UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
x
¨
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2010
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 00-10039
NEUMEDIA, INC. (f/k/a MANDALAY MEDIA, INC.)
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
22-2267658
(I.R.S. Employer Identification No.)
2000 Avenue of the Stars, Suite 410, Los Angeles, CA
(Address of Principal Executive Offices)
90067
(Zip Code)
(310) 601-2500
(Issuer’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, Par Value $0.0001 Per Share
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ¨ No x
Indicate by check mark whether the registrant : (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( § 232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will
not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of a “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check One)
¨ Large Accelerated Filer
¨ Accelerated Filer
¨ Non-accelerated Filer (do not check if smaller reporting company)
x Smaller Reporting Company
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the
common equity was last sold on the OTC Bulletin Board on September 30, 2009 was $8,839,777.
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange
Act subsequent to the distribution of securities under a plan confirmed by a court. Yes x No ¨
As of July 14, 2010, the Issuer had 35,573,502 shares of its common stock, $0.0001 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
NeuMedia, Inc.
ANNUAL REPORT ON FORM 10-K
FOR THE PERIOD ENDED MARCH 31, 2010
TABLE OF CONTENTS
PART I
ITEM 1.
BUSINESS
ITEM 1A.
RISK FACTORS
ITEM 2.
ITEM 3.
ITEM 4.
PART II
PROPERTIES
LEGAL PROCEEDINGS
REMOVED AND RESERVED
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6.
ITEM 7.
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
ITEM 9.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
ITEM 9A(T).
CONTROLS AND PROCEDURES
ITEM 9B.
OTHER INFORMATION
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11.
EXECUTIVE COMPENSATION
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Information included in this Annual Report on Form 10-K may contain forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). All statements, other than statements of historical facts included in this Annual Report on Form 10-K regarding our strategy,
future operations, future financial position, projected expenses, prospects and plans and objectives of management are forward-looking
statements. These statements may involve known and unknown risks, uncertainties and other factors which may cause our actual results,
performance or achievements to be materially different from our future results, performance or achievements expressed or implied by any
forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations,
are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the
negative of these words or other variations on these words or comparable terminology. Forward-looking statements are based on assumptions
that may be incorrect, and there can be no assurance that any projections or other expectations included in any forward-looking statements will
come to pass. Our actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various
factors, including the risk factors described in greater detail in the section entitled “Risk Factors.” Except as required by applicable laws, we
undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other
events occur in the future.
ITEM 1. BUSINESS
Historical Operations of NeuMedia, Inc.
PART I
NeuMedia, Inc. (“NeuMedia” or the “Company”), formerly known as Mandalay Media, Inc., was originally incorporated in the State of
Delaware on November 6, 1998 under the name eB2B Commerce, Inc. On April 27, 2000, 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
May 12, 2010, the company changed its name to NeuMedia, Inc.
On October 27, 2004, and as amended on December 17, 2004, NeuMedia 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) NeuMedia’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 NeuMedia to fund the expenses of remaining public; (4) 3.5%
of the new common stock of NeuMedia (140,000 shares) was issued to the holders of record of NeuMedia’s preferred stock in settlement of
their liquidation preferences; (5) 3.5% of the new common stock of NeuMedia (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 NeuMedia (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, NeuMedia 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, NeuMedia was a public shell company with no operations, and controlled by its significant stockholder,
Trinad Capital Master Fund, L.P.
Our Current Operations
Twistbox Entertainment, Inc.
On February 12, 2008, NeuMedia completed its acquisition of Twistbox Entertainment, Inc. pursuant to an Agreement and Plan of
Merger entered into on December 31, 2007, as subsequently amended by the Amendment to Agreement and Plan of Merger dated February 12,
2008, with Twistbox Acquisition, Inc., a Delaware corporation and a wholly-owned subsidiary of NeuMedia (“Merger Sub”), Twistbox
Entertainment, Inc. (“Twistbox”), and Adi McAbian and Spark Capital, L.P., as representatives of the stockholders of Twistbox, as part of which
Merger Sub merged with and into Twistbox, with Twistbox as the surviving corporation (the “Merger”). Following the Merger, Twistbox
became the sole operating subsidiary of NeuMedia until the acquisition of AMV Holding Limited, a United Kingdom private limited company
(“AMV”) on October 23, 2008 as described below.
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Twistbox is a global publisher and distributor of entertainment content primarily focused on video and games for Third Generation (3G)
mobile networks. Twistbox publishes its content in over 40 countries with distribution representing more than one billion subscribers. Operating
since 2003, Twistbox has developed an intellectual property portfolio unique to its 18 to 40 year old target demographic (18 to 40) that includes
worldwide or territory exclusive mobile rights to content from leading film, television and lifestyle media companies. Twistbox has built a
proprietary mobile publishing platform that includes: tools that automate handset portability for the distribution of images and video; a mobile
games development suite that automates the porting of mobile games and applications to over 1,500 handsets; and a content standards and ratings
system globally adopted by major wireless carriers to assist with the responsible deployment of age-verified programming and services.
Twistbox has leveraged its brand portfolio and platform to secure “direct” distribution agreements with the leading mobile operators throughout
Europe, North America and Latin America, including, among others, Vodafone, Telefonica, Orange, Hutchinson 3G, O2 Verizon, Sprint and
Orange.
Twistbox maintains distribution agreements with leading mobile network operators throughout the North American, European, Latin
America and Asia-Pacific regions that include Verizon, Virgin Mobile, T-Mobile, Telefonica, America Movil, Hutchinson 3G, O2 and
Orange. Twistbox maintains a worldwide distribution agreement with Vodafone. Through this relationship, in certain markets Twistbox serves
as Vodafone’s exclusive supplier and aggregator of late night content, a portion of which is age-verified. Twistbox has similar exclusive
agreements with other operators in selected territories for both Late Night and Play for Prizes mobile games categories.
Twistbox’s intellectual property encompasses over 75 worldwide exclusive, territory exclusive or non-exclusive content licensing
agreements that cover its lifestyle, late night and casual games programming and services. Twistbox’s content portfolio is distributed via mobile
applications and services that include more than 350 WAP sites, 250 games and 66 mobile TV channels.
In addition to its content publishing business through mobile operators, Twistbox operates a suite of Direct to Consumer services
including text and video chat and web2mobile marketing services of video, images and games that are promoted through on-line, print, and TV
advertising. Payments for the Company’s Direct to Consumer services are through integration with Premium Short Message Service (Premium
SMS) billing aggregators and credit card processing companies.
Twistbox target customers are the highly-mobile, digitally-aware 18 to 40 year old demographic. This group is a leading consumer of
new mobile handsets and represents more than 50% of mobile content consumption revenue globally. In addition, this group is very focused on
consumer lifestyle brands and is much sought after by advertisers.
Revenue Model
Twistbox’s revenue model includes pay per-download and a growing base of recurring subscription services. Video services include
daily, weekly and monthly subscriptions to access a specific WAP site or suite of mobile TV channels. Twistbox’s play-for-prizes tournament
games revenue model is based on a monthly recurring subscription per game although a subscriber can elect for a higher priced one-time
payment.
Collectively, Twistbox’s mobile content sites generate in excess of 500 million advertising impressions monthly. In turn, Twistbox has
begun to leverage its distribution and traffic to generate revenues from WAP advertising on mobile content portals that Twistbox manages on an
exclusive basis.
Twistbox bills and receives payment directly through mobile operators and billing aggregators that form the majority of its revenue.
Twistbox receives between 40% to 60% of the billings from the mobile operator or billing aggregator, which it recognizes as its Gross
Revenue. Twistbox’s Cost of Revenues represents license fees paid to content providers, which currently averages approximately 30%.
Content and Game Development
Twistbox’s production activities currently address over 1,500 handsets, including models manufactured by Nokia, Motorola, Samsung
and Sony Ericsson. Twistbox has created an automated handset abstraction and publishing tools that significantly reduces the time required to
“port” and publish games and mobile services across a significant number of these handsets.
Twistbox develops games and applications that work with a number of languages, platforms, and formats, including J2ME, BREW,
DoJa, and Symbian, and localizes its releases in the EFIGS languages (English, French, Italian, German and Spanish). It is actively involved in a
number of technical initiatives aimed at enhancing its titles with value-added features, such as multi-player functionality, 3D graphics, and
location-based features. In addition to mobile video clips, games, WAP sites, and other entertainment applications, Twistbox is currently focusing
its development and licensing activities on complementary applications such as in game advertising, TV-SMS campaigns, play-for-prizes and
multi-player games.
Twistbox intends to acquire additional third-party licenses and to develop new applications through relationships with third-party
developers as well as its in-house development staff to assure that it has a steady supply of new content to offer its customers. The Company
believes that the market for mobile entertainment should continue to increase as mobile operators continue to roll out their next generation service
offerings and advanced handsets offering improvements in data handling capability, graphics resolution and other features.
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Publishing
Renux™ is Twistbox’s carrier class content management and publishing platform developed internally for the deployment and
marketing of mobile content and applications. The system has been in operation for over five years and today supports over 350 WAP sites, more
than 66 mobile TV channels and 250 games in 18 languages. The Renux™ content management system stores image and video content formatted
for 1.5G to up to 3G devices, and incorporates a comprehensive metadata format that categorizes the content for handset recognition,
programming, marketing and reporting. Twistbox maintains content hosting facilities in Los Angeles, Washington, D.C. and Frankfurt that
support the distribution of content to mobile network operators globally.
RapidPort™
RapidPort™ is Twistbox’s software suite that enables the development and porting of mobile games and applications to over 1,500
different handsets from leading manufacturers including Nokia, Motorola, Samsung and Sony Ericsson. Twistbox has created an automated
handset abstraction tool that significantly reduces the time required to “port” a game across a significant number of these handsets. The
RapidPort™ development platform supports a broad number of wireless device formats including J2ME, BREW, DoJa and Symbian, and
provides localization in over 18 languages. Twistbox Games has recently enhanced RapidPort™ to include new technology designed to enhance
titles with value-added features, such as in-game advertising, multi-player and play-for-prizes functionality, 3D graphics and location-based
services (LBS).
Nitro-CDP™
Nitro-CDP™ is an internally developed content download and delivery platform for mobile network operators, portals and content
publishers. The Nitro-CDP™ platform allows for real-time content upload, editing, rating and deployment, and merchandising, while maintaining
carrier-grade security, reliability and scalability. The platform enables mobile network operators to effectively manage millions of mobile
download transactions across multiple channels and categories. Nitro-CDP™ also provides innovative cross-promotional tools, including
purchase history-based up-sales and advertising, an individual “My Downloads” area for each consumer and peer-to-peer recommendations.
CMX Wrapper™
The CMX Wrapper™ technology, developed internally by Twistbox, enables mobile operators to integrate additional and
complimentary functionality into existing mobile games and applications without the need to alter the original code or involve the original
developer. This value-added functionality includes support for in-game promotions and billing, and “try before you buy” and “refer a friend”
functionality.
Play-for-Prizes - - Competition Goes Mobile ®
The Twistbox Games for-prizes network, currently deployed by major mobile operators across the U.S. such as AT&T Wireless and
Verizon, offers several genres of games in which players compete in daily and weekly skill-based multiplayer tournaments to win prizes.
Subscribers can compete in both daily head-to-head and weekly progressive tournaments. The Twistbox Games for-prizes platform enables
unique in-game promotions through carrier-specific campaigns in cooperation with sponsors and advertisers. On July 25, 2008, Twistbox filed
with the United States Patent and Trademark Office a patent application for the Improvements In Skill-Based Electronic Gaming Tournament
Play having Serial Number 12/180,405.
WAAT Media Wireless Content Standards Rating Matrix ©
First developed in 2003, and refined over the last several years, Twistbox has developed a proprietary content standards matrix widely
known as the “WAAT Media Wireless Content Standards Ratings Matrix©” (the “Ratings Matrix”). The Ratings Matrix has been filed with the
Library of Congress’s Copyright Office. It is the globally-accepted content ratings system for age-verified mobile programming that encompasses
language, violence and explicitness. The system is licensed on a royalty-free basis by the world’s leading mobile carriers and leading content
providers and is the basis for the United Kingdom’s Code of Practice. The Ratings Matrix currently supports 33 ratings levels and incorporates a
suite of content validation tools and industry best practices that takes into account country-by-country carrier programming requirements and local
broadcast standards.
Distribution
Twistbox distributes its programming and services through on-deck relationships with mobile carriers and off-deck relationships with
third-party aggregation, connectivity and billing providers.
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On-Deck
Twistbox’s on-deck services include the programming and provisioning of games and games aggregation, images, videos and
mobileTV content and portal management. Twistbox currently has on-deck agreements with more than 100 mobile operators including Vodafone,
T-Mobile, Verizon, AT&T, Orange, O2, Virgin Mobile, Telefonica and MTS in over 40 countries. Through these on-deck agreements, Twistbox
relies on the carriers for both marketing and billing. Twistbox currently reaches over one billion mobile subscribers worldwide through these
relationships. Its currently deployed programming includes over 350 WAP sites, 250 games and 66 mobile TV channels.
Off-Deck
Twistbox has recently deployed off-deck services that include the programming and distribution of games, images, videos, chat services
and mobile marketing campaigns. Twistbox manages the campaigns directly and maintains billing and connectivity agreements with leading
service providers in each territory. In addition, Twistbox has built and implemented a “Web-to-Mobile” affiliate program that allows for the
cross-marketing and sales of mobile content from Web storefronts of its various programming partners and their affiliates.
Mobile Operators (Carriers)
Twistbox currently has a large number of distribution agreements with mobile operators and portals in Europe, the U.S., Japan and Latin
America. Twistbox currently has distribution agreements with more than 100 single territory operators in 40 countries. Twistbox continues to
sign new operators on a quarterly basis and, in the near term, intends to extend its distribution base into Eastern Europe and South America. The
strength and coverage of these relationships is of paramount importance and the ability to support and service them is a vital component in route
to the consumer.
Affiliates Program
Twistbox has also established an Affiliates Program to market and sell its content “off-deck,” that is, through a direct-to-consumer
online portal that end users can access directly from their PCs or phones. We believe that this channel offers an attractive secondary outlet for
consumers wishing to peruse and purchase content in an environment less limiting and restrictive than an operator’s “walled garden.”
Sales and Marketing
In order to sell to its target base of carrier and infrastructure customers, Twistbox has built an affiliate sales and marketing team that is
localized on a country-by-country basis. As of March 31, 2010, Twistbox had a workforce of approximately 100 employees
Competition
While many mobile marketing companies sell a diversified portfolio of content from ring tones to wall papers and kids programming to
adult, Twistbox has taken a more focused and disciplined approach. Twistbox focuses on programming and platforms where it can manage
categories on an exclusive or semi-exclusive basis for a mobile operator. Target markets include Age Verified Programming, Play4Prizes or areas
in which Twistbox has exclusive rights to the top one or two brands in a genre.
In the area of mature themed mobile entertainment, Twistbox is a leading provider of content and services. The industry trend has been
for leading operators to focus on fewer partners and often assign a company to manage the category. We believe that Twistbox’s responsible
reputation and the Ratings Matrix combined with its publishing platform and leading brands that maximize revenue positions it to manage the
age-verified category for operators globally.
Twistbox competes with a number of other companies in the mobile games publishing industry, including Arvato, Minick, Jamba,
Buongiorno, Mobile Streams, Glu Mobile, ZED Group and Gameloft. Brands such as Playboy have sought to create their own direct distribution
arrangements with network operators. To the extent that such firms continue to seek such relationships, they will compete directly with Twistbox
in their respective content segments. While Twistbox competes with many of the leading publishers, its core business is providing services and
platforms for operators and publishers to enhance revenues. In turn, through the management of an operator’s download platform, providing a
cross carrier Play4Prizes infrastructure or facilitating in game advertising or billing, Twistbox has become a strategic value added partner to both
the mobile operator and publishing communities.
Direct-to-consumer (D2C) Web portals may have an adverse impact on Twistbox’s business, as these portals may not strike distribution
arrangements with Twistbox. Additionally, wireless device manufacturers such as Nokia, Sony Ericsson and Motorola may choose to pursue
their own content strategies.
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We believe that the principal competitive factors in the market for mobile games and other content include carrier relationships, access to
compelling content, quality and reliability of content delivery, availability of talented content developers and skilled technical personnel, and
financial stability.
Trademarks, Trade names, Patent and Copyrights
Twistbox has used, registered and applied to register certain trademarks and service marks to distinguish its products, technologies and
services from those of its competitors in the United States and in foreign countries. Twistbox also has a copyright known as the “WAAT Media
Wireless Content Standards Ratings Matrix©”, which has been filed with the Library of Congress’s Copyright Office. On July 25, 2008,
Twistbox filed with the United States Patent and Trademark Office a patent application for the Improvements In Skill-Based Electronic Gaming
Tournament Play having Serial Number 12/180,405. We believe that these trademarks, trade names, patent and copyrights are important to its
business. The loss of some of Twistbox’s intellectual property might have a negative impact on its financial results and operations.
AMV Holding Limited
On October 23, 2008, NeuMedia 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.
AMV is a 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 including Bling, Phonebar and
GameZone through a unique Customer Relationship Management (CRM) platform that drives revenue through mobile internet, print and TV
advertising.
On June 21, 2010, NeuMedia sold all of the operating subsidiaries of AMV in exchange for the release of $23.3 million of secured
indebtedness, comprising of a release of all amounts due and payable under the AMV Note and all amounts due and payable under that certain
Senior Secured Note, as amended, in favor of ValueAct SmallCap Master Fund, L.P. (“ValueAct”) dated July 30, 2007 and due July 31, 2010
(“Note”) except for $3.5 million in principal. See “Management’s Discussion and Analysis or Plan of Operation – Historical Operations of
NeuMedia, Inc. – Summary of the AMV Acquisition”.
ITEM 1A. RISK FACTORS
Unless the context otherwise indicates, the use of the terms “we,” “our” “us” or the “Company” refer to the business and operations of
NeuMedia , Inc. (“NeuMedia”) through its operating and wholly-owned subsidiary Twistbox Entertainment, Inc. (“Twistbox”).
Risks Related to Our Business
The Company has a history of net losses, may incur substantial net losses in the future and may not achieve profitability.
We expect to continue to increase expenses as we implement initiatives designed to continue to grow our business, including, among
other things, the development and marketing of new products and services, further international and domestic expansion, expansion of our
infrastructure, development of systems and processes, acquisition of content, and general and administrative expenses associated with being a
public company. If our revenues do not increase to offset these expected increases in operating expenses, we will continue to incur significant
losses and will not become profitable. Our revenue growth in recent periods should not be considered indicative of our future performance. In
fact, in future periods, our revenues could decline. Accordingly, we may not be able to achieve profitability in the future.
We have a limited operating history in an emerging market, which may make it difficult to evaluate our business.
We have only a limited history of generating revenues, and the future revenue potential of our business in this emerging market is
uncertain. As a result of our short operating history, we have limited financial data that can be used to evaluate our business. Any evaluation of
our business and our prospects must be considered in light of our limited operating history and the risks and uncertainties encountered by
companies in our stage of development. As an early stage company in the emerging mobile entertainment industry, we face increased risks,
uncertainties, expenses and difficulties. To address these risks and uncertainties, we must do the following:
· maintain our current, and develop new, wireless carrier relationships, in both the international and domestic markets;
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· maintain and expand our current, and develop new, relationships with third-party branded and non-branded content owners;
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retain or improve our current revenue-sharing arrangements with carriers and third-party content owners;
· maintain and enhance our own brands;
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continue to develop new high-quality products and services that achieve significant market acceptance;
continue to port existing products to new mobile handsets;
continue to develop and upgrade our technology;
continue to enhance our information processing systems;
increase the number of end users of our products and services;
· maintain and grow our non-carrier, or “off-deck,” distribution, including through our third-party direct-to-consumer distributors;
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expand our development capacity in countries with lower costs;
execute our business and marketing strategies successfully;
respond to competitive developments; and
attract, integrate, retain and motivate qualified personnel.
We may be unable to accomplish one or more of these objectives, which could cause our business to suffer. In addition, accomplishing
many of these efforts might be very expensive, which could adversely impact our operating results and financial condition.
We may not be able to resume our operations in Russia, which could have a material adverse impact on our results of operations.
From April 2009 to December 2009, approximately 13% of Twistbox’s revenues were generated from our operations in Russia. In
January 2010, our assets and operations in Russia were diverted to an unaffiliated entity. We may take action to reacquire our Russian operations
in the future, however there is no assurance that we will be successful. If we are unable reacquire our Russian assets and operations, our results
of operations and financial condition could be materially and adversely affected.
Our financial results could vary significantly from quarter to quarter and are difficult to predict.
Our revenues and operating results could vary significantly from quarter to quarter because of a variety of factors, many of which are
outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. In addition, we may not
be able to predict our future revenues or results of operations. We base our current and future expense levels on our internal operating plans and
sales forecasts, and our operating costs are to a large extent fixed. As a result, we may not be able to reduce our costs sufficiently to compensate
for an unexpected shortfall in revenues, and even a small shortfall in revenues could disproportionately and adversely affect financial results for
that quarter. Individual products and services, and carrier relationships, represent meaningful portions of our revenues and net loss in any quarter.
We may incur significant or unanticipated expenses when licenses are renewed. In addition, some payments from carriers that we recognize as
revenue on a cash basis may be delayed unpredictably.
In addition to other risk factors discussed in this section, factors that may contribute to the variability of our quarterly results include:
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the number of new products and services released by us and our competitors;
the timing of release of new products and services by us and our competitors, particularly those that may represent a significant
portion of revenues in a period;
the popularity of new products and services, and products and services released in prior periods;
changes in prominence of deck placement for our leading products and those of our competitors;
the expiration of existing content licenses;
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the timing of charges related to impairments of goodwill, intangible assets, royalties and minimum guarantees;
changes in pricing policies by us, our competitors or our carriers and other distributors;
changes in the mix of original and licensed content, which have varying gross margins;
the timing of successful mobile handset launches;
the seasonality of our industry;
fluctuations in the size and rate of growth of overall consumer demand for mobile products and services and related content;
strategic decisions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments or
changes in business strategy;
our success in entering new geographic markets;
foreign exchange fluctuations;
accounting rules governing recognition of revenue;
general economic, political and market conditions and trends;
the timing of compensation expense associated with equity compensation grants; and
decisions by us to incur additional expenses, such as increases in marketing or research and development.
As a result of these and other factors, our operating results may not meet the expectations of investors or public market analysts who
choose to follow our company. Our failure to meet market expectations would likely result in decreases in the trading price of our common stock.
The markets in which we operate are highly competitive, and many of our competitors have significantly greater resources than we do.
The development, distribution and sale of mobile products and services is a highly competitive business. We compete for end users
primarily on the basis of “on-deck” or “off-deck” positioning, brand, quality and price. We compete for wireless carriers for “on-deck” placement
based on these factors, as well as historical performance, technical know-how, perception of sales potential and relationships with licensors of
brands and other intellectual property. We compete for content and brand licensors based on royalty and other economic terms, perceptions of
development quality, porting abilities, speed of execution, distribution breadth and relationships with carriers. We also compete for experienced
and talented employees.
Our primary competitors for the on-deck distribution channels include Arvato, Minick, Jamba, Buongiorno, Mobile Streams, Glu
Mobile, Player X and Gameloft, and for end-users via our direct-to-consumer off-deck distribution channels they include Red Circle (recently
acquired by Zamano plc), Playphone, Inc, Mobile Messenger Pty Ltd, Jamba (a subsidiary of News Corp), Zero9 S.p.A. and Flycell Inc. In the
future, likely competitors include major media companies, traditional video game publishers, platform developers, content aggregators, mobile
software providers and independent mobile game publishers. Carriers may also decide to develop, internally or through a managed third-party
developer, and distribute their own products and services. If carriers enter the wireless market as publishers, they might refuse to distribute some
or all of our products and services or might deny us access to all or part of their networks.
Some of our competitors’ and our potential competitors’ advantages over us, either globally or in particular geographic markets, include
the following:
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significantly greater revenues and financial resources;
stronger brand and consumer recognition regionally or worldwide;
the capacity to leverage their marketing expenditures across a broader portfolio of mobile and non-mobile products;
· more substantial intellectual property of their own from which they can develop products and services without having to pay
royalties;
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pre-existing relationships with brand owners or carriers that afford them access to intellectual property while blocking the access
of competitors to that same intellectual property;
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greater resources to make acquisitions;
lower labor and development costs; and
broader global distribution and presence.
If we are unable to compete effectively or we are not as successful as our competitors in our target markets, our sales could decline, our
margins could decline and we could lose market share, any of which would materially harm our business, operating results and financial
condition.
Failure to renew our existing brand and content licenses on favorable terms or at all and to obtain additional licenses would impair our
ability to introduce new products and services or to continue to offer our products and services based on third-party content.
Revenues are derived from our products and services based on or incorporating brands or other intellectual property licensed from third
parties. Any of our licensors could decide not to renew our existing license or not to license additional intellectual property and instead license to
our competitors or develop and publish its own products or other applications, competing with us in the marketplace. Several of these licensors
already provide intellectual property for other platforms, and may have significant experience and development resources available to them should
they decide to compete with us rather than license to us.
We have both exclusive and non-exclusive licenses and both licenses that are global and licenses that are limited to specific geographies.
Our licenses generally have terms that range from two to five years. We may be unable to renew these licenses or to renew them on terms
favorable to us, and we may be unable to secure alternatives in a timely manner. Failure to maintain or renew our existing licenses or to obtain
additional licenses would impair our ability to introduce new products and services or to continue to offer our current products or services, which
would materially harm our business, operating results and financial condition. Some of our existing licenses impose, and licenses that we obtain
in the future might impose, development, distribution and marketing obligations on us. If we breach our obligations, our licensors might have the
right to terminate the license which would harm our business, operating results and financial condition.
Even if we are successful in gaining new licenses or extending existing licenses, we may fail to anticipate the entertainment preferences
of our end users when making choices about which brands or other content to license. If the entertainment preferences of end users shift to
content or brands owned or developed by companies with which we do not have relationships, we may be unable to establish and maintain
successful relationships with these developers and owners, which would materially harm our business, operating results and financial condition.
In addition, some rights are licensed from licensors that have or may develop financial difficulties, and may enter into bankruptcy protection
under U.S. federal law or the laws of other countries. If any of our licensors files for bankruptcy, our licenses might be impaired or voided,
which could materially harm our business, operating results and financial condition.
We currently rely on wireless carriers to market and distributes some of our products and services and thus to generate some of our
revenues. The loss of or a change in any of these significant carrier relationships could cause us to lose access to their subscribers and
thus materially reduce our revenues.
The future success of our “on-deck” business is highly dependent upon maintaining successful relationships with the wireless carriers
with which we currently work and establishing new carrier relationships in geographies where we have not yet established a significant presence.
A significant portion of our revenue is derived from a very limited number of carriers. We expect that we will continue to generate a substantial
portion of our revenues through distribution relationships with a limited number of carriers for the foreseeable future. Our failure to maintain our
relationships with these carriers would materially reduce our revenues and thus harm our business, operating results and financial condition.
We have both exclusive and non-exclusive carrier agreements. Typically, carrier agreements have a term of one or two years with
automatic renewal provisions upon expiration of the initial term, absent a contrary notice from either party. In addition, some carrier agreements
provide that the carrier can terminate the agreement early and, in some instances, at any time without cause, which could give them the ability to
renegotiate economic or other terms. The agreements generally do not obligate the carriers to market or distribute any of our products or services.
In many of these agreements, we warrant that our products do not violate community standards, do not contain libelous content, do not contain
material defects or viruses, and do not violate third-party intellectual property rights and we indemnify the carrier for any breach of a third party’s
intellectual property. In addition, many of our agreements allow the carrier to set the retail price without adjustment to the negotiated revenue split.
If one of these carriers sets the retail price below historic pricing models, the total revenues received from these carriers will be significantly
reduced.
Many other factors outside our control could impair our ability to generate revenues through a given carrier, including the following:
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the carrier’s preference for our competitors’ products and services rather than ours;
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the carrier’s decision not to include or highlight our products and services on the deck of its mobile handsets;
the carrier’s decision to discontinue the sale of some or all of products and services;
the carrier’s decision to offer similar products and services to its subscribers without charge or at reduced prices;
the carrier’s decision to require market development funds from publishers like us;
the carrier’s decision to restrict or alter subscription or other terms for downloading our products and services;
a failure of the carrier’s merchandising, provisioning or billing systems;
the carrier’s decision to offer its own competing products and services;
the carrier’s decision to transition to different platforms and revenue models; and
consolidation among carriers.
If any of our carriers decides not to market or distribute our products and services or decides to terminate, not renew or modify the terms
of its agreement with us or if there is consolidation among carriers generally, we may be unable to replace the affected agreement with acceptable
alternatives, causing us to lose access to that carrier’s subscribers and the revenues they afford us, which could materially harm our business,
operating results and financial condition.
End user tastes are continually changing and are often unpredictable; if we fail to develop and publish new products and services that
achieve market acceptance, our sales would suffer.
Our business depends on developing and publishing new products and services that wireless carriers distribute and end users will buy.
We must continue to invest significant resources in licensing efforts, research and development, marketing and regional expansion to enhance our
offering of new products and services, and we must make decisions about these matters well in advance of product release in order to implement
them in a timely manner. Our success depends, in part, on unpredictable and volatile factors beyond our control, including end-user preferences,
competing products and services and the availability of other entertainment activities. If our products and services are not responsive to the
requirements of our carriers or the entertainment preferences of end users, are not marketed effectively through our direct-to-consumer
operations, or they are not brought to market in a timely and effective manner, our business, operating results and financial condition would be
harmed. Even if our products and services are successfully introduced, marketed effectively and initially adopted, a subsequent shift in our
carriers, the entertainment preferences of end users, or our relationship with third-party billing aggregators could cause a decline in the popularity
of, or access to, our offerings could materially reduce our revenues and harm our business, operating results and financial condition.
Inferior on-deck placement would likely adversely impact our revenues and thus our operating results and financial condition.
Wireless carriers provide a limited selection of products that are accessible to their subscribers through a deck on their mobile handsets.
The inherent limitation on the volume of products available on the deck is a function of the limited screen size of handsets and carriers’
perceptions of the depth of menus and numbers of choices end users will generally utilize. Carriers typically provide one or more top level menus
highlighting products that are recent top sellers or are of particular interest to the subscriber, that the carrier believes will become top sellers or that
the carrier otherwise chooses to feature, in addition to a link to a menu of additional products sorted by genre. We believe that deck placement on
the top level or featured menu or toward the top of genre-specific or other menus, rather than lower down or in sub-menus, is likely to result in
products achieving a greater degree of commercial success. If carriers choose to give our products less favorable deck placement, our products
may be less successful than we anticipate, our revenues may decline and our business, operating results and financial condition may be materially
harmed.
If we are unsuccessful in establishing and increasing awareness of our brand and recognition of our products and services or if we incur
excessive expenses promoting and maintaining our brand or our products and services, our potential revenues could be limited, our costs
could increase and our operating results and financial condition could be harmed.
We believe that establishing and maintaining our brand is critical to retaining and expanding our existing relationships with wireless
carriers and content licensors, as well as developing new relationships. Promotion of the Company’s brands will depend on our success in
providing high-quality products and services. Similarly, recognition of our products and services by end users will depend on our ability to
develop engaging products and quality services to maintain existing, and attract new, business relationships and end users. However, our success
will also depend, in part, on the services and efforts of third parties, over which we have little or no control. For instance, if our carriers fail to
provide high levels of service, our end users’ ability to access our products and services may be interrupted, which may adversely affect our
brand. If end users, branded content owners and carriers do not perceive our offerings as high-quality or if we introduce new products and
services that are not favorably received by our end users and carriers, then we may be unsuccessful in building brand recognition and brand
loyalty in the marketplace. In addition, globalizing and extending our brand and recognition of our products and services will be costly and will
involve extensive management time to execute successfully. Further, the markets in which we operate are highly competitive and some of our
competitors already have substantially more brand name recognition and greater marketing resources than we do. If we fail to increase brand
awareness and consumer recognition of our products and services, our potential revenues could be limited, our costs could increase and our
business, operating results and financial condition could suffer.
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We currently rely on the current state of the law in certain territories where we operate our “off-deck” direct-to-consumer business and any
adverse change in such laws may significantly adversely impact our revenues and thus our operating results and financial condition.
Decisions that regulators or governing bodies make with regard to the provision and marketing of mobile content and/or billing can have
a significant impact on the revenues generated in that market. Although most of our markets are mature with regulation clearly defined and
implemented, there remains the potential for regulatory changes that would have adverse consequences on the business and subsequently our
revenue.
