume of activity on company monitored sites, seasonality, time elapsed from launch of services or product lines, the age of games and the expected impact of newly launched games, successful introduction of newer and more advanced handsets, promotions during the period and economic trends. When the Company receives the final carrier reports, to the extent not received within a reasonable time frame following the end of each month, the Company records any differences between estimated revenues and actual revenues in the reporting period when the Company determines the actual amounts. Revenues earned from certain carriers may not be reasonably estimated. If the Company is unable to reasonably estimate the amount of revenues to be recognized in the current period, the Company recognizes revenues upon the receipt of a carrier revenue report and when the Company’s portion of licensed revenues are fixed or determinable and collection is probable. To monitor the reliability of the Company’s estimates, management, where possible, reviews the revenues by country, by carrier and by product line on a regular basis to identify unusual trends such as differential adoption rates by carriers or the introduction of new handsets. If the Company deems a carrier not to be creditworthy, the Company defers all revenues from the arrangement until the Company receives payment and all other revenue recognition criteria have been met.
In accordance with FASB ASC 605-45, Reporting Revenue Gross as a Principal Versus Net as an Agent, the Company recognizes as revenues the amount the carrier reports as payable upon the sale of the Company’s products, images or games. The Company has evaluated its carrier agreements and has determined that it is not the principal when selling its products, images or games through carriers. Key indicators that it evaluated to reach this determination include:
| |
|
wireless subscribers directly contract with the carriers, which have most of the service interaction and are generally viewed as the primary obligor by the subscribers;
|
| |
|
|
| |
|
carriers generally have significant control over the types of content that they offer to their subscribers;
|
| |
|
|
| |
|
carriers are directly responsible for billing and collecting fees from their subscribers, including the resolution of billing disputes;
|
| |
|
|
| |
|
carriers generally pay the Company a fixed percentage of their revenues or a fixed fee for each game;
|
| |
|
|
| |
|
carriers generally must approve the price of the Company’s content in advance of their sale to subscribers, and the Company’s more significant carriers generally have the ability to set the ultimate price charged to their subscribers; and
|
| |
|
the Company has limited risks, including no inventory risk and limited credit risk.
|
For direct to consumer business, revenue is earned by delivering a product or service directly to the end user of that product or service. In those cases, the Company records as revenue the amount billed to that end user and recognizes the revenue when persuasive evidence of an arrangement exists, the product, image or game has been delivered, the fee is fixed or determinable, and the collection of the resulting receivable is probable. Substantially all of our discontinued operations represents direct to consumer business.
Net Loss per Common Share
Basic loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period plus dilutive common stock equivalents, using the treasury stock method. All stock options, warrants, convertible notes, and convertible Series A Preferred Stock were excluded from the diluted loss per share calculation due to their anti-dilutive effect. Potentially dilutive shares from stock options, warrants, convertible notes, and convertible Series A preferred stock were as follows:
| |
|
3 Months Ended
|
|
|
3 Months Ended
|
|
|
6 Months Ended
|
|
|
6 Months Ended
|
|
| |
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
| |
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Potentially dilutive shares
|
|
|
28,305 |
|
|
|
12,917 |
|
|
|
27,491 |
|
|
|
6,516 |
|
Comprehensive Loss
Comprehensive income consists of two components, net income and other comprehensive income. Other comprehensive income 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. The Company’s other comprehensive income currently includes only foreign currency translation adjustments.
Cash and Cash Equivalents
The Company considers all highly liquid short-term investments purchased with a maturity of three months or less to be cash equivalents.
Accounts Receivable
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.
Content Provider Licenses
Content Provider License Fees
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 content acquisitions, paid in advance and capitalized on our balance sheet as prepaid license fees. 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 content acquired. Minimum guarantee 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.
Minimum Guarantee License Fees
The Company at times may enter into contracts with licensors that 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
At times the Company may pay amounts 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. These amounts would be capitalized and included in the balance sheet as prepaid expenses, and would then be expensed over the estimated life of the content acquired.
Software Development Costs
The Company applies the principles of FASB ASC 985-20, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed (“ASC 985-20”). ASC 985-20 requires that software development costs incurred in conjunction with product development be charged to research and development expense until technological feasibility is established. Thereafter, until the product is released for sale, software development costs must be capitalized and reported at the lower of unamortized cost or net realizable value of the related product.
The Company has adopted the “tested working model” approach to establishing technological feasibility for its products and games. Under this approach, the Company does not consider a product or game in development to have passed the technological feasibility milestone until the Company has completed a model of the product or game that contains essentially all the functionality and features of the final game and has tested the model to ensure that it works as expected. To date, the Company has not incurred significant costs between the establishment of technological feasibility and the release of a product or game for sale; thus, the Company has expensed all software development costs as incurred. The Company considers the following factors in determining whether costs can be capitalized: the emerging nature of the mobile market; the gradual evolution of the wireless carrier platforms and mobile phones for which it develops products and games; the lack of pre-orders or sales history for its products and games; the uncertainty regarding a product’s or game’s revenue-generating potential; its lack of control over the carrier distribution channel resulting in uncertainty as to when, if ever, a product or game will be available for sale; and its historical practice of canceling products and games at any stage of the development process.
Product Development Costs
The Company charges costs related to research, design and development of products to product development expense as incurred. The types of costs included in product development expenses include salaries, contractor fees and allocated facilities costs.
Advertising Expenses
The Company expenses the production costs of advertising, including direct response advertising, the first time the advertising takes place. Advertising expense for continuing operations was $2 and $13 in the three months ended September 30, 2011 and 2010, respectively, and $6 and $24 in the six months ended September 30, 2011 and 2010, respectively. Advertising expense for discontinued operations was $0 and $0 in the three months ended September 30, 2011 and 2010 and $0 and $956 in the six ended September 30, 2011 and 2010, respectively.
