# Digital Turbine, Inc.: Form 10-Q for the period ended Dec 31, 2009

- Company: [Digital Turbine, Inc.](/companies/apps.md) (CIK 317788)
- Form: 10-Q
- Filed: 2010-02-16
- Accepted by EDGAR: Feb 16, 2010, 11:05 ET
- Period: 2009-12-31
- Accession: 0001144204-10-007627
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/317788/000114420410007627/v174457_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/317788/000114420410007627/

## Management's discussion and analysis

As filed, 36,556 characters.

The following discussion should be read in conjunction with, and is qualified in its entirety by, the Financial Statements and the Notes thereto included in this report. This discussion contains certain forward-looking statements that involve substantial risks and uncertainties. When used in this Quarterly Report on Form 10-Q, the words “anticipate,” “believe,” “estimate,” “expect” and similar expressions, as they relate to our management or us, are intended to identify such forward-looking statements. Our actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements as a result of a variety of factors including those set forth under “Risk Factors” in our Annual Report on Form 10-K, as amended, for the period ended March 31, 2009. Historical operating results are not necessarily indicative of the trends in operating results for any future period.

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

### Historical Operations ofthe Company

The Company was originally incorporated in the State of Delaware on November 6, 1998 under the name eB2B Commerce, Inc. On April 27, 2000, the Company merged into DynamicWeb Enterprises Inc., a New Jersey corporation, and changed its name to eB2B Commerce, Inc. On April 13, 2005, the Company changed its name to Mediavest, Inc. On November 7, 2007, through a merger, the Company reincorporated in the State of Delaware under the name Mandalay Media, Inc.

On October 27, 2004, and as amended on December 17, 2004, the Company filed a plan for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the “Plan of Reorganization”). Under the Plan of Reorganization, as completed on January 26, 2005: (1) the Company’s net operating assets and liabilities were transferred to the holders of the secured notes in satisfaction of the principal and accrued interest thereon; (2) $400,000 were transferred to a liquidation trust and used to pay administrative costs and certain preferred creditors; (3) $100,000 were retained by the Company to fund the expenses of remaining public; (4) 3.5% of the new common stock of the Company (140,000 shares) was issued to the holders of record of the Company’s preferred stock in settlement of their liquidation preferences; (5) 3.5% of the new common stock of the Company (140,000 shares) was issued to common stockholders of record as of January 26, 2005 in exchange for all of the outstanding shares of the common stock of the company; and (6) 93% of the new common stock of the Company (3,720,000 shares) was issued to the sponsor of the Plan of Reorganization in exchange for $500,000 in cash. Through January 26, 2005, the Company and its subsidiaries were engaged in providing business-to-business transaction management services designed to simplify trading between buyers and suppliers.

Prior to February 12, 2008, the Company was a public shell company with no operations, and controlled by its significant stockholder, Trinad Capital Master Fund, L.P.

### SUMMARY OF THE MERGER

Mandalay Media entered into an Agreement and Plan of Merger on December 31, 2007, as subsequently amended by the Amendment to Agreement and Plan of Merger dated February 12, 2008 (the “Merger Agreement”), with Twistbox Acquisition, Inc., a Delaware corporation and a wholly-owned subsidiary of Mandalay Media (“Merger Sub”), Twistbox Entertainment, Inc. (“Twistbox”), and Adi McAbian and Spark Capital, L.P., as representatives of the stockholders of Twistbox, pursuant to which Merger Sub would merge with and into Twistbox, with Twistbox as the surviving corporation (the “Merger”). The Merger was completed on February 12, 2008.

