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, 2012
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 00-10039
MANDALAY DIGITAL GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
4751 Wilshire Boulevard, Third Floor
Los Angeles, CA
(Address of Principal Executive Offices)
22-2267658
(I.R.S. Employer Identification No.)
90010
(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 x 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. ¨
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, 2011 was $16,271,626.
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 June 15, 2012, the Company had 83,791,232 shares of its common stock, $0.0001 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Mandalay Digital Group, Inc.
ANNUAL REPORT ON FORM 10-K
FOR THE PERIOD ENDED MARCH 31, 2012
TABLE OF CONTENTS
PART I
ITEM 1.
BUSINESS
ITEM 1A.
RISK FACTORS
ITEM 2.
ITEM 3.
ITEM 4.
PART II
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURE
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
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
SIGNATURES
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PART I
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Information included in this Annual Report on Form 10-K (the “Form 10-K”) contains 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”). We claim the protection of the safe harbor contained in the Private Securities Litigation Reform Act
of 1995. All statements, other than statements of historical facts included in this 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
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,” “future,” “plan,” 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, but not limited to, a continued decline in general economic conditions nationally and internationally; decreased demand for
our products and services; market acceptance of our products; the ability to protect our intellectual property rights; impact of any litigation or
infringement actions brought against us; competition from other providers and products; risks in product development; inability to raise capital
to fund continuing operations; changes in government regulation; the ability to complete customer transactions and capital raising transactions,
and other factors, including the risk factors described in greater detail in Item 1A of this Form 10-K under the heading “Risk Factors.” Should
one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ
significantly from those anticipated, believed, estimated, expected, intended or planned. 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
History of Mandalay Digital Group, Inc.
Mandalay Digital Group, Inc. ("Mandalay" or the "Company" or, in the first person as “we” “us” and “our”), 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 11, 2010, Mandalay Media, Inc. merged into its wholly-owned, newly formed subsidiary, NeuMedia Inc., with NeuMedia
as the surviving corporation. NeuMedia issued: (1) one new share of common stock in exchange for each share of outstanding common stock
of Mandalay Media, Inc. and (2) one new share of preferred stock in exchange for each share outstanding preferred stock of Mandalay Media,
Inc. as of May 11, 2010. The preferred and common stock of NeuMedia had the same status and par value as the respective stock of
Mandalay Media, Inc. and NeuMedia acceded to all the rights, acquired all the assets and assumed all of the liabilities of Mandalay Media, Inc.
3
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 its secured notes in satisfaction of the principal and accrued interest thereon; (2) $400,000 was transferred to a liquidation trust
and used to pay administrative costs and certain preferred creditors; (3) $100,000 was 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.
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 and its subsidiaries, a mobile media and marketing company. On June 21, 2010, we sold AMV
Holding Limited and its subsidiaries.
Current Operations
Mandalay is at the convergence of Internet media content and mobile communications. We are an established provider of mobile
services enabling mobile content distribution and transactions serving Mobile Operators, End Consumers, and Original Equipment
Manufactures (OEM’s) of mobile devices and tablets. Our software as a service ("SaaS") based platform delivers a mobile services platform
that works with mobile operators and third-party publishers to provide portal management, user interface, content development and billing
technology that enables the ecosystem required for the global distribution of mobile content. Our platforms enable our customers to implement
an intuitive user experience and storefront, enabling the discovery, purchase and download of mobile content. Our integrated solutions address
the mobile ecosystem spanning mobile optimized websites, mobile applications, mobile merchandising and content management, mobile
messaging, mobile advertising, mobile billing and predictive analytics. Our solutions allow our customers to drive loyalty, generate revenue
and reengineer business processes to capture the advantages of their mobile-enabled customer base. Our predictive analytics capabilities allow
our customers to recommend the right solution to their end-customer based upon the consumers’ tastes and preferences. We are headquartered
in Los Angeles and have offices in Europe to support global sales and marketing.
Key Operating Divisions
Digital Turbine
On December 28, 2011, the Company acquired the assets of Digital Turbine Group, LLC, the developer of Digital Turbine (“DT”), a
technology platform that allows media companies, mobile carriers, and their OEM handset partners to take advantage of multiple mobile
operating systems across multiple networks, and offers solutions that allow them to maintain their own branding and personalized, one-to-one
relationships with each end-user. DT’s cross-platform user interface and multimedia management system for carriers and OEMs can be
integrated with different operating systems to provide a more organized and unified experience for end-users of mobile content across search,
discovery, billing, and delivery. Other aspects of the platform, such as a smart content discovery toolbar, allows carriers and OEMs to control
the data presented to their users while giving the end-user a more efficient way of finding and purchasing the desired content.
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With the acquisition and integration of the assets of Digital Turbine, the Company will be able to provide an end-to-end, modular
platform to the Company’s existing carrier customers. The combined Digital Turbine offering allows new and existing customers to choose
from a fully outsourced, smart mobile ecosystem to more efficient, modular components that can be integrated with different operating systems
to provide a more unified experience for end-users of mobile content across search, discovery, billing, and delivery.
Based upon the initial launch data, the Company believes there is an opportunity to integrate its DT platform with new and existing
mobile carriers. Mobile carriers are facing increased competition from competing mobile application storefronts and improved user experiences
from other retailing, social networking, and operating system providers including Apple, Google, Amazon, and Facebook. As a result,
operators are looking for new, innovative solutions for how they better manage their existing user experience. The DT platform can be “white-
labeled” to allow operators to custom tailor their own unique branding experience to the customer.
In addition to improved user experiences, many operators are looking for end-to-end solutions for their mobile storefronts that
include procuring and programming the content, managing the content experience, ingesting content into the content management system
(CMS), securely installing and de-installing applications from the device, and integrating with the back-end elements such as billing interfaces,
analytics, settlement, and reporting.
Twistbox Entertainment, Inc.
Twistbox Entertainment, Inc. (“Twistbox”) is a global publisher, developer and enabler of mobile content and data services across
mobile networks. Twistbox provides its services in over 14 countries supporting over 50 carriers. Since operations began in 2003, Twistbox
has developed an intellectual property portfolio that includes a proprietary mobile publishing platform covering: tools that automate device
management; distribution and billing technology; a mobile games development, distribution and retail platform; and a content ratings system
adopted by wireless carriers globally to assist with the deployment of age-verified content. Twistbox has leveraged its intellectual property and
carrier-class platforms to secure agreements with leading mobile operators throughout the world including, among others, Vodafone,
Telefonica, Orange, and Hutchison’s 3.
We are considering the future status and role of Twistbox in relation to our focus on the DT platform. Although it is our only active
business, Twistbox revenues have been declining, which we expect to continue for the foreseeable future. At the same time, we intend to seek
to leverage its existing customer base for offerings by DT. While we believe the offering of DT’s platform to Twistbox customers is an
attractive strategy, it entails significant risks, some of which are described in “Risk Factors”, and include the possibility that Twistbox may
operate at a deficit while we need to make investments to effectively launch DT, which, in turn, entails business and financial risks and the
possibility of needing additional capital and the associate dilution.
Twistbox’s 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.
On February 12, 2008, the Company 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.
5
Revenue
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 mobile site or suite of mobile TV channels. Twistbox also earns revenue for
platform and portal management, carrier development projects, and by licensing its platform to mobile operators and other 3rd party vendors.
Since the year ended March 31, 2010 the total revenue earned by Twistbox has materially declined due in part to overall market conditions and
the general shift in end-user discovery of content services. These trends are likely to continue as more and more users begin to use their mobile
devices to search for content. The Company’s strategy is to work with mobile carriers to try to recapture and grow market share by offering its
DT platform to new and existing customers.