Restructuring
The Company accounts for costs associated with employee terminations and other exit activities in accordance with FASB ASC 420-10, Accounting for Costs Associated with Exit or Disposal Activities. The Company records employee termination benefits as an operating expense when it communicates the benefit arrangement to the employee and it requires no significant future services, other than a minimum retention period, from the employee to earn the termination benefits.
Fair Value of Financial Instruments
As of September 30, 2011 and March 31, 2011, the carrying value of cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued license fees, accrued compensation and other current liabilities approximates fair value due to the short-term nature of such instruments. The carrying value of long-term debt approximates fair value as the related interest rates approximate rates currently available to the Company.
Foreign Currency Translation
The Company uses the United States dollar for financial reporting purposes. Assets and liabilities of foreign operations are translated using current rates of exchange prevailing at the balance sheet date. Equity accounts have been translated at their historical exchange rates when the capital transaction occurred. Statement of Operations amounts are translated at average rates in effect for the reporting period. The foreign currency translation adjustment gains of $47 and $138 in the six months ended September 30, 2011 and September 30, 2010, respectively, have been reported as a components of comprehensive loss in the consolidated statements of stockholders’ equity and comprehensive loss. Translation gains or losses are shown as a separate component of stockholders’ equity.
Concentrations of Credit Risk
Financial instruments which potentially subject us to concentration of credit risk consist principally of cash and cash equivalents, and accounts receivable. We have placed cash and cash equivalents with a single high credit-quality institution. Most of our sales are made directly to large national mobile phone operators in the countries that we operate. We have a significant level of business and resulting significant accounts receivable balance with one operator and therefore have a high concentration of credit risk with that operator. We perform ongoing credit evaluations of our customers and maintain an allowance for potential credit losses. As of September 30, 2011, one major customer represented approximately 46% of our gross accounts receivable outstanding, and 45% of gross accounts receivable outstanding as of September 30, 2010. This customer accounted for 44% of our gross revenues in the period ended September 30, 2011; and 51% in the period ended September 30, 2010.
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 the lesser of 8 to 10 years or the term of the lease for leasehold improvements and 5 years for other assets.
Goodwill and Indefinite Life Intangible Assets
Goodwill represents the excess of cost over fair value of net assets of businesses acquired. In accordance with FASB ASC 350-20 Goodwill and Other Intangible Assets, the value assigned to goodwill and indefinite lived intangible assets, including trademarks and tradenames, is not amortized to expense, but rather they are evaluated at least on an annual basis to determine if there are potential impairments. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the implied fair value of the reporting unit goodwill is less than the carrying value. If the fair value of an indefinite lived intangible (such as trademarks and trade names) is less than its carrying amount, an impairment loss is recorded. Fair value is determined based on discounted cash flows, market multiples or appraised values, as appropriate. Discounted cash flow analysis requires assumptions about the timing and amount of future cash inflows and outflows, risk, the cost of capital, and terminal values. Each of these factors can significantly affect the value of the intangible asset. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management’s judgment. Any changes in key assumptions about the Company’s businesses and their prospects, or changes in market conditions, could result in an impairment charge. Some of the more significant estimates and assumptions inherent in the intangible asset valuation process include: the timing and amount of projected future cash flows; the discount rate selected to measure the risks inherent in the future cash flows; and the assessment of the asset’s life cycle and the competitive trends impacting the asset, including consideration of any technical, legal or regulatory trends.
Impairment of Long-Lived Assets and Finite Life Intangibles
Long-lived assets, including, intangible assets subject to amortization primarily consisting of customer lists, license agreements and software that have been acquired are amortized using the straight-line method over their useful lives ranging from three to ten years and are reviewed for impairment in accordance with FASB ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
In the period ended September 30, 2011 the Company determined that there was no impairment of intangible assets. In the year ended March 31, 2011, the Company determined that there was an impairment of intangible assets, amounting to $4,482. In the year ended March 31, 2010, the Company determined that there was an impairment of intangible assets, amounting to $5,736. In performing the related valuation analysis the Company used various valuation methodologies including probability weighted discounted cash flows, comparable transaction analysis, and market capitalization and comparable company multiple comparison. The impairment is detailed in Note 9 below.
Income Taxes
The Company accounts for income taxes in accordance with FASB ASC 740-10, Accounting for Income Taxes (“ASC 740-10”), which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in its financial statements or tax returns. Under ASC 740-10, the Company determines deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of assets and liabilities along with net operating losses, if it is more likely than not the tax benefits will be realized using the enacted tax rates in effect for the year in which it expects the differences to reverse. To the extent a deferred tax asset cannot be recognized, a valuation allowance is established if necessary.
ASC 740-10 prescribes that a company should use a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax positions that meet the “more-likely-than-not” recognition threshold should be measured as the largest amount of the tax benefits, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement in the financial statements. We recognize interest and penalties related to income tax matters as a component of the provision for income taxes. We do not currently anticipate that the total amount of unrecognized tax benefits will significantly change within the next 12 months.
Stock-based compensation
We have applied FASB ASC 718 Share-Based Payment (“ASC 718”) and accordingly, we record stock-based compensation expense for all of our stock-based awards.
Under ASC 718, we estimate the fair value of stock options granted using the Black-Scholes option pricing model. The fair value for awards that are expected to vest is then amortized on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. The amount of expense recognized represents the expense associated with the stock options we expect to ultimately vest based upon an estimated rate of forfeitures; this rate of forfeitures is updated as necessary and any adjustments needed to recognize the fair value of options that actually vest or are forfeited are recorded.