If we are unsuccessful in expanding the distribution of our “off-deck” direct-to-consumer products and services, our potential revenues
could be limited and our operating results and financial condition could be harmed.
As mature markets tend to flatten, they can deliver more challenging levels of margin growth. This is especially the case where
regulation is introduced (despite the fact that the sector is still young). To compensate for such trends, the Company will continue to make its
products and services available in new geographic markets and target launches in markets that it believes are best suited for its direct-to-consumer
business.
We currently rely on third-party billing aggregators to provide end-users with access to some of our products and services through
premium short message system (Premium SMS) technologies. The loss of, or a change in, any of these significant third-party relationships
or the use of Premium SMS technologies could reduce the number of transactions initiated by these end-users and thus materially reduce
our revenues.
Our off-deck business is dependent upon billing aggregators that use premium short message system (Premium SMS) technologies to
deliver and bill for our products and services. If we were to lose one or more of these relationships, or if there is a material change or limitation in
the use of Premium SMS technologies, we would experience a significant reduction in the number of transactions initiated by end-users and thus
material reduction in our revenues.
We rely on our current understanding of regional regulatory requirements pertaining to the marketing, advertising and promotion of our
“off-deck” direct- to-consumer products and services and any adverse change in such regulations, or a finding that we did not properly
understand such regulations, may significantly impact our ability to market, advertise and promote our products and services thereby
adversely impact our revenues and thus our operating results and financial condition.
Our off-deck business relies extensively on marketing, advertising and promoting its products and services requiring it to have an
understanding of the local laws and regulations governing its business. In the event that we have relied on inaccurate information or advice, and
engage in marketing, advertising or promotional activities that are not permitted, we may be subject to penalties, restricted from engaging in
further activities or altogether prohibited from offering our products and services in a particular territory, all or any of which will adversely impact
our revenues and thus our operating results and financial condition
Our business and growth may suffer if we are unable to hire and retain key personnel, who are in high demand.
We depend on the continued contributions of our domestic and international senior management and other key personnel. The loss of the
services of any of our executive officers or other key employees could harm our business. All of our executive officers and key employees are
under short term employment agreements which means, that their future employment with the Company is uncertain. We do maintain a key-
person life insurance policy on some of our officers or other employees, but the continuation of such insurance coverage is uncertain.
Our future success also depends on our ability to identify, attract and retain highly skilled technical, managerial, finance, marketing and
creative personnel. We face intense competition for qualified individuals from numerous technology, marketing and mobile entertainment
companies. In addition, competition for qualified personnel is particularly intense in the Los Angeles area, where our headquarters are located.
Further, we conduct principal overseas operations in Germany, an area that, similar to our headquarters region, has a high cost of living and
consequently high compensation standards and/or intense demand for qualified individuals which may require us to incur significant costs to
attract them. We may be unable to attract and retain suitably qualified individuals who are capable of meeting our growing creative, operational
and managerial requirements, or may be required to pay increased compensation in order to do so. If we are unable to attract and retain the
qualified personnel we need to succeed, our business would suffer.
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Volatility or lack of performance in our stock price may also affect our ability to attract and retain our key employees. Many of our
senior management personnel and other key employees have become, or will soon become, vested in a substantial amount of stock or stock
options. Employees may be more likely to leave us if the shares they own or the shares underlying their options have significantly appreciated in
value relative to the original purchase prices of the shares or the exercise prices of the options, or if the exercise prices of the options that they
hold are significantly above the market price of our common stock. If we are unable to retain our employees, our business, operating results and
financial condition would be harmed.
Growth may place significant demands on our management and our infrastructure.
We operate in an emerging market and have experienced, and may continue to experience, growth in our business through internal
growth and acquisitions. This growth has placed, and may continue to place, significant demands on our management and our operational and
financial infrastructure. Continued growth could strain our ability to:
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develop and improve our operational, financial and management controls;
enhance our reporting systems and procedures;
recruit, train and retain highly skilled personnel;
· maintain our quality standards; and
· maintain branded content owner, wireless carrier and end-user satisfaction.
Managing our growth will require significant expenditures and allocation of valuable management resources. If we fail to achieve the
necessary level of efficiency in our organization as it grows, our business, operating results and financial condition would be harmed.
The acquisition of other companies, businesses or technologies could result in operating difficulties, dilution and other harmful
consequences.
We have made acquisitions and, although we have no present understandings, commitments or agreements to do so, we may pursue
further acquisitions, any of which could be material to our business, operating results and financial condition. Future acquisitions could divert
management’s time and focus from operating our business. In addition, integrating an acquired company, business or technology is risky and
may result in unforeseen operating difficulties and expenditures. We may also raise additional capital for the acquisition of, or investment in,
companies, technologies, products or assets that complement our business. Future acquisitions or dispositions could result in potentially dilutive
issuances of our equity securities, including our common stock, or the incurrence of debt, contingent liabilities, amortization expenses or acquired
in-process research and development expenses, any of which could harm our financial condition and operating results. Future acquisitions may
also require us to obtain additional financing, which may not be available on favorable terms or at all.
International acquisitions involve risks related to integration of operations across different cultures and languages, currency risks and the
particular economic, political and regulatory risks associated with specific countries.
Some or all of these issues may result from our acquisition of the Germany based mobile games development and publishing company
Charismatix Ltd & Co KG (now known as Twistbox Games Ltd & Co KG) in May 2006 and the U.S. based mobile games studio from
Infospace, Inc. in January 2007. If the anticipated benefits of these or future acquisitions do not materialize, we experience difficulties integrating
Twistbox Games, the games studio or businesses acquired in the future, or other unanticipated problems arise, our business, operating results and
financial condition may be harmed.
In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill and other
intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may
be required to take charges to our earnings based on this impairment assessment process, which could harm our operating results.
The effects of the recession in the United States and general downturn in the global economy, including financial market disruptions, could
have an adverse impact on our business, operating results or financial condition.
Our operating results also may be affected by uncertain or changing economic conditions such as the challenges that are currently
affecting economic conditions in the United States. If global economic and market conditions, or economic conditions in the United States or
other key markets, remain uncertain or persist, spread, or deteriorate further, we may experience material impacts on our business, operating
results, and financial condition in a number of ways including negatively affecting our profitability and causing our stock price to decline.
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We face added business, political, regulatory, operational, financial and economic risks as a result of our international operations and
distribution, any of which could increase our costs and hinder our growth.
We expect international sales to continue to be an important component of our revenues. Risks affecting our international operations
include:
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challenges caused by distance, language and cultural differences;
· multiple and conflicting laws and regulations, including complications due to unexpected changes in these laws and regulations;
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the burdens of complying with a wide variety of foreign laws and regulations;
higher costs associated with doing business internationally;
difficulties in staffing and managing international operations;
greater fluctuations in sales to end users and through carriers in developing countries, including longer payment cycles and greater
difficulty collecting accounts receivable;
protectionist laws and business practices that favor local businesses in some countries;
foreign tax consequences;
foreign exchange controls that might prevent us from repatriating income earned in countries outside the United States;
price controls;
the servicing of regions by many different carriers;
imposition of public sector controls;
political, economic and social instability, including relating to the current European sovereign debt crisis;
restrictions on the export or import of technology;
trade and tariff restrictions;
variations in tariffs, quotas, taxes and other market barriers; and
difficulties in enforcing intellectual property rights in countries other than the United States.
In addition, developing user interfaces that are compatible with other languages or cultures can be expensive. As a result, our ongoing
international expansion efforts may be more costly than we expect. Further, expansion into developing countries subjects us to the effects of
regional instability, civil unrest and hostilities, and could adversely affect us by disrupting communications and making travel more difficult.
These risks could harm our international expansion efforts, which, in turn, could materially and adversely affect our business, operating results
and financial condition.
If we fail to deliver our products and services at the same time as new mobile handset models are commercially introduced, our sales may
suffer.
Our business is dependent, in part, on the commercial introduction of new handset models with enhanced features, including larger,
higher resolution color screens, improved audio quality, and greater processing power, memory, battery life and storage. We do not control the
timing of these handset launches. Some new handsets are sold by carriers with certain products or other applications pre-loaded, and many end
users who download our products or use our services do so after they purchase their new handsets to experience the new features of those
handsets. Some handset manufacturers give us access to their handsets prior to commercial release. If one or more major handset manufacturers
were to cease to provide us access to new handset models prior to commercial release, we might be unable to introduce compatible versions of
our products and services for those handsets in coordination with their commercial release, and we might not be able to make compatible versions
for a substantial period following their commercial release. If, because of launch delays, we miss the opportunity to sell products and services
when new handsets are shipped or our end users upgrade to a new handset, or if we miss the key holiday selling period, either because the
introduction of a new handset is delayed or we do not deploy our products and services in time for the holiday selling season, our revenues
would likely decline and our business, operating results and financial condition would likely suffer.
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Wireless carriers generally control the price charged for our products and services and the billing and collection for sales and could make
decisions detrimental to us.
Wireless carriers generally control the price charged for our products and services either by approving or establishing the price of the
offering charged to their subscribers. Some of our carrier agreements also restrict our ability to change prices. In cases where carrier approval is
required, approvals may not be granted in a timely manner or at all. A failure or delay in obtaining these approvals, the prices established by the
carriers for our offerings, or changes in these prices could adversely affect market acceptance of our offerings. Similarly, for the significant
minority of our carriers, when we make changes to a pricing plan (the wholesale price and the corresponding suggested retail price based on our
negotiated revenue-sharing arrangement), adjustments to the actual retail price charged to end users may not be made in a timely manner or at all
(even though our wholesale price was reduced). A failure or delay by these carriers in adjusting the retail price for our offerings, could adversely
affect sales volume and our revenues for those offerings.
Carriers and other distributors also control billings and collections for our products and services, either directly or through third-party
service providers. If our carriers or their third-party service providers cause material inaccuracies when providing billing and collection services
to us, our revenues may be less than anticipated or may be subject to refund at the discretion of the carrier. This could harm our business,
operating results and financial condition.
We may be unable to develop and introduce in a timely way new products or services, and our products and services may have defects,
which could harm our brand.
The planned timing and introduction of new products and services are subject to risks and uncertainties. Unexpected technical,
operational, deployment, distribution or other problems could delay or prevent the introduction of new products and services, which could result
in a loss of, or delay in, revenues or damage to our reputation and brand. If any of our products or services is introduced with defects, errors or
failures, we could experience decreased sales, loss of end users, damage to our carrier relationships and damage to our reputation and brand. Our
attractiveness to branded content licensors might also be reduced. In addition, new products and services may not achieve sufficient market
acceptance to offset the costs of development, particularly when the introduction of a product or service is substantially later than a planned “day-
and-date” launch, which could materially harm our business, operating results and financial condition.
If we fail to maintain and enhance our capabilities for porting our offerings to a broad array of mobile handsets, our attractiveness to
wireless carriers and branded content owners will be impaired, and our sales could suffer.
Once developed, a product or application may be required to be ported to, or converted into separate versions for, more than 1,000
different handset models, many with different technological requirements. These include handsets with various combinations of underlying
technologies, user interfaces, keypad layouts, screen resolutions, sound capabilities and other carrier-specific customizations. If we fail to
maintain or enhance our porting capabilities, our sales could suffer, branded content owners might choose not to grant us licenses and carriers
might choose not to give our products and services desirable deck placement or not to give our products and services placement on their decks at
all.
Changes to our design and development processes to address new features or functions of handsets or networks might cause
inefficiencies in our porting process or might result in more labor intensive porting processes. In addition, we anticipate that in the future we will
be required to port existing and new products and applications to a broader array of handsets. If we utilize more labor intensive porting processes,
our margins could be significantly reduced and it might take us longer to port our products and applications to an equivalent number of handsets.
This, in turn, could harm our business, operating results and financial condition.
If we do not adequately protect our intellectual property rights, it may be possible for third parties to obtain and improperly use our
intellectual property and our competitive position may be adversely affected.
Our intellectual property is an essential element of our business. We rely on a combination of copyright, trademark, trade secret and
other intellectual property laws and restrictions on disclosure to protect our intellectual property rights. To date, we have not obtained patent
protection. Consequently, we may not be able to protect our technologies from independent invention by third parties. Despite our efforts to
protect our intellectual property rights, unauthorized parties may attempt to copy or otherwise to obtain and use our technology and software.
Monitoring unauthorized use of our technology and software is difficult and costly, and we cannot be certain that the steps we have taken will
prevent piracy and other unauthorized distribution and use of our technology and software, particularly internationally where the laws may not
protect our intellectual property rights as fully as in the United States. In the future, we may have to resort to litigation to enforce our intellectual
property rights, which could result in substantial costs and diversion of our management and resources.
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In addition, although we require third parties to sign agreements not to disclose or improperly use our intellectual property, it may still be
possible for third parties to obtain and improperly use our intellectual properties without our consent. This could harm our business, operating
results and financial condition.
Third parties may sue us for intellectual property infringement, which, if successful, may disrupt our business and could require us to pay
significant damage awards.
Third parties may sue us for intellectual property infringement or initiate proceedings to invalidate our intellectual property, either of
which, if successful, could disrupt the conduct of our business, cause us to pay significant damage awards or require us to pay licensing fees. In
the event of a successful claim against us, we might be enjoined from using our licensed intellectual property, we might incur significant licensing
fees and we might be forced to develop alternative technologies. Our failure or inability to develop non-infringing technology or software or to
license the infringed or similar technology or software on a timely basis could force us to withdraw products and services from the market or
prevent us from introducing new products and services. In addition, even if we are able to license the infringed or similar technology or software,
license fees could be substantial and the terms of these licenses could be burdensome, which might adversely affect our operating results. We
might also incur substantial expenses in defending against third-party infringement claims, regardless of their merit. Successful infringement or
licensing claims against us might result in substantial monetary liabilities and might materially disrupt the conduct of our business.
Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property infringement, damages
caused by malicious software and other losses.
In the ordinary course of our business, most of our agreements with carriers and other distributors include indemnification provisions.
In these provisions, we agree to indemnify them for losses suffered or incurred in connection with our products and services, including as a
result of intellectual property infringement and damages caused by viruses, worms and other malicious software. The term of these indemnity
provisions is generally perpetual after execution of the corresponding license agreement, and the maximum potential amount of future payments
we could be required to make under these indemnification provisions is generally unlimited. Large future indemnity payments could harm our
business, operating results and financial condition.
As a result of a majority of our revenues from on-deck distribution channels currently being derived from a limited number of wireless
carriers, if any one of these carriers were unable to fulfill its payment obligations, our financial condition and results of operations would
suffer.
If any of our primary carriers is unable to fulfill its payment obligations to us under our carrier agreements with them, our revenues
attributable to on-deck distribution could decline significantly and our financial condition will be harmed.
We may need to raise additional capital to grow our business, and we may not be able to raise capital on terms acceptable to us or at all.
The operation of our business and our efforts to grow our business will further require significant cash outlays and commitments. If our
cash, cash equivalents and short-term investments balances and any cash generated from operations are not sufficient to meet our cash
requirements, we will need to seek additional capital, potentially through debt or equity financings, to fund our growth. We may not be able to
raise needed cash on terms acceptable to us or at all. Financings, if available, may be on terms that are dilutive or potentially dilutive to our
stockholders, and the prices at which new investors would be willing to purchase our securities may be lower than the fair market value of our
common stock. The holders of new securities may also receive rights, preferences or privileges that are senior to those of existing holders of our
common stock. If new sources of financing are required but are insufficient or unavailable, we would be required to modify our growth and
operating plans to the extent of available funding, which would harm our ability to grow our business.
We face risks associated with currency exchange rate fluctuations.
We currently transact a significant portion of our revenues in foreign currencies. Conducting business in currencies other than U.S.
Dollars subjects us to fluctuations in currency exchange rates that could have a negative impact on our reported operating results. Fluctuations in
the value of the U.S. Dollar relative to other currencies impact our revenues, cost of revenues and operating margins and result in foreign
currency transaction gains and losses. To date, we have not engaged in exchange rate hedging activities. Even if we were to implement hedging
strategies to mitigate this risk, these strategies might not eliminate our exposure to foreign exchange rate fluctuations and would involve costs and
risks of their own, such as ongoing management time and expertise, external costs to implement the strategies and potential accounting
implications.
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Our business in countries with a history of corruption and transactions with foreign governments, including with government owned or
controlled wireless carriers, increase the risks associated with our international activities.
As we operate and sell internationally, we are subject to the U.S. Foreign Corrupt Practices Act, or the FCPA, and other laws that
prohibit improper payments or offers of payments to foreign governments and their officials and political parties by the United States and other
business entities for the purpose of obtaining or retaining business. We have operations, deal with carriers and make sales in countries known to
experience corruption, particularly certain emerging countries in Eastern Europe and Latin America, and further international expansion may
involve more of these countries. Our activities in these countries create the risk of unauthorized payments or offers of payments by one of our
employees, consultants, sales agents or distributors that could be in violation of various laws including the FCPA, even though these parties are
not always subject to our control. We have attempted to implement safeguards to discourage these practices by our employees, consultants, sales
agents and distributors. However, our existing safeguards and any future improvements may prove to be less than effective, and our employees,
consultants, sales agents or distributors may engage in conduct for which we might be held responsible. Violations of the FCPA may result in
severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and
financial condition.
Changes to financial accounting standards could make it more expensive to issue stock options to employees, which would increase
compensation costs and might cause us to change our business practices.
We prepare our financial statements to conform with accounting principles generally accepted in the United States. These accounting
principles are subject to interpretation by the Financial Accounting Standards Board, or FASB, the Securities and Exchange Commission (“SEC”
or the “Commission”) and various other bodies. A change in those principles could have a significant effect on our reported results and might
affect our reporting of transactions completed before a change is announced. For example, we have used stock options as a fundamental
component of our employee compensation packages. We believe that stock options directly motivate our employees to maximize long-term
stockholder value and, through the use of vesting, encourage employees to remain in our employ. Several regulatory agencies and entities have
made regulatory changes that could make it more difficult or expensive for us to grant stock options to employees. We may, as a result of these
changes, incur increased compensation costs, change our equity compensation strategy or find it difficult to attract, retain and motivate employees,
any of which could materially and adversely affect our business, operating results and financial condition.
We may be liable for the content we make available through our products and services with mature themes.
Because some of our products and services contain content with mature themes, we may be subject to obscenity or other legal claims by
third parties. Our business, financial condition and operating results could be harmed if we were found liable for this content. Implementing
measures to reduce our exposure to this liability may require us to take steps that would substantially limit the attractiveness of our products and
services and/or its availability in various geographic areas, which would negatively impact our ability to generate revenue. Furthermore, our
insurance may not adequately protect us against all of these types of claims.
Government regulation of our content with mature themes could restrict our ability to make some of our content available in certain
jurisdictions.
Our business is regulated by governmental authorities in the countries in which we operate. Because of our international operations, we
must comply with diverse and evolving regulations. The governments of some countries have sought to limit the influence of other cultures by
restricting the distribution of products deemed to represent foreign or “immoral” influences. Regulation aimed at limiting minors’ access to
content with mature themes could also increase our cost of operations and introduce technological challenges, such as by requiring development
and implementation of age verification systems. As a result, government regulation of our adult content could have a material adverse effect on
our business, financial condition or results of operations.
Government regulation of our marketing methods could restrict our ability to adequately advertise and promote our content and services
available in certain jurisdictions.
Our business is regulated by governmental authorities in the countries in which we operate. Because of our international operations, we
must comply with diverse and evolving regulations. The governments of some countries have sought to regulate the methods and manner in
which certain of our products and services may be marketed to potential end-users. Regulation aimed at prohibiting, limiting or restricting
various forms of advertising and promotion we use to market our products and services could also increase our cost of operations or preclude the
ability to offer our products and services altogether. As a result, government regulation of our marketing efforts could have a material adverse
effect on our business, financial condition or results of operations.
Negative publicity, lawsuits or boycotts by opponents of content with mature themes could adversely affect our operating performance and
discourage investors from investing in our publicly traded securities.
We could become a target of negative publicity, lawsuits or boycotts by one or more advocacy groups who oppose the distribution of
adult-oriented entertainment. These groups have mounted negative publicity campaigns, filed lawsuits and encouraged boycotts against
companies whose businesses involve adult-oriented entertainment. To the extent our content with mature themes is viewed as adult-oriented
entertainment, the costs of defending against any such negative publicity, lawsuits or boycotts could be significant, could hurt our finances and
could discourage investors from investing in our publicly traded securities. To date, we have not been a target of any of these advocacy groups.
As a provider of content with mature themes, we cannot assure you that we may not become a target in the future.
17
Risks Relating to Our Industry
Wireless communications technologies are changing rapidly, and we may not be successful in working with these new technologies.
Wireless network and mobile handset technologies are undergoing rapid innovation. New handsets with more advanced processors and
supporting advanced programming languages continue to be introduced. In addition, networks that enable enhanced features are being developed
and deployed. We have no control over the demand for, or success of, these products or technologies. If we fail to anticipate and adapt to these
and other technological changes, the available channels for our products and services may be limited and our market share and our operating
results may suffer. Our future success will depend on our ability to adapt to rapidly changing technologies and develop products and services to
accommodate evolving industry standards with improved performance and reliability. In addition, the widespread adoption of networking or
telecommunications technologies or other technological changes could require substantial expenditures to modify or adapt our products and
services.
Technology changes in the wireless industry require us to anticipate, sometimes years in advance, which technologies we must
implement and take advantage of in order to make our products and services, and other mobile entertainment products, competitive in the market.
Therefore, we usually start our product development with a range of technical development goals that we hope to be able to achieve. We may not
be able to achieve these goals, or our competition may be able to achieve them more quickly and effectively than we can. In either case, our
products and services may be technologically inferior to those of our competitors, less appealing to end users, or both. If we cannot achieve our
technology goals within our original development schedule, then we may delay their release until these technology goals can be achieved, which
may delay or reduce our revenues, increase our development expenses and harm our reputation. Alternatively, we may increase the resources
employed in research and development in an attempt either to preserve our product launch schedule or to keep up with our competition, which
would increase our development expenses. In either case, our business, operating results and financial condition could be materially harmed.
The complexity of and incompatibilities among mobile handsets may require us to use additional resources for the development of our
products and services.
To reach large numbers of wireless subscribers, mobile entertainment publishers like us must support numerous mobile handsets and
technologies. However, keeping pace with the rapid innovation of handset technologies together with the continuous introduction of new, and
often incompatible, handset models by wireless carriers requires us to make significant investments in research and development, including
personnel, technologies and equipment. In the future, we may be required to make substantial investments in our development if the number of
different types of handset models continues to proliferate. In addition, as more advanced handsets are introduced that enable more complex,
feature rich products and services, we anticipate that our development costs will increase, which could increase the risks associated with one or
more of our products or services and could materially harm our operating results and financial condition.
If wireless subscribers do not continue to use their mobile handsets to access mobile entertainment and other applications, our business
growth and future revenues may be adversely affected.
We operate in a developing industry. Our success depends on growth in the number of wireless subscribers who use their handsets to
access data services and, in particular, entertainment applications of the type we develop and distribute. New or different mobile entertainment
applications developed by our current or future competitors may be preferred by subscribers to our offerings. In addition, other mobile platforms
may become widespread, and end users may choose to switch to these platforms. If the market for our products and services does not continue to
grow or we are unable to acquire new end users, our business growth and future revenues could be adversely affected. If end users switch their
entertainment spending away from the kinds of offerings that we publish, or switch to platforms or distribution where we do not have
comparative strengths, our revenues would likely decline and our business, operating results and financial condition would suffer.
Our industry is subject to risks generally associated with the entertainment industry, any of which could significantly harm our operating
results.
Our business is subject to risks that are generally associated with the entertainment industry, many of which are beyond our control.
These risks could negatively impact our operating results and include: the popularity, price and timing of release of our offerings and mobile
handsets on which they are accessed; economic conditions that adversely affect discretionary consumer spending; changes in consumer
demographics; the availability and popularity of other forms of entertainment; and critical reviews and public tastes and preferences, which may
change rapidly and cannot necessarily be predicted.
A shift of technology platform by wireless carriers and mobile handset manufacturers could lengthen the development period for our
offerings, increase our costs and cause our offerings to be of lower quality or to be published later than anticipated.
Mobile handsets require multimedia capabilities enabled by technologies capable of running applications such as ours. Our development
resources are concentrated in today’s most popular platforms, and we have experience developing applications for these platforms. If one or more
of these technologies fall out of favor with handset manufacturers and wireless carriers and there is a rapid shift to a new technology where we
do not have development experience or resources, the development period for our products and services may be lengthened, increasing our costs,
and the resulting products and services may be of lower quality, and may be published later than anticipated. In such an event, our reputation,
business, operating results and financial condition might suffer.
18
System or network failures could reduce our sales, increase costs or result in a loss of end users of our products and services.
Mobile publishers rely on wireless carriers’ networks to deliver products and services to end users and on their or other third parties’
billing systems to track and account for the downloading of such offerings. In certain circumstances, mobile publishers may also rely on their
own servers to deliver products on demand to end users through their carriers’ networks. In addition, certain products require access over the
mobile internet to our servers in order to enable certain features. Any failure of, or technical problem with, carriers’, third parties’ or our billing
systems, delivery systems, information systems or communications networks could result in the inability of end users to download our products,
prevent the completion of a billing transaction, or interfere with access to some aspects of our products. If any of these systems fail or if there is
an interruption in the supply of power, an earthquake, fire, flood or other natural disaster, or an act of war or terrorism, end users might be unable
to access our offerings. For example, from time to time, our carriers have experienced failures with their billing and delivery systems and
communication networks, including gateway failures that reduced the provisioning capacity of their branded e-commerce system. Any failure of,
or technical problem with, the carriers’, other third parties’ or our systems could cause us to lose end users or revenues or incur substantial repair
costs and distract management from operating our business. This, in turn, could harm our business, operating results and financial condition.
Our business depends on the growth and maintenance of wireless communications infrastructure.
Our success will depend on the continued growth and maintenance of wireless communications infrastructure in the United States and
internationally. This includes deployment and maintenance of reliable next-generation digital networks with the speed, data capacity and security
necessary to provide reliable wireless communications services. Wireless communications infrastructure may be unable to support the demands
placed on it if the number of subscribers continues to increase, or if existing or future subscribers increase their bandwidth requirements.
Wireless communications have experienced a variety of outages and other delays as a result of infrastructure and equipment failures, and could
face outages and delays in the future. These outages and delays could reduce the level of wireless communications usage as well as our ability to
distribute our products and services successfully. In addition, changes by a wireless carrier to network infrastructure may interfere with
downloads and may cause end users to lose functionality. This could harm our business, operating results and financial condition.
Future mobile handsets may significantly reduce or eliminate wireless carriers’ control over delivery of our products and services and force
us to rely further on alternative sales channels, which, if not successful, could require us to increase our sales and marketing expenses
significantly.
A growing number of handset models currently available allow wireless subscribers to browse the internet and, in some cases,
download applications from sources other than through a carrier’s on-deck portal. In addition, the development of other application delivery
mechanisms such as premium-SMS may enable subscribers to download applications without having to access a carrier’s on-deck portal.
Increased use by subscribers of open operating system handsets or premium-SMS delivery systems will enable them to bypass the carriers’ on-
deck portal and could reduce the market power of carriers. This could force us to rely further on alternative sales channels and could require us to
increase our sales and marketing expenses significantly. Relying on placement of our products and services in the menus of off-deck distributors
may result in lower revenues than might otherwise be anticipated. We may be unable to develop and promote our direct website distribution
sufficiently to overcome the limitations and disadvantages of off-deck distribution channels. This could harm our business, operating results and
financial condition
Actual or perceived security vulnerabilities in mobile handsets or wireless networks could adversely affect our revenues.
Maintaining the security of mobile handsets and wireless networks is critical for our business. There are individuals and groups who
develop and deploy viruses, worms and other illicit code or malicious software programs that may attack wireless networks and handsets.
Security experts have identified computer “worm” programs that target handsets running on certain operating systems. Although these worms
have not been widely released and do not present an immediate risk to our business, we believe future threats could lead some end users to seek
to reduce or delay future purchases of our products or reduce or delay the use of their handsets. Wireless carriers and handset manufacturers may
also increase their expenditures on protecting their wireless networks and mobile phone products from attack, which could delay adoption of new
handset models. Any of these activities could adversely affect our revenues and this could harm our business, operating results and financial
condition.
Changes in government regulation of the media and wireless communications industries may adversely affect our business.
It is possible that a number of laws and regulations may be adopted in the United States and elsewhere that could restrict the media and
wireless communications industries, including laws and regulations regarding customer privacy, taxation, content suitability, copyright,
distribution and antitrust. Furthermore, the growth and development of the market for electronic commerce may prompt calls for more stringent
consumer protection laws that may impose additional burdens on companies such as ours conducting business through wireless carriers. We
anticipate that regulation of our industry will increase and that we will be required to devote legal and other resources to address this regulation.
Changes in current laws or regulations or the imposition of new laws and regulations in the United States or elsewhere regarding the media and
wireless communications industries may lessen the growth of wireless communications services and may materially reduce our ability to increase
or maintain sales of our products and services.
19
A number of studies have examined the health effects of mobile phone use, and the results of some of the studies have been interpreted
as evidence that mobile phone use causes adverse health effects. The establishment of a link between the use of mobile phone services and health
problems, or any media reports suggesting such a link, could increase government regulation of, and reduce demand for, mobile phones and,
accordingly, the demand for our products and services, and this could harm our business, operating results and financial condition.
Risks Relating to Our Common Stock
There is a limited trading market for our common stock.
Although prices for our shares of common stock are quoted on the OTC Bulletin Board (under the symbol MNDL.OB), there is no
established public trading market for our common stock, and no assurance can be given that a public trading market will develop or, if developed,
that it will be sustained.
The liquidity of our common stock will be affected by its limited trading market.
Bid and ask prices for shares of our common stock are quoted on the OTC Bulletin Board under the symbol MNDL.OB. There is
currently no broadly followed, established trading market for our common stock. While we are hopeful that we will command the interest of a
greater number of investors, an established trading market for our shares of common stock may never develop or be maintained. Active trading
markets generally result in lower price volatility and more efficient execution of buy and sell orders. The absence of an active trading market
reduces the liquidity of our common stock. As a result of the lack of trading activity, the quoted price for our common stock on the OTC Bulletin
Board is not necessarily a reliable indicator of its fair market value. Further, if we cease to be quoted, holders of our common stock would find it
more difficult to dispose of, or to obtain accurate quotations as to the market value of, our common stock, and the market value of our common
stock would likely decline.
If and when a trading market for our common stock develops, the market price of our common stock is likely to be highly volatile and
subject to wide fluctuations, and you may be unable to resell your shares at or above the current price.
The market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to a number of
factors that are beyond our control, including announcements of new products or services by our competitors. In addition, the market price of our
common stock could be subject to wide fluctuations in response to a variety of factors, including:
·
·
·
·
·
·
quarterly variations in our revenues and operating expenses;
developments in the financial markets, and the worldwide or regional economies;
announcements of innovations or new products or services by us or our competitors;
fluctuations in merchant credit card interest rates;
significant sales of our common stock or other securities in the open market; and
changes in accounting principles.
In the past, stockholders have often instituted securities class action litigation after periods of volatility in the market price of a
company’s securities. If a stockholder were to file any such class action suit against us, we would incur substantial legal fees and our
management’s attention and resources would be diverted from operating our business to respond to the litigation, which could harm our business.
The sale of securities by us in any equity or debt financing could result in dilution to our existing stockholders and have a material adverse
effect on our earnings.
Any sale of common stock by us in a future private placement offering could result in dilution to the existing stockholders as a direct
result of our issuance of additional shares of our capital stock. In addition, our business strategy may include expansion through internal growth
by acquiring complementary businesses, acquiring or licensing additional brands, or establishing strategic relationships with targeted customers
and suppliers. In order to do so, or to finance the cost of our other activities, we may issue additional equity securities that could dilute our
stockholders’ stock ownership. We may also assume additional debt and incur impairment losses related to goodwill and other tangible assets if
we acquire another company, and this could negatively impact our earnings and results of operations.
20
If securities or industry analysts do not publish research or reports about our business, or if they downgrade their recommendations
regarding our common stock, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish
about us or our business. If any of the analysts who cover us downgrade our common stock, our common stock price would likely decline. If
analysts cease coverage of our Company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn
could cause our common stock price or trading volume to decline.
“Penny stock” rules may restrict the market for our common stock.