Twistbox leverages its distribution channels within carrier portals to generate revenue from subscriptions on mobile sites that
Twistbox manages on an exclusive and non-exclusive basis. Twistbox bills and receives payment directly through mobile carriers and billing
aggregators which form the majority of its revenue. Billings from mobile operators or billing aggregators comprise more than 50% of its
collections. Twistbox’s cost of revenues represents license fees paid to content providers, which currently averages approximately 12% of
revenues. Other costs of revenues include customer service fees, and traffic and streaming fees.
Value Added Services for Mobile Content and Game Development
Twistbox is focusing its development activities on value-added services such as in-application billing technology that enables carriers
and billing aggregators to offer solutions such as try-before-you-buy, rentals, and virtual goods. Twistbox has agreements in place with some
of the world’s largest mobile network operators and billing aggregators to offer its In-Application Billing solution.
Twistbox also develops games and applications that work with a number of languages, platforms, and formats. It has been 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. Twistbox continues to develop new applications to assure that it has a steady supply of new content and
services to offer its customers. Twistbox believes it is an industry trend that the overall market for mobile entertainment should continue to
increase as new storefronts proliferate and mobile operators continue to roll out their next-generation service offerings and advanced handsets
offering improvements in billing, data handling capability, graphics resolution and other features.
Carrier-Class Publishing Platform
Renux™ is Twistbox’s carrier-class content management and publishing platform developed for the deployment, billing and
marketing of mobile content and applications. The system has been in operation for over five years and today supports over 350 mobile sites,
and more than 66 mobile TV channels. The Renux™ content management system stores image and video content formatted for a wide range
of mobile 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 across mobile operator networks globally.
6
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 Apple, 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 iOS, Android, J2ME, BREW, DoJa
and Symbian, and provides localization in over 18 languages. Twistbox has enhanced RapidPort™ to include new technology designed to
enhance titles with value-added features, such as in-application billing, multi-player and play-for-prizes functionality, 3D graphics and
location-based services (LBS).
Nitro-CDP™
Nitro-CDP™ is a 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™ 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 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 Play-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.
Distribution
Twistbox distributes its programming and services through on-deck relationships with mobile carriers, off-deck relationships with
third-party aggregators, and through affiliates.
Twistbox’s on-deck services include the programming and provisioning of games and games aggregation, images, videos and mobile
TV content and portal management. Twistbox currently has on-deck agreements with more than 50 mobile operators including Vodafone,
SFR, T-Mobile, Orange, and Telefonica in over 14 countries. Through these on-deck agreements, Twistbox relies on the carriers for both
marketing and billing.
Twistbox off-deck services include the programming and distribution of 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 maintains an affiliate program that allows for the sales and tracking of Twistbox mobile content by 3rd party
publishers, partners and their affiliates.
7
Twistbox has established an affiliate program to market and sell its content off-deck. We believe that this channel offers an attractive
secondary channel for consumers wishing to peruse and purchase content in an environment that is more niche focused than some operators’
“walled gardens.”
Mobile Operators (Carriers)
Twistbox currently has a large number of distribution agreements with mobile operators and portals in Europe, North America, and
Latin America. Twistbox currently has distribution agreements with more than 50 single territory operators in 14 countries. The strength and
coverage of these relationships is of paramount importance and the ability to support and service them is a vital channel for Twistbox’s new
product offerings and services.
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, the Company 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.
On June 21, 2010, the Company signed and closed an agreement whereby ValueAct and the AMV founders, acting through a newly
formed company, acquired all of the AMV operating subsidiaries (the “Assets”) in exchange for the release of $23.2 million of secured
indebtedness, comprising of a release of all amounts due and payable under the AMV Note and all of the amounts due and payable under the
ValueAct Note (as defined below) except for $3.5 million in principal. The Company retained all assets and liabilities of Twistbox and the
Company other than the AMV operating subsidiaries
8
Future Plans
As a result of both the needs of the operator and the need for the Company to scale its distribution, the Company is pursuing targeted
acquisitions that will accelerate growth. On May 1, 2012, the Company announced a letter of intent to acquire Logia Mobile (“Logia”). Logia
Mobile is an Israel-based developer of applications and provider of content. It has relationships with over 500 applications developers and
content vendors, and currently operates in more than 20 countries providing services including in-app billing to more than 50 leading mobile
carriers including: Cellcom, Vodafone, Verizon, Telefonica, Turkcell, Deutsche Telekom among others reaching over 1.5 billion mobile
subscribers. In addition, Logia has existing partnerships with industry suppliers including Amdocs, Ericsson, and Alcatel-Lucent. Mandalay
plans on leveraging Logia’s distribution channels and complimentary technology to add to the Digital Turbine user experience by leveraging
devices that are powered by Logia’s platform and CMS. The Company believes that certain of the assets of Twistbox could be utilized in
assets potentially acquired from the transaction. Logia has no legal obligation to enter or consummate any transaction with us. Our letter of
intent is non-binding and each side has the right to terminate discussions at any time. There is no assurance we will consummate any
transaction with Logia. The Logia transaction would, if consummated, also present certain risks, as described below in “Risk Factors”
Competition
Twistbox is an established enabler of content management services designed for the complex needs and requirements of mobile
carriers. The industry trend has been for carriers to focus on fewer partners and outsource their content retailing and infrastructure
requirements. We believe that Twistbox’s reputation and existing integration with carriers globally enhances the Company’s overall position
allowing it to continue to manage, evolve and offer new services for operators globally, principally the offering of the DT platform to
Twistbox customers.
Twistbox competes with a number of other companies in the mobile content services industry, including Mondia Media, Net-M,
Jesta, Buongiorno (recently acquired by NTT DoCoMo), Mobile Streams, and ZED Group. To the extent that such firms continue to focus on
enabling services, they will compete directly with Twistbox. While Twistbox competes with many of the leading publishers, its core business
is enabling 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-application billing, Twistbox has become a strategic
value added partner to both the mobile operator and publishing communities.
Our direct-to-consumer (D2C) products may have an adverse impact on Twistbox’s business, as these are products that require the
acquisition of mobile traffic from 3rd party publishers that may not price their traffic at rates favorable to scale the business in certain
countries.
We believe that the principal competitive factors in the market for mobile content and services 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.
Employees
As of March 31, 2012, the Company, including its subsidiaries, had 33 employees, 30 of whom were full-time and 3 of whom were
part-time. We consider our relationships with our employees to be satisfactory. None of our employees is covered by a collective bargaining
agreement.
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 Mandalay Digital Group, Inc. (“Mandalay”) through its operating and wholly-owned subsidiary Twistbox Entertainment, Inc.
(“Twistbox”).
Investing in our common stock involves a high degree of risk. Current investors and potential investors should consider carefully the
risks and uncertainties described below together with all other information contained in this Form 10-K before making investment decisions
with respect to our common stock. If any of the following risks actually occurs, our business, financial condition, results of operations and our
future growth prospects would be materially and adversely affected. Under these circumstances, the trading price and value of our common
stock could decline, resulting in a loss of all or part of your investment. The risks and uncertainties described in this Form 10-K are not the
only ones facing us. Additional risks and uncertainties of which we are not presently aware, or that we currently consider immaterial, may also
affect our business operations.
9
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 past periods should not be considered indicative of our future performance. In
fact, in future periods, our revenues could decline as they have in recent years. Accordingly, we may not be able to achieve profitability in the
future.
Also, should Twistbox continue to incur significant losses and not become profitable, we might have to sell all or part of Twistbox,
or terminate operations, which could adversely impact our operating results and financial condition, as well as our ability to qualify for a listing
on a senior exchange, and to finance possible acquisitions that we have considered.
In addition, assets acquired under the DT acquisition have not yet begun to generate revenues. If there are delays in the integration of
DT or if we are unable to successfully negotiate with carriers or mobile operators or if these negotiations cannot occur on a timely basis, we
may not be able to generate revenues through the DT assets in the foreseeable future or at all.