The Black-Scholes option pricing model, used to estimate the fair value of an award, requires the input of subjective assumptions, including the expected volatility of our common stock, interest rates, dividend rates and an option’s expected life. As a result, the financial statements include amounts that are based upon our best estimates and judgments relating to the expenses recognized for stock-based compensation.
Preferred Stock
The Company applies the guidance enumerated in FASB ASC 480-10, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“ASC 480-10”) when determining the classification and measurement of preferred stock. Preferred shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value in accordance with ASC 480-10. All other issuances of preferred stock are subject to the classification and measurement principles of ASC 480-10. Accordingly, the Company classifies conditionally redeemable preferred shares (if any), which includes preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control, as temporary equity. At all other times, the Company classifies its preferred shares in stockholders’ equity.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent asset and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. The most significant estimates relate to revenues for periods not yet reported by carriers, liabilities recorded for future minimum guarantee payments under content licenses, accounts receivable allowances, and stock-based compensation expense.
Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In December 2010, the FASB issued updated guidance on when and how to perform certain steps of the periodic goodwill impairment test for public entities that may have reporting units with zero or negative carrying amounts. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010, with early adoption prohibited. It is applicable to the Company’s fiscal year beginning April 1, 2011. The Company evaluated this guidance, and determined it doesn’t have a material effect on its consolidated financial statements.
In December 2010, the FASB also issued guidance to clarify the reporting of pro forma financial information related to business combinations of public entities and to expand certain supplemental pro forma disclosures. This guidance is effective prospectively for business combinations that occur on or after the beginning of the fiscal year beginning on or after December 15, 2010, with early adoption permitted. It is applicable to the Company’s fiscal year beginning April 1, 2011. The Company evaluated this guidance, and determined it doesn’t have a material effect on its consolidated financial statements.
Recently Issued Accounting Pronouncements
In May 2011, the FASB issued guidance to amend certain measurement and disclosure requirements related to fair value measurements to improve consistency with international reporting standards. This guidance is effective prospectively for public entities for interim and annual reporting periods beginning after December 15, 2011, with early adoption by public entities prohibited, and is applicable to the Company’s fiscal quarter beginning January 1, 2012. The Company is currently evaluating this guidance, but does not expect its adoption will have a material effect on its consolidated financial statements.
In June 2011, the FASB issued new guidance on the presentation of comprehensive income that will require a company to present components of net income and other comprehensive income in one continuous statement or in two separate, but consecutive statements. There are no changes to the components that are recognized in net income or other comprehensive income under current GAAP. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011, with early adoption permitted. It is applicable to the Company’s fiscal year beginning April 1, 2012. The Company is currently evaluating this guidance, but does not expect its adoption will have a material effect on its consolidated financial statements.
In September 2011, the Financial Accounting Standards Board (FASB) issued amended accounting guidance related to goodwill impairment testing. The new guidance provides the option to perform a qualitative assessment by applying a more likely than not scenario to determine whether the fair value of a reporting unit is less than its carrying amount, which may then allow a company to skip the annual two-step quantitative goodwill impairment test depending on the determination. The amended guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Earlier adoption is permitted. Management does not expect the adoption of the amended guidance to have a material impact on the Company’s consolidated financial statements. The Company is currently evaluating this guidance, but does not expect its adoption will have a material effect on its consolidated financial statements.
Other recent authoritative guidance issued by the FASB (including technical corrections to the FASB Accounting Standards Codification), the American Institute of Certified Public Accountants, and the SEC did not, or are not expected to have a material effect on the Company’s consolidated financial statements.
| |
4.
|
Fair Value Measurements
|
The Company applies the provisions of ASC 820-10, “Fair Value Measurements and Disclosures.” ASC 820-10 defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
|
·
|
Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.
|
|
·
|
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
|
| |
|
|
·
|
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
The Company analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities From Equity” and ASC 815, “Derivatives and Hedging.” Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The effects of interactions between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments. In addition, the fair values of freestanding derivative instruments such as warrant and option derivatives are valued using the Black-Scholes model.
The Company uses Level 2 inputs for its valuation methodology for the warrant derivative as their fair values were determined by using the Black-Scholes option pricing model based on various assumptions. The Company’s derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The Company determined the fair value of the warrants issued to be $250, using the Black-Scholes option pricing model and the following assumptions: expected life of 4.5 years, a risk free interest rate of 1.76%, a dividend yield of 0% and volatility of 75%.
At September 30, 2011, the Company identified the following assets and liabilities that are required to be presented on the balance sheet at fair value:
Measured at Fair Value on a Recurring Basis
|
(in thousands)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Stock warrant - derivative liability
|
|
|
(250 |
) |
|
|
- |
|
|
|
(250 |
) |
|
|
- |
|
The stock warrant –derivative liability is included in other current liabilities in the accompanying consolidated balance sheet.
Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). As of March 31, 2011 the Company had incurred cumulative impairment losses on goodwill and other intangible assets of $68,770 based on the fair value measurement methods and criteria described in Note 9. For the period ended September 30, 2011 the Company determined that there was no evidence of impairment and therefore no additional impairment loss was recorded.
| |
|
September 30,
|
|
|
March 31,
|
|
| |
|
2011
|
|
|
2011
|
|
|
Billed
|
|
$ |
957 |
|
|
$ |
1,523 |
|
|
Unbilled
|
|
|
1,130 |
|
|
|
1,272 |
|
|
Less: allowance for doubtful accounts
|
|
|
(85 |
) |
|
|
(96 |
) |
|
Net Accounts receivable
|
|
$ |
2,002 |
|
|
$ |
2,699 |
|
The Company had no significant write-offs or recoveries during the period ended September 30, 2011 and the year ended March 31, 2011.
| |
6.
|
Property and Equipment
|
| |
|
September 30,
|
|
|
March 31,
|
|
| |
|
2011
|
|
|
2011
|
|
|
Equipment
|
|
$ |
1,003 |
|
|
$ |
1,006 |
|
|
Furniture & fixtures
|
|
|
335 |
|
|
|
328 |
|
|
Leasehold improvements
|
|
|
140 |
|
|
|
140 |
|
| |
|
|
1,478 |
|
|
|
1,474 |
|
|
Accumulated depreciation
|
|
|
(1,180 |
) |
|
|
(1,086 |
) |
|
Net Property and Equipment
|
|
$ |
298 |
|
|
$ |
388 |
|
Depreciation expense for continuing operations was $53 and $71 in the three months ended September 30, 2011 and 2010 and $114 and $153 in the six months ended September 30, 2011 and 2010, respectively. Depreciation expense for discontinued operations was $0 and $0 in the three months ended September 30, 2011 and 2010 and $0 and $27 in the six months ended September 30, 2011 and 2010, respectively.
| |
7.
|
Description of Stock Plans
|
On September 27, 2007, the stockholders of the Company adopted the 2007 Employee, Director and Consultant Stock Plan (“Plan”). Under the Plan, the Company may grant up to 3,000 shares or equivalents of common stock of the Company as incentive stock options (“ISO”), non-qualified options (“NQO”), stock grants or stock-based awards to employees, directors or consultants, except that ISOs shall only be issued to employees. Generally, ISOs and NQOs shall be issued at prices not less than fair market value at the date of issuance, as defined, and for terms ranging up to ten years, as defined. All other terms of grants shall be determined by the board of directors of the Company, subject to the Plan.
On February 12, 2008, the Company amended the Plan to increase the number of shares of our common stock that may be issued under the Plan to 7,000 shares and on March 7, 2008, amended the Plan to increase the maximum number of shares of the Company's common stock with respect to which stock rights may be granted in any fiscal year to 1,100 shares. All other terms of the plan remain in full force and effect.
Option Plans
The following table summarizes options granted for the periods or as of the dates indicated:
| |
|
Number of
|
|
|
Weighted Average
|
|
|
(in thousands)
|
|
Shares
|
|
|
Exercise Price
|
|
|
Outstanding at March 31, 2011
|
|
|
6,187 |
|
|
$ |
1.79 |
|
|
Granted
|
|
|
- |
|
|
$ |
- |
|
|
Canceled
|
|
|
(347 |
) |
|
$ |
0.48 |
|
|
Exercised
|
|
|
- |
|
|
$ |
- |
|
|
Outstanding at September 30, 2011
|
|
|
5,840 |
|
|
$ |
1.87 |
|
|
Exercisable at September 30, 2011
|
|
|
5,840 |
|
|
$ |
1.87 |
|
In April 2011, two former employees each agreed to cancel options to purchase 173,622 shares of common stock in connection with their respective termination agreements.
The exercise price for options outstanding and options exercisable at September 30, 2011 was as follows:
|
Options Outstanding and Exercisable
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Average
|
|
|
|
|
|
Weighted
|
|
|
|
|
| |
|
|
Remaining
|
|
|
Number
|
|
|
Average
|
|
|
Aggregate
|
|
|
Range of
|
|
|
Contractual Life
|
|
|
Outstanding
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
Exercise Price
|
|
|
(Years)
|
|
|
September 30, 2011
|
|
|
Price
|
|
|
Value
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| $0 - $1.00 |
|
|
|
4.81 |
|
|
|
2,923 |
|
|
$ |
0.49 |
|
|
$ |
612,310 |
|
| $2.00 - $3.00 |
|
|
|
6.69 |
|
|
|
2,117 |
|
|
$ |
2.67 |
|
|
$ |
- |
|
| $4.00 - $5.00 |
|
|
|
6.38 |
|
|
|
800 |
|
|
$ |
4.75 |
|
|
$ |
- |
|
| |
|
|
|
5.71 |
|
|
|
5,840 |
|
|
$ |
1.87 |
|
|
$ |
612,310 |
|
Stock Plans
A summary of the status of the Company’s nonvested shares as of September 30, 2011 and March 31, 2011 pursuant to the Plan, and changes during the period ended September 30, 2011 is presented below:
| |
|
|
|
|
Weighted Average
|
|
| |
|
Number of
|
|
|
Grant Date
|
|
|
(in thousands)
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested at March 31, 2011
|
|
|
- |
|
|
$ |
- |
|
|
Granted
|
|
|
- |
|
|
$ |
- |
|
|
Vested
|
|
|
- |
|
|
$ |
- |
|
|
Exercised
|
|
|
- |
|
|
$ |
- |
|
|
Nonvested at September 30, 2011
|
|
|
- |
|
|
$ |
- |
|
| |
|
|
|
|
|
|
|
|
|
Cumulative forfeited
|
|
|
(565 |
) |
|
$ |
0.53 |
|
Option Plans and Stock Plans
Total stock compensation expense is included in the following statements of operations components:
| |
|
Six Months Ended
|
|
|
Six Months Ended
|
|
| |
|
September 30,
|
|
|
September 30,
|
|
| |
|
2011
|
|
|
2010
|
|
|
Product development
|
|
$ |
69 |
|
|
$ |
4 |
|
|
Sales and marketing
|
|
$ |
- |
|
|
$ |
10 |
|
|
General and administrative
|
|
$ |
- |
|
|
$ |
222 |
|
| |
|
$ |
69 |
|
|
$ |
236 |
|
| |
8.