Our common stock is subject to rules promulgated by the SEC relating to “penny stocks,” which apply to companies whose shares are
not traded on a national stock exchange, trade at less than $5.00 per share, or who do not meet certain other financial requirements specified by
the SEC. These rules require brokers who sell “penny stocks” to persons other than established customers and “accredited investors” to complete
certain documentation, make suitability inquiries of investors, and provide investors with certain information concerning the risks of trading in
such penny stocks. These rules may discourage or restrict the ability of brokers to sell our common stock and may affect the secondary market
for our common stock. These rules could also hamper our ability to raise funds in the primary market for our common stock .
We do not anticipate paying dividends.
We have never paid cash or other dividends on our common stock. Payment of dividends on our common stock is within the discretion
of our Board of Directors and will depend upon our earnings, our capital requirements and financial condition, and other factors deemed relevant
by our Board of Directors. However, the earliest our Board of Directors would likely consider a dividend is if we begin to generate excess cash
flow.
Our officers, directors and principal stockholders can exert significant influence over us and may make decisions that are not in the best
interests of all stockholders.
Our officers, directors and principal stockholders (greater than 5% stockholders) collectively beneficially own approximately 54% of
our outstanding common stock. As a result, this group will be able to affect the outcome of, or exert significant influence over, all matters
requiring stockholder approval, including the election and removal of directors and any change in control. In particular, this concentration of
ownership of our common stock could have the effect of delaying or preventing a change of control of us or otherwise discouraging or
preventing a potential acquirer from attempting to obtain control of us. This, in turn, could have a negative effect on the market price of our
common stock. It could also prevent our stockholders from realizing a premium over the market prices for their shares of common stock.
Moreover, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders, and,
accordingly, this group could cause us to enter into transactions or agreements that we would not otherwise consider.
If we fail to maintain an effective system of internal controls, we might not be able to report our financial results accurately or prevent
fraud; in that case, our stockholders could lose confidence in our financial reporting, which could negatively impact the price of our stock.
Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. In addition, Section 404 of the
Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, will require us to evaluate and report on our internal control over financial reporting
and have our independent registered public accounting firm attest to our evaluation beginning with our Annual Report on Form 10-K for the year
ending March 31, 2011. We are in the process of preparing and implementing an internal plan of action for compliance with Section 404 and
strengthening and testing our system of internal controls. The process of implementing our internal controls and complying with Section 404 is
expensive and time consuming and requires significant attention of management. We cannot be certain that these measures will ensure that we
implement and maintain adequate controls over our financial processes and reporting in the future. Even if we conclude, and our independent
registered public accounting firm concurs, that our internal control over financial reporting provides reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles, because of its inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements. Failure to
implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to
fail to meet our reporting obligations. If we or our independent registered public accounting firm discover a material weakness or a significant
deficiency in our internal control, the disclosure of that fact, even if quickly remedied, could reduce the market’s confidence in our financial
statements and harm our stock price. In addition, a delay in compliance with Section 404 could subject us to a variety of administrative sanctions,
including ineligibility for short form resale registration, action by the SEC, and the inability of registered broker-dealers to make a market in our
common stock, which could further reduce our stock price and harm our business.
21
Maintaining and improving our financial controls and the requirements of being a public company may strain our resources, divert
management’s attention and affect our ability to attract and retain qualified members for our Board of Directors.
As a public company, we are subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act. The requirements
of these rules and regulations has resulted in an increase in our legal, accounting and financial compliance costs, may make some activities more
difficult, time-consuming and costly and may place undue strain on our personnel, systems and resources.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control
over financial reporting. This can be difficult to do. For example, we depend on the reports of wireless carriers for information regarding the
amount of sales of our products and services and to determine the amount of royalties we owe branded content licensors and the amount of our
revenues. These reports may not be timely, and in the past they have contained, and in the future they may contain, errors.
In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial
reporting, we expend significant resources and provide significant management oversight. We have a substantial effort ahead of us to implement
appropriate processes, document our system of internal control over relevant processes, assess their design, remediate any deficiencies identified
and test their operation. As a result, management’s attention may be diverted from other business concerns, which could harm our business,
operating results and financial condition. These efforts will also involve substantial accounting-related costs.
The Sarbanes-Oxley Act makes it more difficult and more expensive for us to maintain directors’ and officers’ liability insurance, and
we may be required in the future to accept reduced coverage or incur substantially higher costs to maintain coverage. If we are unable to maintain
adequate directors’ and officers’ insurance, our ability to recruit and retain qualified directors, and officers will be significantly curtailed.
The ownership interest of our current stockholders will be substantially diluted if our outstanding securities convertible and/or
exercisable into shares of our common stock are converted and/or exercised.
As of June 21, 2010, we had an aggregate of $2,500,000 of Senior Secured Convertible Notes due June 21, 2013 convertible into
16,666,666 shares of our common stock, and warrants to purchase 8,333,333 shares of our common stock. To the extent our outstanding
securities convertible and/or exercisable into shares of our common stock are converted and/or exercised, additional shares of our common stock
will be issued, which will result in dilution to our stockholders and increase the number of shares of common stock eligible for resale into the
public market. Sales of such shares of common stock could adversely affect the market price of our common stock.
ITEM 2. PROPERTIES
The principal offices of NeuMedia are the offices of Trinad Capital, L.P., located at 2000 Avenue of the Stars, Suite 410, Los Angeles,
California 90067. In March 2007, we entered into a month-to-month lease for such office space with Trinad Management, LLC (“Trinad
Management”) for rent in the amount of $8,500 per month, which was subsequently amended to $5,000 per month
The principal offices of our subsidiary Twistbox are headquartered at 14242 Ventura Boulevard, 3rd Floor, Sherman Oaks, California
91423. On July 1, 2005, The WAAT Corp. (Twistbox’s predecessor-in-interest) entered into a lease for these premises with Berkshire Holdings,
LLC at a base rent of $21,000 per month. The term of the lease expires on July 15, 2010, and becomes month-to-month thereafter. Twistbox also
leases property in Dortmund, Germany and Poland, where it has branch operations.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are subject to various claims, complaints and legal actions in the normal course of business. Except as set forth
below, we do not believe we are party to any currently pending litigation, the outcome of which will have a material adverse effect on our
operations or financial position. Our failure to obtain necessary license or other rights, or litigation arising out of intellectual property claims,
could adversely affect our business.
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 $485,000. On or about March 16, 2009, GMCI filed
a complaint in California Superior Court, LA Superior Court seeking the balance of the minimum guarantee payments due under the agreement in
the approximate amount of $4,085,000. 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.
Non-binding meditation was held on November 16, 2009. The parties were not able to settle their dispute. The litigation is proceeding and
WAAT intends to vigorously defend against this action. Principals of both parties continue to communicate to find a mutually acceptable
resolution.
22
ITEM 4. (REMOVED AND RESERVED).
23
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUTY, RELATED STOCKHOLDER MATTERS AND ISSUER
PART II
PURCHASES OF EQUITY SECURITIES
Market Information
As of July 8, 2010, the closing price of our common stock was $0.35.
Our common stock is quoted on the OTC Bulletin Board under the symbol “MNDL.OB.” Any investor who purchases our common
stock is not likely to find any liquid trading market for our common stock and there can be no assurance that any liquid trading market will
develop.
The following table reflects the high and low bids for our common stock for periods indicated. The quotations reflect high and low bid
price on a daily basis and reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
Year Ended March 31, 2010
First quarter
Second quarter
Third quarter
Fourth quarter
Year Ended March 31, 2009
First quarter
Second quarter
Third quarter
Fourth quarter
Holders
High
Low
$
$
$
$
$
$
$
$
0.91
0.60
0.55
0.50
6.00
3.00
2.39
1.75
$
$
$
$
$
$
$
$
0.31
0.39
0.35
0.30
2.00
1.00
0.60
0.50
As of July 7, 2010, there were 538 holders of record of our common stock. There were also an undetermined number of holders who
hold their stock in nominee or “street” name.
Dividends
We have not declared cash dividends on our common stock since our inception and we do not anticipate paying any cash dividends in
the foreseeable future.
Equity Compensation Plan Information
The following table sets forth information concerning our equity compensation plans as of March 31, 2010.
Plan Category
Equity compensation plans approved by
security holders
Equity compensation plans not approved
by security holders
Total
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
3,000,000
$
3,187,000
$
6,187,000
$
24
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
2.49
2.49
2.49
0
982,000
813,000
Unregistered Sales of Equity Securities
None.
Issuer Purchases of Equity Securities
Period
January 1, 2010 -
January 31, 2010
February 1, 2010 -
February 28, 2010
March 1, 2010 –
March 31, 2010
(a) Total Number of
Shares (or Units)
Purchased
(b) Average Price Paid
per Share (or Unit) ($)
-
12,992 $
45,848 $
-
0.40
0.40
(c)
Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs
(d)
Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased Under
the Plans or
Programs
-
-
-
-
-
-
(1) These shares were repurchased by the Company in satisfaction of tax liability pursuant to Rule 16b-3 of the Exchange Act, or were cancelled
in connection with an employee termination
ITEM 6. SELECTED FINANCIAL DATA
Not applicable as we are a smaller reporting company.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Annual Report on Form 10-K, 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” beginning on page 8 and elsewhere in this filing. 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” “us” or the “Company” refer to the business and operations of
NeuMedia, Inc. (“NeuMedia”) through its operating and wholly-owned subsidiary, Twistbox Entertainment, Inc. (“Twistbox”).
Historical Operations of NeuMedia, Inc.
NeuMedia 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 May 12, 2010, the company changed its name to NeuMedia, Inc.
On October 27, 2004, and as amended on December 17, 2004, NeuMedia 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) NeuMedia’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 NeuMedia to fund the expenses of remaining public; (4) 3.5%
of the new common stock of NeuMedia (140,000 shares) was issued to the holders of record of NeuMedia’s preferred stock in settlement of
their liquidation preferences; (5) 3.5% of the new common stock of NeuMedia (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 NeuMedia (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, NeuMedia and its subsidiaries were engaged in providing business-to-business transaction management services designed to simplify
trading between buyers and suppliers.
25
Prior to February 12, 2008, NeuMedia was a public shell company with no operations, and controlled by its significant stockholder,
Trinad Capital Master Fund, L.P.
SUMMARY OF THE MERGER
NeuMedia 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 NeuMedia (“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 NeuMedia 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 NeuMedia, 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 NeuMedia 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 NeuMedia 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, NeuMedia also assumed all
unvested Twistbox options. The merger consideration consisted of an aggregate of up to 12,325,000 shares of NeuMedia common stock, which
included the conversion of all shares of Twistbox capital stock and the reservation of 2,144,700 shares of NeuMedia common stock required for
assumption of the vested Twistbox options. NeuMedia reserved an additional 318,772 shares of NeuMedia 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,
NeuMedia or any subsidiary of Twistbox or NeuMedia 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, NeuMedia 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 (the “VAC Note Security
Agreement”). 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 entitled 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 entitled 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, would have been permanently increased to an
exercise price of $7.55 per share. Both warrants were scheduled to expire on July 30, 2011. The warrants were subsequently modified on
October 23, 2008 and cancelled on June 21, 2010, as set forth below. We also entered into a Guaranty (the “ValueAct Note Guaranty”) with
ValueAct whereby NeuMedia 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, which was subsequently amended as set forth below. The
financial covenants of the ValueAct Note were also amended, pursuant to which Twistbox was required to maintain a cash balance of not less
than $2,500,000 at all times and NeuMedia is required to maintain a cash balance of not less than $4,000,000 at all times. The ValueAct Note was
subsequently amended and restated as set forth below.
26
SUMMARY OF THE AMV ACQUISITION
On October 23, 2008, NeuMedia 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 was scheduled to mature on July 31, 2010, and bore interest at an initial rate of 5% per annum, subject to adjustment
as provided therein.
In addition, also on October 23, 2008, in connection with the AMV Acquisition, NeuMedia, Twistbox and ValueAct entered into a
Second Amendment to the ValueAct Note, which among other things, provided for a payment in kind election at the option of
Twistbox, modified the financial covenants set forth in the ValueAct Note to require that NeuMedia and Twistbox maintain certain minimum
combined cash balances and provided for certain covenants with respect to the indebtedness of NeuMedia 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, NeuMedia
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.
In addition, also on October 23, 2008, NeuMedia entered into a Securities Purchase Agreement with certain investors identified therein
(the “Investors”), pursuant to which NeuMedia 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 NeuMedia 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 NeuMedia on or about November 8, 2008.
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. In addition, also on August 14, 2009, NeuMedia, 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 ValueAct Note increased from 10% to 12.5%.
On January 25, 2010, NeuMedia, 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 NeuMedia 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 NeuMedia must maintain was increased to $1,600,000.
On February 25, 2010, Twistbox received a letter (the “Letter”) from ValueAct alleging certain events of default with respect to the
ValueAct Note. The Letter claimed that an event of default had occurred and was continuing under the ValueAct Note as result of certain alleged
defaults, including the failure to provide weekly evidence of compliance with certain of Twistbox’s and NeuMedia’s covenants under the
ValueAct Note, the failure to comply with limitations on certain payments by NeuMedia and each of its subsidiaries, and the failure of Twistbox
and Neumedia to maintain minimum cash balances in deposit accounts of each of Twistbox and Neumedia. The Letter also claimed that the
Waiver had ceased to be effective as a result of the alleged failure of NeuMedia to comply with the conditions set forth in the Waiver. On May
10, 2010, Twistbox received from ValueAct a Notice of Event of Default and Acceleration (“Notice”) in which ValueAct stated that an event of
default had occurred under the ValueAct Note as a result of Twistbox’s and NeuMedia’s failure to comply with the cash balance covenant under
the ValueAct Note and, therefore, ValueAct accelerated all outstanding amounts payable by Twistbox under the ValueAct Note. In connection
with the Notice, ValueAct instituted an administration proceeding in the United Kingdom against AMV.
On June 21, 2010, NeuMedia sold all of the operating subsidiaries of AMV to an entity controlled by ValueAct and certain of AMV’s
founders in exchange for the release of $23,000,000 of secured indebtedness, comprising of a release of all amounts due and payable under the
AMV Note and all amounts due and payable under the VAC Note except for $3,500,000 in principal (the “Restructure”). In connection with the
Restructure, the ValueAct Note (as amended and restated, the “Amended ValueAct Note”), the Value Act Security Agreement and the Value Act
Guaranty were amended and restated in their entirety. In addition, all warrants and common stock of NeuMedia held by ValueAct were cancelled
and all warrants and common stock of NeuMedia held by AMV founders Nate MacLeitch and Jonathan Cresswell were repurchased by
NeuMedia for a price of $0.02 per share.
27
The Amended ValueAct Note matures on June 21, 2013 and bears interest at 10% payable in cash semi-annually in arrears on each
January 1 and July 1 that the Amended ValueAct Note is outstanding. Twistbox may prepay the Amended ValueAct Note in whole or in part at
any time without penalty. Notwithstanding the foregoing, at any time on or prior to January 1, 2012, Twistbox 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 January 1,
2012 be added to the principal due under the Amended ValueAct Note. In the event of a Fundamental Change (as defined therein) of Twistbox,
the holder of the Amended ValueAct Note will have the right for a period of thirty days to require Twistbox to repurchase the Amended
ValueAct Note at a price equal to 100% of the outstanding principal and all accrued and unpaid interest.
Also on June 21, 2010, for purposes of capitalizing NeuMedia, NeuMedia sold and issued $2,500,000 of Senior Secured Convertible
Notes due June 21, 2013 (the “New Senior Secured Notes” or the “Senior Debt”) to certain significant stockholders. The New Senior Secured
Notes have a three year term and bear interest at a rate of 10% per annum payable in arrears semi-annually. Notwithstanding the foregoing, at any
time on or prior to the 18th month following the original issue date of the New Senior Secured Notes, NeuMedia 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 NeuMedia at a conversion price of US$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 NeuMedia and its subsidiaries. The Amended ValueAct Note is subordinated to the
New Senior Secured Notes.
Each purchaser of a New Senior Secured Note also received a warrant (“Warrant”) to purchase shares of common stock of NeuMedia at an
exercise price of US$0.25 per share, subject to adjustment. For each $50,000 of New Senior Secured Notes purchased, the purchaser received a
Warrant to purchase 166,667 shares of common stock of NeuMedia. Each Warrant has a five year term.
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 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.
Overview
From February 12, 2008 to October 23, 2008, our sole operations were those of our wholly-owned subsidiary, Twistbox. In October
2008, we acquired AMV Holding Limited, a mobile media and marketing company. On June 21, 2010, we sold all of the operating subsidiaries
of AMV. On Twistbox is a global publisher and distributor of branded entertainment content, including images, video, TV programming and
games, for Third Generation (3G) mobile networks. Twistbox publishes and distributes its content in over 40 countries representing more than
one billion subscribers. Operating since 2003, Twistbox has developed an intellectual property portfolio unique to its target demographic (18 to
35 year old) that includes worldwide exclusive (or territory exclusive) mobile rights to global brands and content from leading film, television and
lifestyle content publishing companies. Twistbox has built a proprietary mobile publishing platform that includes: tools that automate handset
portability for the distribution of images and video; a mobile games development suite that automates the porting of mobile games and
applications to over 1,500 handsets; and a content standards and ratings system globally adopted by major wireless carriers to assist with the
responsible deployment of age-verified content. Twistbox has leveraged its brand portfolio and platform to secure “direct” distribution
agreements with the largest mobile operators in the world, including, among others, AT&T, Hutchinson 3G, O2, MTS, Orange, T-Mobile,
Telefonica, Verizon and Vodafone. Twistbox has experienced annual revenue growth in excess of 50% over the past two years and expects to
become one of the leading players in the rapidly-growing, multibillion-dollar mobile entertainment market.
Twistbox maintains a worldwide distribution agreement with Vodafone. Through this relationship, Twistbox serves as Vodafone’s
exclusive supplier of late night content, a portion of which is age-verified. Additionally, Twistbox is one of the select few content aggregators for
Vodafone. Twistbox aggregates content from leading entertainment companies and manages distribution of this content to Vodafone.
Additionally, Twistbox maintains distribution agreements with other leading mobile network operators throughout the North American,
European, and Asia-Pacific regions that include Verizon, Virgin Mobile, T-Mobile, Telefonica, Hutchinson 3G, Three, O2 and Orange.
Twistbox’s intellectual property encompasses over 75 worldwide exclusive or territory exclusive content licensing agreements that cover
all of its key content genres including lifestyle, glamour, and celebrity news and gossip for U.S. Hispanic and Latin American markets, poker
news and information, late night entertainment and casual games.
Twistbox currently has content live on more than 100 network operators in 40 countries. Through these relationships, Twistbox can
currently reach over one billion mobile subscribers worldwide. Its existing content portfolio includes 300 WAP sites, 250 games and 66 mobile
TV channels.
28
In addition to its content publishing business, Twistbox operates a rapidly growing suite of premium short message service (Premium
SMS) services that include text and video chat and web2mobile marketing services of video, images and games that are promoted through on-
line, magazine and TV affiliates. The Premium SMS infrastructure essentially allows end consumers of Twistbox content to pay for their content
purchases directly from their mobile phone bills.
Twistbox’s end-users are the highly-mobile, digitally-aware 18 to 35 year old demographic. This group is a major consumer of digital
entertainment services and commands significant amounts of disposable income. In addition, this group is very focused on consumer lifestyle
brands and is much sought after by advertisers.
RESULTS OF OPERATIONS
Revenues
Cost of revenues
Gross profit
SG&A
Amortization of intangible assets
Impairment of goodwill
Operating income (loss)
Interest expense, net
Other income / (expenses)
(Loss) before income taxes
Income tax provision
(Loss) from continuing operations
Profit from discontinued operations, net of taxes
Net (loss)
Basic and Diluted net loss per common share:
Continuing operations
Discontinued opeations
Net loss
Basic and Diluted weighted average shares outstanding
Year ended
March 31,
Year ended
March 31,
2010
2009
$
$
$
$
$
14,037 $
3,188
10,849
14,351
547
38,430
(42,479)
(3,053)
1,650
(43,882)
(305)
(44,187)
1,704
(42,483) $
(1.11) $
0.04 $
(1.07) $
39,837
20,064
7,903
12,161
20,808
547
31,784
(40,978)
(2,110)
(552)
(43,640)
(158)
(43,798)
2,198
(41,600)
(1.20)
0.05
(1.15)
36,264
29
Comparison of the Year Ended March 31, 2010 and the Year Ended March 31, 2009
Revenues
Revenues by type:
Games
Other content
Total
Year Ended March 31,
2010
2009
(In thousands)
$
$
4,204 $
9,833
14,037 $
5,736
14,328
20,064
Games revenue – the decline in revenue largely reflects a strategic decision to curtail investment in development of new games for carrier
sales, along with the loss of on-deck placement with US carriers. In addition, we have wound down our development work on behalf of third
parties. This was partly offset by higher platform and services fees, particularly in Germany. Games revenue includes both licensed and
internally developed games for use on mobile phones.
The revenue decline for Other content is the result of multiple factors – the largest variance ($2.8million) relates to off-deck revenue in
the prior year which was transferred to Twistbox’s sister company and thus was not part of continuing operations in fiscal 2010. In addition,
revenues were impacted by a very challenging European sales environment for our carrier partners and consequently for us. This resulted in
lower sales in major territories particularly in the UK, Germany and Greece. Revenues were also affected by the closure of our Russian
operations in Q4 and the loss of a significant on-deck advertising management agreement. Other content includes a broad range of licensed and
internally developed products delivered in the form of WAP, Video, Wallpaper and Mobile TV as well as interactive voice services.
Cost of Revenues
Cost of revenues:
License fees
Other direct cost of revenues
Total cost of revenues
Revenues
Gross margin
Year Ended March 31,
2009
2010
(In thousands)
$
$
$
2,780
408
3,188
$
$
7,178
725
7,903
14,037
$
20,064
77.3%
60.6%
License fees represent costs payable to content providers for use of their intellectual property in products sold. Our licensing agreements
are predominantly on a revenue-share basis, and therefore license fees have decreased as a result of reductions in the revenue share attributable to
several licensed product arrangements, renegotiation of major license agreements resulting in a lower revenue share, and a 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 of discussions with providers. These one-time adjustments contributed approximately 15% of margin in the period.
30
Operating Expenses
Product development expenses
Sales and marketing expenses
General and administrative expenses
Amortization of intangible assets
Impairment of goodwill and intangible assets
Year Ended March 31,
2010
2009
(In thousands)
$
4,194
$
6,663
2,428
7,729
547
4,439
9,706
547
38,430
31,784
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 prior year, is 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 year-over-year is the result of curtailed D2C direct marketing expenses, as that business was transferred to a sister company and is not
part of continuing operations. In addition cost savings were made by headcount reductions and reduced travel.
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.
Significant savings were made during fiscal 2010 through headcount reductions, but were largely offset by higher expenses from the costs of
restructuring the on-deck business, higher professional costs, legal costs related to the Company’s debt restructuring and disputes with the Senior
Debt holder, 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 Twistbox as our “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.
Impairment of goodwill and intangible assets represents the write down in value of goodwill and intangible assets associated with the
acquisition of Twistbox. The consideration in the Twistbox acquisition was entirely stock-based, and generated significant goodwill since
Twistbox was not a capital intensive company. Subsequent to the acquisition, the Company experienced a significant and continued decline in the
market value of its common stock, which resulted in the Company’s market capitalization falling below its net book value. The Company
recorded an impairment charge in the value of goodwill and intangible assets in fiscal 2009. The Company performed its annual impairment
review for goodwill and intangible assets in the fourth quarter of fiscal 2010. As a result of the assessment, the Company determined that its net
book value exceeded the implied fair value; therefore, the Company recorded an additional impairment charge of $32,694 to write down goodwill
and $5,736 to write down intangibles assets. The intangible assets impaired were the valuation associated with the Twistbox trademark/trade
name, and values assigned to customer list and license agreements.
Other Income and Expenses
Interest and other income/(expense)
Year Ended March 31,
2010
2009
(In thousands)
$
(1,403) $
(2,662)
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 prior year relates to
foreign exchange gains (versus losses in the prior year), and miscellaneous income primarily 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 during the year.
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.
31
Financial Condition
Assets
Our current assets related to continuing operations totaled $5.8 million and $9.9 million at March 31, 2010 and March 31, 2009,
respectively, while current assets including discontinued operations were $13.2 million and $18.0 million, respectively. Total assets related to
continuing operations were $22.8 million and $66.5 million at March 31, 2010 and March 31, 2009, respectively, while total assets including
discontinued operations were $46.8 million and $91.2 million, respectively . The decrease in current assets is primarily due to lower cash
balances and prepayments. The decrease in total assets is primarily due to the impairment charge recorded against goodwill and intangibles assets,
as well as the movement in cash and prepayments.
Liabilities and Working Capital
At March 31, 2010, our current and total liabilities related to continuing operations were $33.7 million, compared to $34.0 million at
March 31, 2009. Total liabilities including discontinued operations were $38.4 million and $42.2 million, respectively. The change in liabilities
was related to an overall reduction in accounts payable and other current liabilities, offset by interest accrued on debt. The Company had negative
working capital of $25.5 million at March 31, 2010 and $24.1 million at March 31, 2009 as a result of the timing of maturity of the ValueAct
Note and the AMV Note.
Liquidity and Capital Resources
Consolidated Statement of Cash Flows Data:
Capital expenditures
Cash flows used in operating activities
Cash flows used in investing activities
Cash flows provided by financing activities
Year Ended March 31,
2009
2010
(In thousands)
$
433 $
3,470
-
-
219
5,360
3,554
4,300
Twistbox has incurred losses and negative annual cash flows since inception, although the operating loss has narrowed significantly in
fiscal year 2010. The Company also incurred significant costs in attempting to restructure the debt held by the Senior Note holder.
The primary sources of liquidity have historically been issuance of common and preferred stock, and 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 year ended March 31, 2010, we used $4.0 million of net cash, flowing from the loss excluding impairment charge of $3.7 million
as well as decreases in accounts payable of $3.8 million, offset by non-cash stock based compensation and depreciation and amortization. In the
year ended March 31, 2009, we used $5.0 million of net cash. This primarily related to the net loss excluding impairment charge of $9.8 million,
and reductions in accounts payable/accrued license fees/other liabilities of $4.2 million, partially offset by non cash stock based compensation and
depreciation and amortization included in the net loss and increases in accounts receivable of $4.5million.
As of March 31, 2009, the Company had approximately $0.6 million of cash attributed to continuing operations. The Company has
subsequently restructured its debt, as described in Note 16 to the accompanying financial statements, and has recapitalized by means of receiving
$2.5 million in the form of a new Senior Debt facility.
The Company’s cash requirements in the future will be dependent on actions taken to improve cash flow, including operational
restructuring. 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.
32
Debt obligations include interest payments under the new Senior Debt facility, and also under the Amended ValueAct Note. Under both
facilities the Company may elect to add interest to the principal, until 18 months following June 21, 2010, 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.
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.
Stock Sales and Liquidity
On August 3, 2006, we increased our authorized shares of common stock from 19,000,000 to 100,000,000 and authorized and
effectuated a 2.5 to 1 stock split of our common stock to increase our outstanding shares from 4,000,000 to 10,000,000. All share and per share
amounts have been retroactively adjusted to reflect the effect of the stock split.
On September 14, 2006, we sold 2,800,000 units; on October 12, 2006, we sold 3,400,000 units; and on December 26, 2006, we sold
530,000 units. Each unit sold, at a price per unit of $1.00, consisted of one share of our common stock and one warrant to purchase one share of
our common stock. We realized net proceeds of $6,057,000 after the costs of the offering. The warrants have an exercise price of $2.00 per share
and expire as follows: 2,800,000 warrants expire in September 2008, 3,400,000 warrants expire in October 2008, and 530,000 warrants expired
in December 2008.
On October 12, 2006, we entered into a Series A Convertible Preferred Stock Purchase Agreement with Trinad Management, LLC
(“Trinad Management”). Pursuant to the terms of the agreement, Trinad Management purchased 100,000 shares of our Series A Convertible
Preferred Stock, par value $ 0.0001 per share (“Series A Preferred Stock”), for an aggregate purchase price of $100,000. Series A Preferred
stockholders are entitled to convert, at their option, all or any shares of the Series A Preferred Stock into the number of fully paid and non-
assessable shares of common stock equal to the number obtained by dividing the original purchase price of such Series A Preferred Stock, plus
the amount of any accumulated but unpaid dividends as of the conversion date, by the original purchase price (subject to certain adjustments) in
effect at the close of business on the conversion date. The fair value of the 100,000 shares of our common stock underlying the Series A
Convertible Preferred Stock was $1.425 per share at the date of grant. Since the value was $0.425 lower than the fair value of our common stock
on October 12, 2006, the $42,500 intrinsic value of the conversion option resulted in the reduction of stockholders’ equity for the recognition of a
preferred stock dividend and an increase to additional paid-in capital.
On July 24, 2007, we entered into a Subscription Agreement with certain investors, pursuant to which such investors agreed to
subscribe for an aggregate of 5,000,000 shares of our common stock. Each share of common stock was sold at the price of $0.50, for an
aggregate purchase price of $2,500,000.
In September, October and December 2007, warrants to purchase 625,000 shares of common stock were exercised in a cashless
exchange for 239,000 shares of the Company’s common stock based on the average closing price of the Company’s common stock for the five
days prior to the exercise date.
As described above, pursuant to the Merger, we issued 10,180,292 shares of NeuMedia common stock as part of the merger
consideration in connection with the Merger. Such issuance was made pursuant to the exemption from registration permitted under Section 4(2)
of the Securities Act.
In addition, also in connection with the Merger, on February 12, 2008, we entered into non-qualified stock option agreements with
certain of our directors and officers under the Plan whereby we issued options to purchase an aggregate of 1,700,000 shares of our common
stock to Ian Aaron, Chief Executive Officer of Twistbox and a director of the Company, Russell Burke, Chief Financial Officer of Twistbox and
the Company, David Mandell, Executive Vice-President, General Counsel and Corporate Secretary of Twistbox and Patrick Dodd, Senior Vice
of Worldwide Sales and Marketing of Twistbox, each of whom received an option to purchase 600,000 shares, 350,000 shares, 450,000 shares
and 300,000 shares, respectively, of our common stock. The options have a ten-year term and are exercisable at a price of $4.75 per share. The
options become exercisable over a two-year period, with one-third of the options granted vesting immediately upon grant, an additional one-third
vesting on the first anniversary of the date of grant, and the remaining one-third on the second anniversary of the date of grant. The options were
granted pursuant to the exemption from registration permitted under Rule 506 of Regulation D of the Securities Act.
33
In April and June 2008, warrants to purchase 350,000 shares of common stock were exercised in a cashless exchange for 217,000
shares of the Company’s common stock based on the average closing price of the Company’s common stock for the five days prior to the
exercise date.
On June 18, 2008, the Company granted non-qualified stock options to purchase 1,500,000 shares of common stock of the Company to
four directors under the Plan. The options have a ten year term and are exercisable at a price of $2.75 per share, with one-third of the options
granted vesting immediately upon grant, one-third vesting on the first anniversary of the date of grant and the remaining one-third vesting on the
second anniversary of the date of grant.
As described above, pursuant to the AMV Acquisition, on October 23, 2008, we entered into a Securities Purchase Agreement with
certain investors identified therein, pursuant to which NeuMedia 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 the Company 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 NeuMedia on or about November 8, 2008.
Also as described above, in connection with the AMV Acquisition, on October 23, 2008, NeuMedia 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.
In October 2008, warrants to purchase 2,300,000 shares of common stock were exercised in a cashless exchange for 286,000 shares of
the Company’s common stock based on the average closing price of the Company’s common stock for the five days prior to the exercise date.
In September 2009, the Company granted warrants to purchase 1,200,000 shares of common stock of the Company a vendor. The
warrants are exercisable at $1.25 per share, through September 23, 2014 and were valued at $134,000 at the time of issue.
Revenues
The discussion herein regarding our future operations pertain to the results and operations of Twistbox. Twistbox has historically
generated and expects to continue to generate the vast majority of its revenues from mobile phone carriers that market and distribute its content.
These carriers generally charge a one-time purchase fee or a monthly subscription fee on their subscribers’ phone bills when the subscribers
download Twistbox’s games to their mobile phones. The carriers perform the billing and collection functions and generally remit to Twistbox a
contractual percentage of their collected fee for each game. Twistbox recognizes as revenues the percentage of the fees due to it from the carrier.
End users may also initiate the purchase of Twistbox’s games through various Internet portal sites or through other delivery mechanisms, with
carriers or third parties being responsible for billing, collecting and remitting to Twistbox a portion of their fees. To date, Twistbox’s international
revenues have been much more significant than its domestic revenues.