Pursuant to the Merger Agreement, upon the completion of the Merger, each outstanding share of Twistbox common stock, $0.001 par value per share, on a fully-converted basis, with the conversion on a one-for-one basis of all issued and outstanding shares of the Series A Convertible Preferred Stock of Twistbox and the Series B Convertible Preferred Stock of Twistbox, each $0.01 par value per share (the “Twistbox Preferred Stock”), converted automatically into and became exchangeable for Mandalay Media common stock in accordance with certain exchange ratios set forth in the Merger Agreement. In addition, by virtue of the Merger, each outstanding Twistbox option to purchase Twistbox common stock issued pursuant to the Twistbox 2006 Stock Incentive Plan was assumed by Mandalay Media, subject to the same terms and conditions as were applicable under such plan immediately prior to the Merger, except that (a) the number of shares of Mandalay Media common stock issuable upon exercise of each Twistbox option was determined by multiplying the number of shares of Twistbox common stock that were subject to such Twistbox option immediately prior to the Merger by 0.72967 (the “Option Conversion Ratio”), rounded down to the nearest whole number; and (b) the per share exercise price for the shares of Mandalay Media common stock issuable upon exercise of each Twistbox option was determined by dividing the per share exercise price of Twistbox common stock subject to such Twistbox option, as in effect prior to the Merger, by the Option Conversion Ratio, subject to any adjustments required by the Internal Revenue Code. As part of the Merger, Mandalay Media also assumed all unvested Twistbox options. The merger consideration consisted of an aggregate of up to 12,325,000 shares of Mandalay Media common stock, which included the conversion of all shares of Twistbox capital stock and the reservation of 2,144,700 shares of Mandalay Media common stock required for assumption of the vested Twistbox options. Mandalay Media reserved an additional 318,772 shares of Mandalay Media common stock required for the assumption of the unvested Twistbox options. All warrants to purchase shares of Twistbox common stock outstanding at the time of the Merger were terminated on or before the effective time of the Merger.

Upon the completion of the Merger, all shares of the Twistbox capital stock were no longer outstanding and were automatically canceled and ceased to exist, and each holder of a certificate representing any such shares ceased to have any rights with respect thereto, except the right to receive the applicable merger consideration. Additionally, each share of the Twistbox capital stock held by Twistbox or owned by Merger Sub, Mandalay Media or any subsidiary of Twistbox or Mandalay Media immediately prior to the Merger, was canceled and extinguished as of the completion of the Merger without any conversion or payment in respect thereof. Each share of common stock, $0.001 par value per share, of Merger Sub issued and outstanding immediately prior to the Merger was converted upon completion of the Merger into one validly issued, fully paid and non-assessable share of common stock, $0.001 par value per share, of the surviving corporation.

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

### SUMMARY OF THE AMV ACQUISITION

On October 23, 2008, Mandalay Media consummated the acquisition of 100% of the issued and outstanding share capital of AMV Holding Limited, a United Kingdom private limited company (“AMV”) and 80% of the issued and outstanding share capital of Fierce Media Limited, United Kingdom private limited company (collectively the “Shares”). The acquisition of AMV is referred to herein as the “AMV Acquisition”. The aggregate purchase price (subject to adjustments as provided in the stock purchase agreement) for the Shares consisted of (i) $5,375,000 in cash; (ii) 4,500,000 shares of common stock, par value $0.0001 per share; (iii) a secured promissory note in the aggregate principal amount of $5,375,000 (the “AMV Note”); and (iv) additional earn-out amounts, if any, based on certain targeted earnings as set forth in the stock purchase agreement.

The AMV Note matures on July 31, 2010, and bears interest at an initial rate of 5% per annum, subject to adjustment as provided therein. In the event Mandalay Media completes an equity financing which results in gross proceeds of over $6,000,000, Mandalay Media will prepay a portion of the AMV Note in an amount equal to one-third of the excess of the gross proceeds of such financing over $6,000,000. In addition, if within nine months of the issuance date of the AMV Note, Mandalay Media completes a financing that results in gross proceeds of over $15,000,000, then Mandalay Media shall prepay the entire principal amount then outstanding under the AMV Note, plus accrued interest. If within nine months of the issuance date of the AMV Note, the aggregate principal sum then outstanding under the AMV Note plus accrued interest thereon has not been prepaid, then on and after such date, interest shall accrue on the unpaid principal balance of the AMV Note at a rate of 7% per annum.