We are considering the future status and role of Twistbox in relation to our focus on the DT platform. Although it is our only active
business, Twistbox revenues have been declining, which we expect to continue for the foreseeable future. At the same time, we intend to seek
to leverage its existing customer base for offerings by DT. While we believe the offering of DT’s platform to Twistbox customers is an
attractive strategy, it entails significant risks, some of which are described in “Risk Factors”, and include the possibility that Twistbox may
operate at a deficit while we need to make investments to effectively launch DT, which, in turn, entails business and financial risks and the
possibility of needing additional capital and the associate dilution.
We have a limited operating history in an emerging market, which may make it difficult to evaluate our business.
We have only a limited history of generating revenues, and the future revenue potential of our business in this emerging market is
uncertain. As a result of our short operating history, we have limited financial data that can be used to evaluate our business. Any evaluation of
our business and our prospects must be considered in light of our limited operating history and the risks and uncertainties encountered by
companies in our stage of development. As an early stage company in the emerging mobile entertainment industry, we face increased risks,
uncertainties, expenses and difficulties. To address these risks and uncertainties, we must do the following:
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maintain our current, and develop new, wireless carrier relationships, in both international and domestic markets;
maintain and expand our current, and develop new, relationships with compelling content owners;
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retain or improve our current revenue-sharing arrangements with carriers and content owners;
continue to develop new high-quality products and services that achieve significant market acceptance;
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;
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.
Our financial results could vary significantly from quarter to quarter and are difficult to predict.
Twistbox’s revenues are declining and are expected to continue to decline. 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. 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;
the timing of charges related to impairments of goodwill, intangible assets, royalties and minimum guarantees;
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changes in pricing policies by us, our competitors or our carriers and other distributors;
changes in the mix of original and licensed content, which have varying gross margins;
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.
We currently rely on wireless carriers to market and distribute 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.
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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;
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.
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 licenses that are both 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 our licenses, and such termination would harm our business, operating results and financial
condition.
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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.
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, content licensors, and mobile publishers 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 attracts 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.
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), WAP billing and other technologies. The loss of, or a change in, any of these
significant third-party relationships or the use of mobile billing technologies could reduce the number of transactions initiated by these
end-users and thus materially reduce our revenues.
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Our off-deck business is dependent upon access to available traffic and billing aggregators that use mobile billing 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 certain billing technologies, we would experience a significant reduction in the number of transactions initiated by end-users and
thus material reduction in our revenues.
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.
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.
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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.
Risks Related to Our Market
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 compete for
platform deployment contracts amongst other mobile platform companies. We also compete for experienced and talented employees.
Our primary competitors for the on-deck distribution channels as well as the provisioning of platform services include Mondia
Media, Motricity, net mobile AG, Jesta Digital, Buongiorno (acquired by NTT DOCOMO), Mobile Streams, and Gameloft, and for end-
users via our direct-to-consumer off-deck services they include Zamano plc, Playphone, Inc, Jesta 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. DT, whose principal customers would be
carriers, would face competition from any carriers who decided to distribute their own products or services. In addition, while we are not
aware of any non-carriers who are seeking to offer the equivalent scope of services as the DT platform, various of the competitors mentioned
above (and new competitors entering the mobile platform space) currently offer or could in the future offer components of DT’s platform, and
may seek to expand their offerings to compete with DT on a comprehensive basis, especially if DT’s model and approach meets with success.
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;
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;
greater resources to make acquisitions;
lower labor and development costs; and
broader global distribution and presence.
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If we are unable to compete effectively or we are not as successful as our competitors in our target markets, our sales could decline,
our margins could decline and we could lose market share, any of which would materially harm our business, operating results and financial
condition. If we are unable to compete effectively or we are not as successful as our competitors in our target markets, our sales could decline
(or inhibit generation of sales, in DT's case), our margins could decline and we could lose market share (or in DT's case, fail to penetrate the
market), any of which would 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.
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 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.
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.
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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.
The strategic direction of the Digital Turbine business is not proven or certain.
The business model that Digital Turbine is pursuing, white label storefront solutions, is not proven. There are many different types of
models including, but not limited to, up-front fees, revenue shares, per device fees, and advertising. Initial feedback from customers shows
preference for different types of models. This could lead to risk in predicting future revenues and profits by individual customers. In particular,
the ‘free’ download market is reliant upon mobile advertising and the mobile advertising market is still in a nascent phase of monetization.
In addition, our strategy for Digital Turbine entails offering its platform to Twistbox customers. There can be no assurance that we
will be able to successfully market new services and offerings to Twistbox customers. Moreover, in order to credibly offer DT’s platform, we
will need to achieve additional operational and technical achievements to further develop the product. While we remain optimistic about our
ability to complete this build out, it will be subject to all of the risks attendant to development efforts as well as the need to provide additional
capital to the effort.
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.
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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 and white label storefront providers like us must
support numerous mobile handsets and technologies. However, keeping pace with the rapid innovation of handset technologies together with
the continuous introduction of new, and often incompatible, handset models by wireless carriers requires us to make significant investments in
research and development, including personnel, technologies and equipment. In the future, we may be required to make substantial
investments in our development if the number of different types of handset models continues to proliferate. In addition, as more advanced
handsets are introduced that enable more complex, feature rich products and services, we anticipate that our development costs will increase,
which could increase the risks associated with one or more of our products or services and could materially harm our operating results and
financial condition.
If wireless subscribers do not continue to use their mobile handsets to access mobile entertainment and other applications, our business
growth and future revenues may be adversely affected.
We operate in a developing industry. Our success depends on growth in the number of wireless subscribers who use their handsets
to access data services and, in particular, entertainment applications of the type we develop and distribute. New or different mobile
entertainment applications developed by our current or future competitors may be preferred by subscribers to our offerings. In addition, other
mobile platforms may become widespread, and end users may choose to switch to these platforms. If the market for our products and services
does not continue to grow or we are unable to acquire new end users, our business growth and future revenues could be adversely affected. If
end users switch their entertainment spending away from the kinds of offerings that we publish, or switch to platforms or distribution where
we do not have comparative strengths, our revenues would likely decline and our business, operating results and financial condition would
suffer.
Our industry is subject to risks generally associated with the entertainment industry, any of which could significantly harm our
operating results.
Our business is subject to risks that are generally associated with the entertainment industry, many of which are beyond our control.
These risks could negatively impact our operating results and include: the popularity, price and timing of release of our offerings and mobile
handsets on which they are accessed; economic conditions that adversely affect discretionary consumer spending; changes in consumer
demographics; the availability and popularity of other forms of entertainment; and critical reviews and public tastes and preferences, which
may change rapidly and cannot necessarily be predicted.
A shift of technology platform by wireless carriers and mobile handset manufacturers could lengthen the development period for our
offerings, increase our costs and cause our offerings to be of lower quality or to be published later than anticipated.
Mobile handsets require multimedia capabilities enabled by technologies capable of running applications such as ours. Our
development resources are concentrated in today’s most popular platforms, and we have experience developing applications for these
platforms. If one or more of these technologies fall out of favor with handset manufacturers and wireless carriers and there is a rapid shift to a
new technology where we do not have development experience or resources, the development period for our products and services may be
lengthened, increasing our costs, and the resulting products and services may be of lower quality, and may be published later than anticipated.
In such an event, our reputation, business, operating results and financial condition might suffer.
System or network failures could reduce our sales, increase costs or result in a loss of end users of our products and services.
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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.
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Changes in government regulation of the media and wireless communications industries may adversely affect our business.
It is possible that a number of laws and regulations may be adopted in the United States and elsewhere that could restrict the media
and wireless communications industries, including laws and regulations regarding customer privacy, taxation, content suitability, copyright,
distribution and antitrust. Furthermore, the growth and development of the market for electronic commerce may prompt calls for more
stringent consumer protection laws that may impose additional burdens on companies such as ours conducting business through wireless
carriers. We anticipate that regulation of our industry will increase and that we will be required to devote legal and other resources to address
this regulation. Changes in current laws or regulations or the imposition of new laws and regulations in the United States or elsewhere
regarding the media and wireless communications industries may lessen the growth of wireless communications services and may materially
reduce our ability to increase or maintain sales of our products and services.