|
Discontinued Operations
|
On June 21, 2010, the Company restructured its debt with its senior debt holder by closing a number of transactions, including the sale of AMV. In connection with the sale, ValueAct Small Cap Master Fund, L.P. (“ValueAct”) and Nate MacLeitch and Jonathan Cresswell (the “AMV Founders”), acting through a newly formed company, acquired the operating subsidiaries of AMV in exchange for the release of $23,231 of secured indebtedness, which included a release of all amounts due and payable under a secured promissory note in the aggregate principal amount of $5,375 (the “AMV Note”) and all of the amounts due and payable under the Senior Secured Note, issued by Twistbox, due July 31, 2010, as amended on February 12, 2008 (the “ValueAct Note”) except for $3,500 in principal, which is due in one lump sum principal payment on June 21, 2013. In addition, all intercompany balances at that date were cancelled, and all shares of common stock and warrants of the Company held by ValueAct were cancelled. In addition, approximately 3,541 shares of common stock of the Company held by two of the founders of AMV were acquired by the Company. As of June 30, 2010 the Company accrued $300 to a related party pertaining to the sale of AMV.
In accordance with FASB ASC 205-20, Discontinued Operations, the operating results and net assets and liabilities related to AMV were reclassified as of June 21, 2010 and reported as discontinued operations in the accompanying consolidated financial statements.
In accordance with FASB ASC 360, Property, Plant and Equipment, the Company recorded a gain of $4,315 on the sale of AMV.
The following is a summary of assets and liabilities of the discontinued operations as of March 31, 2010 and as of the disposal date of June 21, 2010 and the resulting gain on sale:
| |
|
June 21,
|
|
|
March 31,
|
|
| |
|
2010
|
|
|
2010
|
|
|
Assets
|
|
|
|
|
|
|
|
Cash
|
|
$ |
641 |
|
|
$ |
1,251 |
|
|
Working Capital, net of cash
|
|
|
1,367 |
|
|
|
1,501 |
|
|
Property and Equipment, net
|
|
|
591 |
|
|
|
668 |
|
|
Goodwill and intangibles
|
|
|
15,948 |
|
|
|
15,955 |
|
|
Net Assets Sold
|
|
$ |
18,547 |
|
|
$ |
19,375 |
|
| |
|
|
|
|
|
|
|
|
|
Direct costs associated with the sale
|
|
|
1,173 |
|
|
|
|
|
|
Currency translation adjustment
|
|
|
234 |
|
|
|
|
|
|
Other
|
|
|
3 |
|
|
|
|
|
| |
|
$ |
19,957 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Consideration
|
|
|
24,272 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Gain on sale, net of taxes
|
|
$ |
4,315 |
|
|
|
|
|
| |
9.
|
Goodwill and Other Intangible Assets
|
Goodwill
The Company's carrying amount of goodwill for the periods ended September 30, 2011 and March 31, 2011 was $6,609
We complete our annual impairment tests in the fourth quarter of each year unless events or circumstances indicate that an asset may be impaired. There were no indications of impairment present during the period ended September 30, 2011. Fair value is defined under ASC 820, Fair Value Measurements and Disclosures as, “The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”. The Company considered a number of valuation approaches and methods and applied the most appropriate methods from the income, and market approaches to derive an opinion of value. Under the income approach, the Company utilized the discounted cash flow method, and under the market approach, consideration was given to the guideline public company method, the merger and acquisition method, and the market capitalization method.
Other Intangible Assets
The following is a reconciliation of the changes to the Company's carrying amount of intangible assets for the period ended September 30, 2011 and the year ended March 31, 2011:
| |
|
Amortizable
|
|
|
Unamortizable
|
|
|
Total
|
|
| |
|
Intangible Assets
|
|
|
Intangible Assets
|
|
|
Intangible Assets
|
|
|
Balance at March 31, 2011
|
|
$ |
893 |
|
|
$ |
2,473 |
|
|
$ |
3,366 |
|
|
Amortization
|
|
|
(115 |
) |
|
|
- |
|
|
|
(115 |
) |
|
Balance at September 30, 2011
|
|
$ |
778 |
|
|
$ |
2,473 |
|
|
$ |
3,251 |
|
The components of intangible assets as at September 30, 2011 and March 31, 2011 were as follows:
| |
|
As of September 30, 2011 |
|
| |
|
|
|
Accumulated
|
|
|
|
|
| |
|
Cost
|
|
Amortization
|
|
|
Net
|
|
| |
|
(in thousands) |
|
|
Software
|
|
$ |
1,611 |
|
|
$ |
(833 |
) |
|
$ |
778 |
|
|
Tradename/Trademark
|
|
|
2,473 |
|
|
|
- |
|
|
2,473
|
|
|
Customer list
|
|
|
1,220 |
|
|
|
(1,220 |
) |
|
|
- |
|
|
License agreements
|
|
|
443 |
|
|
|
(443 |
) |
|
|
- |
|
| |
|
$ |
5,747 |
|
|
$ |
(2,496 |
) |
|
$ |
3,251 |
|
| |
|
As of March 31, 2011 |
|
| |
|
|
|
Accumulated
|
|
|
|
|
| |
|
Cost
|
|
Amortization
|
|
|
Net
|
|
| |
|
|
|
(in thousands)
|
|
|
|
|
|
Software
|
|
$ |
1,611 |
|
|
$ |
(718 |
) |
|
$ |
893 |
|
|
Tradename/Trademark
|
|
|
2,473 |
|
|
|
- |
|
|
2,473
|
|
|
Customer list
|
|
|
1,220 |
|
|
|
(1,220 |
) |
|
|
- |
|
|
License agreements
|
|
|
443 |
|
|
|
(443 |
) |
|
|
- |
|
| |
|
$ |
5,747 |
|
|
$ |
(2,381 |
) |
|
$ |
3,366 |
|
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. The Company recorded amortization expense for continuing operations of $58 and $86, and $115 and $172 during the three and six month periods ended September 30, 2011 and 2010, respectively, in cost of revenues; and amortization expense in the amount of $0 and $19, and $0 and $36 during the three and six month periods ended September 30, 2011 and 2010, respectively, in operating expenses. During the three and six month periods ended September 30, 2011 and 2010 the Company recorded amortization expense for discontinued operations in the amount of $0 and $0, and $0 and $26, respectively, in cost of revenues; and amortization expense in the amount of $0 and $0, and $0 and $40, respectively, in operating expenses.