In addition, also on October 23, 2008, in connection with the AMV Acquisition, Mandalay Media, Twistbox and ValueAct entered into a Second Amendment to the ValueAct Note, which among other things, provides for a payment in kind election at the option of Twistbox, modifies the financial covenants set forth in the ValueAct Note to require that Mandalay Media and Twistbox maintain certain minimum combined cash balances and provides for certain covenants with respect to the indebtedness of Mandalay Media and its subsidiaries. Also on October 23, 2008, AMV granted to ValueAct a security interest in its assets to secure the obligations under the ValueAct Note. In addition, Mandalay Media and ValueAct entered into an allonge to each of those certain warrants issued to ValueAct in connection with the Merger, which, among other things, amended the exercise price of each of the warrants to $4.00 per share. On August 14, 2009, Mandalay Media, Twistbox and ValueAct entered into a Third Amendment to the ValueAct Note. Pursuant to the Third Amendment, the maturity date was changed to July 31, 2010 and the interest rate of the Note increased from 10% to 12.5%. Additionally, the Third Amendment provides that Twistbox may prepay the ValueAct Note in whole or in part at any time without penalty. In the event of any such prepayment prior to January 31, 2010, in an aggregate amount of not less than 50% of the then outstanding and unpaid principal plus accrued interest under the ValueAct Note, the balance of the ValueAct Note shall be payable on the earlier of July 31, 2015, or the date when such amount becomes due and payable as a result of an event of default under the ValueAct Note (the earlier of such date, the “New Maturity Date”). If Twistbox receives any net proceeds from a debt financing (other than any proceeds from a Company Receivables Facility as defined in the ValueAct Note) not to exceed $9,000,000, at least 50% of such proceeds shall be paid by Twistbox to ValueAct to satisfy a portion of the then-outstanding and unpaid principal plus accrued interest under the Note; any indebtedness incurred by Twistbox in connection with such a prepayment shall be excluded from Twistbox’s covenants, as set forth in the Note, not to incur additional indebtedness. If the Company receives any net proceeds from an equity financing, at least 50% of such proceeds shall be paid to ValueAct to satisfy a portion of the then-outstanding and unpaid principal plus accrued interest under the Note, and the balance of the Note shall be payable on the New Maturity Date. In the event Twistbox or the Company have made any prepayments in connection with a debt or equity financing, as applicable, which payments are greater than or equal to $9,000,000 in the aggregate, then the balance of the Note shall be payable on the New Maturity Date. Lastly, if certain of the earn-out payments set forth in that certain Stock Purchase Agreement, by and among the Company, Jonathan Creswell, Nathaniel MacLeitch and the shareholders of AMV, dated as of October 23, 2008, as amended, have been paid, the Company and Twistbox agreed to maintain certain minimum combined cash balances. On January 25, 2010, Mandalay Media, Twistbox and ValueAct entered into a Waiver to Senior Secured Note (the “Waiver”), pursuant to which ValueAct agreed to waive certain provisions of the ValueAct Note. Pursuant to the Waiver, subject to Twistbox’s compliance with certain conditions set forth in the Waiver, certain rights to prepay the ValueAct Note were extended from January 31, 2010 to March 1, 2010. In addition, subject to Twistbox’s compliance with certain conditions set forth in the Waiver, the timing obligation of Mandalay Media and Twistbox to comply with the cash covenant set forth in the ValueAct Note was extended to March 1, 2010 and the minimum cash balance by which Twistbox and Mandalay Media must maintain was increased to $1,600,000.

On August 14, 2009, the Company and ValueAct entered into a Second Allonge to Warrant to Purchase 1,092,621 shares of Common Stock (the “Second Allonge”), which amended that certain warrant to purchase 1,092,621 shares of the Company’s common stock, issued to ValueAct on February 12, 2008, as amended (the “ValueAct Warrant”). Pursuant to the Second Allonge, the exercise price of the ValueAct Warrant decreased from $4.00 per share to the lesser of $1.25 per share, or the exercise price per share for any warrant to purchase shares of the Company’s common stock issued by the Company to certain other parties.

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

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

### Comparison of the Three Months Ended December 31, 2009 and 2008

### Revenues

*unaudited*

*unaudited*

*(In thousands)*

| Revenues by type: | Three Months Ended December 31, 2009 | 2008 |
| --- | ---: | ---: |
| Games | $1,024 | $1,245 |
| Other content | 8,627 | 9,760 |
| Total | $9,651 | $11,005 |

Games revenue – lower games revenue in the quarter compared to the same quarter last year relates to the timing of development work in the U.S. for third parties and lower revenue from U.S. carriers due to rotation of games on-deck. Games revenue includes both licensed and internally developed games for use on mobile phones.

The decrease in other content revenues as compared to the third quarter of fiscal 2009 is due to a fall in off-deck revenues in the U.K. as the market contracted and was subject to tighter regulatory restrictions, partly offset by a recovery in the South African market. In addition, the on-deck business saw decreased carrier sales as a result of a continuation of a very challenging European sales environment. Other content includes a broad range of licensed and internally-developed product delivered in the form of WAP, Video, Wallpaper and Mobile TV as well as interactive voice services.