A number of studies have examined the health effects of mobile phone use, and the results of some of the studies have been
interpreted as evidence that mobile phone use causes adverse health effects. The establishment of a link between the use of mobile phone
services and health problems, or any media reports suggesting such a link, could increase government regulation of, and reduce demand for,
mobile phones and, accordingly, the demand for our products and services, and this could harm our business, operating results and financial
condition.
Risks Related to Our Management, Employees and Potential Acquisitions
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. We have
had 2 people fill the position of Chief Executive Officer in the last 2 years. The loss of the services of any of our executive officers or other
key employees could harm our business. Because not all of our executive officers and key employees are under employment agreements or are
under agreement with short terms, their future employment with the Company is uncertain specifically our Chief Executive Officer’s and our
Executive Chairman’s agreements each have short terms.
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.
Volatility or lack of performance in our stock price may also affect our ability to attract and retain our key employees. Some 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.
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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 (except as
otherwise disclosed within this document), 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, even in instances
where acquisition negotiations are unsuccessful. 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.
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 acquisition of Logia Mobile might not be successful, or accretive to long-term shareholder value.
While we believe that targeted acquisitions such as Logia Mobile will facilitate accelerated distribution for the DT user experience,
there is no assurance that this will be the case or that we will be able to generate significant growth in revenues from Logia’s mobile customers
or from other potential acquisitions. In particular, a significant portion of Logia Mobile’s revenue comes from one large mobile operator
customer. and Logia Mobile is reliant upon that customer for a significant portion of its operating cash flow. In addition, there is no assurance
that mobile operators will be successful and continue to want to compete with other mobile storefronts, and they may decide they simply want
to provide network access to their customers. The solutions are complex with many different components and there is risk in the ability to
integrate all of these various components into a single solution.
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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 restricted stock and stock
options grants as a fundamental component of our employee compensation packages. We believe that such grants 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 or
restricted stock 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.
Risks Related to the Economy in the United States and Globally
The effects of the recent 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 and the global economy. 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.
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;
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;
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greater fluctuations in sales to end users and through carriers in developing countries, including longer payment cycles and greater
difficulty collecting accounts receivable;
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.
Risks Related to Potential Liability, our Intellectual Property and our Content
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.
Litigation may harm our business.
Substantial, complex or extended litigation could cause us to incur significant costs and distract our management. For example,
lawsuits by employees, stockholders, collaborators, distributors, customers, competitors or others could be very costly and substantially
disrupt our business. Disputes from time to time with such companies, organizations or individuals are not uncommon, and we cannot assure
you that we will always be able to resolve such disputes or on terms favorable to us. Unexpected results could cause us to have financial
exposure in these matters in excess of recorded reserves and insurance coverage, requiring us to provide additional reserves to address these
liabilities, therefore impacting profits.
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.
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.
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. Additionally, we could continue to be exposed to these claims
and potential liability even if and after we decide to sell such assets.
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.
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Negative publicity, lawsuits or boycotts by opponents of content with mature themes could adversely affect our operating performance
and discourage investors from investing in our publicly traded securities.
We could become a target of negative publicity, lawsuits or boycotts by one or more advocacy groups who oppose the distribution of
adult-oriented entertainment. These groups have mounted negative publicity campaigns, filed lawsuits and encouraged boycotts against
companies whose businesses involve adult-oriented entertainment. To the extent our content with mature themes is viewed as adult-oriented
entertainment, the costs of defending against any such negative publicity, lawsuits or boycotts could be significant, could hurt our finances and
could discourage investors from investing in our publicly traded securities. To date, we have not been a target of any of these advocacy
groups. As a provider of content with mature themes, we cannot assure you that we may not become a target in the future.
Risks Relating to Our Common Stock
There is a limited trading market for our common stock.
Although prices for our shares of common stock are quoted as of the date of this filing on the OTC QB tier of the OTC Markets
(under the symbol MNDL), 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. We were removed from the OTC Bulletin Board in April 2012 due to
having three untimely filings with the SEC in a two-year period.
There is no assurance that we will regain OTC bulletin board quotation or a listing on any national securities exchange, whose
requirements would require a reverse split of our stock, compliance with other quantitative and qualitative requirements and a subjective
evaluation by the staffs of any such national securities exchange. Even if we attain a listing on a national securities exchange there is no
guarantee we will maintain it.
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 QB tier of the OTC Markets under the symbol MNDL.
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 QB tier of the OTC Markets 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 to a lower tier would likely decline. In addition, the tier of the OTC Markets on which we are
traded could change. Any change could make it harder for holders of our common stock or potential investors to access our information and
find quotes for our stock.
If and when a trading market for our common stock develops, the market price of our common stock is likely to be highly volatile and
subject to wide fluctuations, and you may be unable to resell your shares at or above the current price.
The market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to a
number of factors that are beyond our control, including announcements of new products or services by our competitors. In addition, the
market price of our common stock could be subject to wide fluctuations in response to a variety of factors, including:
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quarterly variations in our revenues and operating expenses;
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developments in the financial markets, and the worldwide or regional economies;
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, or the issuance of new shares related to an acquisition, could result in
dilution to our existing stockholders and have a material adverse effect on our earnings.
Any sale or issuance of common stock by us in a future offering or acquisition 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.
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.
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 our business or us. 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.
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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 56% 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, requires us to evaluate and report on our internal control over financial reporting.
We are in the process of 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 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 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, if we fail to comply
with the applicable portions of Section 404, we could be subject 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.
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.
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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 15, 2012, we had an aggregate of approximately $3,680,000 of Convertible Notes convertible into 18,352,381 shares of
our common stock, and warrants to purchase 18,312,987 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.
Shares eligible for future sale
As of June 15, 2012, 51,196,077 of our total outstanding shares are restricted from immediate resale but may be sold into the market
in the near future. This could cause the market price of our common stock to drop significantly. Shares of restricted common stock are
generally available for resale following a six month holding period. As restrictions on resale end, the market price could drop significantly if
the holders of these restricted shares sell them or are perceived by the market as intending to sell them.
ITEM 2.
PROPERTIES
The principal offices of Mandalay and those of DT are located at 4751 Wilshire Boulevard, Third Floor, Los Angeles, California
90010.
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. In July 2010, the lease expired and the Company entered a month-to-month
lease for a reduced amount of space for $9,000 per month. Twistbox also leases property in Germany and Poland, where it has branch
operations.
30
ITEM 3.
LEGAL PROCEEDINGS
Twistbox’s wholly owned subsidiary, WAAT Media Corp. (“WAAT”) and General Media Communications, Inc. (“GMCI”) were
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 seeking the balance of the minimum guarantee payments due under the agreement in the approximate amount of
$4,085,000. WAAT counter-sued claiming GMCI was not entitled to the claimed amount and that it had breached the agreement, by
fraudulently inducing WAAT to enter into the agreement based on GMCI’s repeated assurances of its intention to reinvigorate its flagship
brand. GMCI filed a demurrer to the counter-claim. WAAT subsequently filed an amended counter-claim. On August 16, 2011, the LA
Superior Court ruled in favor of WAAT’s Summary Judgment Motion. As a result, GMCI’s potential damages were limited to the amount of
minimum royalty installments that accrued prior to the termination of the content license agreement in the amount of approximately $800,000.
Trial had been scheduled for April 16, 2012. However, on December 22, 2011, the parties agreed to a settlement, pursuant to which WAAT
will be required to pay GMCI $300,000 over a 30 month period, beginning December 28, 2011. The action will be dismissed with prejudice
upon written notice to the court to be provided by GMCI within five business days of GMCI’s receipt of the final installment payment.
On March 6, 2012, the Company received a notice of levy in the amount of $72,596 pertaining to a dispute with a service provider.
The Company has recorded the full amount in Accounts Payable on the balance sheet.