We believe that improving quality and greater availability of 2.5 and 3G handsets is in turn encouraging consumer awareness and
demand for high quality content on their mobile devices. At the same time, carriers and branded content owners are focusing on a small group of
publishers that have the ability to provide high-quality mobile content consistently and port it rapidly and cost-effectively to a wide variety of
handsets. Additionally, branded content owners are seeking publishers that have the ability to distribute content globally through relationships
with most or all of the major carriers. We believe Twistbox has created the requisite development and porting technology and has achieved the
scale to operate at this level. We also believe that leveraging carrier and content owner relationships will allow us to grow our revenues without
corresponding percentage growth in our infrastructure and operating costs. Our revenue growth rate will depend significantly on continued
growth in the mobile content market and our ability to leverage our distribution and content relationships, as well as to continue to expand. Our
ability to attain profitability will be affected by the extent to which we must incur additional expenses to expand our sales, marketing,
development, and general and administrative capabilities to grow our business. The largest component of our expenses is personnel costs.
Personnel costs consist of salaries, benefits and incentive compensation, including bonuses and stock-based compensation, for our employees.
Our operating expenses will continue to grow in absolute dollars, assuming our revenues continue to grow. As a percentage of revenues, we
expect these expenses to decrease.
Many new mobile handset models are released in the fourth calendar quarter to coincide with the holiday shopping season. Because
many end users download our content soon after they purchase new handsets, we may experience seasonal sales increases based on this key
holiday selling period. However, due to the time between handset purchases and content purchases, much of this holiday impact may occur in our
March quarter. For a variety of reasons, we may experience seasonal sales decreases during the summer, particularly in Europe, which is
predominantly reflected in our September quarter. In addition to these possible seasonal patterns, our revenues may be impacted by new or
changed carrier deals, and by changes in the manner that our major carrier partners marketing our content on their deck. Initial spikes in revenues
as a result of successful launches or campaigns may create further aberrations in our revenue patterns.
34
Cost of Revenues
Twistbox’s cost of revenues historically, and our cost of revenues going forward, consists primarily of royalties that we pay to content
owners from which we license brands and other intellectual property. In addition, certain other direct costs such as quality assurance (“QA”) and
use of short codes are included in cost of revenues. Our cost of revenues also includes noncash expenses—amortization of certain acquired
intangible assets, and any impairment of guarantees. We generally do not pay advance royalties to licensors. Where we acquire rights in
perpetuity or for a specific time period without revenue share or additional fees, we record the payments made to content owners as prepaid
royalties on our balance sheet when payment is made to the licensor. We recognize royalties in cost of revenues based upon the revenues derived
from the relevant game multiplied by the applicable royalty rate. If applicable, we will record an impairment of prepaid royalties or accrue for
future guaranteed royalties that are in excess of anticipated recoupment. At each balance sheet date, we perform a detailed review of prepaid
royalties and guarantees that considers multiple factors, including forecasted demand, anticipated share for specific content providers,
development and launch plans, and current and anticipated sales levels. We expense the costs for development of our content prior to
technological feasibility as we incur them throughout the development process, and we include these costs in product development expenses.
Gross Margin
Our gross margin going forward will be determined principally by the mix of content that we deliver, and the costs of distribution. Our
games based on licensed intellectual property require us to pay royalties to the licensor and the royalty rates in our licenses vary significantly. Our
own in-house developed games, which are based on our own intellectual property, require no royalty payments to licensors. For late night
business, branded content requires royalty payment to the licensors, generally on a revenue share basis, while for acquired content we amortize
the cost against revenues, and this will generally result in a lower cost associated with it. There are multiple internal and external factors that affect
the mix of revenues between games and late night content, and among licensed, developed and acquired content within those categories, including
the overall number of licensed games and developed games available for sale during a particular period, the extent of our and our carriers’
marketing efforts for each type of content, and the deck placement of content on our carriers’ mobile handsets. We believe the success of any
individual game during a particular period is affected by the recognizability of the title, its quality, its marketing and media exposure, its overall
acceptance by end users and the availability of competitive games. In the case of Play for Prizes games, this is further impacted by its suitability to
“tournament” play and the prizes available. For other content, we believe that success is driven by the carrier’s deck placement, the rating of the
content, by quality and by brand recognition. If our product mix shifts more to licensed games or games with higher royalty rates, our gross
margin would decline. For other content as we increase scale, we believe that we will have the opportunity to move the mix towards higher
margin acquired product. Our gross margin is also affected by direct costs such as charges for mobile phone short codes, and QA, and by
periodic charges for impairment of intangible assets and of prepaid royalties and guarantees. These charges can cause gross margin variations,
particularly from quarter to quarter.
Operating Expenses
Our operating expenses going forward will primarily include product development expenses, sales and marketing expenses and general
and administrative expenses. Our product development expenses consist primarily of salaries and benefits for employees working on creating,
developing, editing, programming, porting, quality assurance, carrier certification and deployment of our content, on technologies related to
interoperating with our various mobile phone carriers and on our internal platforms, payments to third parties for developing our content, and
allocated facilities costs. We devote substantial resources to the development, supporting technologies, porting and quality assurance of our
content. We believe that developing games internally through our own development studios allows us to increase operating margins, leverage the
technology we have developed and better control game delivery. Games development may encompass development of a game from concept
through deployment or adaptation or rebranding of an existing game. For acquired content, typically we will receive content from our licensors
which must be edited for mobile phone users, combined with other appropriate content, and packaged for end consumers. The process is made
more complex by the need to deliver content on multiple carriers platforms and across a large number of different handsets.
Sales and Marketing. Sales and marketing expenses historically, and our sales and marketing expenses going forward, will consist
primarily of salaries, benefits and incentive compensation for sales, business development, project management and marketing personnel,
expenses for advertising, trade shows, public relations and other promotional and marketing activities, expenses for general business
development activities, travel and entertainment expenses and allocated facilities costs. We expect sales and marketing expenses to increase in
absolute terms with the growth of our business and as we further promote our content and expand our carrier network.
General and Administrative. Our general and administrative expenses historically, and going forward, will consist primarily of salaries
and benefits for general and administrative personnel, consulting fees, legal, accounting and other professional fees, information technology costs
and allocated facilities costs. We expect that general and administrative expenses will increase in absolute terms as we hire additional personnel
and incur costs related to the anticipated growth of our business and our operation as a public company. We also expect that these expenses will
increase because of the additional costs to comply with the Sarbanes-Oxley Act and related regulation, our efforts to expand our international
operations and, in the near term, additional accounting costs related to our operation as a public company.
35
Amortization of Intangible Assets. We will record amortization of acquired intangible assets that are directly related to revenue-
generating activities as part of our cost of revenues and amortization of the remaining acquired intangible assets, such as customer lists and
platform, as part of our operating expenses. We will record intangible assets on our balance sheet based upon their fair value at the time they are
acquired. We will determine the fair value of the intangible assets using a contribution approach. We will amortize the amortizable intangible
assets using the straight-line method over their estimated useful lives of three to five years.
Estimates and Assumptions
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Income Taxes
We provide for deferred income taxes using the liability method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax
bases and the tax effect of net operating loss carry-forwards. A valuation allowance has been provided as it is more likely than not that the
deferred assets will not be realized.
Recent Accounting Pronouncements
Adopted Accounting Pronouncements
Effective July 1, 2009, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 105-10 , Generally Accepted Accounting Principles (“ASC 105-10”) (the “Codification”). ASC 105-10 establishes the exclusive
authoritative reference for U.S. GAAP for use in financial statements, except for SEC rules and interpretive releases, which are also authoritative
GAAP for SEC registrants. The Codification will supersede all existing non-SEC accounting and reporting standards. The Company has
included the references to the Codification, as appropriate, in these consolidated financial statements. As the Codification was not intended to
change or alter existing GAAP, it did not have any impact on the Company’s consolidated financial statements.
Effective April 1, 2009, the Company adopted ASC 855, Subsequent Events (“ASC 855-10”). The standard modifies the names of the
two types of subsequent events either as “recognized subsequent events” (previously referred to in practice as Type I subsequent events) or “non-
recognized subsequent events” (previously referred to in practice as Type II subsequent events). In addition, the standard modifies the definition
of subsequent events to refer to events or transactions that occur after the balance sheet date, but before the financial statements are issued (for
public entities) or available to be issued (for nonpublic entities). It also requires the disclosure of the date through which subsequent events have
been evaluated. The standard did not result in significant changes in the practice of subsequent event disclosures or the related accounting thereof,
and therefore the adoption did not have any impact on the Company’s consolidated financial statements.
Effective April 1, 2009, the Company adopted three accounting standard updates which were intended to provide additional application
guidance and enhanced disclosures regarding fair value measurements and impairments of securities. They also provide additional guidelines for
estimating fair value in accordance with fair value accounting. The first update, as codified in ASC 820-10-65, provides additional guidelines for
estimating fair value in accordance with fair value accounting. The second accounting update, as codified in ASC 320-10-65, changes accounting
requirements for other-than-temporary-impairment (OTTI) for debt securities by replacing the current requirement that a holder have the positive
intent and ability to hold an impaired security to recovery in order to conclude an impairment was temporary with a requirement that an entity
conclude it does not intend to sell an impaired security and it will not be required to sell the security before the recovery of its amortized cost
basis. The third accounting update, as codified in ASC 825-10-65, increases the frequency of fair value disclosures. These updates were effective
for fiscal years and interim periods ended after June 15, 2009. The adoption of these accounting updates did not have any impact on the
Company’s consolidated financial statements.
Effective April 1, 2009, the Company adopted a new accounting standard update regarding business combinations, ASC 805, which
establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. ASC 805-10 also provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business combination. ASC 805-10 applies prospectively to business combinations
for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We will
apply the requirements of ASC 805-10 prospectively to any future acquisitions. Although the Company did not enter into any business
combinations during the first year ended March 31, 2010, the Company believes ASC 805-10 may have a material impact on the Company’s
future consolidated financial statements if the Company were to enter into any future business combinations depending on the size and nature of
any such future transactions.
36
In August 2009, the FASB issued Update No. 2009-05, Fair Value Measurements and Disclosures (Topic 820) — Measuring
Liabilities at Fair Value (ASU 2009-05). ASU 2009-05 amends ASC 820, Fair Value Measurements and Disclosures, of the Codification to
provide further guidance on how to measure the fair value of a liability, an area where practitioners have been seeking further guidance. It
primarily does three things: (1) sets forth the types of valuation techniques to be used to value a liability when a quoted price in an active market
for the identical liability is not available, (2) clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a
separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability and (3) clarifies that
both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded
as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. This
standard became effective beginning in the fourth quarter of 2009 for the Company. The adoption of this pronouncement did not have a material
impact on our results of operations, financial position or cash flows.
In January 2010, the FASB issued ASU 2010-02, Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership
of a Subsidiary ("ASU 2010-02"). This amendment to Topic 810 clarifies, but does not change, the scope of current US GAAP. It clarifies the
decrease in ownership provisions of Subtopic 810-10 and removes the potential conflict between guidance in that Subtopic and asset
derecognition and gain or loss recognition guidance that may exist in other US GAAP. An entity will be required to follow the amended guidance
beginning in the period that it first adopts FAS 160 (now included in Subtopic 810-10). For those entities that have already adopted FAS 160, the
amendments are effective at the beginning of the first interim or annual reporting period ending on or after December 15, 2009, which was our
year ended March 31, 2010. The amendments should be applied retrospectively to the first period that an entity adopted FAS 160. The adoption
of this pronouncement did not have a material impact on our results of operations, financial position or cash flows.
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures
about Fair Value Measurements ("ASU 2010-06"). ASU 2010-06 amends ASC 820 and clarifies and provides additional disclosure
requirements related to recurring and non-recurring fair value measurements and employers' disclosures about postretirement benefit plan assets.
ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, which was our year ending March 31,
2010. Our adoption of this pronouncement did not have a material impact on our results of operations, financial position or cash flows.
Disclosures about purchases, sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurements are effective for
fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years, which will be our quarter ending June 30,
2011. The adoption is not expected to have a material impact on our results of operations, financial position or cash flows.
New Accounting Pronouncements
In September 2009, the FASB issued Update No. 2009-13, Multiple-Deliverable Revenue Arrangements—a consensus of the FASB
Emerging Issues Task Force ” (ASU 2009-13). It updates the existing multiple-element revenue arrangements guidance currently included under
ASC 605-25, which originated primarily from the guidance in EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables”
(EITF 00-21). The revised guidance primarily provides two significant changes: (1) eliminates the need for objective and reliable evidence of the
fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and (2) eliminates the residual
method to allocate the arrangement consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition.
ASU 2009-13 will be effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided
that the revised guidance is retroactively applied to the beginning of the year of adoption. The adoption of this standard update is not expected to
impact the Company’s consolidated financial statements.
In October 2009, the FASB concurrently issued ASU No. 2009-14, Software (Topic 985): Certain Revenue Arrangements That Include
Software Elements (a consensus of the FASB Emerging Issues Task Force). This new guidance amends the scope of existing software revenue
recognition accounting. Tangible products containing software components and non-software components that function together to deliver the
product's essential functionality would be scoped out of the accounting guidance on software and accounted for based on other appropriate
revenue recognition guidance. For the Company, this guidance is effective for all new or materially modified arrangements entered into on or after
January 1, 2011 with earlier application permitted as of the beginning of a fiscal year. Full retrospective application of the new guidance is
optional. This guidance must be adopted in the same period that the company adopts the amended accounting for arrangements with multiple
deliverables described in the preceding paragraph. The Company is currently assessing its implementation of this new guidance, but does not
expect a material impact on the consolidated financial statements.
Other recently issued accounting pronouncements are not expected to have a significant impact on the company’s results of operations
or financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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, 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 March 31, 2010, our two largest customers represented approximately
44% and 6% of our gross accounts receivable outstanding.
44% and 6% of our gross accounts receivable outstanding.
37
Foreign Currency Risk
The functional currencies of our United States and German operations are the United States Dollar, or USD, and the Euro, respectively.
A significant portion of our business is conducted in currencies other than the USD 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 either the
USD 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by Item 8 are submitted in a separate section of this report, beginning on Page F-1, and are incorporated herein
and made apart hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A (T) CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Annual Report on Form 10-K, have
concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and
principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Controls and Procedures
There were no changes in our internal controls over financial reporting or in other factors identified in connection with the evaluation
required by Exchange Act Rules 13a-15(d) or 15d-15(d) that occurred during the fiscal period ended March 31, 2010 that have materially
affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act. Our internal controls over financial reporting are designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections
of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal controls over financial reporting as of March 31, 2010 based on the
framework in Internal Control-Integrated Framework , published by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on our assessment, we have concluded that our internal controls over financial reporting were effective as of March 31, 2010.
38
This Annual Report on Form 10-K does not include an attestation report by our registered public accounting firm regarding internal
control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to
temporary rules of the SEC that permit us to provide only our management’s report in this Annual Report on Form 10-K.
ITEM 9B. OTHER INFORMATION
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table sets forth our directors and executive officers as of July 14, 2010:
PART III
Name
Ray Schaaf
James Lefkowitz
Russell Burke
David Mandell
Peter Guber
Robert S. Ellin
Adi McAbian
Paul Schaeffer
Age
49
51
50
49
68
45
36
62
Position(s)
President and Director
Chief Operating Officer
Chief Financial Officer, and Senior Vice President and Chief Financial Officer of Twistbox
Executive Vice President, General Counsel and Corporate Secretary of Twistbox
Co-Chairman
Co-Chairman
Director
Director
Biographical information for our directors and executive officers are as follows:
Ray Schaaf. Mr. Schaaf has been our President since October 27, 2009 and a director since April 5, 2010. He is a 25 year veteran digital media
veteran with significant experience in the casual games, content, ecommerce, and mobile industries. Prior to joining the Company, from 2007 to
2009, Mr. Schaaf served as president and chief executive officer of Arcadia Entertainment, Inc. From 2005 to 2007, Mr. Schaaf was chief
operating officer of Navio, a digital content, ecommerce, and promotions solution provider to Fox Interactive Media, Shockwave, Disney, Sony
BMG, EMI, and MasterCard. Prior to Navio, he was president of publishing at Glu Mobile. Prior to Glu Mobile, he served as president of
Intershop, where he oversaw the Americas and APAC operations. Prior to Intershop, Mr. Schaaf was chief executive officer and president of
XMARC, where he launched the first location-based application deployed on a public wireless network. He also has held executive management
positions at Veritas Software, NeXT Computers, and Ziff Davis. Mr. Schaaf received his B.S. degree in business from Boston College. The
Company selected Mr. Schaaf as a director because he has over 25 years experience managing companies in the gaming, wireless and digital
content industries with operations in the US, Asia and Europe. His specific experience will assist the Company in building and implementing a
strategy for growth and expansion
James Lefkowitz. Mr. Lefkowitz has been our Chief Operating Officer since October 27, 2009. He is a 20 year entertainment industry veteran
with a wide range of experience in law, business, finance, film and television. Mr. Lefkowitz joined NeuMedia from Cantor Fitzgerald (Cantor),
where he was managing director of Cantor Entertainment. Prior to Cantor, Mr. Lefkowitz was an agent for eight years at Creative Artists
Agency, the premiere talent agency in Hollywood, where he represented actors, writers and directors. He began his career as an attorney at the
law firm of Manatt, Phelps, and Phillips in Los Angeles. He subsequently worked for six years as a business affairs executive at Walt Disney
Studios and Touchstone Pictures. Mr. Lefkowitz is a graduate of the University of Michigan School of Business Administration and Michigan
Law School.
Russell Burke. Mr. Burke has served as our Chief Financial Officer since May 21, 2009 and Senior Vice President and Chief Financial
Officer of Twistbox since December 2006 and is responsible for all aspects of Twistbox’s financial infrastructure including reporting and
financial systems and information systems. He also has responsibility for strategic planning and for managing investor relationships. Mr. Burke
was previously the Managing Director for Australia and New Zealand for Weight Watchers International, Inc, a publicly traded company. He had
full responsibility for the company’s operations across those territories, and was a member of the company’s global executive committee. Prior to
this, Mr. Burke served as the Senior Vice-President and Chief Financial Officer of Pressplay, a joint venture of Sony Music and Universal
Music. He joined Pressplay at the start up stage and was part of a small management team which forged a viable business in the digital music
arena. He was responsible for developing all financial systems and oversaw the creation of management and external reporting; as well as
international business development. Additionally, he was involved in the acquisition of Pressplay by Roxio, Inc. and the subsequent re-branding
and re-launching of the service as Napster. Before joining Pressplay, Mr. Burke held a number of senior financial positions at Sony Music
International in Sydney (Australia), New York and London. Mr. Burke began his career with Price Waterhouse (now PricewaterhouseCoopers)
in Australia, where over a period of 13 years he worked with a broad range of clients in the Los Angeles, Sydney and Newcastle (Australia)
offices of Price Waterhouse, advising on business and compliance matters. Mr. Burke received a B. Comm. from the University of Newcastle
(Australia).
39
David Mandell. Mr. Mandell has served as Executive Vice President, General Counsel and Corporate Secretary of Twistbox since June 2006.
Mr. Mandell is responsible for all corporate governance matters for Twistbox, including those related to all foreign and domestic subsidiaries and
affiliated companies. Prior to joining Twistbox, Mr. Mandell was Senior Vice President, Business/Legal Affairs of Gemstar-TV Guide
International, Inc. (now ROVI Corporation), which was a NASDAQ publicly traded company that engaged in the development, licensing,
marketing, and distribution of products and services for TV guidance and home entertainment needs of TV viewers worldwide. From October
1998 to January 2003, Mr. Mandell served as Vice President, Business/Legal Affairs of Playboy Entertainment Group, Inc., a subsidiary of
Playboy Enterprises, Inc., which owns film and television properties (Playboy Films, Playboy TV, Spice Networks), related home video
imprints, and online content and gaming operations. Mr. Mandell received a B.A. from the University of Florida and a J.D. from the University
of Miami, School of Law.
Peter Guber. Mr. Guber has served as Co-Chairman of our Board of Directors since August 2007. He is a 30-year veteran of the entertainment
industry. His positions previously held include: Former Studio Chief, Columbia Pictures; Founder of Casablanca Record and Filmworks;
Founder, and Former Chairman/CEO, PolyGram Filmed Entertainment; Founder and Former Co-owner, Guber-Peters Entertainment Company;
Former Chairman and CEO, Sony Pictures Entertainment (SPE). Films directly produced and executive produced by Guber have received more
than 50 Academy Award nominations, including four times for Best Picture. Among his personal producing credits are Witches of Eastwick, The
Deep, Color Purple, Midnight Express, The Jacket, Missing, Batman and Rain Man, which won the Oscar for best picture. During Mr. Guber’s
tenure at SPE, the Motion Picture Group achieved, over four years, an industry-best domestic box office market share averaging 17%. During the
same period, Sony Pictures led all competitors with a remarkable total of 120 Academy Award nominations, the highest four-year total ever for a
single company. After leaving Sony in 1995, Mr. Guber formed Mandalay Entertainment Group (“Mandalay Entertainment”) as a multimedia
entertainment vehicle in motion pictures, television, sports entertainment and new media. Mr. Guber is a full professor at the UCLA School of
Theater, Film and Television and has been a member of the faculty for over 30 years. He also can be seen every Sunday morning on the
American Movie Channel (AMC), as the co-host of the critically acclaimed show, Sunday Morning Shootout. He received his B.A. from
Syracuse University, and both a Masters and Juris Doctor degree in law from New York University and was recruited by Columbia Pictures
Corporation from NYU where he pursued an M.B.A. degree. He is a member of the New York and California Bars. The Company selected Mr.
Guber as Co-Chairman of the Board because of his extensive experience in the film, music and television businesses and world-wide recognition
thereby enabling the Company to more successfully navigate through complex and relationship driven ventures.
Robert S. Ellin. Mr. Ellin has been a member of our Board of Directors and our Co-Chairman since February 2005. Mr. Ellin has twenty
years of investment and turnaround experience. Mr. Ellin is a partner and co-founder of Trinad, an activist hedge fund focused on micro-cap
public companies. Prior to founding Trinad, Mr. Ellin was the founder and President of Atlantis Equities, Inc. (“Atlantis”), a personal investment
company. Founded in 1990, Atlantis actively managed an investment portfolio of small capitalization public companies, as well as select private
company investments. Mr. Ellin frequently played an active role in its investee companies including board representation, management selection,
corporate finance and other advisory services. Through Atlantis and related companies, Mr. Ellin spearheaded investments into ThQ, Inc., Grand
Toys, Forward Industries, Inc. and completed a leveraged buyout of S&S Industries, Inc. where he also served as President from 1996 to 1998.
Prior to founding Atlantis, Mr. Ellin worked in Institutional Sales at LF Rothschild and prior to that he was the Manager of Retail Operations at
Lombard Securities. Mr. Ellin is Chief Executive Officer of Zoo Entertainment, Inc. and President of Noble Medical Technologies, Inc. Mr. Ellin
currently sits on the boards of Command Security Corporation, Lateral Media, Inc., Zoo Entertainment, Inc., Noble Medical Technologies, Inc.
and New Motion, Inc. d/b/a Artrinsic, Inc. Mr. Ellin also serves on the Board of Governors at Cedars-Sinai Hospital. Mr. Ellin received his B.A.
from Pace University. The Company selected Mr. Ellin as Co-Chairman of the Board based, in part, on his experience in institutional sales at LF
Rothschild and as a manager of retail operations at Lombard Securities. His invaluable experience in the retail equity and debt markets will assist
the Company in efforts to raise additional capital to fund operations and expand its operations.
Paul Schaeffer. Mr. Schaeffer has served on our Board of Directors since August 2007 as Vice-Chairman. He is Vice Chairman, Chief
Operating Officer and Co-Founder of Mandalay Entertainment. Along with Peter Guber, Mr. Schaeffer is responsible for all aspects of the
motion picture and television business, focusing primarily on the corporate and business operations of those entities. Prior to forming Mandalay
Entertainment, Mr. Schaeffer was the Executive-Vice President of Sony Pictures Entertainment, overseeing the worldwide corporate operations
for SPE including Worldwide Administration, Financial Affairs, Human Resources, Corporate Affairs, Legal Affairs and Corporate
Communications. During his tenure, Mr. Schaeffer also had supervisory responsibility for the $105 million rebuilding and renovation of Sony
Pictures Studios. Mr. Schaeffer is a member of the Academy of Motion Pictures, Arts, & Sciences. A veteran of 20 years of private law practice,
Mr. Schaeffer joined SPE from Armstrong, Hirsch and Levine, where he was a senior partner working with corporate entertainment clients. He
spent two years as an accountant with Arthur Young & Company in Philadelphia. He graduated from the University of Pennsylvania Law
School and received his accounting degree from Pennsylvania State University. The Company considered Mr. Schaeffer to be a valuable resource
when it selected him as a director based on having served for more than 5 years as the Chairman of the Finance Committee, and a member of the
Board of Trustees of Childrens Hospital Los Angeles, as well as a member of its Audit Committee, Compensation Committee and Executive
Committee for more than five years.
40
Adi McAbian. Mr. McAbian has served on our Board of Directors since February 2008 and is a co-founder and former Managing Director of
Twistbox since May 2003. As the Managing Director of Twistbox, Mr. McAbian was responsible for global sales and carrier relationships that
span the globe. Mr. McAbian’s background includes experience as an entrepreneur and executive business leader with over 12 years experience
as a business development and sales manager in the broadcast television industry. Mr. McAbian is experienced in entertainment and media rights
management, licensing negotiation and production, and has previously secured deals with AOL/Time Warner, Discovery Channel, BMG, RAI,
Disney, BBC and Universal among others. He has been responsible for facilitating strategic collaborations with over 60 mobile operators
worldwide on content standards and minor protection legislation and he has been a frequent speaker, lecturing on adult mobile content business
and management issues throughout Europe and the U.S., including conferences organized by iWireless World, Mobile Entertainment Forum, and
Informa. The Company considered Mr. McAbian to be a valuable addition to the Board based on his expertise and frequent lecturing in the
emerging mobile entertainment business, as well as having served on the Mobile Marketing Associations’ Consumer Best Practices Committee.
Audit Committee
The Company’s audit committee was established during the fiscal year ended March 31, 2010 and consists of Paul Schaeffer and
Robert Ellin. Mr. Schaeffer has been designated as the Chairman of the committee and the financial expert within the rules and regulations of the
SEC. The committee met regularly during the course of the year, including regular meetings with the company’s auditors, and monitors the
Company’s compliance with its obligations under the assessment of internal control over financial reporting.
Nominating Committee
The entire Board of Directors currently operates as our Nominating Committee.
Code of Ethics
We intend to establish a code of ethics.
Section 16(A) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our officers, directors, and persons owning more than ten percent of a registered class of our
equity securities (“ten percent stockholders”) to file reports of ownership and changes of ownership with the SEC. Officers, directors, and ten-
percent stockholders are required by the SEC regulations to furnish us with copies of all Section 16(a) reports they file with the SEC. To the best
of our knowledge, based solely on review of the copies of such reports and amendments thereto furnished to us, we believe that during the fiscal
year ended March 31, 2010, all Section 16(a) filing requirements applicable to our officers, directors, and ten percent stockholders were met
except for the following: one Form 4 report was not timely filed by Trinad Capital Master Fund, Ltd and Robert Ellin with respect to one
transaction.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the total compensation paid during our fiscal years ended March 31, 2009 and
March 31, 2010, for our principal executive officer and two most highly compensated executive officers:
41
Position
Period
Salary
($)
Bonus
($)
Stock
($)
Option All Other
($)
($)
Total
($)
Ray Schaaf
President (appointed 10/27/09)
Ian Aaron
Former CEO of Twistbox (until
10/7/09)
Jonathan Cresswell
Co-Managing Director of AMV
Nathaniel MacLeitch
Co-Managing Director of AMV
Year ended March 31,
2010
Year ended March 31,
2009
Year ended March 31,
2010
Year ended March 31,
2009
Year ended March 31,
2010
Year ended March 31,
2009
Year ended March 31,
2010
Year ended March 31,
2009
105,128
-
296,025
314,163
159,660
-
159,660
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
61,363
166,491
-
-
14,208
310,233
23,457
337,620
496,927
656,587
4,774
4,774
496,927
656,587
2,798
2,798
Mr. Schaaf was appointed as President of the Company on October 27, 2009 following a period of acting in a consulting capacity to the
Company. Amounts disclosed as salary represent salary paid in his capacity as President, while amounts disclosed as “All Other” include fees
prior to his appointment as President and other benefits paid.
Mr. Aaron resigned his position as Chief Executive Officer of Twistbox on October 10, 2009. In connection with Mr. Aaron’s
resignation, the Company, Twistbox and Mr. Aaron entered into a Severance and Release Agreement (the “Severance Agreement”), dated as of
October 7, 2009. Pursuant to the Severance Agreement, the Company agreed to extend the time period during which Mr. Aaron may exercise his
vested stock options to purchase the Company’s common stock, until the earlier of September 30, 2010, and 90 days following the date that Mr.
Aaron shall first be eligible to sell the shares of common stock under a registration statement that has been declared effective by the SEC. The
Company also agreed that 157,422 shares of common stock that were issued to Mr. Aaron pursuant to a restricted stock agreement dated March
16, 2009, that are the total number of shares subject to forfeiture as a result of his termination of service, shall not be forfeited as of the
termination date and that such right of forfeiture shall be amended so that it lapses upon the earlier of March 31, 2010, and a change in control,
provided that Mr. Aaron does not breach certain provisions of the Severance Agreement prior to such date.
The Severance Agreement also provided that the Company issue to Mr. Aaron 79,938 shares of common stock on March 31, 2010 in
full satisfaction of Mr. Aaron’s accrued, but unused, paid vacation days, provided that Mr. Aaron did not breach certain provisions of the
Severance Agreement and that the Company will pay Mr. Aaron’s, and his eligible covered dependents’, COBRA continuation insurance
coverage premiums for a period of six months ending on April 7, 2010. Mr. Aaron was also prohibited from selling or otherwise transferring
any of his shares of common stock without the prior written consent of the Company for a period ending on the March 31, 2010.
Mr. Aaron’s compensation in both years included stock granted in lieu of cash salary foregone. In the year ended March 31, 2010 the
amount disclosed as salary includes $286,425 of stock compensation, while in the year ended March 31, 2009 $182,130 of salary represented
stock compensation for salary foregone.
Mr. Cresswell and Mr. MacLeitch served as the Co-Managing Directors of AMV during the year ended March 31, 2010. During this
period they received a salary, and also received payments in connection with an earn-out formula which was part of the Stock Purchase
Agreement for the acquisition of AMV Holding Limited. These payments are included under “All Other”.
Other than as described above, we have no plans or arrangements with respect to remuneration received or that may be received by our
named executive officers to compensate such officers in the event of termination of employment (as a result of resignation, retirement, change of
control) or a change of responsibilities following a change of control.
OUTSTANDING EQUITY AWARDS AT THE PERIOD ENDED MARCH 31, 2010
The following table presents information regarding outstanding options held by certain of our executive officers as of March 31, 2010.
42
Name
Ian Aaron, Former Chief
Executive Officer of Twistbox (1)
Number of Securities
Underlying Unexercised
Options
(#)
Exercisable
Number of Securities
Underlying Unexercised
Options
(#)
Unexercisable
Equity Incentive Plan Awards:
Number of Securities
Underlying Unexercised
Uneraned Options
Option Exercise Price Option Expiration
(#)
($)
Date
54,725
400,000
-
-
-
-
0.48
4.75
1/17/2016
2/12/2018
(1) Twistbox’s board of directors granted Mr. Aaron the options pursuant to the terms of the Twistbox 2006 Stock Incentive Plan on January
17, 2006 in connection with his employment as Chief Executive Officer of Twistbox. The options have a 10-year term and are exercisable at a
price of $0.35 per share. Upon consummation of the Merger, all of the options held by Mr. Aaron, became immediately exercisable for 54,725
shares of NeuMedia common stock. In connection with the Merger, the Board of Directors granted Mr. Aaron the options pursuant to the Plan
on February 12, 2008 as partial compensation in connection with Mr. Aaron entering into an amendment to his employment agreement with
Twistbox. One-third of the options were immediately exercisable upon grant, an additional one-third became exercisable on February 12, 2009
and the remaining options became exercisable on February 12, 2010.
The following table presents information regarding outstanding compensation paid to our directors during the fiscal year ended March
DIRECTOR COMPENSATION
31, 2010.