### Cost of Revenues

*unaudited*

*unaudited*

*(In thousands)*

| Cost of revenues: | Three Months Ended December 31, 2009 | 2008 |
| --- | ---: | ---: |
| License fees | $974 | $1,670 |
| Other direct cost of revenues | 1,948 | 2,264 |
| Total cost of revenues | $2,922 | $3,934 |
| Revenues | $9,651 | $11,005 |
| Gross margin | 69.7% | 64.3% |

License fees represent costs payable to content providers for use of their intellectual property in products sold. License fees have decreased as a result of reductions in the revenue share attributable to several licensed product arrangements and a significant change in mix towards product for which the rights have been acquired in perpetuity. In addition license fees in the quarter benefited from the reversal of previously accrued license fees, following resolution with providers. One-time adjustments amounted to $624, which improved margins by approximately 6%. Other direct cost of revenues includes costs to deliver products, and amortization of the intangibles identified as part of the purchase price accounting and attributed to cost of revenues. The decrease in other direct costs is largely attributable to a decrease in off-deck revenues. The improvement in margin is due the mix changes noted above and the impact of off-deck revenues, which has higher margins, and adjustments related to settlement agreements with certain content providers.

### Operating Expenses

*unaudited*

*unaudited*

*(In thousands)*

|  | Three Months Ended December 31, 2009 | 2008 |
| --- | ---: | ---: |
| Product development expenses | $1,184 | $1,563 |
| Sales and marketing expenses | 2,276 | 4,243 |
| General and administrative expenses | 2,986 | 2,173 |
| Amortization of intangible assets | 177 | 177 |

Product development expenses include the costs to develop, edit and make content ready for consumption on a mobile phone. The decrease in expenses compared to the third quarter of the prior year are primarily the result of restructuring during the year resulting in a reduction in employees, particularly in the product development areas.

Sales and marketing expenses represent the costs of sales and marketing personnel, and advertising and marketing campaigns. The decrease in sales and marketing expenses from the third quarter of the prior year is the result of a sharp decrease in marketing within the off-deck business as marketing campaigns were fine-tuned towards more profitable segments, particularly in the primary UK market.

General and administrative expenses represent management and support personnel costs in each of the subsidiary companies and related expenses, as well as professional and consulting costs, and other costs such as stock based compensation, depreciation and bad debt expenses. The increase in expenses over the third quarter in the prior year is the result of costs of restructuring the on-deck business, higher professional costs in the quarter, including costs related to the company’s bid for World Poker Tour Enterprises, legal costs related to content provider disputes, and legal and accounting costs incurred in complying with a Securities and Exchange Commission (“SEC”) request to re-file certain historical financial statements presenting the acquired Twistbox subsidiary as the “predecessor” entity.

Amortization of intangibles represents amortization of the intangibles identified as part of the purchase price accounting related to both acquisitions and attributed to operating expenses.

### Other Income / (Expenses)

*unaudited*

*unaudited*

*(In thousands)*

|  | Three Months Ended December 31, 2009 | 2008 |
| --- | ---: | ---: |
| Interest and other income/(expense) | $753 | $(1,138) |

Interest and other income/(expense) includes interest income on invested funds, interest expense related to the ValueAct Note and the AMV Note, foreign exchange transaction gains, and other income/expense. The change in net expense compared to the third quarter of the prior year relates to foreign exchange gains (versus losses in the prior year period), and significant miscellaneous income related to the settlement of two long outstanding matters – one related to fees payable to an investment bank in conjunction with the Twistbox acquisition and the other related to amounts potentially payable to a significant customer associated with VAT liabilities in Europe. Both matters were settled favorably in the quarter. These were partially offset by increased interest expense related to the increase in the balance due and higher interest rates under both the ValueAct Note, and the AMV Note, which represents deferred purchase consideration related to the AMV Acquisition.

### Comparison of the Nine Months Ended December 31, 2009 and 2008

### Revenues

*unaudited*

*unaudited*

*(In thousands)*

| Revenues by type: | Nine Months Ended December 31, 2009 | 2008 |
| --- | ---: | ---: |
| Games | $3,549 | $3,738 |
| Other content | 26,326 | 17,616 |
| Total | $29,875 | $21,354 |

Games revenue – decreased sales of non-core game products and particular challenges in carrier games sales in key markets, especially Germany were partly offset by higher development revenue in the U.S. games revenue includes both licensed and internally developed games for use on mobile phones.