On May 4, 2012, the Company received notice of a judgment in the amount of $36,201 pertaining to a dispute with a previous
employee. The Company has recorded the full amount in Other Current Liabilities on the balance sheet.
ITEM 4.
MINE SAFETY DISCLOSURE
Not applicable.
31
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PART II
PURCHASES OF EQUITY SECURITIES
Market Information
As of June 15, 2012, the closing price of our common stock was $0.79.
On May 16, 2012, we received FINRA's decision to remove the Company's common stock from the OTC Bulletin Board. As a
result, our common stock is quoted on the OTC tier of the OTC Markets under the symbol “MNDL.” We intend to either return to being
quoted on the OTC Bulletin Board one year from the date of our removal from the OTC Bulletin Board, or to achieve a listing on a national
securities exchange, in the future. 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.
Fiscal Year Ended March 31, 2012
First quarter
Second quarter
Third quarter
Fourth quarter
Fiscal Year Ended March 31, 2011
First quarter
Second quarter
Third quarter
Fourth quarter
High Low
$
$
$
$
$
$
$
$
0.64 $
0.85 $
0.70 $
0.99 $
0.30
0.44
0.42
0.57
0.40 $
0.64 $
0.39 $
0.74 $
0.15
0.20
0.21
0.15
Holders
As of June 15, 2012, there were 503 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.
Adoption of Amended and Restated 2011 Equity Incentive Plan of Mandalay Digital Group, Inc.
On May 26, 2011, our board of directors adopted the 2011 Equity Incentive Plan of NeuMedia, Inc. and on April 27, 2012, our
board of directors amended and restated the plan and the related plan documents to change references to the name of our company from the
“NeuMedia, Inc.” to “Mandalay Digital Group, Inc.” and further directed that they be submitted to stockholders for their consideration and
approval. On May 23, 2012, our stockholders approved and adopted by written consent the Amended and Restated 2011 Equity Incentive
Plan of Mandalay Digital Group, Inc. (the “Plan”) and the Mandalay Digital Group, Inc. Amended and Restated 2011 Equity Incentive Plan
Notice of Grant and Restricted Stock Agreement and the Mandalay Digital Group, Inc. Amended and Restated 2011 Equity Incentive Plan
Notice of Grant and Stock Option Agreement (collectively, the “Related Documents”). A summary of the Plan is set forth below. This
summary is subject to and qualified in its entirety by the Plan and related documents.
32
Principal Reasons for Adoption of the Plan
Our board of directors believes the Plan is necessary to give us the ability to (i) attract and retain qualified key employees, non-
employee directors and consultants with appropriate equity-based awards, (ii) motivate high levels of performance, (iii) recognize employee
contributions to our success, and (iv) align the interests of plan participants with those of our stockholders. In addition, our board of directors
believes a meaningful equity compensation program is necessary to provide us with flexibility in negotiating strategic acquisitions and other
business relationships to further expand and grow our business.
Without the ability to grant equity-based awards for these purposes, we may not remain competitive for qualified executives and
employees, non-employee directors and consultants, particularly against similar companies vying for a limited talent pool. The Plan contains a
number of provisions that the board believes are consistent with the interests of stockholders and sound corporate governance practices. These
include:
•
Individual Grant Limits. No participant may be granted in aggregate, in any calendar year, Awards covering more than
500,000 shares.
• No annual “Evergreen” Provision. The Plan provides for a fixed allocation of shares, thereby requiring stockholder approval
of any additional allocation of shares.
• No Discount Stock Options. The Plan prohibits the grant of a stock option with an exercise price of less than the fair market
value of the closing price of our common stock on the date the stock option is granted.
Implementation and Effect of the Plan
Summary Description of the Plan
The Plan provides for grants of stock options, stock appreciation rights (“SARs”), restricted stock and restricted stock units
(sometimes referred to individually or collectively as “Awards”) to our and our subsidiaries’ officers, employees, non-employee directors and
consultants. Stock options may be either “incentive stock options” (“ISOs”), as defined in Section 422 of the Internal Revenue Code of 1986,
as amended (the “Code”), or non-qualified stock options (“NQSOs”). The Plan reserves 4,000,000 shares for issuance, of which 191,667
remain available for issuance as of May 23, 2012. The 4,000,000 shares reserved for issuance will serve as the underlying value for all equity
awards under the Plan.
Plan Administration; Amendment and Termination
Our board of directors and/or one or more of its committees (“Administrator”) administer the Plan in accordance with applicable law.
The Board may amend, suspend or terminate any portion of the Plan for any reason, but must obtain stockholder consent for any material plan
amendment to the extent necessary to comply with applicable laws, rules or regulations, and the consent of affected plan participants if any
such action alters or impairs any obligations regarding Awards that have been granted to such participants. The Plan terminates in 2021.
However, such termination will not affect Awards granted under the Plan prior to termination.
33
Reversion of Shares to the Plan
When Awards made under the Plan expire or are forfeited, the underlying shares will become available for future Awards under the
Plan. In addition, any shares that are not issued upon the exercise of an Award shall also become available for future Awards under the Plan.
Shares awarded and delivered under the Plan may be authorized but unissued, or reacquired shares.
Eligibility for Awards
The employees, officers, non-employee directors and consultants of the Company and its subsidiaries and “affiliates” (as defined in
the Plan) may be granted Awards under the Plan. The Administrator determines which individuals will receive Awards, as well as the number
and composition of each Award. Awards under the Plan may consist of a single type or any combination of the types of Awards permissible
under the Plan as determined by the Administrator (or by the full board in the case of Awards to non-employee directors). These decisions
may be based on various factors, including a participant’s duties and responsibilities, the value of the participant’s past services, his/her
potential contributions to our success, and other factors.
Exercise Price Limitations
The Administrator will determine the exercise price for the shares underlying each Award on the date the Award is granted. The
exercise price for shares under an ISO may not be less than 100% of fair market value on the date the Award is granted. Similarly, under the
terms of the Plan, the exercise price for SARs and NQSOs may not be less than 100% of fair market value on the date of grant. There is no
minimum exercise price prescribed for restricted stock and restricted stock units awarded under the Plan.
Individual Grant Limits
No participant may be granted in aggregate, in any calendar year, Awards covering more than 500,000 shares. Such limitation is
subject to proportional adjustment in connection with any change in our capitalization as described in the Plan.
Award Exercise; Payment of Exercise Price
The Administrator will determine when Awards become exercisable. However, no Award may have a term longer than 10 years
from the date of grant unless otherwise approved by our stockholders, and no Award may be exercised after expiration of its term. Payment
for any shares issued upon exercise of an Award shall be specified in each participant’s award agreement, and may be made by cash, check or
other means specified in the Plan.
Tax Withholding
We will have the right to deduct or withhold or require a participant to remit to us an amount sufficient to satisfy federal, state, local
and any applicable foreign taxes (including FICA obligations, if applicable) required to be withheld with respect to the grant, exercise or
vesting of any Award.
Effect of Termination, Death, or Disability
If a participant’s employment or consulting arrangement terminates for any reason, vesting will stop as of the effective termination
date, and all unvested awards as of such date shall immediately terminate. Participants generally have three months from their termination date
to exercise vested unexercised options and SARs before they expire. Longer post-termination exercise periods apply in the event the
termination of employment or cessation of service results from death or disability. If a participant is dismissed for cause, the right to exercise
shall generally terminate five business days following written notice from us.
34
Non-Transferability of Awards
Unless otherwise determined by the Administrator, Awards granted under the Plan are not transferable other than by will or the laws
of descent and distribution, and may be exercised by the participant only during the participant’s lifetime.