Name
Paul Schaeffer
Richard Spitz (2)
Peter Guber
Robert Ellin
Barry Regenstein (3)
Keith McCurdy (2)
Ray Schaaf
Adi McAbian
Jay Wolf (4)
Fees Earned or
Paid in Cash (1)
($)
Option Awards
($)
All Other
Compensation
($)
Total ($)
$
$
$
$
$
$
$
$
$
-
28,000
-
-
-
28,000
-
20,000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
$
$
$
$
$
$
$
-
28,000
-
-
-
28,000
-
20,000
-
(1) Amounts paid to Richard Spitz, Keith McCurdy, and Adi McAbian represent fees in connection with their work for the Company’s Special
Committee reviewing restructuring options.
(2) Messrs. Spitz and McCurdy resigned as members of our board of directors on April 7, 2010.
(3) Mr. Regenstein resigned as a member of our board of directors on November 18, 2009.
(4) Mr. Wolf resigned as a member of our board of directors on December 3, 2009.
Compensation Policies and Practices As They Relate to the Company’s Risk Management
The Company believes that its compensation policies and practices for all employees, including executive officers, do not create risks
that are reasonably likely to have a material adverse effect on the Company
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Reference is made to the information contained in the Equity Compensation Plan Information table contained in Item 5 of this
Annual Report on Form 10-K, which is incorporated herein by reference.
The following table sets forth certain information regarding the beneficial ownership of our common stock as of July 8, 2010, by (i)
each of our current named executive officers and directors, (ii) all persons, including groups, known to us to own beneficially more than five
percent (5%) of the outstanding common stock, and (iii) all named executive officers and directors as a group. As of July 14, 2010, there were a
total of 35,573,502 shares of common stock outstanding.
43
Name and Address (1)
Trinad Capital Master Fund, Ltd.(3)
Robert S. Ellin(3)
Peter Guber (4)
David E. Smith (5)
Lyrical Partners, L.P.(6)
Paul Schaeffer (7)
Adi McAbian (8)
Spark Capital, L.P. (9)
Ray Schaaf
Ian Aaron(10)
Jonathan Cresswell
Nathaniel MacLeitch
Number of Shares
Beneficially Owned (2) Percentage Owned(%)
4,643,132
5,143,132
6,414,124
4,749,698
2,784,121
800,000
966,813
2,857,144
-
1,773,410
-
-
10.6%
11.8%
14.7%
10.9%
6.4%
1.8%
2.2%
6.5%
-
4.1%
-
-
All directors and named executive officers as a group (8 individuals)
15,097,479
34.5%
(1) Except as otherwise indicated, the address of each of the following persons is c/o NeuMedia, Inc., 2000 Avenue of the Stars, Suite 410, Los
Angeles, CA 90067.
(2) Except as specifically indicated in the footnotes to this table, the persons named in this table have sole voting and investment power with
respect to all shares of common stock shown as beneficially owned by them, subject to community property laws where applicable. Beneficial
ownership is determined in accordance with the rules of the Commission. In computing the number of shares beneficially owned by a person and
the percentage ownership of that person, shares of common stock subject to options, warrants or rights held by that person that are currently
exercisable or exercisable, convertible or issuable within 60 days of July 14, 2010, are deemed outstanding. Such shares, however, are not
deemed outstanding for the purpose of computing the percentage ownership of any other person.
(3) In the case of Robert S. Ellin, consists of 4,262,233 shares of common stock, 280,899 shares of common stock issuable upon exercise of
warrants, 500,000 shares of common stock issuable upon exercise of options and 100,000 shares of common stock issuable upon conversion of
100,000 shares of Series A Convertible Preferred Stock, assuming a conversion on a one-for-one basis of the Series A Convertible Preferred
Stock. The number of shares of common stock into which the Series A Convertible Preferred Stock is convertible is subject to adjustment for
stock splits, stock dividends, reorganizations, the issuance of dividends, and other events specified in our certificate of incorporation. Trinad
Capital Master Fund, Ltd. is the beneficial owner of 4,643,132 shares of the common stock, which includes 4,262,233 shares of common stock
and 280,899 shares of common stock issuable upon exercise of warrants held by Trinad Capital Master Fund, Ltd., at an exercise price of $2.67
per share. Trinad Management, LLC (as the manager of the Trinad Capital Master Fund, Ltd. and Trinad Capital LP) is deemed the beneficial
owner of 4,643,132 shares of the common stock which includes 4,262,233 shares of the common stock held by Trinad Capital Master Fund, Ltd.
and 100,000 shares of common stock issuable upon conversion of 100,000 shares of Series A Convertible Preferred Stock held by Trinad
Management LLC, assuming conversion price $1.00 per share. Trinad Management, LLC disclaims beneficial ownership of the shares of
common stock directly and beneficially owned by Trinad Capital Master Fund, Ltd. Robert S. Ellin, the managing director of and portfolio
manager for Trinad Management, LLC and the managing director of Trinad Advisors II LLC is deemed the beneficial owner of 5,143,132 shares
of the common stock which includes 4,262,233 shares of the common stock held by Trinad Capital Master Fund, Ltd. and 100,000 shares of
common stock issuable upon conversion of 100,000 shares of Series A Convertible Preferred Stock held by Trinad Management LLC and
options to purchase 500,000 shares of common stock of the Issuer owned by Mr. Ellin individually. Robert S. Ellin disclaims beneficial
ownership of the shares of common stock directly and beneficially owned by Trinad Capital Master Fund, Ltd. except to the extent of his
pecuniary interests therein. Trinad Capital LP (as the owner of 84.53% of the shares of Trinad Capital Master Fund, Ltd. as of September 30,
2009) and Trinad Advisors II, LLC (as the general partner of Trinad Capital LP), are each deemed the beneficial owner of 3,602,866
(representing 84.53% of the shares of the 4,262,233 shares of the common stock held by Trinad Capital Master Fund, Ltd.). Trinad Advisors II,
LLC disclaims beneficial ownership of the shares of common stock. Trinad Management, LLC and Robert S. Ellin have shared power to direct
the vote and shared power to direct the disposition of the 4,643,132 shares of common stock. The address of each of the beneficial owners is
2000 Avenue of the Stars, Suite 410, Los Angeles, CA 90067.
44
(4) The securities indicated are held indirectly by Mr. Guber through the Guber Family Trust for which he serves as a trustee. Mr. Guber
disclaims beneficial ownership of these securities except to the extent of his pecuniary interest.
(5) David E. Smith, Coast Investment Management, LLC, The Coast Fund, LP and Coast Medina, LLC share voting and dispositive power with
respect to 4,749,698 shares of common stock. David E. Smith holds sole voting and dispositive power with respect to 2,232,000 shares of
common stock. The address for each of the beneficial owners is 2450 Colorado Ave., Suite 100 E. Tower, Santa Monica, CA 90404.
(6) Lyrical Multi-Manager Fund, LP beneficially owns 2,535,321 shares of common stock and Lyrical Multi-Manager Offshore Fund Ltd.
beneficially owns 248,800 shares of common stock of the company. Lyrical Partners, L.P., as the investment manager of Lyrical Multi-Manager
Fund, LP and Lyrical Multi-Manager Offshore Fund Ltd., has the sole power to vote and dispose of the 2,784,121 shares of common stock held
collectively by Lyrical Multi-Manager Fund, LP and Lyrical Multi-Manager Offshore Fund Ltd. This information is based solely on a Schedule
13D filed by Jeffrey Keswin with the Commission on February 13, 2007, which reported ownership as of September 12, 2006. The address for
Lyrical Multi-Manager Fund is 405 Park Avenue, 6th Floor, New York, New York 10022.
(7) Consists of 500,000 shares of common stock and 100,000 shares of common stock underlying options. The securities indicated are held
indirectly by Mr. Schaeffer through the Paul and Judy Schaeffer Living Trust for which he serves as a trustee. Mr. Schaeffer disclaims beneficial
ownership of these securities except to the extent of his pecuniary interest.
(8) Includes 54,725 shares of common stock underlying options. The address for Mr. McAbian is c/o Twistbox Entertainment, Inc., 14242
Ventura Blvd., 3 rd Floor, Sherman Oaks, CA 91423.
(9) Consists of: (i) 2,779,986 shares of common stock held by Spark Capital, (ii) 49,357 shares of common stock held by Spark Founders
Fund, and (iii) 27,801 shares of common stock held by Spark Member Fund. Messrs. Dagres, Politi, Miller, Sabet and Conway are the sole
managing members of Spark Management, the sole general partner of each of Spark Capital, Spark Member Fund and Spark Founders Fund.
Each of Spark Member Fund and Spark Founders Fund invests alongside Spark Capital in investments made by Spark Capital. This information
is based solely on a Schedule 13G filed with the Commission on February 21, 2008 by Spark Capital, L.P. (“Spark Capital”), Spark
Management Partners, LLC (“Spark Management”), Spark Member Fund, L.P. (“Spark Member Fund”), Spark Capital Founders’ Fund, L.P.
(“Spark Founders Fund”), Todd Dagres, Santo Politi, Dennis A. Miller, Bijan R. Sabet and Paul J. Conaway. The address for Spark Capital is
137 Newbury Street, Boston, Massachusetts 02116.
(10) Consists of 1,318,685 shares of common stock and 454,725 shares of common stock underlying options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
NeuMedia
Management Agreement
On September 14, 2006, we entered into a management agreement (the “Management Agreement”) with Trinad Management, the
manager of Trinad Capital Master Fund, which is one of our principal stockholders. Pursuant to the terms of the Management Agreement, which
is for a term of five years, Trinad Management will provide certain management services, including without limitation the sourcing, structuring
and negotiation of a potential business combination transaction involving the Company. We have agreed to pay Trinad Management a
management fee of $90,000 per quarter, plus reimbursement of all expenses reasonably incurred by Trinad Management in connection with the
provision of management services. Either party may terminate with prior written notice. However, in the event the Company terminates the
Management Agreement, we shall pay to Trinad Management a termination fee of $1,000,000. For the year ended March 31, 2010 the Company
paid management fees under the agreement of $360,000.
In March 2008, the Company entered into a month to month lease for office space with Trinad Management for rent of $9,000 per
month subsequently reduced to $5,000 per month. Rent expense in connection with this lease was $99,000 for the year ended March 31, 2010.
Robert Ellin, our director, is the managing director of and portfolio manager for Trinad Management.
45
Senior Secured Convertible Notes
On June 21, 2010, we sold and issued $2,500,000 of Senior Secured Convertible Notes due June 21, 2013 (the “New Senior Secured
Notes”) to certain significant stockholders, comprised of a $1,500,000 New Senior Secured Note sold and issued to Trinad Capital Master Fund
and a $1,000,000 New Senior Secured Note sold and issued to the Guber Family Trust (the “Offering”). Trinad Capital Master Fund is one of
our principal stockholders and an affiliate of our director Robert Ellin. Peter Guber, our director, serves as trustee of the Guber Family Trust.
The New Senior Secured Notes have a three year term and bear interest at a rate of 10% per annum payable in arrears semi-annually.
Notwithstanding the foregoing, at any time on or prior to the 18th month following the original issue date of the New Senior Secured Notes,
NeuMedia 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 NeuMedia at a conversion price of US$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 NeuMedia and its subsidiaries. The Amended ValueAct Note
is subordinated to the New Senior Secured Notes.
Each purchaser of a New Senior Secured Note also received a warrant (“Warrant”) to purchase shares of our common stock at an exercise price
of US$0.25 per share, subject to adjustment. For each $50,000 of New Senior Secured Notes purchased, the purchaser received a Warrant to
purchase 166,667 shares of common stock. Each Warrant has a five year term.
In connection with the Offering, certain of our significant stockholders, David Smith, Coast Medina, LLC, Spark Capital and Lyrical Multi-
Manager Fund L.P., have the right to purchase on or prior to July 15, 2010, up to an aggregate of $600,000 of the New Senior Secured Notes
purchased by Trinad Capital Master Fund and the Guber Family Trust, upon the same the same terms and conditions described above.
Twistbox
Twistbox engages in various business relationships with its stockholders and officers and their related entities. The significant
relationships are as follows:
Lease of Premises
Twistbox leases its primary offices in Los Angeles, California from Berkshire Holdings, LLC, a company with common ownership by
Adi McAbian, a director of NeuMedia and a common stockholder. Amounts paid in connection with this lease were $426,400 and $382,180 for
the years ended March 31, 2010 and 2009 respectively.
Loans
As part of the Merger, NeuMedia agreed to guarantee up to $8,250,000 of Twistbox’s outstanding debt to 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 the ValueAct Note in the amount of $16,500,000 and the Warrant
which entitled ValueAct to purchase from Twistbox up to a total of 2,401,747 shares of Twistbox’s common stock. In connection
therewith, 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 entitled 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 entitled 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. Both warrants were scheduled to expire on July
30, 2011. We also entered into a Guaranty with ValueAct whereby NeuMedia agreed to guarantee Twistbox’s payment to ValueAct of up to
$8,250,000 of principal under the ValueAct 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 maintain a cash balance of not less than
$2,500,000 at all times and NeuMedia is required to maintain a cash balance of not less than $4,000,000 at all times. ValueAct is one of our
greater than 5% stockholders.
On October 23, 2008, in connection with the AMV Acquisition, NeuMedia, Twistbox and ValueAct entered into a Second Amendment
to the ValueAct Note in the amount of $16,500,000, which among other things, provided for a payment in kind election at the option of
Twistbox, modified the financial covenants set forth in the ValueAct Note to require that NeuMedia and Twistbox maintain certain minimum
combined cash balances and provides for certain covenants with respect to the indebtedness of NeuMedia 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, NeuMedia
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.
46
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 August 14, 2009, NeuMedia, 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%.
On January 25, 2010, NeuMedia, 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 NeuMedia 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 NeuMedia must maintain was increased to $1,600,000.
On February 25, 2010, Twistbox received a letter (the “Letter”) from ValueAct alleging certain events of default with respect to the
ValueAct Note. The Letter claimed that an event of default had occurred and was continuing under the ValueAct Note as result of certain alleged
defaults, including the failure to provide weekly evidence of compliance with certain of Twistbox’s and NeuMedia’s covenants under the
ValueAct Note, the failure to comply with limitations on certain payments by NeuMedia and each of its subsidiaries, and the failure of Twistbox
and Neumedia to maintain minimum cash balances in deposit accounts of each of Twistbox and Neumedia. The Letter also claimed that the
Waiver had ceased to be effective as a result of the alleged failure of NeuMedia to comply with the conditions set forth in the Waiver. On May
10, 2010, Twistbox received from ValueAct a Notice of Event of Default and Acceleration (“Notice”) in which ValueAct stated that an event of
default had occurred under the ValueAct Note as a result of Twistbox’s and NeuMedia’s failure to comply with the cash balance covenant under
the ValueAct Note and, therefore, ValueAct accelerated all outstanding amounts payable by Twistbox under the ValueAct Note. In connection
with the Notice, ValueAct instituted an administration proceeding in the United Kingdom against AMV.
On June 21, 2010, NeuMedia sold all of the operating subsidiaries of AMV to an entity controlled by ValueAct and certain of AMV’s
founders in exchange for the release of $23,000,000 of secured indebtedness, comprising of a release of all amounts due and payable under the
AMV Note and all amounts due and payable under the VAC Note except for $3,500,000 in principal. In connection with the Restructure, the
ValueAct Note, the Value Act Security Agreement and the Value Act Guaranty were amended and restated in their entirety. In addition, all
warrants and common stock of NeuMedia held by ValueAct were cancelled and all warrants and common stock of NeuMedia held by AMV
founders Nate MacLeitch and Jonathan Cresswell were repurchased by NeuMedia for a price of $0.02 per share.
The Amended ValueAct Note matures on June 21, 2013 and bears interest at 10% payable in cash semi-annually in arrears on each
January 1 and July 1 that the Amended ValueAct Note is outstanding. Twistbox may prepay the Amended ValueAct Note in whole or in part at
any time without penalty. Notwithstanding the foregoing, at any time on or prior to January 1, 2012, Twistbox 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 January 1,
2012 be added to the principal due under the Amended ValueAct Note. In the event of a Fundamental Change (as defined therein) of Twistbox,
the holder of the Amended ValueAct Note will have the right for a period of thirty days to require Twistbox to repurchase the Amended
ValueAct Note at a price equal to 100% of the outstanding principal and all accrued and unpaid interest.
The above description of the Restructure does not purport to be complete and is qualified in its entirety by reference to the Current
Report on Form 8-K filed by us on June 23, 2010, which is incorporated by reference herein.
Director Independence
Of the 5 members on our Board of Directors, none of the directors are independent directors based on the listing standards of the NYSE
Alternext.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Effective May 28, 2008, the Board approved the engagement of Grobstein Horwath & Company LLP (“ Grobstein” ) as the Company’s
new independent registered public accounting firm to provide audit services for the Company. We engaged Grobstein to audit our financial
statements for the Transition Period Ended March 31, 2008. Raiche Ende Malter & Co. LLP conducted the reviews of our annual financial
statements and other audit related services for the fiscal years ended December 31, 2007 and 2006.
47
Effective February 15, 2009, the Company's Board of Directors approved the engagement of Crowe Horwath LLP ("Crowe") as the
Company's new independent certified registered public accounting firm due to the acquisition of certain assets of Grobstein, the Company's
former independent certified public accounting firm. Grobstein resigned as the Company's independent certified public accounting firm
simultaneous with the engagement of Crowe.
On June 2, 2009, the Company dismissed Crowe as the Company's independent registered public accounting firm. The decision to
change accountants was approved by the Company's Board of Directors. No reports issued by Crowe during the time that it served as the
Company's principal accountant, from February 15, 2009 to June 2, 2009, contained an adverse opinion or disclaimer of opinion, nor were any
reports issued by Crowe qualified or modified as to uncertainty, audit scope, or accounting principles. During the time that Crowe served as the
Company's principal accountant, there were no disagreements with Crowe on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Crowe, would have caused Crowe to make
reference to the subject matter of the disagreements in connection with its reports on the Company's financial statements during such periods.
None of the events described in Item 304(a)(1)(iv) or (v) of Regulation S-K occurred during the period that Crowe served as the Company's
principal accountant.
Effective June 2, 2009, the Company engaged Singer Lewak, LLP ("Singer") as the Company's new independent registered public
accounting firm to provide audit services for the Company. During the period that Crowe served as the Company's principal accountant, the
Company did not consult with Singer regarding the application of accounting principles to a specific transaction, or type of audit opinion that
might be rendered on the Company's financial statements and no written or oral advice was provided by Singer that was a factor considered by
the Company in reaching a decision as to accounting, auditing or financial reporting issues, and the Company did not consult with Singer on or
regarding any of the matters set forth in Item 304(a)(2)(i) or (ii) of Regulation S-K.
The Company subsequently engaged Crowe to complete certain specific audit procedures related to amended historical filings.
Fees
Aggregate fees for professional services rendered to us by Singer, MacIntrye Hudson LLP, Grobstein and Raiche Ende Malter & Co.
LLP for the Year Ended March 31, 2009 were:
Year
Ended
March
31,
2009
400,436
3,695
8,840
17,679
$ 430,650
Audit fees
Audit related fees
Tax fees
All other fees
Total
Aggregate fees for professional services rendered to us by Singer and Crowe for the Year Ended March 31, 2010 were:
Year
Ended
March
31,
2010
272,674
137,971
-
-
$ 410,645
Audit fees
Audit related fees
Tax fees
All other fees
Total
48
Policy on Pre-Approval of Audit and Permissible Non-audit Services of Independent Auditors
Consistent with the SEC policies regarding auditor independence, the Board of Directors has responsibility for appointing, setting
compensation and overseeing the work of the independent auditor. In recognition of this responsibility, the Board of Directors has established a
policy to pre-approve all audit and permissible non-audit services provided by the independent auditor.
Prior to engagement of the independent auditor for the next year’s audit, management will submit an aggregate of services expected to be
rendered during that year for each of the following four categories of services to the Board of Directors for approval.
1. Audit services include audit work performed in the preparation of financial statements, as well as work that generally only the
independent auditor can reasonably be expected to provide, including comfort letters, statutory audits, and attest services and consultation
regarding financial accounting and/or reporting standards.
2. Audit-Related services are for assurance and related services that are traditionally performed by the independent auditor, including
due diligence related to mergers and acquisitions, employee benefit plan audits, and special procedures required to meet certain regulatory
requirements.
3. Tax services include all services performed by the independent auditor’s tax personnel except those services specifically related to
the audit of the financial statements, and includes fees in the areas of tax compliance, tax planning, and tax advice.
4. Other Fees are those associated with services not captured in the other categories.
Prior to engagement, the Board of Directors pre-approves these services by category of service. The fees are budgeted and the Board of
Directors requires the independent auditor and management to report actual fees versus the budget periodically throughout the year by category of
service. During the year, circumstances may arise when it may become necessary to engage the independent auditor for additional services not
contemplated in the original pre-approval. In those instances, the Board of Directors requires specific pre-approval before engaging the
independent auditor.
The Board of Directors may delegate pre-approval authority to one or more of its members. The member to whom such authority is
delegated must report, for informational purposes only, any pre-approval decisions to the Board of Directors at its next scheduled meeting.
Our Board of Directors pre-approved the retention of the independent auditors for all audit and audit-related services during fiscal 2009
and 2010.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Annual Report on Form 10-K.
(1)Financial Statements: The list of financial statements required by this item is set forth in Item 8.
(2)Financial Statement Schedules: All financial statement schedules called for under Regulation S-X are not required under the related
instructions, are not material or are not applicable and, therefore, have been omitted or are included in the consolidated financial statements
or notes thereto included elsewhere in this Annual Report on Form 10-K.
(3)Exhibits: See Item 15(b) below.
(b) The following documents are filed as exhibits to this Annual Report on Form 10-K or have been previously filed with the SEC as
indicated and are incorporated herein by reference:
Exhibit
No.
2.1
2.2
2.3
Amended Disclosure Statement filed with the United States Bankruptcy Court for the Southern District of New York. 1
Description
Amended Plan of Reorganization filed with the United States Bankruptcy Court for the Southern District of New York 1
Order Confirming Amended Plan of Reorganization issued by the United States Bankruptcy Court for the Southern District of
New York. 1
49
2.4
2.5
2.6
2.7
2.8
3.1
3.2
4.1
4.2
4.3
4.4
Plan and Agreement of Merger, dated September 27, 2007, of NeuMedia Media, Inc., a Delaware corporation, and Mediavest,
Inc., a New Jersey corporation. 2
Certificate of Merger merging Mediavest, Inc., a New Jersey corporation, with and into NeuMedia Media, Inc., a Delaware
corporation, as filed with the Secretary of State of the State of Delaware. 2
Certificate of Merger merging Mediavest, Inc., a New Jersey corporation, with and into NeuMedia Media, Inc., a Delaware
corporation, as filed with the Secretary of State of the State of New Jersey. 2
Agreement and Plan of Merger, dated as of December 31, 2007, by and among NeuMedia Media, Inc., Twistbox Acquisition,
Inc., Twistbox Entertainment, Inc. and Adi McAbian and Spark Capital, L.P. 3
Amendment to Agreement and Plan of Merger, dated as of February 12, 2008, by and among NeuMedia Media, Inc., Twistbox
Acquisition, Inc., Twistbox Entertainment, Inc. and Adi McAbian and Spark Capital, L.P. 4
Certificate of Incorporation. 2
Bylaws. 2
Form of Warrant to Purchase Common Stock dated September 14, 2006. 5
Form of Warrant to Purchase Common Stock dated October 12, 2006. 6
Form of Warrant to Purchase Common Stock dated December 26, 2006. 7
Form of Warrant Issued to David Chazen to Purchase Common Stock dated August 3, 2006. 8
4.5
Form of Warrant issued to Investors, dated October 23, 2008. 9
4.6
4.7
4.8
4.9
Warrant dated September 23, 2008 issued to Vivid Entertainment, LLC. 23
Form of Warrant issued to Investors, dated June 21, 2010. 25
Form of Senior Secured Convertible Note due June 21, 213. 25
Amended and Restated Senior Subordinated Secured Note due June 21, 2013, by Twistbox Entertainment, Inc. in favor of
ValueAct SmallCap Master Fund, L.P. 25
10.1
2007 Employee, Director and Consultant Stock Plan. 2
10.1.1 Form of Non-Qualified Stock Option Agreement. 2
10.2
Amendment to 2007 Employee, Director and Consultant Stock Plan. 4
10.3
Second Amendment to 2007 Employee, Director and Consultant Stock Plan. 10
10.4
Form of Restricted Stock Agreement. 11
10.5
Twistbox 2006 Stock Incentive Plan. 4
10.6
Form of Stock Option Agreement for Twistbox 2006 Stock Incentive Plan. 4
10.7
Loan Agreement with Trinad Capital Master Fund, Ltd., dated March 20, 2006. 12
10.8
Form of Subscription Agreement between the Company and certain investors listed thereto dated September 14, 2006. 5
10.9
Form of Subscription Agreement between the Company and certain investors listed thereto dated October 12, 2006. 6
10.10
Series A Convertible Preferred Stock Purchase Agreement dated October 12, 2006 between the Company and Trinad
Management, LLC. 6
50
10.11 Form of Subscription Agreement between the Company and certain investors listed thereto dated December 26, 2006. 7
10.12 Form of Subscription Agreement between the Company and certain investors listed thereto. 13
10.13 Employment Letter, by and between the Company and James Lefkowitz, dated as of June 28, 2007. 14
10.14 Salary Reduction Letter by and between Mandalay Media, Inc. and James Lefkowitz, dated March 16, 2009. 11
10.15 Securities Purchase Agreement, dated July 30, 2007, by and among Twistbox Entertainment, Inc., the Subsidiary
Guarantors and ValueAct SmallCap Master Fund, L.P. 4
10.16 Guarantee and Security Agreement, dated July 30, 2007 by and among Twistbox Entertainment, Inc., each of the
Subsidiaries party thereto, the Investor party thereto and ValueAct SmallCap Master Fund, L.P. 4
10.17 Control Agreement, dated July 30, 2007, by and among Twistbox Entertainment. Inc. and ValueAct SmallCap Master
Fund, L.P. to East West Bank. 4
10.18 Trademark Security Agreement, dated July 30, 2007, by Twistbox, in favor of ValueAct SmallCap Master Fund, L.P. 4
10.19 Copyright Security Agreement, dated July 30, 2007, by Twistbox in favor of ValueAct SmallCap Master Fund, L.P. 4
10.20 Guaranty given as of February 12, 2008, by Mandalay Media, Inc. to ValueAct SmallCap Master Fund, L.P. 4
10.21 Termination Agreement, dated as of February 12, 2008, by and between Twistbox Entertainment, Inc. and ValueAct
SmallCap Master Fund, L.P. 4
10.22 Waiver to Guarantee and Security Agreement, dated February 12, 2008, by and between Twistbox Entertainment, Inc. and
ValueAct SmallCap Master Fund, L.P. 4
10.23 Standard Industrial/Commercial Multi-Tenant Lease, dated July 1, 2005, by and between Berkshire Holdings, LLC and
The WAAT Corp. 4
10.24 Letter Agreement, dated May 16, 2006, between The WAAT Corp. and Adi McAbian. 4
10.25 Amendment to Employment Agreement by and between Twistbox Entertainment, Inc. and Adi McAbian, dated as of
December 31, 2007. 4
10.26 Second Amendment to Employment Agreement, dated February 12, 2008, by and between Twistbox Entertainment, Inc.
and Adi McAbian. 4
10.27 Letter Agreement, dated May 16, 2006 between The WAAT Corp. and Ian Aaron. 4
10.28 Salary Reduction Letter by and between Mandalay Media, Inc. and Ian Aaron, dated March 16, 2009. 11
10.29 Amendment to Employment Agreement, by and between Twistbox Entertainment, Inc. and Ian Aaron, dated as of
December 31, 2007. 4
10.30 Second Amendment to Employment Agreement by and between Twistbox Entertainment, Inc. and Ian Aaron, dated
February 12, 2008. 4
10.31 Employment Agreement, dated May 9, 2006, between Charismatix and Eugen Barteska. 4
10.32 Employment Agreement, dated June 5, 2006, between The WAAT Corp. and David Mandell. 4
10.33 First Amendment to Employment Agreement, by and between Twistbox Entertainment, Inc. and David Mandell, dated
February 12, 2008. 4
10.34 Employment Agreement, dated December 11, 2006 between Twistbox and Russell Burke. 4
10.35 First Amendment to Employment Agreement by and between Twistbox Entertainment, Inc. and Russell Burke, dated
February 12, 2008. 4
51
10.36
Directory Agreement, dated as of May 1, 2003, between Vodafone Global Content Services Limited and The WAAT Corporation. 4
10.37
Contract Acceptance Notice - Master Global Content Reseller Agreement by Vodafone Hungary Ltd. 4
10.38
Master Global Content Agency Agreement, effective as of December 17, 2004, between Vodafone Group Services Limited and The
WAAT Media Corporation. 4
10.39
Letter of Amendment, dated February 27, 2007, by and between WAAT Media Corporation and Vodafone UK Content Services
Limited. 4
10.40
Content Schedule, dated December 17, 2004, by and between WAAT Media Corporation and Vodafone Group Services Limited. 4
10.41
Contract Acceptance Notice - Master Global Content Agency Agreement by Vodafone D2 GmbH. 4
10.42
Contract Acceptance Notice - Master Global Content Agency Agreement by Vodafone Sverige AB. 4
10.43
Master Global Content Reseller Agreement, effective January 17, 2005, between Vodafone Group Services Limited and The
WAAT Corporation. 4
10.44
Contract Acceptance Notice - Master Global Content Agency Agreement by Vodafone New Zealand Limited. 4
10.45
Contract Acceptance Notice - Master Global Content Agency Agreement by Vodafone España, S.A. 4
10.46
Contract Acceptance Notice - Master Global Content Reseller Agreement by Vodafone UK Content Services LTD. 4
10.47
Contract Acceptance Notice - Master Global Content Reseller Agreement by VODAFONE-PANAFON Hellenic
Telecommunications Company S.A. 4
10.48
Content Schedule, dated January 17, 2005, by and between WAAT Media Corporation and Vodafone Group Services Limited. 4
10.49
Contract Acceptance Notice - Master Global Content Agency Agreement by Belgacom Mobile NV. 4
10.50
Content Schedule, dated January 17, 2005, by and between WAAT Media Corporation and Vodafone Group Services Limited. 4
10.51
Contract Acceptance Notice - Master Global Content Agency Agreement by Swisscom Mobile. 4
10.52
Linking Agreement, dated November 1, 2006 between Vodafone Libertel NV and Twistbox Entertainment, Inc. 4
10.53
Agreement, dated as of March 23, 2007, between Twistbox Entertainment, Inc. and Vodafone Portugal - COMUNICAÇÕES
PESSOAIS, S.A 4
10.54
Contract for Content Hosting and Services “Applications and Games Services,” effective August 27, 2007 between Vodafone D2
GmbH and Twistbox Games Ltd & Co. KG. 4
10.55 Partner Agreement, dated August 27, 2007, by and between Vodafone D2 GmbH and Twistbox. 4
10.56
Letter of Amendment, dated February 25, 2006 by and between WAAT Media Corporation and Vodafone UK Content Services
Limited. 4
10.57
Letter of Amendment, dated August 2007, by and between WAAT Media Corporation and Vodafone UK Content Services
Limited. 4
10.58
Content Schedule, dated December 17, 2004, by and between WAAT Media Corporation and Vodafone Group Services Limited. 4
10.59
Consolidated financial statements of Twistbox Entertainment, Inc. for the fiscal years ended March 31, 2006 and March 31, 2007. 4
10.60
Consolidated financial statements of Twistbox Entertainment, Inc. for the six months ended September 20, 2006 and September 30,
2007. 4
10.61
Stock Purchase Agreement, by and among Mandalay Media, Inc., Jonathan Cresswell, Nathaniel MacLeitch and the shareholders of
AMV Holding Limited signatories thereto, dated as of October 8, 2008. 15
52
10.62
Amendment to the Stock Purchase Agreement, between Mandalay Media, Inc. and Nathaniel MacLeitch as the Sellers’
Representative, dated as of October 23, 2008. 9
10.63
Employment Agreement, by and between AMV Holding Limited and Nathaniel MacLeitch, dated as of October 23, 2008. 9
10.64
Employment Agreement, by and between AMV Holding Limited and Jonathan Cresswell (a/k/a Jack Cresswell), dated as of
October 23, 2008. 9
10.65
Securities Purchase Agreement, by and among Mandalay Media, Inc. and the investors set forth therein, dated as of October 23,
2008. 9
10.66
Note, dated October 23, 2008, issued by Mandalay Media, Inc. to Nathaniel MacLeitch, as the Sellers’ Representative. 9
10.67
Management Agreement dated September 14, 2006 between the Company and Trinad Management, LLC. 5
10.68
Commercial Lease Agreement, dated as of March 1, 2007, between Trinad Management LLC and Mediavest, Inc. 16
10.69
First Amendment to Promissory Note, dated August 14, 2009, issued by Mandalay Media, Inc. to Nathaniel MacLeitch, as the
Sellers’ Representative.21
10.70
Severance and Release Agreement, by and among Mandalay Media, Inc., Twistbox Entertainment, Inc. and Ian Aaron, dated as of
October 7, 2009.22
10.71
Waiver to Senior Secured Note by and among Mandalay Media, Inc., Twistbox Entertainment, Inc. and ValueAct SmallCap Master
Fund, L.P., dated as of January 25, 2010.24
10.72
Agreement, dated as of June 21, 2010, between ValueAct SmallCap Master Fund, L.P., NeuMedia, Inc., Jonathan Cresswell,
Nathaniel MacLeitch, Robert Ellin, Trinad Management, LLC, Trinad Capital Master Fund, Ltd. and the Guber Family Trust. 25
10.73
Mutual Release, dated as of June 21, 2010, among ValueAct SmallCap Master Fund, L.P., Antiphony (Management Holdings)
Limited, Nathaniel MacLeitch, Jonathan Cresswell, NeuMedia, Inc., Twistbox Entertainment, Inc., Peter Guber, Robert Ellin, Paul
Schaeffer, Adi McAbian, Richard Spitz, Ray Schaaf, Keith McCurdy, Russell Burke, James Lefkowitz and Trinad Management. 25
10.74
Subordination Agreement, dated as of June 21, 2010, by and between Trinad Capital Master Fund, Ltd., and ValueAct SmallCap
Master Fund, L.P., and each of NeuMedia, Inc. and Twistbox Entertainment, Inc.25
10.74
Deed Poll Release, dated as of June 21, 2010, between NeuMedia, Inc., Twistbox Entertainment, Inc., James Lefkowitz and Russell
Burke.25
10.74
Non-Competition Agreement, dated as of June 21, 2010, among NeuMedia, Inc., Antiphony (Management Holdings)
Limited, Jack Cresswell and Nate MacLeitch.25
10.74
Earn-Out Termination Letter Agreement, dated as of June 21, 2010, among ValueAct SmallCap Master Fund, L.P., NeuMedia, Inc.,
Jonathan Cresswell, Nathaniel MacLeitch and certain other parties.25
10.74
Amended and Restated Guaranty, dated as of June 21, 2010, by NeuMedia, Inc. to ValueAct SmallCap Master Fund, L.P.25
10.74
Letter Agreement, dated as of June 21, 2010, between ValueAct SmallCap Master Fund, L.P., NeuMedia, Inc., Rob Ellin and
Trinad Management, LLC.25
10.74
Amended and Restated Guarantee and Security Agreement, dated as of June 21, 2010, among Twistbox Entertainment, Inc.,
NeuMedia, Inc. and each of its subsidiaries identified on Schedule I as being a subsidiary guarantor, the investors party thereto and
ValueAct SmallCap Master Fund, L.P.25
10.74
Guarantee and Security Agreement, dated as of June 21, 2010, among Twistbox Entertainment, Inc., NeuMedia, Inc., each of the
subsidiaries thereof party thereto, the investors party thereto and Trinad Capital Management, LLC.