Based on the amortizable intangible assets as of September 30, 2011, we estimate amortization expense for the next five years to be as follows:
| |
|
Amortization
|
|
|
Forthe twelve months ending September30,
|
|
Expense
|
|
| |
|
(in thousands)
|
|
|
2012
|
|
|
232 |
|
|
2013
|
|
|
232 |
|
|
2014
|
|
|
232 |
|
|
2015
|
|
|
82 |
|
| |
|
$ |
778 |
|
| |
|
September 30,
|
|
|
March 31,
|
|
| |
|
2011
|
|
|
2011
|
|
|
Short Term Debt
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Note Payable
|
|
$ |
100 |
|
|
$ |
100 |
|
|
Equipment Leases and accrued interest on debt
|
|
|
809 |
|
|
|
15 |
|
| |
|
$ |
909 |
|
|
$ |
115 |
|
| |
|
September 30,
|
|
|
March 31,
|
|
| |
|
2011
|
|
|
2011
|
|
|
Long Term Debt
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Senior secured note, net of discount,
|
|
|
|
|
|
|
|
of $1,438 and $1,856, respectively
|
|
$ |
1,062 |
|
|
$ |
644 |
|
|
Secured note
|
|
|
3,500 |
|
|
|
3,500 |
|
| |
|
$ |
4,562 |
|
|
$ |
4,144 |
|
Note Payable
On March 31, 2011 as a part of settlement of debt, the Company incurred a Note Payable to a service provider of $100.
ValueAct Note
On June 21, 2010 the ValueAct Note was amended and restated in its entirety and reduced to $3,500 of principal (the “Amended ValueAct Note”).
Senior Secured Convertible Notes
In addition, for purposes of capitalizing the Company, the Company sold and issued $2,500 of Senior Secured Convertible Notes due June 21, 2013 of the Company (the “New Senior Secured Notes”) to certain of the Company’s significant stockholders. The New Senior Secured Notes have a three year term and bear interest at a rate of 10% per annum payable in arrears semi-annually. The entire principal balance is due in one lump sum payment on June 21, 2013. Notwithstanding the foregoing, at any time on or prior to the 18th month following the original issue date of the New Senior Secured Notes, the Company may, at its option, in lieu of making any cash payment of interest, elect that the amount of any interest due and payable on any interest payment date on or prior to the 18th month following the original issue date of the New Senior Secured Notes be added to the principal due under the New Senior Secured Notes. The accrued and unpaid principal and interest due on the New Senior Secured Notes are convertible at any time at the election of the holder into shares of common stock of the Company at a conversion price of $0.15 per share, subject to adjustment. The New Senior Secured Notes are secured by a first lien on substantially all of the assets of the Company and its subsidiaries pursuant to the terms of that certain Guarantee and Security Agreement, dated as of June 21, 2010, among Twistbox, the Company, each of the subsidiaries thereof party thereto, the investors party thereto and Trinad Management. The Amended ValueAct Note is subordinated to the New Senior Secured Notes pursuant to the terms of that certain Subordination Agreement, dated as of June 21, 2010, by and between Trinad Fund, and ValueAct, and each of the Company and Twistbox.
Each purchaser of a New Senior Secured Note also received a warrant (“Warrant”) to purchase shares of common stock of the Company at an exercise price of $0.25 per share, subject to adjustment. For each $1 of New Senior Secured Notes purchased, the purchaser received a Warrant to purchase 3.33 shares of common stock of the Company. Each Warrant has a five year term.
The Warrants granted to the New Senior Secured Note holders on June 21, 2010 and conversion feature in the New Senior Secured Notes are not considered derivative instruments since the Warrants and the New Senior Secured Notes have a set conversion price and all of the requirements for equity classification were met. The Company determined the fair value of the detachable warrants issued in connection with the New Senior Secured Notes to be $1,678, using the Black-Scholes option pricing model and the following assumptions: expected life of 5 years, a risk free interest rate of 2.05%, a dividend yield of 0% and volatility of 54.62%. In addition, the Company determined the value of the beneficial conversion feature to be $5,833. The combined total discount for the New Senior Secured Notes is limited to the face value of the New Senior Secured Notes of $2,500 and is being amortized over the term of the New Senior Secured Notes. For the period ended September 30, 2011, the Company amortized $418 of the aforesaid discounts as interest and financing costs in the accompanying consolidated statements of operations.
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11.
|
Related Party Transactions
|
The Company engages in various business relationships with shareholders and officers and their related entities. The significant relationships are disclosed below.