Stock Appreciation Rights
Under the Plan, SARs may be settled in shares or cash and must be granted with an exercise price of not less than 100% of fair
market value on the date of grant. Upon exercise of a SAR, a participant is entitled to receive cash or a number of shares equivalent in value to
the difference between the fair market value on the exercise date and the exercise price of the SAR. For example, assume a participant is
granted 100 SARs with an exercise price of $10 and assume the SARs are later exercised when the fair market value of the underlying shares
is $20 per share. At exercise, the Participant is entitled to receive 50 shares [(($20-$10) x 100) / $20], or $1,000 in cash (50 x $20).
Restricted Stock
The Plan also permits us to grant restricted stock. The Administrator has discretion to establish periods of restriction during which
shares awarded remain subject to forfeiture or our right to repurchase if the participant’s employment terminates for any reason (including
death or disability). Restrictions may be based on the passage of time, the achievement of specific performance objectives, or other measures
as determined by the Administrator in its discretion. During periods of restriction, a participant has the right to vote his/her restricted stock and
to receive distributions and dividends, if any, but may not sell or transfer any such shares.
Restricted Stock Units
The Plan also permits us to grant restricted stock units that are payable in our shares or in cash. Each restricted stock unit is
equivalent in value to one share of our common stock. Depending on the number of restricted stock units that become vested at the end of the
performance period, the equivalent number of shares are payable to the participant, or the equivalent value in cash. The restricted stock units
may be vested upon the attainment of performance goals of based on continued service.
Changes in Capitalization; Change of Control
The Plan provides for exercise price and quantity adjustments if we declare a stock dividend or stock split. Also, vesting or restriction
periods may be accelerated if we merge with another entity that does not either assume the outstanding Awards or substitute equivalent
Awards.
U.S. Federal Income Tax Consequences
Option Grants
Options granted under the Plan may be either ISOs, which are intended to satisfy the requirements of section 422 of the Internal
Revenue Code (IRC), or NQSOs, which are not intended to meet those requirements. The Federal income tax treatment for NQSOs and ISOs
are summarized below.
Non-Qualified Stock Options
No taxable income is recognized by a participant upon the grant of an NQSO. Generally, the participant will recognize ordinary
income in the year in which the option is exercised. The amount of ordinary income will equal the difference between the fair market value of
the purchased shares on the exercise date compared to the exercise price paid to acquire such shares. We and the participant are required to
satisfy the tax withholding requirements applicable to that income, unless the participant is a non-employee Director or consultant, in which
case tax withholding is not required. We will be entitled to an income tax deduction equal to the amount of ordinary income recognized by the
participant with respect to exercised NQSOs.
35
Incentive Stock Options
No taxable income is recognized by a participant upon the grant of an ISO. Generally, the participant will not recognize ordinary
income in the year in which the option is exercised, although the participant’s gain from exercise may be subject to alternative minimum tax. If
the participant sells the underlying shares acquired from the option within two years after the option grant date or within one year of the option
exercise date, gain on that premature, “disqualifying” disposition will be treated as compensatory ordinary income to the extent of the lesser of:
(1) the fair market value of the shares on the date of exercise minus the exercise price paid to acquire such shares, or (2) the amount realized on
the disposition minus the exercise price. We will be entitled to an income tax deduction that equals the amount of the participant’s
compensatory ordinary income. If the participant does not make a disqualifying disposition, then we will not be entitled to a tax deduction. If
the participant sells the underlying shares in a “qualifying” disposition (i.e., two years after the option is granted and one year after the exercise
date), the disposition will be treated as either long-term capital gain or loss based on the difference between the sales proceeds and the exercise
price paid to acquire the shares.
Stock Appreciation Rights
No taxable income is recognized by a participant upon the grant of a SAR. The participant will recognize ordinary income in the year
in which the SAR is exercised. The amount of ordinary income will be the fair market value of the shares received or the cash payment. We
and the participant are required to satisfy the applicable tax withholding requirements, unless the participant is a non-employee Director, where
in such case tax withholding is not required. We will be entitled to an income tax deduction equal to the amount of ordinary income recognized
by the participant with respect to exercised SARs.
Restricted Stock
The tax principles applicable to the issuance of restricted shares under the Plan will be substantially the same as those summarized
above for the exercise of non-qualified stock options in that they are both governed by Section 83 of the IRC Code. Generally, when the
restriction lapses, the participant will have ordinary income equal to the difference between the fair market value of the shares on the vesting
date and any amount paid for the shares, if any. Alternatively, at the time of the grant, the participant may elect under Section 83(b) of the Code
to include as ordinary income in the year of the grant, an amount equal to the difference between the fair market value of the granted shares on
the grant date and any amount paid for the shares. If the IRC Section 83(b) election is made, the participant will not recognize any additional
compensation income when the restriction lapses, but may have capital gain income or loss upon sale of the shares. We will be entitled to an
income tax deduction equal to the ordinary income recognized by the participant in the year in which the participant recognizes such income.
Restricted Stock Units
Generally, a plan participant who is granted restricted stock units will recognize ordinary income in the year payment occurs. The
income recognized will generally be equal to the fair market value of the shares received or to the cash payment. We will generally be entitled
to an income tax deduction equal to the income recognized by the participant on the payment date for the taxable year in which the ordinary
income is recognized by the participant.
36
Deductibility of Executive Compensation
We intend that any compensation deemed paid by us in connection with the exercise of ISOs, NQSOs and SARs granted with
exercise prices equal to the fair market value of the shares on grant date will qualify as performance-based compensation not subject to Code
Section 162(m) $1,000,000 limitation per covered individual on the deductibility of compensation paid to certain of our executive officers. A
number of requirements must be met in order for particular compensation to so qualify, so there can be no assurance that such compensation
under the Plan will be fully deductible in all circumstances.
Equity Compensation Plan Information
The following table sets forth information concerning our 2007 Employee, Director and Consultant Stock Plan, our Amended and
Restated 2011 Equity Incentive Plan, and individual compensation arrangements with employees or consultants of the Company as of March
31, 2012.
Plan Category
Equity compensation plan
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)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
4,798,352 $
1.80
-
525,000 $
5,323,352
0.42
100,000
-
1,498,352 options of the approved plan in column (a) include awards transferred from Twistbox’s equity compensation plan at the time of the
merger with the Company.
Unregistered Sales of Equity Securities
The following is a summary of transactions by us during the three months ended March 31, 2012, involving sales of our securities
that were not registered under the Securities Act. Each sale was exempt from registration under either Section 4(2) of the Securities Act or
Section 3(a)(9) of the Securities Act because (i) the securities were offered and sold only to accredited investors; (ii) there was no general
solicitation or general advertising related to the offerings; (iii) each investor was given the opportunity to ask questions and receive answers
concerning the terms of and conditions of the offering and to obtain additional information; (iv) the investors represented that they were
acquiring the securities for their own account and for investment; and (v) the securities were issued with restrictive legends where required.
·
In March 2012, the Company issued warrants to purchase 2,000,000 shares of common stock of the Company at an exercise price of
$0.70 cents per share with a term of 5 years. The warrants were issued as consideration related to the modification of an existing note
to convertible debt and treated as debt modification expense of $1,459 as of March 31, 2012. In connection with the same transaction,
the Company issued 1,071,429 warrants to purchase shares of common stock of the Company at an exercise price of $0.70 cents per
share. Also in connection with the same transaction, the Company issued 2,600,000 shares of common stock of the Company as
payment of $1,820 of principle of a convertible note. We relied on Section 3(a)(9) of the Securities Act as providing an exemption
from registering the issuance of these shares of common stock under the Securities Act inasmuch as the conversion was made with our
existing security holders exclusively and no commission or other remuneration was paid or given directly or indirectly for soliciting the
exchange.
37
·
·
·
·
·
In March 2012, the Company sold 3,857,143 shares of common stock of the Company to investors for $0.70 cents per share. In
connection with this sale of common stock, the Company issued warrants to purchase 964,286 shares of common stock of the
Company at an exercise price of $0.70 cents per share with a term of 5 years. We relied on Section 4(2) of the Securities Act, as
providing an exemption from registering the sale of these shares of common stock under the Securities Act.