The increase in other content revenues over the first nine months of fiscal 2009 over the prior year is primarily due to the inclusion of revenues from AMV Holding which was acquired in the third quarter of fiscal 2009. This was partially offset by decreased carrier sales as a result of a very challenging European sales environment, and the loss and a significant on-deck advertising management agreement. Other content includes a broad range of licensed and internally-developed product delivered in the form of WAP, Video, Wallpaper and Mobile TV as well as interactive voice services.

### Cost of Revenues

*unaudited*

*unaudited*

*(In thousands)*

| Cost of revenues: | Nine Months Ended December 31, 2009 | 2008 |
| --- | ---: | ---: |
| License fees | $2,849 | $5,604 |
| Other direct cost of revenues | 5,934 | 2,468 |
| Total cost of revenues | $8,783 | $8,072 |
| Revenues | $29,875 | $21,354 |
| Gross margin | 70.6% | 62.2% |

License fees represent costs payable to content providers for use of their intellectual property in products sold. License fees have decreased as a result of reductions in the revenue share attributable to several licensed product arrangements and a significant change in mix towards product for which the rights have been acquired in perpetuity. In addition, license fees benefited from the reversal of previously accrued license fees, following resolution with providers. These one-time adjustments contributed approximately 6.5% of margin in the period. Other direct cost of revenues includes costs to deliver products, and amortization of the intangibles identified as part of the purchase price accounting and attributed to cost of revenues. The increase in other direct costs is largely attributable to the inclusion of AMV cost of revenues for three quarters in the current year as compared to one quarter in the prior fiscal year. The improvement in margin is due the various changes noted above and the impact of AMV, which has higher margin sales, and adjustments related to settlement agreements with content providers.

### Operating Expenses

*unaudited*

*unaudited*

*(In thousands)*

|  | Nine Months Ended December 31, 2009 | 2008 |
| --- | ---: | ---: |
| Product development expenses | $3,964 | $5,130 |
| Sales and marketing expenses | 8,681 | 6,527 |
| General and administrative expenses | 8,330 | 7,545 |
| Amortization of intangible assets | 531 | 451 |

Product development expenses include the costs to develop, edit and make content ready for consumption on a mobile phone. The decrease in expenses compared to the same period of the prior year are primarily the result of restructuring during the year resulting in a reduction in employees, particularly in the product development areas.

Sales and marketing expenses represent the costs of sales and marketing personnel, and advertising and marketing campaigns. Advertising increased significantly with the AMV Acquisition in October 2008 due to the “direct to consumer” nature of that business, with a significant element of direct marketing required to stimulate revenues. In addition, a significant portion of AMV’s employee base is classified as sales and marketing employees. This was partially offset by a decrease in marketing expenses in the third quarter within the off-deck business as marketing campaigns were adjusted in favor of more profitable channels, particularly in the primary UK market.

General and administrative expenses represent management and support personnel costs in each of the subsidiary companies and related expenses, as well as professional and consulting costs, and other costs such as stock based compensation, depreciation and bad debt expenses. Higher expenses in the third quarter resulted from the costs of restructuring the on-deck business, higher professional costs, including costs related to the company’s bid for World Poker Tour Enterprises, legal costs related to content provider disputes, and legal and accounting costs incurred in complying with an SEC request to re-file certain historical financial statements presenting the acquired Twistbox subsidiary as the “predecessor” entity. These were partially offset by employee reductions and cost savings initiatives implemented during the period.

Amortization of intangibles represents amortization of the intangibles identified as part of the purchase price accounting related to both acquisitions and attributed to operating expenses.

### Other Income / (Expenses)

*unaudited*

*unaudited*

*(In thousands)*

|  | Nine Months Ended December 31, 2009 | 2008 |
| --- | ---: | ---: |
| Interest and other income/(expense) | $(203) | $(2,084) |

Interest and other income/(expense) includes interest income on invested funds, interest expense related to the ValueAct Note and the AMV Note, foreign exchange transaction gains, and other income/expense. The decrease in net expense compared to the same period of the prior year relates to foreign exchange gains (versus losses in the prior year period), and miscellaneous income related to the settlement of two long outstanding matters – one related to fees payable to an investment bank in conjunction with the Twistbox acquisition and the other related to amounts potentially payable to a significant customer associated with VAT liabilities in Europe. Both matters were settled favorably in the quarter. These were partially offset by increased interest expense related to the increase in the balance due and higher interest rates under both the ValueAct Note, and the AMV Note, which represents deferred purchase consideration related to the AMV Acquisition.