16.1
Letter dated May 11, 2007 from Most & Company, LLP to the Securities and Exchange Commission. 17
16.2
Letter regarding change in certifying accountant, dated June 2, 2008 from Raich Ende Malter & Co. LLP. 18
53
16.3
Letter from Grobstein Horwath & Company LLP, dated February 20, 2009. 19
16.4
Letter regarding change in certifying accountant, dated June 4, 2009 from Crowe Horwath, LLP. 20
21
List of Subsidiaries *
31.1
Certification of Ray Schaaf, Principal Executive Officer. *
31.2
Certification of Russell Burke, Principal Financial Officer. *
32.1
Certification of Ray Schaaf, Principal Executive Officer pursuant to U.S.C. Section 1350. *
32.2
Certification of Russell Burke, Principal Financial Officer pursuant to U.S.C. Section 1350. *
* Filed herewith
(1) Incorporated by reference to the Registrant’s Annual Report on Form 10-KSB (File No. 000-10039), filed with the Commission on
December 2, 2005.
(2) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-10039), filed with the Commission on November
14, 2007.
(3) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-10039), filed with the Commission on January 2,
2008.
(4) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-10039), filed with the Commission on February 12,
2008.
(5) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-10039), filed with the Commission on September
20, 2006.
(6) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-10039), filed with the Commission on October 18,
2006.
(7) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-10039), filed with the Commission on January 3,
2007.
(8) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-10039), filed with the Commission on August 9,
2006.
(9) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-10039), filed with the Commission on October 27,
2008.
(10) Incorporated by reference to our Current Report on Form 8-K (File No. 000-10039 ), filed with the Commission on March 28, 2008.
(11) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-10039), filed with the Commission on March 20,
2009.
(12) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-10039), filed with the Commission on March 23,
2006.
(13) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-10039), filed with the Commission on July 30,
2007.
(14) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-10039), filed with the Commission on July 3,
2007.
(15) Incorporated by reference to our Current Report on Form 8-K (File No. 000-10039 ), filed with the Commission on October 15, 2008.
(16) Incorporated by reference to our Registrant’s Transition Report on Form 10-KT (File No. 000-10039), filed with the Commission on July
15, 2008.
(17) Incorporated by reference to our Current Report on Form 8-K (File No. 000-10039 ), filed with the Commission on May 16, 2007.
(18) Incorporated by reference to our Current Report on Form 8-K (File No. 000-10039 ), filed with the Commission on June 2, 2008.
(19) Incorporated by reference to our Current Report on Form 8-K (File No. 000-10039 ), filed with the Commission on February 23, 2009.
(20) Incorporated by reference to our Current Report on Form 8-K (File No. 000-10039 ), filed with the Commission on June 4, 2009.
(21) Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-10039 ), filed with the Commission on August 14, 2009.
(22) Incorporated by reference to our Current Report on Form 8-K (File No. 000-10039 ), filed with the Commission on October 14, 2009.
(23) Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-10039 ), filed with the Commission on November 16, 2009.
(24) Incorporated by reference to our Current Report on Form 8-K (File No. 000-10039 ), filed with the Commission on January 28, 2010.
(25) Incorporated by reference to our Current Report on Form 8-K (File No. 000-10039 ), filed with the Commission on June 23, 2010.
(c) Financial Statement Schedules. Reference is made to Item 15(a)(2) above.
54
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SIGNATURES
Dated: July 14, 2010
NeuMedia, Inc.
By:
/s/ Ray Schaaf
President
(Principal Executive Officer)
Pursuant to the requirements of the Exchange Act, this Report has been signed below by the following persons in the capacities and on the dates
indicated.
Signatures
Title
/s/ Robert S. Ellin
Robert S. Ellin
/s/ Peter Guber
Peter Guber
/s/ Ray Schaaf
Ray Schaaf
/s/ Russell Burke
Russell Burke
/s/ Ray Schaaf
Ray Schaaf
/s/ Paul Schaeffer
Paul Schaeffer
/s/ Adi McAbian
Adi McAbian
Co- Chairman of the Board
Co-Chairman of the Board
President
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Director
Director
Director
55
Date
July 14, 2010
July 14, 2010
July 14, 2010
July 14, 2010
July 14, 2010
July 14, 2010
July 14, 2010
EXHIBIT INDEX
Description
Amended Disclosure Statement filed with the United States Bankruptcy Court for the Southern District of New York. 1
Amended Plan of Reorganization filed with the United States Bankruptcy Court for the Southern District of New York 1
Order Confirming Amended Plan of Reorganization issued by the United States Bankruptcy Court for the Southern District of
New York. 1
Plan and Agreement of Merger, dated September 27, 2007, of NeuMedia Media, Inc., a Delaware corporation, and Mediavest,
Inc., a New Jersey corporation. 2
Certificate of Merger merging Mediavest, Inc., a New Jersey corporation, with and into NeuMedia Media, Inc., a Delaware
corporation, as filed with the Secretary of State of the State of Delaware. 2
Certificate of Merger merging Mediavest, Inc., a New Jersey corporation, with and into NeuMedia Media, Inc., a Delaware
corporation, as filed with the Secretary of State of the State of New Jersey. 2
Agreement and Plan of Merger, dated as of December 31, 2007, by and among NeuMedia Media, Inc., Twistbox Acquisition,
Inc., Twistbox Entertainment, Inc. and Adi McAbian and Spark Capital, L.P. 3
Amendment to Agreement and Plan of Merger, dated as of February 12, 2008, by and among NeuMedia Media, Inc., Twistbox
Acquisition, Inc., Twistbox Entertainment, Inc. and Adi McAbian and Spark Capital, L.P. 4
Certificate of Incorporation. 2
Bylaws. 2
Form of Warrant to Purchase Common Stock dated September 14, 2006. 5
Form of Warrant to Purchase Common Stock dated October 12, 2006. 6
Form of Warrant to Purchase Common Stock dated December 26, 2006. 7
Form of Warrant Issued to David Chazen to Purchase Common Stock dated August 3, 2006. 8
Exhibit
No.
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
3.1
3.2
4.1
4.2
4.3
4.4
4.5
Form of Warrant issued to Investors, dated October 23, 2008. 9
4.6
4.7
4.8
4.9
Warrant dated September 23, 2008 issued to Vivid Entertainment, LLC. 23
Form of Warrant issued to Investors, dated June 21, 2010. 25
Form of Senior Secured Convertible Note due June 21, 213. 25
Amended and Restated Senior Subordinated Secured Note due June 21, 2013, by Twistbox Entertainment, Inc. in favor of
ValueAct SmallCap Master Fund, L.P. 25
10.1
2007 Employee, Director and Consultant Stock Plan. 2
10.1.1 Form of Non-Qualified Stock Option Agreement. 2
10.2
Amendment to 2007 Employee, Director and Consultant Stock Plan. 4
10.3
Second Amendment to 2007 Employee, Director and Consultant Stock Plan. 10
10.4
Form of Restricted Stock Agreement. 11
56
10.5
Twistbox 2006 Stock Incentive Plan. 4
10.6
Form of Stock Option Agreement for Twistbox 2006 Stock Incentive Plan. 4
10.7
Loan Agreement with Trinad Capital Master Fund, Ltd., dated March 20, 2006. 12
10.8
Form of Subscription Agreement between the Company and certain investors listed thereto dated September 14, 2006. 5
10.9
Form of Subscription Agreement between the Company and certain investors listed thereto dated October 12, 2006. 6
10.10
Series A Convertible Preferred Stock Purchase Agreement dated October 12, 2006 between the Company and Trinad
Management, LLC. 6
10.11
Form of Subscription Agreement between the Company and certain investors listed thereto dated December 26, 2006. 7
10.12
Form of Subscription Agreement between the Company and certain investors listed thereto. 13
10.13
Employment Letter, by and between the Company and James Lefkowitz, dated as of June 28, 2007. 14
10.14
Salary Reduction Letter by and between Mandalay Media, Inc. and James Lefkowitz, dated March 16, 2009. 11
10.15
Securities Purchase Agreement, dated July 30, 2007, by and among Twistbox Entertainment, Inc., the Subsidiary Guarantors
and ValueAct SmallCap Master Fund, L.P. 4
10.16
Guarantee and Security Agreement, dated July 30, 2007 by and among Twistbox Entertainment, Inc., each of the Subsidiaries
party thereto, the Investor party thereto and ValueAct SmallCap Master Fund, L.P. 4
10.17
Control Agreement, dated July 30, 2007, by and among Twistbox Entertainment. Inc. and ValueAct SmallCap Master Fund,
L.P. to East West Bank. 4
10.18
Trademark Security Agreement, dated July 30, 2007, by Twistbox, in favor of ValueAct SmallCap Master Fund, L.P. 4
10.19
Copyright Security Agreement, dated July 30, 2007, by Twistbox in favor of ValueAct SmallCap Master Fund, L.P. 4
10.20
Guaranty given as of February 12, 2008, by Mandalay Media, Inc. to ValueAct SmallCap Master Fund, L.P. 4
10.21
Termination Agreement, dated as of February 12, 2008, by and between Twistbox Entertainment, Inc. and ValueAct SmallCap
Master Fund, L.P. 4
10.22
Waiver to Guarantee and Security Agreement, dated February 12, 2008, by and between Twistbox Entertainment, Inc. and
ValueAct SmallCap Master Fund, L.P. 4
10.23
Standard Industrial/Commercial Multi-Tenant Lease, dated July 1, 2005, by and between Berkshire Holdings, LLC and The
WAAT Corp. 4
10.24
Letter Agreement, dated May 16, 2006, between The WAAT Corp. and Adi McAbian. 4
10.25
Amendment to Employment Agreement by and between Twistbox Entertainment, Inc. and Adi McAbian, dated as of
December 31, 2007. 4
10.26
Second Amendment to Employment Agreement, dated February 12, 2008, by and between Twistbox Entertainment, Inc. and
Adi McAbian. 4
10.27
Letter Agreement, dated May 16, 2006 between The WAAT Corp. and Ian Aaron. 4
10.28
Salary Reduction Letter by and between Mandalay Media, Inc. and Ian Aaron, dated March 16, 2009. 11
10.29
Amendment to Employment Agreement, by and between Twistbox Entertainment, Inc. and Ian Aaron, dated as of December 31,
2007. 4
57
10.30
Second Amendment to Employment Agreement by and between Twistbox Entertainment, Inc. and Ian Aaron, dated February 12,
2008. 4
10.31
Employment Agreement, dated May 9, 2006, between Charismatix and Eugen Barteska. 4
10.32
Employment Agreement, dated June 5, 2006, between The WAAT Corp. and David Mandell. 4
10.33
First Amendment to Employment Agreement, by and between Twistbox Entertainment, Inc. and David Mandell, dated February 12,
2008. 4
10.34
Employment Agreement, dated December 11, 2006 between Twistbox and Russell Burke. 4
10.35
First Amendment to Employment Agreement by and between Twistbox Entertainment, Inc. and Russell Burke, dated February 12,
2008. 4
10.36
Directory Agreement, dated as of May 1, 2003, between Vodafone Global Content Services Limited and The WAAT Corporation. 4
10.37
Contract Acceptance Notice - Master Global Content Reseller Agreement by Vodafone Hungary Ltd. 4
10.38
Master Global Content Agency Agreement, effective as of December 17, 2004, between Vodafone Group Services Limited and The
WAAT Media Corporation. 4
10.39
Letter of Amendment, dated February 27, 2007, by and between WAAT Media Corporation and Vodafone UK Content Services
Limited. 4
10.40
Content Schedule, dated December 17, 2004, by and between WAAT Media Corporation and Vodafone Group Services Limited. 4
10.41
Contract Acceptance Notice - Master Global Content Agency Agreement by Vodafone D2 GmbH. 4
10.42
Contract Acceptance Notice - Master Global Content Agency Agreement by Vodafone Sverige AB. 4
10.43
Master Global Content Reseller Agreement, effective January 17, 2005, between Vodafone Group Services Limited and The
WAAT Corporation. 4
10.44
Contract Acceptance Notice - Master Global Content Agency Agreement by Vodafone New Zealand Limited. 4
10.45
Contract Acceptance Notice - Master Global Content Agency Agreement by Vodafone España, S.A. 4
10.46
Contract Acceptance Notice - Master Global Content Reseller Agreement by Vodafone UK Content Services LTD. 4
10.47
Contract Acceptance Notice - Master Global Content Reseller Agreement by VODAFONE-PANAFON Hellenic
Telecommunications Company S.A. 4
10.48
Content Schedule, dated January 17, 2005, by and between WAAT Media Corporation and Vodafone Group Services Limited. 4
10.49
Contract Acceptance Notice - Master Global Content Agency Agreement by Belgacom Mobile NV. 4
10.50
Content Schedule, dated January 17, 2005, by and between WAAT Media Corporation and Vodafone Group Services Limited. 4
10.51
Contract Acceptance Notice - Master Global Content Agency Agreement by Swisscom Mobile. 4
10.52
Linking Agreement, dated November 1, 2006 between Vodafone Libertel NV and Twistbox Entertainment, Inc. 4
10.53
Agreement, dated as of March 23, 2007, between Twistbox Entertainment, Inc. and Vodafone Portugal - COMUNICAÇÕES
PESSOAIS, S.A 4
10.54
Contract for Content Hosting and Services “Applications and Games Services,” effective August 27, 2007 between Vodafone D2
GmbH and Twistbox Games Ltd & Co. KG. 4
10.55
Partner Agreement, dated August 27, 2007, by and between Vodafone D2 GmbH and Twistbox. 4
58
10.56
Letter of Amendment, dated February 25, 2006 by and between WAAT Media Corporation and Vodafone UK Content Services
Limited. 4
10.57
Letter of Amendment, dated August 2007, by and between WAAT Media Corporation and Vodafone UK Content Services
Limited. 4
10.58
Content Schedule, dated December 17, 2004, by and between WAAT Media Corporation and Vodafone Group Services Limited.
4
10.59
Consolidated financial statements of Twistbox Entertainment, Inc. for the fiscal years ended March 31, 2006 and March 31,
2007. 4
10.60
Consolidated financial statements of Twistbox Entertainment, Inc. for the six months ended September 20, 2006 and September
30, 2007. 4
10.61
Stock Purchase Agreement, by and among Mandalay Media, Inc., Jonathan Cresswell, Nathaniel MacLeitch and the shareholders
of AMV Holding Limited signatories thereto, dated as of October 8, 2008. 15
10.62
Amendment to the Stock Purchase Agreement, between Mandalay Media, Inc. and Nathaniel MacLeitch as the Sellers’
Representative, dated as of October 23, 2008. 9
10.63
Employment Agreement, by and between AMV Holding Limited and Nathaniel MacLeitch, dated as of October 23, 2008. 9
10.64
Employment Agreement, by and between AMV Holding Limited and Jonathan Cresswell (a/k/a Jack Cresswell), dated as of
October 23, 2008. 9
10.65
Securities Purchase Agreement, by and among Mandalay Media, Inc. and the investors set forth therein, dated as of October 23,
2008. 9
10.66
Note, dated October 23, 2008, issued by Mandalay Media, Inc. to Nathaniel MacLeitch, as the Sellers’ Representative. 9
10.67
Management Agreement dated September 14, 2006 between the Company and Trinad Management, LLC. 5
10.68
Commercial Lease Agreement, dated as of March 1, 2007, between Trinad Management LLC and Mediavest, Inc. 16
10.69
First Amendment to Promissory Note, dated August 14, 2009, issued by Mandalay Media, Inc. to Nathaniel MacLeitch, as the
Sellers’ Representative.21
10.70
Severance and Release Agreement, by and among Mandalay Media, Inc., Twistbox Entertainment, Inc. and Ian Aaron, dated as
of October 7, 2009.22
10.71
Waiver to Senior Secured Note by and among Mandalay Media, Inc., Twistbox Entertainment, Inc. and ValueAct SmallCap
Master Fund, L.P., dated as of January 25, 2010.24
10.72
Agreement, dated as of June 21, 2010, between ValueAct SmallCap Master Fund, L.P., NeuMedia, Inc., Jonathan Cresswell,
Nathaniel MacLeitch, Robert Ellin, Trinad Management, LLC, Trinad Capital Master Fund, Ltd. and the Guber Family Trust. 25
10.73
Mutual Release, dated as of June 21, 2010, among ValueAct SmallCap Master Fund, L.P., Antiphony (Management Holdings)
Limited, Nathaniel MacLeitch, Jonathan Cresswell, NeuMedia, Inc., Twistbox Entertainment, Inc., Peter Guber, Robert Ellin,
Paul Schaeffer, Adi McAbian, Richard Spitz, Ray Schaaf, Keith McCurdy, Russell Burke, James Lefkowitz and Trinad
Management. 25
10.74
Subordination Agreement, dated as of June 21, 2010, by and between Trinad Capital Master Fund, Ltd., and ValueAct SmallCap
Master Fund, L.P., and each of NeuMedia, Inc. and Twistbox Entertainment, Inc.25
10.74
Deed Poll Release, dated as of June 21, 2010, between NeuMedia, Inc., Twistbox Entertainment, Inc., James Lefkowitz and
Russell Burke.25
10.74
Non-Competition Agreement, dated as of June 21, 2010, among NeuMedia, Inc., Antiphony (Management Holdings)
Limited, Jack Cresswell and Nate MacLeitch.25
10.74
Earn-Out Termination Letter Agreement, dated as of June 21, 2010, among ValueAct SmallCap Master Fund, L.P., NeuMedia,
Inc., Jonathan Cresswell, Nathaniel MacLeitch and certain other parties.25
10.74
Amended and Restated Guaranty, dated as of June 21, 2010, by NeuMedia, Inc. to ValueAct SmallCap Master Fund, L.P.25
59
10.74
Letter Agreement, dated as of June 21, 2010, between ValueAct SmallCap Master Fund, L.P., NeuMedia, Inc., Rob Ellin and
Trinad Management, LLC.25
10.74
Amended and Restated Guarantee and Security Agreement, dated as of June 21, 2010, among Twistbox Entertainment, Inc.,
NeuMedia, Inc. and each of its subsidiaries identified on Schedule I as being a subsidiary guarantor, the investors party thereto and
ValueAct SmallCap Master Fund, L.P.25
10.74
Guarantee and Security Agreement, dated as of June 21, 2010, among Twistbox Entertainment, Inc., NeuMedia, Inc., each of the
subsidiaries thereof party thereto, the investors party thereto and Trinad Capital Management, LLC.
16.1
Letter dated May 11, 2007 from Most & Company, LLP to the Securities and Exchange Commission. 17
16.2
Letter regarding change in certifying accountant, dated June 2, 2008 from Raich Ende Malter & Co. LLP. 18
16.3
Letter from Grobstein Horwath & Company LLP, dated February 20, 2009. 19
16.4
Letter regarding change in certifying accountant, dated June 4, 2009 from Crowe Horwath, LLP. 20
21
List of Subsidiaries *
31.1
Certification of Ray Schaaf, Principal Executive Officer. *
31.2
Certification of Russell Burke, Principal Financial Officer. *
32.1
Certification of Ray Schaaf, Principal Executive Officer pursuant to U.S.C. Section 1350. *
32.2
Certification of Russell Burke, Principal Financial Officer pursuant to U.S.C. Section 1350. *
* Filed herewith
(1) Incorporated by reference to the Registrant’s Annual Report on Form 10-KSB (File No. 000-10039), filed with the Commission on
December 2, 2005.
(2) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-10039), filed with the Commission on November
14, 2007.
(3) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-10039), filed with the Commission on January 2,
2008.
(4) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-10039), filed with the Commission on February 12,
2008.
(5) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-10039), filed with the Commission on September
20, 2006.
(6) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-10039), filed with the Commission on October 18,
2006.
(7) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-10039), filed with the Commission on January 3,
2007.
(8) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-10039), filed with the Commission on August 9,
2006.
(9) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-10039), filed with the Commission on October 27,
2008.
(10) Incorporated by reference to our Current Report on Form 8-K (File No. 000-10039 ), filed with the Commission on March 28, 2008.
(11) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-10039), filed with the Commission on March 20,
2009.
(12) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-10039), filed with the Commission on March 23,
2006.
(13) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-10039), filed with the Commission on July 30,
2007.
(14) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-10039), filed with the Commission on July 3,
2007.
(15) Incorporated by reference to our Current Report on Form 8-K (File No. 000-10039 ), filed with the Commission on October 15, 2008.
(16) Incorporated by reference to our Registrant’s Transition Report on Form 10-KT (File No. 000-10039), filed with the Commission on July
15, 2008.
(17) Incorporated by reference to our Current Report on Form 8-K (File No. 000-10039 ), filed with the Commission on May 16, 2007.
60
(18) Incorporated by reference to our Current Report on Form 8-K (File No. 000-10039 ), filed with the Commission on June 2, 2008.
(19) Incorporated by reference to our Current Report on Form 8-K (File No. 000-10039 ), filed with the Commission on February 23, 2009.
(20) Incorporated by reference to our Current Report on Form 8-K (File No. 000-10039 ), filed with the Commission on June 4, 2009.
(21) Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-10039 ), filed with the Commission on August 14, 2009.
(22) Incorporated by reference to our Current Report on Form 8-K (File No. 000-10039 ), filed with the Commission on October 14, 2009.
(23) Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-10039 ), filed with the Commission on November 16, 2009.
(24) Incorporated by reference to our Current Report on Form 8-K (File No. 000-10039 ), filed with the Commission on January 28, 2010.
(25) Incorporated by reference to our Current Report on Form 8-K (File No. 000-10039 ), filed with the Commission on June 23, 2010.
61
NeuMedia, Inc. (formerly known
as Mandalay Media, Inc.)
and Subsidiaries
Consolidated Financial Statements
March 31, 2010
Consolidated Balance Sheets as of March 31, 2010 and March 31, 2009
Consolidated Statements of Operations for the years ended March 31, 2010 and March 31, 2009
Consolidated Statements of Stockholders’ Equity and Comprehensive Loss for the periods ended March 31, 2010 and March 31,
2009
Consolidated Statements of Cash Flows for the years ended March 31, 2010 and March 31, 2009
Notes to Consolidated Financial Statements
Page(s)
F-3
F-4
F-5
F-6
F-7-F-36
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
NeuMedia, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of NeuMedia, Inc. and subsidiaries as of March 31, 2010 and 2009, and the
related consolidated statements of operations, stockholders' equity and comprehensive loss, and cash flows for each of the two years in the
period ended March 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NeuMedia,
Inc. and subsidiaries as of March 31, 2010 and 2009, and the results of their operations and their cash flows for each of the two years in the
period ended March 31, 2010, in conformity with U.S. generally accepted accounting principles.
We were not engaged to examine management's assessment of the effectiveness of NeuMedia, Inc. and subsidiaries’ internal control over
financial reporting as of March 31, 2010, included in the accompanying Management’s Report on Internal Control over Financial Reporting
and, accordingly, we do not express an opinion thereon.
SingerLewak LLP
Los Angeles, CA
July 14, 2010
F-2
NeuMedia, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share amounts)
ASSETS
Current assets
Cash and cash equivalents
Accounts receivable, net of allowances of $403 and $174, respectively
Prepaid expenses and other current assets
Net current assets of assets to be sold
Total current assets
Property and equipment, net
Intangible assets, net
Goodwill
Net non-current assets of assets to be sold
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable
Accrued license fees
Accrued compensation
Current portion of long term debt
Other current liabilities
Net current liabilities of assets to be sold
Total currrent liabilities
Net non-current liabilities of assets to be sold
Total liabilities
Commitments and contingencies (Note 15)
Stockholders' equity
Preferred stock
March 31, March 31,
2010
2009
$
$
$
640 $
4,711
477
7,377
13,205
603
8,195
8,155
16,623
46,781 $
3,340
5,963
1,072
7,631
18,006
862
14,885
40,849
16,588
91,190
4,011 $
1,814
537
26,082
1,638
4,625
38,707
5,341
2,795
592
23,296
3,541
6,574
42,139
-
38,707 $
27
42,166
$
Series A convertible preferred stock at $0.0001 par value; 100,000 shares
authorized,issued and outstanding (liquidation preference of $1,000,000)
Common stock, $0.0001 par value: 100,000,000 shares authorized;
39,776,597 issued and outstanding at March 31, 2010; 39,653,125 issued
and outstanding at March 31, 2009
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders' equity
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
100
100
4
95,741
(419)
(87,352)
8,074
46,781 $
4
93,918
(129)
(44,869)
49,024
91,190
$
The accompanying notes are an integral part of these consolidated financial statements
F-3
NeuMedia, Inc. and Subsidiaries
Consolidated Statement of Operations
(In thousands, except per share amounts)
Net revenues
Cost of revenues
License fees
Other direct cost of revenues
Total cost of revenues
Gross profit
Operating expenses
Product development
Sales and marketing
General and administrative
Amortization of intangible assets
Impairment of goodwill and intangible assets
Total operating expenses
Loss from operations
Interest and other income / (expense)
Interest income
Interest expense
Foreign exchange transaction gain / (loss)
Other income / (expense)
Interest and other expense
Loss from operations before income taxes
Income tax provision
Net loss from continuing operations net of taxes
Discontinued operations, net of taxes:
Profit from discontinued operations net of taxes
Net loss
Comprehensive loss
Basic and diluted net loss per common share
Continuing operations
Discontinued opeations
Net loss
Year ended Year ended
March 31, March 31,
2010
2009
$
14,037 $
20,064
2,780
408
3,188
7,178
725
7,903
10,849
12,161
4,194
2,428
7,729
547
38,430
53,328
6,663
4,439
9,706
547
31,784
53,139
(42,479)
(40,978)
9
(3,062)
155
1,495
(1,403)
147
(2,257)
(466)
(86)
(2,662)
(43,882)
(43,640)
(305)
(158)
(44,187)
(43,798)
1,704
2,198
(42,483) $
(41,600)
(42,773) $
(41,790)
(1.07) $
(1.11) $
0.04 $
(1.07) $
(1.15)
(1.20)
0.05
(1.15)
$
$
$
$
$
$
Weighted average common shares outstanding, basic and diluted
39,837
36,264
The accompanying notes are an integral part of these consolidated financial statements
F-4
NeuMedia, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity and Comprehensive Loss
(In thousands, except share amounts)
Additional
Accumulated
Other
Common Stock
Preferred Stock Paid-In Comprehensive Accumulated
Shares
Amount Shares Amount Capital
Income/(Loss) Deficit
Total
Comprehensive
Loss
Balance at March 31, 2008 32,149,089 $
3 100,000 $
100 $
76,154 $
61 $
(3,269) $ 73,049
Net Loss
Issuance of common
stock in satisfaction of
payable
Issuance of common
stock on cashless
exercise of warrants
Issuance of common
stock on cashless
exercise of warrants
25,000
-
100
241,688
-
38,000
-
4,499,997
1
9,899
Issuance of common
stock related to
acquisition
Adjustment in valuation
of warrants in
connection with the
acquisition
Issuance of common
stock in satisfaction of
payable
Issuance of common
stock on cashless
exercise of warrants
Issuance of common
45,000
-
285,500
-
stock net of issuance
costs
Issuance of common
stock as part of
compensation
Foreign currency
1,685,394
-
683,457
-
translation gain/(loss)
Stock-based
compensation
Comprehensive loss
(41,600) (41,600)
(41,600)
100
0
0
9,900
377
79
0
4,354
155
(190)
(190)
(190)
2,800
$
(41,790)
377
79
4,354
155
2,800
Balance at March 31, 2009 39,653,125 $
4 100,000 $
100 $
93,918 $
(129) $
(44,869) $ 49,024
Net Loss
Foreign currency
translation gain/(loss)
Issuance of common
stock as part of
compensation, net of
forfeitures
Stock-based
compensation
Issuance of warrants to
vendor for services
rendered
Comprehensive loss
123,472
-
572
1,117
134
(42,483) (42,483)
(42,483)
(290)
(290)
(290)
572
1,117
134
$
(42,773)
Balance at March 31, 2010 39,776,597 $
4 100,000 $
100 $
95,741 $
(419) $
(87,352) $ 8,074
The accompanying notes are an integral part of these consolidated financial statements
F-5
NeuMedia, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
Allowance for doubtful accounts
Stock-based compensation
Impairment of goodwill and intangibles
Warrants issued as compensation for services
(Increase) / decrease in assets:
Accounts receivable
Prepaid expenses and other current assets
Increase / (decrease) in liabilities:
Accounts payable
Accrued license fees
Accrued compensation
Other liabilities
Net cash used in operating activities
Cash flows from investing activities
Purchase of property and equipment
Transaction costs
Cash used in acquisition of subsidiary
Cash acquired with acquisition of subsidiary
Net cash used in investing activities
Cash flows from financing activities
Proceeds from the sale of common stock (net of issuance costs of $146)
Installment payments related to prior acquisition
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net decrease in cash and cash equivalents
Cash and cash equivalents, beginning of period
Year ended Year ended
March 31, March 31,
2010
2009
$
(42,483) $
(41,600)
1,612
229
1,689
38,430
134
38
400
(3,849)
(996)
(70)
1,396
(3,470)
(433)
-
-
-
(433)
-
-
-
(133)
1,518
6
2,955
31,784
-
4,489
(312)
(3,133)
(1,039)
(96)
68
(5,360)
(219)
(802)
(6,132)
3,380
(3,773)
4,354
(54)
4,300
(176)
(4,036)
(5,009)
5,927
10,936
Cash and cash equivalents, end of period
$
1,891 $
5,927
Supplemental disclosure of cash flow information:
Taxes paid
1,208
561
The accompanying notes are an integral part of these consolidated financial statements
F-6
NeuMedia, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
1.