In March 2012, the Company issued 150,000 shares of common stock of the Company to a vendor. The shares vest over one year and
were valued at the closing market price on that date of $0.90 cents per share. The overall value was determined to be $135, of which $2
was recorded through the period ended March 31, 2012. We relied on Section 4(2) of the Securities Act, as providing an exemption
from registering the sale of these shares of common stock under the Securities Act.
In March 2012, the Company issued 50,000 shares of common stock of the Company to a vendor. The shares are vested, but restricted
for a one year period. The shares were valued at the closing market price on that date of $0.85 cents per share. The overall value was
determined to be $42, of which $42 was recorded in the period ended March 31, 2012. We relied on Section 4(2) of the Securities Act
as providing an exemption from registering the issuance of these shares of common stock under the Securities Act.
In January 2012, the Company issued 1,375,000 shares of common stock of the Company to three employees. The shares are partially
vested, but are restricted for a two year period. The shares were valued at the closing market price on that date of $0.65 cents per share.
The overall value was determined to be $894, and $569 of expense was recorded through the period ended March 31, 2012. We relied
on Section 4(2) of the Securities Act, as providing an exemption from registering the sale of these shares of common stock under the
Securities Act.
In January 2012, the Company entered into a consulting agreement, pursuant to which, the Company issued 150,000 shares of
common stock of the Company. The shares vest over one year and were valued at the closing market price on that date of $0.65 cents
per share. The overall value was determined to be $98, and $59 of expense was recorded through the period ended March 31,
2012. We relied on Section 4(2) of the Securities Act, as providing an exemption from registering the sale of these shares of common
stock under the Securities Act.
Issuer Purchases of Equity Securities
(d)
Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased Under
the Plans or
Programs
(c)
Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs
For the year ending
March 31, 2012
(a)
Total Number of
Shares (or Units)
Purchased
(b)
Average Price Paid
per Share (or Unit)
($)
-
0.00
38
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 7 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 Mandalay Digital Group, Inc. (“Mandalay Digital”) and its operating and wholly-owned subsidiary, Twistbox Entertainment, Inc.
(“Twistbox”).
Historical Operations of Mandalay Digital Group, Inc.
Mandalay Digital 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. DynamicWeb Enterprises, Inc was
the resulting entity, but it 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 February 6, 2012, the Company merged with a wholly-owned, newly-formed subsidiary, changing its name to Mandalay Digital
Group, Inc.
On October 27, 2004, and as amended on December 17, 2004, the Company filed a plan for reorganization under Chapter 11 of the
United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the “Plan of Reorganization”).
Under the Plan of Reorganization, as completed on January 26, 2005: (1) the Company’s net operating assets and liabilities were transferred to
the holders of the secured notes in satisfaction of the principal and accrued interest thereon; (2) $400,000 was transferred to a liquidation trust
and used to pay administrative costs and certain preferred creditors; (3) $100,000 was retained by the Company to fund the expenses of
remaining public; (4) 3.5% of the new common stock of the Company (140,000 shares) was issued to the holders of record of Mandalay
Digital’s preferred stock in settlement of their liquidation preferences; (5) 3.5% of the new common stock of the Company (140,000 shares)
was issued to common stockholders of record as of January 26, 2005 in exchange for all of the outstanding shares of the common stock of the
company; and (6) 93% of the new common stock of the Company (3,720,000 shares) was issued to the sponsor of the Plan of Reorganization
in exchange for $500,000 in cash. Through January 26, 2005, the Company and its subsidiaries were engaged in providing business-to-
business transaction management services designed to simplify trading between buyers and suppliers.
39
Prior to February 12, 2008, the Company was a public shell company with no operations, and controlled by its significant
stockholder, Trinad Capital Master Fund, L.P.
SUMMARY OF THE TWISTBOX MERGER
The Company 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 the Company (“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, $0.01 par value per share (the “Twistbox
Preferred Stock”), converted automatically into and became exchangeable for Company 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 (the “Plan”) was assumed by the Company, 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 Company
common stock issuable upon exercise of each Twistbox option was determined by multiplying the number of shares of Twistbox common
stock that were subject to such Twistbox option immediately prior to the Merger by 0.72967 (the “Option Conversion Ratio”), rounded down
to the nearest whole number; and (b) the per share exercise price for the shares of Mandalay Digital 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, the Company also assumed all unvested Twistbox options. The Merger consideration consisted of an aggregate of up to
12,325,000 shares of Company common stock, which included the conversion of all shares of Twistbox capital stock and the reservation of
2,144,700 shares of Company common stock required for assumption of the vested Twistbox options. The Company reserved an additional
318,772 shares of Company 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, the Company or any subsidiary of Twistbox or the Company 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.
40
As part of the Merger, the Company agreed to guarantee up to $8,250,000 of Twistbox’s outstanding debt to ValueAct SmallCap
Master Fund L.P. (“ValueAct” or “VAC”), 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” or the “VAC 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 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 the Company 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, 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 the Company 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.
SUMMARY OF THE AMV ACQUISITION
On October 23, 2008, the Company 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 Company 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, the Company, 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 the Company and Twistbox maintain certain minimum
combined cash balances and provided for certain covenants with respect to the indebtedness of the Company 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,
the Company 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, the Company entered into a Securities Purchase Agreement with certain investors identified
therein (the “Investors”), pursuant to which the Company 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 the Company on or about November 8, 2008.
41
On August 14, 2009, the Company and ValueAct entered into a Second Allonge to Warrant to Purchase 1,092,621 shares of the
Company’s 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, the Company, 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, Mandalay Digital, 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 the
Company and Twistbox to comply with the cash covenant set forth in the ValueAct Note was extended to March 1, 2010 and the minimum
cash balance by which Twistbox and Mandalay Digital 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 the Company’s covenants
under the ValueAct Note, the failure to comply with limitations on certain payments by the Company and each of its subsidiaries, and the
failure of Twistbox and the Company to maintain minimum cash balances in deposit accounts of each of Twistbox and the Company. The
Letter also claimed that the Waiver had ceased to be effective as a result of the alleged failure of Mandalay Digital 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 Mandalay
Digital’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, the Company 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 $23,231,000 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 the
Company held by ValueAct were cancelled and all warrants and common stock of the Company held by AMV founders Nate MacLeitch and
Jonathan Cresswell were repurchased by the Company 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.
42
Also on June 21, 2010, for purposes of capitalizing the Company, the Company 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, 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 Company common stock 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 the Company 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 the
Company at an exercise price of $0.25 per share, subject to adjustment. For each $1.00 of New Senior Secured Notes purchased, the
purchaser received a Warrant to purchase 3.33 shares of common stock of the Company. Each Warrant has a five year term.
The 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.
On December 16, 2011 the Amended ValueAct Note was purchased by Taja, LLC (“Taja”) and immediately amended to remove
certain negative covenants (as amended, the “Taja Note”).
Company 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 and its subsidiaries, a mobile media and marketing company. On June 21, 2010, we sold AMV
Holding Limited and its subsidiaries.
Twistbox is a global, mobile data services company primarily focused on enabling and optimizing the development, distribution and
billing of content and applications across mobile networks. Operating since 2003, Twistbox publishes content in over 28 countries with
distribution representing more than five hundred million subscribers. Twistbox has developed an intellectual property portfolio that includes
worldwide or territory exclusive mobile rights to content, a proprietary publishing platform that includes tools to automate device management
and billing of content and applications; a mobile games development and distribution platform that automates the porting of mobile games and
applications to over 1,500 handset models; a content ratings system adopted by certain major wireless carriers to assist with the responsible
deployment of age-verified programming and services; a suite of value added billing technologies that allow for in-application billing, and
Digital Rights Management (DRM) solutions. Twistbox has leveraged its intellectual property and carrier-class technology to secure direct
distribution and/or enabling agreements with leading mobile operators throughout Europe, North America and Latin America, including,
among others, Vodafone, Telefonica, Orange, and SFR.