### Financial Condition

#### Assets

Our current assets totaled $13.8 million and $18.0 million at December 31, 2009 and March 31, 2009, respectively. Total assets were $86.3 million and $91.2 million at December 31, 2009 and March 31, 2009, respectively. The decrease in current assets is primarily due to the lower cash balances and accounts receivable. The decrease in total assets is primarily due to the amortization of intangibles assets, as well as the movement in cash and accounts receivable.

#### Liabilities and Working Capital

At December 31, 2009, our total liabilities were $37.4 million. Our current liabilities totaled $37.4 million and $42.1 million at December 31, 2009 and March 31, 2009, respectively. The change in current liabilities was primarily related to the reduction in accounts payable and other current liabilities. The Company had negative working capital of $23.6 million at December 31, 2009 and $24.1 million at March 31, 2009 as a result of the timing of maturity of the ValueAct Note.

### Liquidity and Capital Resources

*unaudited*

*unaudited*

*(In thousands)*

| Consolidated Statement of Cash Flows Data: | Nine Months Ended December 31, 2009 | 2008 |
| --- | ---: | ---: |
| Capital expenditures | $530 | $101 |
| Cash flows used in operating activities | 3,289 | 5,591 |
| Cash flows used in investing activities | - | 3,262 |
| Cash flows provided by financing activities |  | 4,300 |

Twistbox has incurred losses and negative annual cash flows since inception, although the operating loss has narrowed significantly in the current period. AMV has generally experienced profits and strongly positive cash flows. The primary sources of liquidity have historically been issuance of common and preferred stock, in the case of Twistbox, borrowings under credit facilities with aggregate proceeds of $16.5 million. In the future, we anticipate that our primary sources of liquidity will be cash generated by our operating activities.

#### Operating Activities

In the nine months ended December 31, 2009, we used $3.3 million of net cash, flowing from the loss of $1.6 million as well as decreases in accounts payable of $4.3 million and in other liabilities of $0.6 million, offset by non cash stock based compensation and depreciation and amortization. In the nine months ended December 31, 2008, we used $5.6 million of net cash in operating expenses. This primarily related to the net loss of $8.9 million, and reductions in accounts payable/accrued license fees/other liabilities of $3.8 million, partially offset by non cash stock based compensation and depreciation and amortization included in the net loss and increases in accounts receivable.

As of December 31, 2009, the Company had approximately $2.3 million of cash. The Company has restructured its debt, as described in Note 9 to the financial statements. Among other things, this provides for the due date to be extended to July 31, 2010, an interest rate of 12% from the date of the agreement through maturity, an extension of the payment in kind (“PIK”) election through to the interest payment otherwise due in January 2010, and a reduction in the minimum cash covenant to $1 million until January 31, 2010 and $4 million thereafter, subject to certain conditions. In addition the Company and the sellers of AMV Limited entered into an agreement which extended the maturity date of the AMV Note, which represents deferred purchase consideration in relation to the AMV Acquisition, until July 31, 2010.

The Company’s cash requirements will be dependent on actions taken to improve cash flow, including the debt restructuring and operational restructuring within the subsidiaries. We may require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If these sources are insufficient to satisfy our cash requirements, we may seek to sell additional debt securities or additional equity securities or to obtain a credit facility. The sale of convertible debt securities or additional equity securities could result in additional dilution to our stockholders. The incurrence of increased indebtedness would result in additional debt service obligations and could result in additional operating and financial covenants that would restrict our operations. In addition, there can be no assurance that any additional financing will be available on acceptable terms, if at all.

Debt obligations include interest payments under the ValueAct Note, payable at the end of the term, in July 2010, and interest payments under the AMV Note, payable at the end of the term, in July 2010. The ValueAct Note was amended during fiscal 2009 such that the Company may elect to add interest to the principal, with the full amount payable at the end of the term. The Company’s operating lease obligations include non-cancelable operating leases for the Company’s office facilities in several locations, expiring in various years through 2014. Twistbox has entered into license agreements with various owners of brands and other intellectual property in order to develop and publish branded products for mobile handsets. Pursuant to some of these agreements, we are required to pay minimum royalties over the term of the agreements regardless of actual sales.