On September 14, 2006, the Company entered into a five year management agreement (“Agreement”) with Trinad Management, the manager of Trinad Capital Master Fund, which is one of our principal stockholders. In addition, Robert Ellin, our director, is the managing director of and portfolio manager for Trinad Management. Pursuant to the terms of the Agreement, Trinad Management provides certain management services, including, without limitation, relating to the sourcing, structuring and negotiation of a potential business combination transaction involving the Company in exchange for a fee of $90 per quarter, plus reimbursements of all related expenses reasonably incurred. The Agreement expired on September 14, 2011. For the six month periods ended September 30, 2011 and 2010, the Company incurred management fees under the agreement of $180 and $180, respectively. At September 30, 2011 and March 31, 2011, the accrued payable to Trinad Management was $135 and $135, respectively. In March 2008, the Company entered into a month to month lease for office space with Trinad Management for rent of $9 per month, subsequently reduced to $5 per month. Rent expense in connection with this lease was $0 and $30 respectively for the six month periods ended September 30, 2011 and 2010.
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12.
|
Capital Stock Transactions
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Preferred Stock
There are 100 shares of Series A Convertible Preferred Stock (“Series A”) authorized, issued and outstanding. The Series A has a par value of $0.0001 per share. The Series A holders are entitled to: (1) vote on an equal per share basis as common stock, (2) dividends paid to the common stock holders on an as if-converted basis and (3) a liquidation preference equal to the greater of $10 per share of Series A (subject to adjustment) or such amount that would have been paid to the common stock holders on an as if-converted basis. The holder of the Series A has agreed not to exercise certain rights until such time as the Amended ValueAct Note has been repaid in full.
Common Stock and Warrants
On April 1, 2011, 347,244 shares of common stock of the Company were issued to two former employees of the Company, as compensation, at the closing market price on that date of $0.58 cents per share, resulting in a total value of $201. In addition, the employees each agreed to cancel options to purchase 173,622 shares of common stock in connection with their respective termination agreements which were valued at $132. The Company determined the fair value of the cancelled options using the Black-Scholes option pricing model and the following assumptions: expected life of 5.11 years, a risk free interest rate of 1.76%, a dividend yield of 0% and volatility of 75%. The net value of the termination was $69.
On April 6, 2011, the Company issued 150,000 shares of common stock of the Company to a vendor. The shares vest over a one year period. The shares were valued at the closing market price on that date of $0.55 cents per share. The overall value was determined to be $83, of which $44 was recorded through the period ended September 30, 2011.
On April 6, 2011, the Company issued warrants to purchase 75,000 shares of the Company’s common stock to a vendor, as compensation for services rendered, at $0.25 cents per share. The Company initially determined the fair value of the warrants issued to be a $28, using the Black-Scholes option pricing model and the following assumptions: expected life of 3.00 years, a risk free interest rate of 1.36%, a dividend yield of 0% and volatility of 75%. The warrants vest over a six month period and $34 of expense has been recorded through the period ended September 30, 2011.
In May 2011, 150,000 shares of common stock of the Company were issued to a vendor as a settlement, at the closing market price on that date of $0.40 cents per share, resulting in a total value of $60.
In June 2011, the Company entered into a consulting agreement, pursuant to which, the Company issued warrants to purchase 150,000 shares of the Company’s common stock at an exercise price of $0.47 cents per share. The Company determined the fair value of the warrants issued to be $33, using the Black-Scholes option pricing model and the following assumptions: expected life of 3.00 years, a risk free interest rate of 0.74%, a dividend yield of 0% and volatility of 75%. The warrants vest over a one year period and $17 of expense has been recorded through the period ended September 30, 2011.
In June 2011, the Company entered into a consulting agreement, pursuant to which, the Company issued warrants to purchase 150,000 shares of the Company’s common stock at an exercise price of $0.47 cents per share. The Company determined the fair value of the warrants issued to be $33, using the Black-Scholes option pricing model and the following assumptions: expected life of 3.00 years, a risk free interest rate of 0.81%, a dividend yield of 0% and volatility of 75%. The warrants vest over a one year period and $33 of expense has been recorded in the period ended September 30, 2011.
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13.
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Employee Benefit Plans
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The Company has an employee 401(k) savings plan covering full-time eligible employees. These employees may contribute eligible compensation up to the annual IRS limit. The Company does not make matching contributions.
The income tax provision for the quarter represents foreign withholding taxes related to continuing operations paid in jurisdictions outside of the US. Profit from discontinued operations is disclosed net of taxes – these are income taxes currently payable in foreign jurisdictions, primarily the United Kingdom based on revenue derived in that territory. The tax provision arising from the gain on disposal of discontinued operations is offset against available tax losses.
Management has evaluated and concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements as of September 30, 2011.
ASC 740 requires the consideration of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Significant management judgment is required in determining any valuation allowance recorded against deferred tax assets. The Company adopted the provisions of ASC 740 on January 1, 2008 and there was no difference between the amounts of unrecognized tax benefits recognized in the balance sheet prior to the adoption of ASC 740 and those after the adoption of ASC 740. There were no unrecognized tax benefits not subject to valuation allowance as of September 30, 2011 and March 31, 2011. The Company recognized no interest and penalties on income taxes in its statement of operations for the periods ended September 30, 2011 and 2010.
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15.