Organization
NeuMedia, Inc. (“we”, “us”, “our”, the “Company” or “NeuMedia”), formerly Mandalay Media, Inc. (“Mandalay Media”) and formerly
Mediavest, Inc. (Mediavest), was originally incorporated in the state of Delaware on November 6, 1998 under the name eB2B
Commerce, Inc. On April 27, 2000, it merged into DynamicWeb Enterprises Inc., a New Jersey corporation, the surviving company, and
changed its name to eB2B Commerce, Inc. On April 13, 2005, the Company changed its name to Mediavest, Inc. Through January 26,
2005, the Company and its former subsidiaries were engaged in providing business-to-business transaction management services
designed to simplify trading between buyers and suppliers. The Company was inactive from January 26, 2005 until its merger with
Twistbox Entertainment, Inc., February 12, 2008 (Note 7). On September 14, 2007, Mediavest was re-incorporated in the state of
Delaware as Mandalay Media, Inc.
On November 7, 2007, Mediavest merged into its wholly-owned, newly formed subsidiary, Mandalay Media, with Mandalay Media as
the surviving corporation. Mandalay Media issued: (1) one new share of common stock in exchange for each share of Mediavest’s
outstanding common stock and (2) one new share of preferred stock in exchange for each share of Mediavest’s outstanding preferred
stock as of November 7, 2007. Mandalay Media’s preferred and common stock had the same status and par value as the respective stock
of Mediavest and Mandalay Media acceded to all the rights, acquired all the assets and assumed all of the liabilities of Mediavest.
On February 12, 2008, Mandalay Media completed a merger (the “Merger”) with Twistbox Entertainment, Inc. (“Twistbox”) through an
exchange of all outstanding capital stock of Twistbox for 10,180 shares of common stock of the Company. In connection with the
Merger, the Company assumed of all the outstanding options under Twistbox’s Stock Incentive Plan by the issuance of options to
purchase 2,463 shares of common stock of the Company, including 2,145 vested and 319 unvested options.
After the Merger, Twistbox became a wholly-owned subsidiary of the Company, and the Company’s only active subsidiary. Twistbox
Entertainment, Inc. (formerly known as The WAAT Corporation) is incorporated in the State of Delaware.
Twistbox is a global publisher and distributor of branded entertainment content, including images, video, TV programming and games,
for Third Generation (3G) mobile networks. Twistbox publishes and distributes its content in a number of countries. Since operations
began in 2003, Twistbox has developed an intellectual property portfolio that includes mobile rights to global brands and content from
leading film, television and lifestyle content publishing companies. Twistbox has built a proprietary mobile publishing platform that
includes: tools that automate handset portability for the distribution of images and video; a mobile games development suite that automates
the porting of mobile games and applications to multiple handsets; and a content standards and ratings system globally adopted by major
wireless carriers to assist with the responsible deployment of age-verified content. Twistbox has distribution agreements with many of
the largest mobile operators in the world.
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.
F-7
NeuMedia, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
On October 23, 2008 the Company completed an acquisition of 100% of the issued and outstanding share capital of AMV Holding
Limited, a United Kingdom private limited company (“AMV”), and 80% of the issued and outstanding share capital of Fierce Media Ltd
(“Fierce”).
In consideration for the shares of AMV and Fierce, and subject to adjustment as set forth in the Stock Purchase Agreement (“Stock
Purchase Agreement”), the aggregate purchase price (the “Purchase Price”) consisted of: (a) $5,375 in cash (the “Cash Consideration”);
(b) 4,500 fully paid shares of common stock (the “Stock Consideration”); (c) a secured promissory note in the aggregate original principal
amount of $5,375 (the “AMV Note”); and (d) additional earn-out amounts, if any, if the acquired companies achieved certain targeted
earnings for each of the periods from October 1, 2008 to March 31, 2009, April 1, 2009 to March 31, 2010, and April 1, 2010 to
September 30, 2010, as determined in accordance with the Stock Purchase Agreement. The Purchase Price was subject to certain
adjustments based on the working capital of AMV, to be determined initially within 75 days of the closing, and subsequently within 60
days following June 30, 2009. Any such adjustment of the Purchase Price would be made first by means of an adjustment to the principal
sum due under the AMV Note, as set forth in the Stock Purchase Agreement. An initial adjustment of $443 was made subsequent to
closing, and was added to the AMV Note. The initial period earn-out was recognized in the year ended March 31, 2009 and was added to
the amount of consideration for the acquisition, as described in Note 7.
AMV is a leading mobile media and marketing company delivering games and lifestyle content directly to consumers in the United
Kingdom, Australia, South Africa and various other European countries. AMV markets its well established branded services through a
unique Customer Relationship Management platform that drives revenue through mobile internet, print and TV advertising. AMV is
headquartered in Marlow, outside of London in the United Kingdom.
On May 10, 2010 an administrator was appointed over AMV Holding Limited 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 7 below.
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.
2.
Summary of Significant Accounting Policies
Basis of Presentation
The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
(“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for 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.
F-8
NeuMedia, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and our wholly-owned subsidiaries. All material intercompany
balances and transactions have been eliminated in consolidation. Discontinued operations have been treated in accordance with Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 205-20, Discontinued Operations.
Revenue Recognition
The Company’s revenues are derived primarily by licensing material and software in the form of products (Image Galleries, Wallpapers,
video, WAP Site access, Mobile TV) and mobile games. License arrangements with the end user can be on a perpetual or subscription
basis.
A perpetual license gives an end user the right to use the product, image or game on the registered handset on a perpetual basis. A
subscription license gives an end user the right to use the product, image or game on the registered handset for a limited period of time,
ranging from a few days to as long as one month.
The Company either markets and distributes its products directly to consumers, or distributes products through mobile
telecommunications service providers (“carriers”), in which case the carrier markets the product, images or games to end users. License
fees for perpetual and subscription licenses are usually billed upon download of the product, image or game by the end user. In the case
of subscriber licenses, many subscriber agreements provide for automatic renewal until the subscriber opts-out, while others provide opt-
in renewal. In either case, subsequent billings for subscription licenses are generally billed monthly. The Company applies the provisions
of FASB ASC 985-605, Software Revenue Recognition, to all transactions.
Revenues are recognized from the Company’s products, images and games when persuasive evidence of an arrangement exists, the
product, image or game has been delivered, the fee is fixed or determinable, and the collection of the resulting receivable is probable. For
both perpetual and subscription licenses, management considers a license agreement to be evidence of an arrangement with a carrier or
aggregator and a “clickwrap” agreement to be evidence of an arrangement with an end user. For these licenses, the Company defines
delivery as the download of the product, image or game by the end user.
The Company estimates revenues from carriers in the current period when reasonable estimates of these amounts can be made. Most
carriers only provide detailed sales transaction data on a one to two month lag. Estimated revenue is treated as unbilled receivables until
the detailed reporting is received and the revenues can be billed. Some carriers provide reliable interim preliminary reporting and others
report sales data within a reasonable time frame following the end of each month, both of which allow the Company to make reasonable
estimates of revenues and therefore to recognize revenues during the reporting period when the end user licenses the product, image or
game. Determination of the appropriate amount of revenue recognized involves judgments and estimates that the Company believes are
reasonable, but it is possible that actual results may differ from the Company’s estimates. The Company’s estimates for revenues include
consideration of factors such as preliminary sales data, carrier-specific historical sales trends, volume of activity on company monitored
sites, seasonality, time elapsed from launch of services or product lines, the age of games and the expected impact of newly launched
games, successful introduction of new handsets, growth of 3G subscribers by carrier, promotions during the period and economic trends.
When the Company receives the final carrier reports, to the extent not received within a reasonable time frame following the end of each
month, the Company records any differences between estimated revenues and actual revenues in the reporting period when the Company
determines the actual amounts. Revenues earned from certain carriers may not be reasonably estimated. If the Company is unable to
reasonably estimate the amount of revenues to be recognized in the current period, the Company recognizes revenues upon the receipt of a
carrier revenue report and when the Company’s portion of licensed revenues are fixed or determinable and collection is probable. To
monitor the reliability of the Company’s estimates, management, where possible, reviews the revenues by country, by carrier and by
product line on a regular basis to identify unusual trends such as differential adoption rates by carriers or the introduction of new
handsets. If the Company deems a carrier not to be creditworthy, the Company defers all revenues from the arrangement until the
Company receives payment and all other revenue recognition criteria have been met.
F-9
NeuMedia, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
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. Potentially dilutive shares from stock options and warrants and the conversion of the Series A preferred
stock were as follows:
F-10
NeuMedia, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
12 Months Ended 12 Months Ended
March 31
March 31
2010
2009
Potentially dilutive shares
100
2,478
These shares were not included in the computation of diluted loss per share as they were anti-dilutive in each period.
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.
Content Provider Licenses
Content Provider License Fees and Minimum Guarantees
The Company’s royalty expenses consist of fees that it pays to branded content owners for the use of their intellectual property in the
development of the Company’s games and other content, and other expenses directly incurred in earning revenue. Royalty-based
obligations are either accrued as incurred and subsequently paid, or in the case of longer term content acquisitions, paid in advance and
capitalized on our balance sheet as prepaid royalties. These royalty-based obligations are expensed to cost of revenues either at the
applicable contractual rate related to that revenue or over the estimated life of the prepaid royalties. Advanced license payments that are not
recoupable against future royalties are capitalized and amortized over the lesser of the estimated life of the branded title or the term of the
license agreement.
The Company’s contracts with some licensors include minimum guaranteed royalty payments, which are payable regardless of the
ultimate volume of sales to end users. Each quarter, the Company evaluates the realization of its royalties as well as any unrecognized
guarantees not yet paid to determine amounts that it deems unlikely to be realized through product sales. The Company uses estimates of
revenues, and share of the relevant licensor to evaluate the future realization of future royalties and guarantees. This evaluation considers
multiple factors, including the term of the agreement, forecasted demand, product life cycle status, product development plans, and current
and anticipated sales levels, as well as other qualitative factors. To the extent that this evaluation indicates that the remaining future
guaranteed royalty payments are not recoverable, the Company records an impairment charge to cost of revenues and a liability in the
period that impairment is indicated.
F-11
NeuMedia, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
Content Acquired
Amounts paid to third party content providers as part of an agreement to make content available to the Company for a term or in
perpetuity, without a revenue share, have been capitalized and are included in the balance sheet as prepaid expenses. These balances will
be expensed over the estimated life of the material acquired.
Software Development Costs
The Company applies the principles of FASB ASC 985-20, Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed (“ASC 985-20”). ASC 985-20 requires that software development costs incurred in conjunction with product
development be charged to research and development expense until technological feasibility is established. Thereafter, until the product is
released for sale, software development costs must be capitalized and reported at the lower of unamortized cost or net realizable value of
the related product.
The Company has adopted the “tested working model” approach to establishing technological feasibility for its products and games.
Under this approach, the Company does not consider a product or game in development to have passed the technological feasibility
milestone until the Company has completed a model of the product or game that contains essentially all the functionality and features of
the final game and has tested the model to ensure that it works as expected. To date, the Company has not incurred significant costs
between the establishment of technological feasibility and the release of a product or game for sale; thus, the Company has expensed all
software development costs as incurred. The Company considers the following factors in determining whether costs can be capitalized:
the emerging nature of the mobile market; the gradual evolution of the wireless carrier platforms and mobile phones for which it develops
products and games; the lack of pre-orders or sales history for its products and games; the uncertainty regarding a product’s or game’s
revenue-generating potential; its lack of control over the carrier distribution channel resulting in uncertainty as to when, if ever, a product
or game will be available for sale; and its historical practice of canceling products and games at any stage of the development process.
Product Development Costs
The Company charges costs related to research, design and development of products to product development expense as incurred. The
types of costs included in product development expenses include salaries, contractor fees and allocated facilities costs.
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 ($485) and $1,119 in the years ended March 31, 2010 and 2009, respectively.
Advertising expense for discontinued operations was $7,018 and $3,755 in the years ended March 31, 2010 and 2009, respectively.
Restructuring
The Company accounts for costs associated with employee terminations and other exit activities in accordance with FASB ASC 420-10,
Accounting for Costs Associated with Exit or Disposal Activities. The Company records employee termination benefits as an operating
expense when it communicates the benefit arrangement to the employee and it requires no significant future services, other than a
minimum retention period, from the employee to earn the termination benefits.
F-12
NeuMedia, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
Fair Value of Financial Instruments
As of March 31, 2010 and March 31, 2009, the carrying value of cash and cash equivalents, accounts receivable, prepaid expenses and
other current assets, accounts payable, accrued license fees, accrued compensation and other current liabilities approximates fair value due
to the short-term nature of such instruments. The carrying value of current portion of long-term debt approximates fair value as the related
interest rates approximate rates currently available to the Company.
Foreign Currency Translation.
The Company uses the United States dollar for financial reporting purposes. Assets and liabilities of foreign operations are translated
using current rates of exchange prevailing at the balance sheet date. Equity accounts have been translated at their historical exchange rates
when the capital transaction occurred. Statement of Operations amounts are translated at average rates in effect for the reporting period.
The foreign currency translation adjustment loss of $290 in the year ended March 31, 2010 and $190 in the year ended March 31, 2009
has been reported as a component of comprehensive loss in the consolidated statements of stockholders’ equity and comprehensive
income. 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 March 31, 2010, one
major customer represented approximately 36% of our gross accounts receivable outstanding, and 15% of gross accounts receivable
outstanding as of March 31, 2009. This customer accounted for 44% of our gross revenues in the year ended March 31, 2010; and 33%
in the year ended March 31, 2009.
Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization is calculated using the straight-line method over the estimated
useful lives of the related assets. Estimated useful lives are 8 to 10 years for leasehold improvements and 5 years for other assets.
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.
F-13
NeuMedia, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
In the year ended March 31, 2009, the Company determined that there was an impairment of goodwill, amounting to $27,844. In the year
ended March 31, 2010, the Company determined that there was an impairment of goodwill, amounting to $32,694. 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 8 below.
Impairment of Long-Lived Assets and Finite Life Intangibles
Long-lived assets, including, intangible assets subject to amortization primarily consist of customer lists, license agreements and software
that have been acquired are amortized using the straight-line method over their useful 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 year ended March 31, 2009, the Company determined that there was an impairment of intangible assets, amounting to $3,940. 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 8 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.
F-14
NeuMedia, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
ASC 740-10 prescribes that a company should use a more-likely-than-not recognition threshold based on the technical merits of the tax
position taken. Tax positions that meet the “more-likely-than-not” recognition threshold should be measured as the largest amount of the
tax benefits, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement in the
financial statements. We recognize interest and penalties related to income tax matters as a component of the provision for income taxes.
We do not currently anticipate that the total amount of unrecognized tax benefits will significantly change within the next 12 months.
Stock-based compensation.
We have applied FASB ASC 718 Share-Based Payment (“ASC 718”) and accordingly, we record stock-based compensation expense for
all of our stock-based awards.
Under ASC 718, we estimate the fair value of stock options granted using the Black-Scholes option pricing model. The fair value for
awards that are expected to vest is then amortized on a straight-line basis over the requisite service period of the award, which is generally
the option vesting term. The amount of expense recognized represents the expense associated with the stock options we expect to
ultimately vest based upon an estimated rate of forfeitures; this rate of forfeitures is updated as necessary and any adjustments needed to
recognize the fair value of options that actually vest or are forfeited are recorded.
The Black-Scholes option pricing model, used to estimate the fair value of an award, requires the input of subjective assumptions,
including the expected volatility of our common stock, interest rates, dividend rates and an option’s expected life. As a result, the financial
statements include amounts that are based upon our best estimates and judgments relating to the expenses recognized for stock-based
compensation.
Preferred Stock
The Company applies the guidance enumerated in FASB ASC 480-10, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity (“ASC 480-10”) when determining the classification and measurement of preferred stock.
Preferred shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value in
accordance with ASC 480-10. All other issuances of preferred stock are subject to the classification and measurement principles of ASC
480-10. Accordingly, the Company classifies conditionally redeemable preferred shares (if any), which includes preferred shares that
feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events
not solely within the Company’s control, as temporary equity. At all other times, the Company classifies its preferred shares in
stockholders’ equity.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent asset and liabilities at the
date of the financial statements and reported amounts of revenue and expenses during the period. Actual results could differ from those
estimates. The most significant estimates relate to revenues for periods not yet reported by Carriers, liabilities recorded for future
minimum guarantee payments under content licenses, accounts receivable allowances, and stock-based compensation expense.
F-15
NeuMedia, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
Recent Accounting Pronouncements
With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting
pronouncements during the year ended March 31, 2010, as compared to the recent accounting pronouncements described in the
Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2009, that are of significance, or potential significance to
the Company.
Adopted Accounting Pronouncements
Effective July 1, 2009, the Company adopted FASB ASC 105-10 , Generally Accepted Accounting Principles (“ASC 105-10”) (the
“Codification”). ASC 105-10 establishes the exclusive authoritative reference for U.S. GAAP for use in financial statements, except for
SEC rules and interpretive releases, which are also authoritative GAAP for SEC registrants. The Codification will supersede all existing
non-SEC accounting and reporting standards. The Company has included the references to the Codification, as appropriate, in these
consolidated financial statements. As the Codification was not intended to change or alter existing GAAP, it did not have any impact on
the Company’s consolidated financial statements.
Effective April 1, 2009, the Company adopted ASC 855, Subsequent Events (“ASC 855-10”). The standard modifies the names of the
two types of subsequent events either as “recognized subsequent events” (previously referred to in practice as Type I subsequent events)
or “non-recognized subsequent events” (previously referred to in practice as Type II subsequent events). In addition, the standard
modifies the definition of subsequent events to refer to events or transactions that occur after the balance sheet date, but before the
financial statements are issued (for public entities) or available to be issued (for nonpublic entities). It also requires the disclosure of the
date through which subsequent events have been evaluated. The standard did not result in significant changes in the practice of
subsequent event disclosures or the related accounting thereof, and therefore the adoption did not have any impact on the Company’s
consolidated financial statements.
Effective April 1, 2009, the Company adopted three accounting standard updates which were intended to provide additional application
guidance and enhanced disclosures regarding fair value measurements and impairments of securities. They also provide additional
guidelines for estimating fair value in accordance with fair value accounting. The first update, as codified in ASC 820-10-65, provides
additional guidelines for estimating fair value in accordance with fair value accounting. The second accounting update, as codified in ASC
320-10-65, changes accounting requirements for other-than-temporary-impairment (OTTI) for debt securities by replacing the current
requirement that a holder have the positive intent and ability to hold an impaired security to recovery in order to conclude an impairment
was temporary with a requirement that an entity conclude it does not intend to sell an impaired security and it will not be required to sell
the security before the recovery of its amortized cost basis. The third accounting update, as codified in ASC 825-10-65, increases the
frequency of fair value disclosures. These updates were effective for fiscal years and interim periods ended after June 15, 2009. The
adoption of these accounting updates did not have any impact on the Company’s consolidated financial statements.
F-16
NeuMedia, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
Effective April 1, 2009, the Company adopted a new accounting standard update regarding business combinations, ASC 805, which
establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. ASC 805-10 also provides guidance
for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable
users of the financial statements to evaluate the nature and financial effects of the business combination. ASC 805-10 applies
prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008. We will apply the requirements of ASC 805-10 prospectively to any future acquisitions.
Although the Company did not enter into any business combinations during the first year ended March 31, 2010, the Company believes
ASC 805-10 may have a material impact on the Company’s future consolidated financial statements if the Company were to enter into any
future business combinations depending on the size and nature of any such future transactions.
In August 2009, the FASB issued Update No. 2009-05, Fair Value Measurements and Disclosures (Topic 820) — Measuring
Liabilities at Fair Value (ASU 2009-05). ASU 2009-05 amends ASC 820, Fair Value Measurements and Disclosures, of the
Codification to provide further guidance on how to measure the fair value of a liability, an area where practitioners have been seeking
further guidance. It primarily does three things: (1) sets forth the types of valuation techniques to be used to value a liability when a
quoted price in an active market for the identical liability is not available, (2) clarifies that when estimating the fair value of a liability, a
reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that
prevents the transfer of the liability and (3) clarifies that both a quoted price in an active market for the identical liability at the
measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the
quoted price of the asset are required are Level 1 fair value measurements. This standard became effective beginning in the fourth quarter
of 2009 for the Company. The adoption of this pronouncement did not have a material impact on our results of operations, financial
position or cash flows.
In January 2010, the FASB issued ASU 2010-02, Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of
a Subsidiary ("ASU 2010-02"). This amendment to Topic 810 clarifies, but does not change, the scope of current US GAAP. It clarifies
the decrease in ownership provisions of Subtopic 810-10 and removes the potential conflict between guidance in that Subtopic and asset
derecognition and gain or loss recognition guidance that may exist in other US GAAP. An entity will be required to follow the amended
guidance beginning in the period that it first adopts FAS 160 (now included in Subtopic 810-10). For those entities that have already
adopted FAS 160, the amendments are effective at the beginning of the first interim or annual reporting period ending on or after
December 15, 2009, which was our year ended March 31, 2010. The amendments should be applied retrospectively to the first period that
an entity adopted FAS 160. The adoption of this pronouncement did not have a material impact on our results of operations, financial
position or cash flows.
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures
about Fair Value Measurements ("ASU 2010-06"). ASU 2010-06 amends ASC 820 and clarifies and provides additional disclosure
requirements related to recurring and non-recurring fair value measurements and employers' disclosures about postretirement benefit plan
assets. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, which was our year
ending March 31, 2010. Our adoption of this pronouncement did not have a material impact on our results of operations, financial
position or cash flows. Disclosures about purchases, sales, issuances, and settlements in the roll forward activity in Level 3 fair value
measurements are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years, which
will be our quarter ending June 30, 2011. The adoption is not expected to have a material impact on our results of operations, financial
position or cash flows.
F-17
NeuMedia, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
In February 2010, the FASB issued ASU 2010-09, "Amendments to Certain Recognition and Disclosure Requirements" ("ASU2010-
09"), which is included in the FASB Accounting Standards Codification (the "ASC") Topic 855 Subsequent Events. ASU 2010-09
clarifies that an SEC filer is required to evaluate subsequent events through the date that the financial statements are issued. ASU 2010-09
is effective upon the issuance of the final update and had no impact on our balance sheet, statement of operations or cash flows.
New Accounting Pronouncements
In September 2009, the FASB issued Update No. 2009-13, Multiple-Deliverable Revenue Arrangements—a consensus of the FASB
Emerging Issues Task Force ” (ASU 2009-13). It updates the existing multiple-element revenue arrangements guidance currently
included under ASC 605-25, which originated primarily from the guidance in EITF Issue No. 00-21, “Revenue Arrangements with
Multiple Deliverables” (EITF 00-21). The revised guidance primarily provides two significant changes: (1) eliminates the need for
objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of
accounting, and (2) eliminates the residual method to allocate the arrangement consideration. In addition, the guidance also expands the
disclosure requirements for revenue recognition. ASU 2009-13 will be effective for the first annual reporting period beginning on or after
June 15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year of
adoption. The adoption of this standard update is not expected to impact the Company’s consolidated financial statements.
In October 2009, the FASB concurrently issued ASU No. 2009-14, Software (Topic 985): Certain Revenue Arrangements That Include
Software Elements (a consensus of the FASB Emerging Issues Task Force). This new guidance amends the scope of existing software
revenue recognition accounting. Tangible products containing software components and non-software components that function together
to deliver the product's essential functionality would be scoped out of the accounting guidance on software and accounted for based on
other appropriate revenue recognition guidance. For the Company, this guidance is effective for all new or materially modified
arrangements entered into on or after January 1, 2011 with earlier application permitted as of the beginning of a fiscal year. Full
retrospective application of the new guidance is optional. This guidance must be adopted in the same period that the company adopts the
amended accounting for arrangements with multiple deliverables described in the preceding paragraph. The Company is currently
assessing its implementation of this new guidance, but does not expect a material impact on the consolidated financial statements.
3.
Fair Value Measurements
As of March 31, 2010 the carrying amounts of cash and cash equivalents, accounts receivables, accounts payable and accrued liabilities
approximate their fair values due to the short-term maturities of these instruments.
On April 1, 2009, the Company adopted FASB ASC 820-10, Fair Value Measurements and Disclosures - Measuring Liabilities at
Fair Value (“ASC 820-10”). ASC 820-10, which defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value measurements. ASC 820-10 does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the
information.
ASC 820-10 establishes a three-level valuation hierarchy of valuation techniques that is based on observable and unobservable inputs.
Classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement. The
first two inputs are considered observable and the last unobservable, that may be used to measure fair value and include the following:
Level 1 - - Quoted prices in active markets for identical assets or liabilities.
Level 2 - - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
F-18
NeuMedia, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
Level 3 - - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or
liabilities.
As of March 31, 2010, the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis,
including its cash and cash equivalents. The fair value of these assets and liabilities was determined using the following inputs in
accordance with ASC 820-10 at March 31, 2010:
Fair Value Measurement as of March 31, 2010
Description
Cash and cash equivalents
Fair Value on A Nonrecurring Basis
Total
$
Level 1
Level 2
Level 3
640 $
640
-
-
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).
The following table presents the assets and liabilities carried on the balance sheet by caption and by level within the fair value hierarchy
(as described above) as of March 31, 2010, for which a nonrecurring change in fair value has been recorded during the year ended
March 31, 2010.
(in thousands)
Carrying value at March 31, 2010
Total
Level 1
Level 2
Level 3
Year
ended
March 31,
2010
Total losses
Goodwill and other intangible assets
$
16,350 $
- $
- $
16,350 $
38,450
Goodwill and other intangible assets measured at fair value on a nonrecurring basis relate to goodwill and intangible assets that were
acquired in connection with an acquisition. Losses of $38,430 represent an impairment charge related to these intangible assets
recorded in fiscal 2010. The fair value of these intangible assets was calculated based on the methods and criteria described in Note 7
– Goodwill.
4.
Accounts Receivable
Accounts receivable
Less: allowance for doubtful accounts
Net Accounts receivable of continuing operations
Net Accounts receivable of discontinued operations
March 31,
2010
March 31,
2009
$
$
$
5,114 $
(403)
4,711 $
6,137
(174)
5,963
5,694 $
4,782
Accounts receivable includes amounts billed and unbilled as of the respective balance sheet dates. The Company had no significant
write-offs or recoveries during the years ended March 31, 2010 and March 31, 2009.
5.
Property and Equipment
Equipment
Furniture & fixtures
Leasehold improvements
Accumulated depreciation
Net Property and Equipment of continuing operations
Net Property and Equipment of discontinued operations
March 31,
2010
March 31,
2009
$
$
$
829 $
278 $
140 $
1,247 $
(644) $
603 $
864
302
140
1,306
(444)
862
668 $
369
Depreciation expense for the years ended March 31, 2010 and 2009 was $354 and $353, respectively for continuing operations and
$141 and $49 for discontinued operations.
F-19
NeuMedia, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
6.
Description of Stock Plans
On September 27, 2007, the stockholders of the Company adopted the 2007 Employee, Director and Consultant Stock Plan (“Plan”).
Under the Plan, the Company may grant up to 3,000 shares or equivalents of common stock of the Company as incentive stock options
(ISO), non-qualified options (NQO), stock grants or stock-based awards to employees, directors or consultants, except that ISO’s shall
only be issued to employees. Generally, ISO’s and NQO’s shall be issued at prices not less than fair market value at the date of
issuance, as defined, and for terms ranging up to ten years, as defined. All other terms of grants shall be determined by the board of
directors of the Company, subject to the Plan.
On February 12, 2008, the Company amended the Plan to increase the number of shares of our common stock that may be issued under
the Plan to 7,000 shares and on March 7, 2008, amended the Plan to increase the maximum number of shares of the Company's
common stock with respect to which stock rights may be granted in any fiscal year to 1,100 shares. All other terms of the plan remain in
full force and effect.
Option Plans
The following table summarizes options granted for the periods or as of the dates indicated:
Outstanding at March 31, 2008
Granted
Canceled
Exercised
Outstanding at March 31, 2009
Granted
Canceled
Exercised
Outstanding at March 31, 2010
Exercisable at March 31, 2010
Number of Weighted Average
Shares
Exercise Price
6,802 $
1,860 $
(1,702) $
- $
6,960 $
- $
(773) $
- $
6,187 $
5,205 $
2.70
2.67
0.48
0.48
2.52
-
2.76
-
2.49
2.32
The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:
Expected life (years)
Risk-free interest rate
Expected volatility
Expected dividend yield
Options Granted
Year Ended
March 31, 2009
Options Granted
Options Tranferred
from Twistbox
6
3.90% to 3.92%
49.73% to 54.33%
0%
4 to 6
2.7% to 3.89%
70% to 75.2%
0%
3 to 7
2.03% to 5.03%
70% to 75%
0%
F-20
NeuMedia, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
The exercise price for options outstanding at March 31, 2010 were as follows:
Options outstanding
Weighted
Average
Remaining
Contractual Life
(Years)
Number
Outsanding
March 31, 2010
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
6.58
8.33
8.12
7.69
2,071 $
2,616 $
1,500 $
6,187 $
0.63 $
2.67 $
4.75 $
2.49 $
22,511
-
-
22,511
Range of
Exercise Price
$0 - $1.00
$2.00 - $3.00
$4.00 - $5.00
The exercise price for options exercisable at March 31, 2010 were as follows:
Options Exercisable
Weighted
Average
Remaining
Contractual Life
(Years)
Options
Exercisable
March 31, 2010
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
6.57
8.26
8.12
7.57
2,027 $
2,045 $
1,133 $
5,205 $
0.63 $
2.66 $
4.75 $
2.32
22,501
-
-
22,501
Range of
Exercise Price
$0 - $1.00
$2.00 - $3.00
$4.00 - $5.00
Stock Plans
A summary of the status of the Company’s nonvested shares as of March 31, 2010 pursuant to the Plan, and changes during the year
ended March 31, 2010 is presented below:
Nonvested shares
Nonvested at March 31, 2009
Granted
Vested
Cancelled
Nonvested at March 31, 2010
Cumulative Forfeited
Number of
Shares
Weighted Average
Grant Date
Fair Value
498,767 $
309,326 $
778,609 $
29,484 $
- $
(218,379) $
0.85
0.79
0.84
0.85
-
0.61
F-21
NeuMedia, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
As of March 31, 2010, there was $0 of total unrecognized compensation cost related to nonvested share-based compensation
arrangements granted under the Plan.. The total fair value of shares vested during the year ended March 31, 2010 was $652, and $80
was forfeited to cover individual tax withholdings. The total fair value of shares vested during the year ended March 31, 2009 was
$210, and $52 was forfeited to cover individual tax withholdings.
Option Plans and Stock Plans
Total stock compensation expense is included in the following statements of operations components:
Product development
Sales and marketing
General and administrative
Stock forfeited
12 Months Ended 12 Months Ended
March 31
March 31
2010
2009
$
$
$
$
$
12 $
80 $
1,677 $
1,769 $
(80) $
34
39
2,934
3,007
(52)
7.
Acquisitions/Purchase Price Accounting/Discontinued Operations
Acquisition - - AMV Holding Limited and subsidiaries (Discontinued Operation)
On October 23, 2008, the Company completed an acquisition of 100% of AMV Holding Limited, a United Kingdom private limited
company (“AMV”) and 80% of Fierce Media Limited. The acquisition was effective on October 1, 2008.
Subject to adjustment as set forth in the Stock Purchase Agreement, the aggregate purchase price (the “Purchase Price”) consisted of: (a)
$5,375 in cash (the “Cash Consideration”); (b) 4,500 fully paid and non-assessable shares of common stock (the “Stock
Consideration”); (c) a secured promissory note in the aggregate original principal amount of $5,375 (the “AMV Note”); and (d)
additional earn-out amounts, if any, if the acquired companies achieved certain targeted earnings for each of the periods from October 1,
2008 to March 31, 2009, April 1, 2009 to March 31, 2010, and April 1, 2010 to September 30, 2010, as determined in accordance with
the Stock Purchase Agreement. The Purchase Price was subject to certain adjustments based on the working capital of AMV, to be
determined initially within 75 days of the closing, and subsequently within 60 days following June 30, 2009. Any such adjustment of
the Purchase Price would be made first by means of an adjustment to the principal sum due under the AMV Note, as set forth in the
Stock Purchase Agreement. The initial adjustment has been determined preliminarily as $443, to be added to the AMV Note.