As described above, on January 25, 2010, the Company, Twistbox and ValueAct entered into a Waiver to Senior Secured Note (the “Waiver”), pursuant to which ValueAct agreed to waive certain provisions of the ValueAct Note. Pursuant to the Waiver, subject to Twistbox’s compliance with certain conditions of the Waiver, certain rights to prepay the ValueAct Note were extended from January 31, 2010 to March 1, 2010. In addition, subject to Twistbox’s compliance with certain conditions of the Waiver, the timing obligation of the Company and Twistbox to comply with the cash covenant set forth in the ValueAct Note was extended to March 1, 2010 and the minimum cash balance by which Twistbox and the Company must maintain was increased to $1.6 million. In addition to working with ValueAct in connection with the Waiver, the Board of Directors of the Company has appointed a Special Committee of the Board of Directors to explore various alternatives with respect to the Company, its outstanding debt and its future operations.

### Off-Balance Sheet Arrangements

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

## Market risk

As filed, 3,105 characters.

### Interest Rate and Credit Risk

Our current operations have exposure to interest rate risk that relates primarily to our investment portfolio. All of our current investments are classified as cash equivalents or short-term investments and carried at cost, which approximates market value. We do not currently use or plan to use derivative financial instruments in our investment portfolio. The risk associated with fluctuating interest rates is limited to our investment portfolio, and we do not believe that a 10% change in interest rates would have a significant impact on our interest income, operating results or liquidity.

Currently, our cash and cash equivalents are maintained by financial institutions in the United States, Germany, the United Kingdom, Poland, Russia, Argentina and Colombia, and our current deposits are likely in excess of insured limits. We believe that the financial institutions that hold our investments are financially sound and, accordingly, minimal credit risk exists with respect to these investments. Our accounts receivable primarily relate to revenues earned from domestic and international Mobile phone carriers. We perform ongoing credit evaluations of our carriers’ financial condition but generally require no collateral from them. As of December 31, 2009, our two largest customers represented approximately 12% and 12%, respectively, of our gross accounts receivable outstanding.

### Foreign Currency Risk

The functional currencies of our United States, United Kingdom and German operations are the United States Dollar, or USD, Pound Sterling and the Euro, respectively. A significant portion of our business is conducted in currencies other than the USD, the Pound or the Euro. Our revenues are usually denominated in the functional currency of the carrier. Operating expenses are usually in the local currency of the operating unit, which mitigates a portion of the exposure related to currency fluctuations. Intercompany transactions between our domestic and foreign operations are denominated in the USD, Pound or the Euro. At month-end, foreign currency-denominated accounts receivable and intercompany balances are marked to market and unrealized gains and losses are included in other income (expense), net. Our foreign currency exchange gains and losses have been generated primarily from fluctuations in the Euro and pound sterling versus the USD and in the Euro versus the pound sterling. In the future, we may experience foreign currency exchange losses on our accounts receivable and intercompany receivables and payables. Foreign currency exchange losses could have a material adverse effect on our business, operating results and financial condition.

### Inflation

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we might not be able to offset these higher costs fully through price increases. Our inability or failure to do so could harm our business, operating results and financial condition.

## Controls and procedures

As filed, 1,178 characters.

### Evaluation of Disclosure Controls and Procedures

Members of our management, including our Principal Executive Officer, Ray Schaaf, and Principal Financial Officer, Russell Burke, have evaluated the effectiveness of our disclosure controls and procedures, as defined by the Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-15(e) or 15d-15(e), as of December 31, 2009, the end of the period covered by this report. Based upon that evaluation, Messrs. Schaaf and Burke concluded that our disclosure controls and procedures are adequate and effective to ensure that material information was made known to them by others within those entities, particularly during the period for which this Quarterly Report on Form 10-Q was prepared.

### Changes in Controls and Procedures

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

## Risk factors

As filed, 157 characters.

There has been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K, as amended, for the year ended March 31, 2009.

Filed Feb 16, 2010.
Source: SEC EDGAR, the filing index for accession 0001144204-10-007627. Last ingested by Listed: Nov 10, 2026, 03:21 ET. No prices; not investment advice.