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Segment and Geographic information
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The Company operates in one reportable segment in which it is a developer and publisher of branded entertainment content for mobile phones. Revenues are attributed to geographic areas based on the country in which the carrier’s principal operations are located. The Company attributes its long-lived assets, which primarily consist of property and equipment, to a country primarily based on the physical location of the assets. Goodwill and intangibles are not included in this allocation. The following information sets forth geographic information on our sales and net property and equipment for the period ended September 30, 2011:
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|
North
|
|
|
|
|
|
Other
|
|
|
|
|
| |
|
America
|
|
|
Europe
|
|
|
Regions
|
|
|
Consolidated
|
|
|
Three Months ended September 30, 2011 Net sales to unaffiliated customers
|
|
|
50 |
|
|
|
1,316 |
|
|
|
572 |
|
|
$ |
1,938 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months ended September 30, 2011 Net sales to unaffiliated customers
|
|
|
107 |
|
|
|
2,835 |
|
|
|
889 |
|
|
$ |
3,831 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net at September 30, 2011
|
|
|
234 |
|
|
|
63 |
|
|
|
1 |
|
|
$ |
298 |
|
Our largest customer accounted for 44% of gross revenues in the period ended September 30, 2011; and 51% in the period ended September 30, 2010.
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16.
|
Commitments and Contingencies
|
Operating Lease Obligations
The Company leases office facilities under non-cancelable operating leases expiring in various years through 2012.
Following is a summary of future minimum payments under initial terms of leases at September 30, 2011:
|
Year Ending September 30,
|
|
|
|
| |
|
|
|
|
2012
|
|
$ |
24 |
|
|
2013
|
|
$ |
6 |
|
|
Total minimum lease payments
|
|
$ |
30 |
|
These amounts do not reflect future escalations for real estate taxes and building operating expenses. Rental expense for continuing operations amounted to $92 and $184, respectively, for the periods ended September 30, 2011 and 2010.
Other Obligations
As of September 30, 2011, the Company was obligated for payments under various distribution agreements, equipment lease agreements, employment contracts and the management agreement described in Note 11 with initial terms greater than one year at September 30, 2011. As of September 30, 2011, accrued management fees payable to Trinad Management are $135. Annual payments relating to these commitments at September 30, 2011 are as follows:
|
Year Ending September 30,
|
|
|
|
| |
|
|
|
|
2012
|
|
$ |
7 |
|
|
Total minimum payments
|
|
$ |
7 |
|
Litigation
Twistbox’s wholly owned subsidiary, WAAT Media Corp. (“WAAT”) and General Media Communications, Inc. (“GMCI”) are parties to a content license agreement dated May 30, 2006, whereby GMCI granted to WAAT certain exclusive rights to exploit GMCI branded content via mobile devices. GMCI terminated the agreement on January 26, 2009 based on its claim that WAAT failed to cure a material breach pertaining to the non-payment of a minimum royalty guarantee installment in the amount of $485. On or about March 16, 2009, GMCI filed a complaint seeking the balance of the minimum guarantee payments due under the agreement in the approximate amount of $4,085. WAAT has counter-sued claiming GMCI is not entitled to the claimed amount and that it has breached the agreement by, among other things, failing to promote, market and advertise the mobile services as required under the agreement and by fraudulently inducing WAAT to enter into the agreement based on GMCI’s repeated assurances of its intention to reinvigorate its flagship brand. GMCI has filed a demurrer to the counter-claim. WAAT subsequently filed an amended counter-claim. On August 16, 2011, the LA Superior Court ruled in favor of WAAT’s Summary Judgment Motion. As a result, GMCI’s potential damages have been limited to the amount of minimum royalty installments that accrued prior to termination of the content license agreement in the amount of approximately $800. Trial has been scheduled for April 16, 2012. WAAT intends to vigorously defend against this action. Principals of both parties continue to communicate to find a mutually acceptable resolution. The Company has accrued for its estimated liability in this matter.
The Company is subject to various claims and legal proceedings arising in the normal course of business. Based on the opinion of the Company’s legal counsel, management believes that the ultimate liability, if any in the aggregate of other claims will not be material to the financial position or results of operations of the Company for any future period; and no liability has been accrued.
As previously disclosed, on July 11, 2011, Peter Adderton has been appointed as the interim Chief Executive Officer of the Company effective July 15, 2011 and pursuant to the terms of the agreement described below. Mr. Adderton, is currently the chairman and Chief Executive Officer of Agency 3.0, a digital marketing services company, where he leads the company's practice focusing on mobile and wireless clients. In addition, he is also Founder and Chief Executive Officer and a majority owner of Digital Turbine Group, LLC, a multimedia management technology company. Mr. Adderton's appointment as interim Chief Executive Officer of the Company was made in connection with the Company amending its previously announced letter of intent to acquire Digital Turbine LLC. On September 30, 2011, the Company entered into a memorandum of understanding setting forth certain material terms relating to the following agreements: (i) an asset purchase agreement whereby the Company will acquire all of the assets of Digital Turbine, LLC and its wholly-owned subsidiaries, and in return, the Company will issue 50,000 shares of restricted stock to the equity holders of Digital Turbine, LLC; (ii) a written employment agreement with Peter Adderton, pursuant to which he will become the Chief Executive Officer of the Company; and (iii) certain employee, consulting and/or other agreements, pursuant to which the Company will issue shares of restricted stock to various parties. The consummation of the foregoing transactions is subject to certain closing conditions, including without limitation: (i) the successful completion of an equity financing by the Company with gross proceeds equal to at least $1 million; (ii) satisfaction of Peter Adderton's dispute with VAC, the acquisition by a third party of the VAC Note, and the conversion of $3 million in principal amount of the VAC Note into shares of the common stock of the Company at a conversion price of $1.00 per share; and (iii) the negotiation, execution and delivery of definitive agreements. Although the Company is currently negotiating the terms of the definitive documents, the terms of the proposed transactions outlined in the memorandum of understanding may not occur on the terms currently set forth in the memorandum of understanding or at all.