F-22
NeuMedia, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
Prior to closing, each outstanding option to purchase shares of capital stock of AMV (an “AMV Option”) was either exercised in full or
terminated. The AMV Note was scheduled to mature on July 31, 2010, and bore interest at an initial rate of 5% per annum, subject to
adjustment as provided therein. In the event the Company completed an equity financing that resulted in gross proceeds of over $6,000,
the Company would have been obligated to prepay a portion of the AMV Note in an amount equal to one-third of the excess of the
gross proceeds of such financing over $6,000. Additionally, in connection with the AMV Note, AMV granted to the sellers a security
interest in its assets. Such security interest was subordinate to the security interest granted to ValueAct Small Cap Master Fund, L.P.
(“ValueAct) under the Senior Secured Note, issued by Twistbox, due July 31, 2010, as amended on February 12, 2008 (the “ValueAct
Note”), and as subsequently amended on October 23, 2008. AMV also agreed to guarantee Mandalay Media’s repayment of the AMV
Note to the sellers.
The Purchase Price was preliminarily estimated by the Company to be $23,030 consisting of $9,900 attributed to the Stock
Consideration issued, $5,375 in cash, $95 in stamp duty, $5,818 under the AMV Note referenced above (inclusive of the working-
capital adjustment), $1,098 as an estimate of the initial period earn-out adjustment and $744 in transaction costs. Any
further adjustments required under the “working capital adjustment” provision and any further adjustment under the “earn-out”
provision of the Stock Purchase Agreement have not yet been determined and therefore have not been included in the preliminary
calculation of the purchase price. The shares of the Stock Consideration were valued using the closing stock price at the acquisition date
of $2.20 per share. Under the purchase method of accounting, the Company allocated the total Purchase Price of $23,030 to the net
tangible and intangible assets acquired and liabilities assumed based upon their respective estimated fair values as of the acquisition date
as follows:
Cash and cash equivalents
Accounts receivable, net of allowances
Prepaid expenses and other current assets
Property and equipment, net
Accounts payable
Bank overdrafts
Other current liabilities
Other long term liabilities
Minority interests
Identified intangibles
Acquisition related restructuring reserves
Goodwill
$
3,380
9,087
16
406
(10,391)
(1,902)
(1,262)
(223)
95
1,368
22,456
$ 23,030
Net assets associated with Fierce Media Limited were insignificant. Goodwill recognized in the above transaction is preliminarily
estimated at $22,456. The business acquired is not capital intensive and does not require significant identifiable intangible assets – as a
result the greater proportion of consideration has been allocated to goodwill. Goodwill in relation to the acquisition of AMV is not
expected to be deductible for US income tax purposes.
At March 31, 2010 AMV has been treated as a discontinued operation, and as a result, the goodwill allocated to the acquisition of AMV
has been segregated on the balance sheet as part of discontinued non-current assets.
F-23
NeuMedia, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
Discontinued Operations
The Company had been negotiating a restructuring of debt with its senior debt holder for some time. These negotiations were finalized
subsequent to year end, and as described in Note 16, on June 21, 2010 the Company signed and closed a number of transactions, which
included the sale of AMV. Pursuant to the Agreement, ValueAct and the AMV Founders, acting through a newly formed company
(“NewCo”), acquired the operating subsidiaries of AMV in exchange for the release of approximately $23 million of secured
indebtedness, which included a release of all amounts due and payable under the AMV Note and all of the amounts due and payable
under the ValueAct Note except for $3.5 million in principal. In addition, all intercompany balances at that date were cancelled, and
ValueAct’s stock and warrants in the Company were cancelled. In addition, approximately 3,541 shares in the Company held by two of
the AMV Sellers were acquired by the Company.
The Company has not yet finalized all of the component parts of the transaction.
In accordance with FASB ASC 205-20, Discontinued Operations, the assets, liabilities and operating results related to AMV have been
segregated and reported as discontinued operations in the accompanying consolidated financial statements.
The following amounts represent the operations of the discontinued unit and have been segregated from continuing operations and
reported as discontinued operations as of March 31, 2010 and 2009:
Revenues
Cost of revenues
Gross profit
Operating expenses and other expenses
Income from discontinued operations
Income tax provision
Income from discontinued operations, net of tax
F-24
Year ended Year ended
March 31, March 31,
2010
2009
24,739
8,558
16,181
13,574
2,607
(903)
1,704
11,562
3,564
7,998
6,208
1,790
408
2,198
NeuMedia, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
The following is a summary of assets and liabilities of the discontinued operations as of March 31, 2010 and 2009:
Assets
Cash
Accounts receivable, net
Other current assets
Property and equipment, net
Goodwill and intangibles
Total Assets
Liabilities
Accounts payable and accrued expenses
Total Liabilities
Goodwill
March 31, March 31,
2010
2009
1,251
5,694
432
668
15,955
24,000
2,587
4,782
261
369
16,220
24,219
4,625
4,625
6,574
6,574
A reconciliation of the changes to the Company's carrying amount of goodwill for the years ended March 31, 2010 and 2009 was as
follows:
Balance at March 31, 2008
Goodwill acquired during the period
Adjustments made to goodwill
Goodwill impairment
Balance at March 31, 2009
Goodwill attributable to discontinued operations
Goodwill impairment
Balance at March 30, 2010
$
61,377
22,456
(156)
(27,844)
$
55,833
(14,984)
(32,694)
8,155
$
The Company performed its annual review of the fair value of goodwill in the fourth quarter of fiscal 2010. 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.
As a result of the assessment, the Company determined that its net book value exceeded the implied fair value; and recorded an
impairment charge of $32,694 to write down goodwill. The impairment charge is included “Impairment of goodwill and intangible
assets” within operating expenses in the statements of operations.
F-25
NeuMedia, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
8.
Other Intangible Assets
A reconciliation of the changes to the Company's carrying amount of intangible assets for the year ended March 31, 2010 was as
follows:
Balance at March 31, 2008
Intangibles acquired during the period
Amortization
Impairment charge
Balance at March 31, 2009
Amortization
Intangibles attributable to discontinued operations
Impairment of intangibles
Balance at March 31, 2010
$
$
$
19,780
1,368
(1,087)
(3,940)
16,121
(1,219)
(971)
(5,736)
8,195
The Company performed its annual review of the fair value of intangible assets in the fourth quarter of fiscal 2010. The Company
separately considered a number of valuation methodologies for each intangible asset group. As a result of the assessment, the Company
determined that its net book value exceeded the implied fair value; and recorded an impairment charge of $5,736 to write down
intangible assets. The impairment charge is included “Impairment of goodwill and intangible assets” within operating expenses in the
statements of operations.
The components of intangible assets as at March 31, 2010 and 2009 were as follows:
Software
Trade name / Trademark
Customer list
License agreements
Accumulated amortization
Net Intangible Assets of continuing operations
Net Intangible Assets of discontinued operations
March 31, March 31,
2010
2009
$
$
$
1,611 $
6,491
1,548
579
10,229
(2,034)
8,195 $
1,611
9,090
4,378
886
15,965
(1,080)
14,885
971 $
1,236
The Company has included amortization of acquired intangible assets directly attributable to revenue-generating activities in cost of
revenues. The Company has included amortization of acquired intangible assets not directly attributable to revenue-generating activities
in operating expenses. During the years ended March 31, 2010 and 2009, the Company recorded amortization expense for continuing
operations in the amount of $407 and $407, respectively, in cost of revenues; and amortization expense in the amount of $547 and $547
respectively, in operating expenses. During the years ended March 31, 2010 and 2009 the Company recorded amortization expense for
discontinued operations in the amount of $104 and $52, respectively, in cost of revenues; and amortization expense in the amount of
$162 and $80, respectively, in operating expenses.
F-26
NeuMedia, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
As of March 31, 2010, the total expected future amortization related to intangible assets for continuing operations was as follows:
12 Months Ended March 31,
2011
2012
2013
2014
2014
Thereafter
$
$
236 $
66
73
375 $
236 $
66
73
375 $
236 $
66
55
357 $
236 $
66
-
302 $
177 $
66
-
243 $
-
52
-
52
Software
Customer List
License Agreements
9.
Debt
Short Term Debt
March 31,
2010
March 31,
2009
$
$
19,749
6,333
26,082 $
17,351
5,945
23,296
Senior secured note, inclusive of accrued interest net of discount of $40 and $250, respectively
Deferred purchase consideration inclusive of accrued interest
In July 2007 Twistbox entered into a debt financing agreement pursuant to the ValueAct Note amounting to $16,500, payable at 30
months. The holder of the ValueAct Note was granted first lien over all of the Company’s assets. The ValueAct Note carried interest of
9% annually for the first year and 10% subsequently, with semi-annual interest only payments. The debt-financing agreement included
certain restrictive covenants. In conjunction with the Merger described in Note 7, the Company guaranteed up to $8,250 of the principal;
and the restrictive covenants were modified, including a requirement for both Mandalay Media and Twistbox to maintain certain
minimum cash balances. In connection with the guaranty, the Company issued the lender warrants to purchase 1,093 and 1,093 shares
of common stock of the Company, exercisable at $7.55 per share, and at $5.00 per share, (increasing to $7.55 per share, if not exercised
in full by February 12, 2009), respectively, through July 30, 2011. These warrants replaced warrants originally issued by Twistbox in
conjunction with the ValueAct Note.
On October 23, 2008 in conjunction with the acquisition of AMV, as described in Note 7, the Company entered into a secured
promissory note in the aggregate original principal amount of $5,375 (the “AMV Note”). With accrued interest, the balance of this note
was $6,333 at March 31, 2010 and $5,945 at March 31, 2009.
F-27
NeuMedia, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
On October 23, 2008, the Company, Twistbox and ValueAct entered into a Second Amendment (the “Second Amendment”) to the
ValueAct Note. Among other things, the Second Amendment provided for a payment in kind election, whereby, in lieu of making any
cash payments to ValueAct on the following two interest payment dates, Twistbox had the option to elect that the amount of any interest
due on such date be added to the principal amount due under the ValueAct Note. That election was made in connection with the first
interest payment following the amendment. In addition, ValueAct agreed to amend the ValueAct Note to modify the covenant requiring
that the Company and Twistbox maintain certain minimum combined cash balances, during specified periods of time. Lastly, the Second
Amendment provided that an event of default may be triggered in the event the Company fails to observe certain covenants as agreed to
in the Second Amendment, including a covenant that, until all principal and interest and any other amounts due under the ValueAct Note
are paid in full in cash, the Company: (i) would not create, incur, assume or permit to exist certain indebtedness, except for indebtedness
in connection with a receivables facility as described in the Second Amendment, which indebtedness would rank pari passu in right of
payment on the ValueAct Note, provided, that any receivables used to procure and maintain such receivables facility would not be
subject to any lien of ValueAct during the term of such receivables facility; and (ii) would not, and would not permit any subsidiary to,
without the prior consent of ValueAct, prepay any indebtedness incurred in connection with the AMV Note, other than prepayments
with proceeds raised in an equity financing as permitted by the AMV Note. Additionally, on October 23, 2008, in connection with the
ValueAct Note, as amended, AMV agreed to grant to ValueAct a security interest in its assets, which ranks senior to the security
interest granted to the sellers of AMV. AMV also agreed to guarantee Twistbox’s repayment of the ValueAct Note.
As described above, the Company had previously issued to ValueAct two warrants to purchase shares of the Company’s common
stock. One warrant entitled ValueAct to purchase up to a total of 1,093 shares of common stock at an exercise price of $7.55 per share
(“$7.55 Warrant”). The other warrant entitled ValueAct to purchase up to a total of 1,093 shares of common stock at an initial exercise
price of $5.00 per share (“$5.00 Warrant,” and together with the $7.55 Warrant, the “ValueAct Warrants”). On October 23, 2008, the
Company and ValueAct entered into an allonge to each of the ValueAct Warrants. Among other things, the exercise price of each of the
ValueAct Warrants was amended to be $4.00 per share. The price change resulted is an adjustment to the valuation of the warrants and
therefore to the debt discount which is amortized over the life of the term of the debt.
On August 14, 2009, the Company, Twistbox and ValueAct entered into a Third Amendment (the “Third Amendment”) to the
ValueAct Note. Among other things, the Third Amendment provided for the due date to be extended to July 31, 2010, an interest rate of
12.5% from the date of the agreement through maturity, an extension of the payment in kind (“PIK”) election through to the interest
payment otherwise due in January 2010, and a reduction in the minimum cash covenant to $1 million until January 31, 2010 and $4
million thereafter, subject to certain conditions. There were no other significant changes.
As described above, the Company had previously issued to ValueAct warrants to purchase shares of the Company’s common stock. On
August 14, 2009, the Company and ValueAct entered into an allonge to the warrant to purchase 1,093 shares of common stock. The
exercise price of the Warrant was amended from $4.00 to $1.25 per share, and the termination date of the warrants was amended to July
14, 2010. The impact of the price change of the warrants is immaterial to the consolidated financial statements.
In addition the Company and the sellers of AMV entered into an agreement which extended the maturity date of the AMV Note which
represented deferred purchase consideration in relation to the AMV acquisition, until July 31, 2010.
F-28
NeuMedia, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
On January 25, 2010, the Company, Twistbox and ValueAct entered into a Waiver to Senior Secured Note (the “Waiver”), pursuant to
which ValueAct agreed to waive certain provisions of the ValueAct Note. Pursuant to the Waiver, subject to Twistbox’s compliance
with certain conditions set forth in Section 2 of the Waiver (the “Conditions”), certain rights to prepay the ValueAct Note were extended
from January 31, 2010 to March 1, 2010. In addition, subject to Twistbox’s compliance with the Conditions, the timing obligation of the
Company and Twistbox to comply with the cash covenant set forth in the ValueAct Note was extended to March 1, 2010 and the
minimum cash balance which Twistbox and the Company was required to maintain was increased to $1,600.
On February 25, 2010, Twistbox received a letter (the “Notice”) from ValueAct alleging certain events of default with respect to the
ValueAct Note. The Notice claimed that an event of default had occurred and was continuing under the ValueAct Note as a result of
certain alleged defaults. In the Notice, ValueAct reserved its rights and remedies under the loan documents relating to the ValueAct
Note. The Notice did not state that ValueAct had elected for the unpaid principal and accrued interest under the ValueAct Note to
become due and payable. The Notice claimed that the Waiver, which among other things, had extended certain rights of Twistbox to
prepay amounts under the ValueAct Note from January 31, 2010 to March 1, 2010 in order to extend the maturity of remaining amounts
due under the ValueAct Note and extended the time period for the Company and Twistbox to comply with the $4,000 minimum cash
balance covenant set forth in the ValueAct Note to March 1, 2010, had ceased to be effective as a result of the alleged failure of the
Company to comply with the conditions set forth in the Waiver. Under the ValueAct Note, upon the occurrence of an event of default,
ValueAct, by written notice to Twistbox, may declare the unpaid principal amount of the ValueAct Note, plus accrued but unpaid
interest thereon, to be immediately due and payable. Commencing after the occurrence of an event of default and so long as the default is
continuing, the interest rate applicable under the ValueAct Note is to increase an additional 2% per annum. If an event of default had
been determined to have occurred and continuing, and ValueAct had declared the unpaid principal amount of the ValueAct Note, plus
accrued but unpaid interest thereon, to be immediately due and payable, it may also have exercised its rights pursuant to the Guaranty
and Security Agreement and the Debenture to foreclose on the assets of Twistbox and AMV. The Company believed that the events
described in the Notice did not constitute defaults or if such events do constitute defaults, and that Twistbox was entitled to requisite
cure periods which ValueAct had failed to observe and that ValueAct had not properly exercised its rights under the ValueAct Note.
On May 10, 2010, Twistbox received from ValueAct a Notice of Event of Default and Acceleration (“Acceleration Notice”) in which
ValueAct stated that an event of default occurred under the ValueAct Note as a result of Twistbox’s and the Company’s failure to
comply with the cash balance covenant under the ValueAct Note and, therefore, ValueAct had accelerated all outstanding amounts
payable by Twistbox under the ValueAct Note. In connection with the Acceleration Notice, ValueAct instituted an administration
proceeding in the United Kingdom against AMV. The Company continued to dispute the timeliness of ValueAct’s claim and contended
that the commencement of the administration in the United Kingdom may have been unfounded.
As described in Note 16, in connection with the disposal of AMV subsequent to March 31, 2010, all amounts due and payable under
the AMV Note were released, and the ValueAct Note was amended and restated in its entirety and reduced to $3.5 million (the
“Amended ValueAct Note”).
F-29
NeuMedia, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
In addition, for purposes of capitalizing the Company, the Company sold and issued $2,500 of Senior Secured Convertible Notes due
June 21, 2013 of the Company (the “New Senior Secured Notes”) to certain of the Company’s significant stockholders. The New
Senior Secured Notes have a three year term and bear interest at a rate of 10% per annum payable in arrears semi-annually.
Notwithstanding the foregoing, at any time on or prior to the 18th month following the original issue date of the New Senior Secured
Notes, the Company may, at its option, in lieu of making any cash payment of interest, elect that the amount of any interest due and
payable on any interest payment date on or prior to the 18th month following the original issue date of the New Senior Secured Notes be
added to the principal due under the New Senior Secured Notes. The accrued and unpaid principal and interest due on the New Senior
Secured Notes are convertible at any time at the election of the holder into shares of common stock of the Company at a conversion price
of $0.15 per share, subject to adjustment. The New Senior Secured Notes are secured by a first lien on substantially all of the assets of
the Company and its subsidiaries pursuant to the terms of that certain Guarantee and Security Agreement, dated as of June 21, 2010,
among Twistbox, the Company, each of the subsidiaries thereof party thereto, the investors party thereto and Trinad Management. The
Amended ValueAct Note is subordinated to the New Senior Secured Notes pursuant to the terms of that certain Subordination
Agreement, dated as of June 21, 2010, by and between Trinad Fund, and ValueAct, and each of the Company and Twistbox.
Each purchaser of a New Senior Secured Note also received a warrant (“Warrant”) to purchase shares of common stock of the
Company at an exercise price of $0.25 per share, subject to adjustment. For each $50,000 of New Senior Secured Notes purchased, the
purchaser received a Warrant to purchase 166,667 shares of common stock of the Company. Each Warrant has a five year term.
At March 31, 2010, minimum future obligations through July 31, 2010, including interest, under the ValueAct Note were $20,557
including repayment of the principal.
10. Related Party Transactions
The Company engages in various business relationships with shareholders and officers and their related entities. The significant
relationships are disclosed below.
On September 14, 2006, the Company entered into a management agreement (“Agreement”) with Trinad Management for five years.
Pursuant to the terms of the Agreement, Trinad Management will provide certain management services, including, without limitation, the
sourcing, structuring and negotiation of a potential business combination transaction involving the Company in exchange for a fee of
$90 per quarter, plus reimbursements of all expenses reasonably incurred in connection with the provision of Agreement. The
Agreement expires on September 14, 2011. Either party may terminate with prior written notice. However, if the Company terminates, it
shall pay a termination fee of $1,000. For the years ended March 31, 2010 and 2009, the Company incurred management fees under the
agreement of $360 and $360 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
$99 and $104 respectively for the years ended March 31, 2010 and 2009.
11. Capital Stock Transactions
Preferred Stock
There are 100 shares of Series A Convertible Preferred Stock authorized, issued and outstanding. The stock has a par value of $0.0001
per share. The Series A holders shall be entitled to: (1) vote on an equal per share basis as common, (2) dividends 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 on an as if-converted basis. The holder of the preferred stock has agreed not to exercise certain rights until such time as
the Amended ValueAct Note has been repaid in cash in full.
F-30
NeuMedia, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
Common Stock
In September 2009, the Company granted warrants to purchase 1,200 shares of common stock of the Company to a vendor. The
warrants are exercisable at $1.25 per share, through September 23, 2014 and were valued at $134 at the time of issue.
12.
Employee Benefit Plans
The Company has an employee 401(k) savings plan covering full-time eligible employees. These employees may contribute eligible
compensation up to the annual IRS limit. The Company does not make matching contributions.
13.
Income Taxes
The difference between taxes at actual rates and the federal statutory rate was as follows:
Statutory Federal Income Taxes
State income taxes, net of federal benefit
Write down of goodwill and other perm difference
Foreign Expense
Increase in Valuation Allowance
Income tax provision (benefit)
Less discontinued Operations
Income tax provision (benefit) for Continuing Ops
F-31
Year Ended Year Ended
March 31, March 31,
2010
(14,920)
(645)
11,157
903
4,713
1,208
(903)
305
2009
(14,191)
(2,087)
12,057
-
4,110
(111)
269
158
NeuMedia, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
Deferred tax assets and liabilities consist of the following:
Net Operating Loss Carryforward
Amortization of Intangible Asset
Stock-based compensation
Credit Carryforwards
Other
Deferred State Tax
Valuation Allowance
Net Deferred Tax Asset
March 31, March 31,
20009
16,985
196
1,679
-
-
18,860
(18,860)
-
2010
22,352
(3,259)
2,602
553
107
22,355
(22,355)
-
In accordance with ASC 740 and based on all available evidence on a jurisdictional basis, the Company believes that, it is more likely
than not that its deferred tax assets will not be utilized, and has recorded a full valuation allowance against its net deferred tax assets in
each jurisdiction.
As of March 31, 2010, the Company had net operating loss (NOL) carry-forwards to reduce future Federal income taxes of
approximately $56,000, expiring in various years ranging through 2029. Utilization of the NOLs may be subject to a substantial annual
limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the
Internal Revenue Code of 1986, as amended (the "Code"), as well as similar state limitations. These ownership changes may limit the
amount of NOLs that can be utilized annually to offset future taxable income and tax, respectively. In general, an "ownership change"
as defined by Section 382 of the Code, results from a transaction of series of transactions over a three-year period resulting in an
ownership change of more than 50 percentage points of the outstanding stock by a company by certain stockholders or public groups.
As of March 31, 2010, realization of the Company's net deferred tax asset of approximately $22,353 was not considered more likely
than not and, accordingly, a valuation allowance of $22,253 has been provided. During the year ended March 31, 2010, the valuation
allowance increased by $3,495.
Management has evaluated and concluded that there are no significant uncertain tax positions requiring recognition in the Company’s
financial statements as of March 31, 2010.
ASC 740 requires the consideration of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Significant
management judgment is required in determining any valuation allowance recorded against deferred tax assets. The Company adopted
the provisions of ASC 740 on January 1, 2008 and there was no difference between the amounts of unrecognized tax benefits
recognized in the balance sheet prior to the adoption of ASC 740 and those after the adoption of ASC 740. There were no unrecognized
tax benefits not subject to valuation allowance as at March 31, 2010 and March 31, 2009. The Company recognized no interest and
penalties on income taxes in its statement of operations for the year ended March 31, 2010; or the year ended March 31,
2009. Management believes that with few exceptions, the Company is no longer subject to income tax examinations by tax authorities
for years before March 31, 2004.
F-32
NeuMedia, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
14.
Segment and Geographic information
The Company operates in one reportable segment in which it is a developer and publisher of branded 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 March 31, 2010:
Twelve Months ended March 31, 2010
Net sales to unaffiliated customers
Twelve Months ended March 31, 2009
Net sales to unaffiliated customers
North
America
Europe
Other
Regions
Consolidated
2,497
11,276
264 $
14,037
4,818
13,663
1,583 $
20,064
Property and equipment, net at March 31, 2010
528
73
2 $
603
Our largest customers accounted for 44% of gross revenues in the year ended March 31, 2010; and 33% in the year ended March 31,
2010.
15. Commitments and Contingencies
Operating Lease Obligations
The Company leases office facilities under noncancelable operating leases expiring in various years through 2012.
Following is a summary of future minimum payments under initial terms of leases at March 31, 2010:
Year Ending March 31,
2011
2012
2013 and thereafter
Total minimum lease payments
$
$
146
10
-
156
These amounts do not reflect future escalations for real estate taxes and building operating expenses. Rental expense for continuing
operations amounted to $851 and $666 respectivly for the years ended March 31, 2010 and 2009.
F-33
NeuMedia, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
Minimum Guaranteed Royalties
The Company has entered into license agreements with various owners of brands and other intellectual property so that it could develop
and publish branded products for mobile handsets.
Pursuant to some of these agreements, the Company is required to pay minimum royalties over the term of the agreements regardless of
actual sales. Future minimum royalty payments for those
agreements as of March 31, 2010 were as follows:
Year Ending March
31,
2011
2012
Total minimum payments
Minimum
Guaranteed
Royalties
$
$
120
30
150
Commitments in the above table include guaranteed royalties to licensors that are included as a liability in the Company’s consolidated
balance sheet of $150 at March 31, 2010, because the Company has determined that recoupment is unlikely.
Other Obligations
As of March 31, 2010, the Company was obligated for payments under various distribution agreements, equipment lease agreements,
employment contracts and the management agreement described in Note 10 with initial terms greater than one year at March 31,
2010. Annual payments relating to these commitments at March 31, 2010 are as follows:
Year Ending March 31,
2011
2012
2013
Total minimum payments
Litigation
Commitments
$
$
2,305
178
2
2,485
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. 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.
F-34
NeuMedia, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
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.
16.
Subsequent Events
Management has evaluated subsequent events through July 14, 2010, the business date that this Report on the Form 10-K was filed
with the SEC.
As previously disclosed, on May 10, 2010, Twistbox received from ValueAct a Notice of Event of Default and Acceleration (“Notice”).
In the Notice, ValueAct stated that an event of default occurred under the ValueAct Note, as a result of Twistbox’s and the Company’s
failure to comply with the cash balance covenant under the ValueAct Note and, therefore, ValueAct accelerated all outstanding amounts
payable by Twistbox under the ValueAct Note. The ValueAct Note was secured by, among other things, the assets of AMV, a wholly
owned subsidiary of the Company, which was also a guarantor of the Note. In connection with the Notice, ValueAct instituted an
administration proceeding in the United Kingdom against AMV.
On June 21, 2010, the Company signed and closed the transactions contemplated by a binding agreement (the “Agreement”) with
ValueAct, Jonathan Cresswell (“Cresswell”), Nathaniel MacLeitch (including in his capacity as Trustee for the AMV Founders under
the AMV Note (each as defined below) (“MacLeitch”), Robert Ellin (“Ellin”), Trinad Management, LLC (“Trinad Management”) and
Trinad Capital Master Fund, Ltd. (“Trinad Fund” and together with Ellin and Trinad Management, the “Trinad Affiliates”) and the
Guber Family Trust (“Guber” and, together with the Trinad Affiliates, the “Lead Participating Investors”) with regard to the (i) partial
satisfaction of the ValueAct Note, and (ii) satisfaction of the AMV Note.
Sale of AMV
Pursuant to the Agreement, ValueAct and the AMV Founders, acting through a newly formed company (“NewCo”), acquired the
operating subsidiaries of AMV (the “Assets”) in exchange for the release of approximately $23,300 of secured indebtedness (the
“Sale”), comprising of a release of all amounts due and payable under the AMV Note and all of the amounts due and payable under the
ValueAct Note except for $3,500 in principal. The Company retained all assets and liabilities of Twistbox and the Company other than
the Assets.
In connection with the Sale and the other transactions contemplated by the Agreement and the transaction documents set forth in the
Agreement (the “Restructure”), (i) the ValueAct Note (as amended and restated, the “Amended VAC Note”), (ii) that certain Guarantee
and Security Agreement, dated as of June 30, 2007, by and among the Company, the subsidiary guarantors party thereto, the investors
party thereto and ValueAct and (iii) that certain Guaranty, given as of February 12, 2008, by the Company to ValueAct (as amended and
restated, the “ Amended and Restated Guaranty”), were amended and restated in their entirety.
F-35
NeuMedia, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
New Senior Secured 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 the Lead Participating Investors. The New Senior Secured Notes
have a three year term and bear interest at a rate of 10% per annum payable in arrears semi-annually. Notwithstanding the foregoing, at
any time on or prior to the 18th month following the original issue date of the New Senior Secured Notes, the Company may, at its
option, in lieu of making any cash payment of interest, elect that the amount of any interest due and payable on any interest payment date
on or prior to the 18th month following the original issue date of the New Senior Secured Notes be added to the principal due under the
New Senior Secured Notes. The accrued and unpaid principal and interest due on the New Senior Secured Notes are convertible at any
time at the election of the holder into shares of common stock of the Company at a conversion price of $0.15 per share, subject to
adjustment. The New Senior Secured Notes are secured by a first lien on substantially all of the assets of the Company and its
subsidiaries pursuant to the terms of that certain Guarantee and Security Agreement, dated as of June 21, 2010, among Twistbox, the
Company, each of the subsidiaries thereof party thereto, the investors party thereto and Trinad Management. The Amended ValueAct
Note is subordinated to the New Senior Secured Notes pursuant to the terms of that certain Subordination Agreement, dated as of June
21, 2010, by and between Trinad Fund, and ValueAct, and each of the Company and Twistbox.
Each purchaser of a New Senior Secured Note also received a warrant (“Warrant”) to purchase shares of common stock of the
Company at an exercise price of $0.25 per share, subject to adjustment. For each $50 of New Senior Secured Notes purchased, the
purchaser received a Warrant to purchase 166,667 shares of common stock of the Company. Each Warrant has a five year term.
The New Senior Secured Notes and Warrants were sold and issued in a transaction exempt from registration under the Securities Act of
1933, as amended (the “ Securities Act ”), pursuant to Section 4(2) of the Securities Act.
Under the Agreement, certain significant stockholders of the Company have the right to purchase up to an aggregate $600 of the New
Senior Secured Notes.
F-36
Exhibit 21
Entity
NeuMedia, Inc.
Chief Executive Offices or
Principal Place of Business
Jurisdiction of
Organization
FEIN
Company
Organizational
Numbers
2000 Avenue of the Stars,
Suite 410, LA CA 90067
Delaware
22-2267658
4423588
Twistbox Entertainment,
Inc.
14242 Ventura Blvd., 3rd Floor
Sherman Oaks, CA 91423
WAAT Media Corp.
14242 Ventura Blvd., 3rd Floor
Sherman Oaks, CA 91423
Twistbox Entertainment
Ltd. (Russia)
Smolensky Passage, 3
Smolenskaya sq. 7th floor,
Moscow 121099, Russia
Twistbox Entertainment
Limited (UK)
Central Court
25 Southhampton
Buildings Chancery Lane
London WC2A 1AL-UK
Twistbox Entertainment
LTDA (Brazil)
Rua Frei Duarte Jorge de
Mendonca, 100, 12 andar,
Sao Paulo, SP 05725-060, Brazil
WAAT Media Chile SA
Moneda Nº 970, Piso 8,
Santiago de Chile
WAAT Media Ltd
Colombia
CI 69 No 11 A-53, Bogota,
Colombia CP 1, Colombia
Twistbox Games Ltd. &
Co KG (DE)
Lohbachstr. 12
58239 Schwerte Germany
Twistbox Games Ltd
(UK)
Central Court
25 Southhampton Buildings
Chancery Lane London
WC2A 1AL-UK
Delaware
80-0058995
4207607
Delaware
4253647
Russian Federation
43909
United Kingdom
5418091
Brazil
Chile
09.091.052/00001-95
76-615-370-4
Colombia
76-615-370-4
Germany
DE814164894
United Kingdom
05145811
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Exhibit 31.1
I, Ray Schaaf, certify that:
1. I have reviewed this Annual Report on Form 10-K of NeuMedia, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: July 14, 2010
/s/ Ray Schaaf
Ray Schaaf
President
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Russell Burke, certify that:
1. I have reviewed this Annual Report on Form 10-K of NeuMedia Media, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: July 14, 2010
/s/ Russell Burke
Russell Burke
Chief Financial Officer
(Principal Financial Officer)
Certification of Principal Executive Officer
Pursuant to U.S.C. Section 1350
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 32.1
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code),
the undersigned officer of NeuMedia, Inc., a Delaware corporation (the “Company”), does hereby certify, to such officer’s knowledge, that:
The Annual Report on Form 10-K for the period ending March 31, 2010 of the Company (the “Form 10-K”) fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in the Form 10-K fairly presents, in
all material respects, the financial condition and results of operations of the Company.
Dated: July 14, 2010
/s/ Ray Schaaf
Ray Schaaf
President
Certification of Principal Financial Officer
Pursuant to U.S.C. Section 1350
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 32.2
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code),
the undersigned officer of NeuMedia, Inc., a Delaware corporation (the “Company”), does hereby certify, to such officer’s knowledge, that:
The Annual Report on Form 10-K for the period ending March 31, 2010 of the Company (the “Form 10-K”) fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in the Form 10-K fairly presents, in
all material respects, the financial condition and results of operations of the Company.
Dated: July 14, 2010
/s/ Russell Burke
Russell Burke
Chief Financial Officer