Twistbox maintains a global distribution agreement with Vodafone. Through this relationship, in certain markets Twistbox serves as
one of Vodafone’s exclusive category portal managers. Twistbox has similar exclusive agreements with other operators in selected territories.
In addition to its carrier publishing and enabling business, Twistbox operates a mobile ad network and suite of direct to consumer
services that are promoted through advertising, as well as from other mobile publishers. Payments for the Company’s direct to consumer
services are processed through integration with the Company’s own mobile billing solutions, third party mobile billing aggregators, and credit
card processing companies.
43
Twistbox’s target customers are the lucrative, tech-savvy 18 to 40 year old demographic. This group is a leading consumer group 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.
In December 2011, the Company purchased the assets of Digital Turbine. With the acquisition and integration of the assets of Digital
Turbine, the Company will be able to provide an end-to-end, modular platform to the Company’s existing carrier customers. The combined
DT offering allows new and existing customers to choose from a fully outsourced, smart mobile ecosystem to more efficient, modular
components that can be integrated with different operating systems to provide to the end user a more unified experience of mobile content
across search, discovery, billing, and delivery. Innovative aspects of the Digital Turbine platform include the ability for carriers and OEMs to
analyze and control the data presented to their end-users while giving them a more efficient way of finding and purchasing content.
44
RESULTS OF OPERATIONS
Revenues
Cost of revenues
Gross profit
SG&A
Amortization of intangible assets
Impairment of intangibles
Impairment of goodwill
Operating loss
Interest expense, net
Foreign exchange transaction gain / (loss)
Change in fair value of accrued derivative liabilities gain / (loss)
Loss on extinguishment of debt
Gain / (loss) on settlement of debt
Other income / (expenses)
Loss before income taxes
Income tax provision
Loss from continuing operations
Profit from discontinued operations, net of taxes
Gain on disposal of discontinued operations, net of taxes
Net (loss) income
Basic and Diluted net income / (loss) per common share:
Continuing operations
Discontinued operations
Net loss
Basic and Diluted weighted average shares outstanding
Year ended Year ended
March 31,
March 31,
2012
2011
(in thousands)
% of
Change
$
$
$
$
$
7,230 $
2,873
4,357
16,040
-
2,319
2,969
(16,971)
(12,497)
(94)
(4,447)
2,004
1,393
15
(30,597)
(110)
(30,707)
-
-
(30,707) $
9,186
3,210
5,976
11,368
54
4,482
1,546
(11,474)
(1,761)
(83)
-
-
(864)
(2)
(14,184)
(224)
(14,408)
809
4,215
(9,384)
(0.62) $
- $
(0.62) $
49,418
(0.38)
0.13
(0.25)
37,664
-21%
-10%
-27%
41%
-100%
-56%
75%
42%
610%
13%
0%
0%
-261%
-782%
111%
-51%
109%
-100%
-100%
221%
60%
-100%
144%
31%
Comparison of the Year Ended March 31, 2012 and the Year Ended March 31, 2011
45
Revenues
Revenues by type:
Services
Content - Games
Content - Other
Advertising
Total
Twelve Months Ended March 31, % of
2012
2011
Change
(In thousands)
$
1,214 $
434
3,824
1,758
1,270
1,107
5,546
1,263
$
7,230 $
9,186
-4%
-61%
-31%
39%
-21%
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. 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 including the UK, Germany and
Spain. Revenues were also affected by the increase in the use of smart phones over feature phones, which hinder the carriers’ ability to
monetize content revenues effectively. Other content includes a broad range of licensed and internally developed products delivered in the form
of WAP, Video, Wallpaper and Mobile.
Cost of Revenues
Cost of revenues:
License fees
Other direct cost of revenues
Total cost of revenues
Revenues
Gross margin
Twelve Months Ended March 31,
% of
2012
2011
Change
(In thousands)
$
$
$
2,643
230
2,873
7,230
$
$
$
2,915
295
3,210
9,186
-9%
-22%
-10%
-21%
60.3%
65.1%
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 have therefore decreased relative to the decrease in revenue. We experienced
slightly higher fees in the area of traffic and advertising costs that affected our sales mix, as well as our gross margin.
46
Operating Expenses
Twelve Months Ended March 31, % of
2012
2011
Change
(In thousands)
Product development expenses
$
2,154 $
3,528
Sales and marketing expenses
873
2,142
-39%
-59%
General and administrative expenses
13,013
5,698
128%
Amortization of intangible assets
-
54
-100%
Impairment of intangible assets
2,319
4,482
-56%
Impairment of goodwill
2,969
1,546
75%
Product development expenses include the costs to build, edit and optimize content formats for consumption on a mobile phone.
Expenses in this area are primarily driven by personnel costs. Due to strategic changes in the focus of the development business as well as the
consolidation of the device operating systems within the marketplace, our headcount has been reduced from period to period.
Sales and marketing expenses represent the costs of sales and marketing personnel, and advertising and marketing campaigns. Selling
costs, including our headcount have been reduced from period to period in an effort to streamline the business. The decrease year-over-year is
the result of cost savings made by headcount reductions, as well as reduced travel and entertainment expenses, offset by relocation costs
relative to our UK operations from late fiscal year 2010 through most of fiscal year 2011.
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, rent, depreciation and bad
debt expenses. The increase during fiscal year 2012 is mostly due to an increase in stock compensation to management. Significant savings
were made during fiscal year 2011 mostly due to a decrease in stock compensation to management, but also through headcount reductions and
related overheads, as well as lower bad debt expense and legal fees.
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 the third quarter of fiscal year 2011 and the last quarter of
fiscal year 2012. At December 31, 2010 the Company recorded an impairment charge of $1,546,000 to write down goodwill and $4,482,000
to write down intangible assets. At March 31, 2012, due to a decline in revenues, the Company performed an impairment review for goodwill
and intangible assets. 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 $2,969,000 to write down goodwill and $2,319,000 to write down intangibles
assets. The intangible assets impaired were the valuation associated with the Twistbox trademark/trade name.
47
Other Income and Expenses
Twelve Months Ended March 31, % of
2012
2011
Change
(In thousands)
Interest and other (expense)
Profit from discontinued operations, net of taxes
Gain on disposal of discontinued operations, net of taxes
$
$
$
(13,626) $
(2,710)
403%
- $
- $
809
-100%
4,215
-100%
Interest and other income/(expense) includes interest income on invested funds, interest expense related to the Senior Secured Note,
the ValueAct Note, the Taja Note, the Adage Note, financing costs including loan modification costs, changes in the fair market value of
derivatives, foreign exchange transaction gains, and other income/expense. The increase in net expense compared to the prior period is
comprised mostly of financing costs, loss on extinguishment of debt, and change in fair value of derivative liabilities offset by settlement of
debt with a provider.
Financial Condition
Assets
Our current assets totaled $10.1 million and $3.8 million at March 31, 2012 and March 31, 2011, respectively. Total assets were
$15.4 million and $14.2 million at March 31, 2012 and March 31, 2011, respectively. The increase in current assets is primarily due to an
increase in cash due to the sale of shares of the Company’s common stock, and the sale of convertible debt offset by lower accounts receivable
balances due to a decrease in revenues. The increase in total assets is primarily due to the increase in cash offset by the impairment charge
recorded against goodwill and intangibles assets, as well as the lower accounts receivable and depreciation of fixed assets.
Liabilities and Working Capital
At March 31, 2012, our current and total liabilities were $9.1 million, compared to $11.6 million at March 31, 2011. The change in
liabilities was related to a significant reduction in accounts payable and accrued license fees due to settlements with certain suppliers, offset by
an increase in accrued compensation due to deferred payroll compensation and an increase in the fair market value of warrant derivative
liabilities. Additionally, debt was reduced due to the restructuring of the Value Act Note, and the equity conversion of $1.8 million of that
note. The Company had positive working capital of $4.1 million at March 31, 2012 as opposed to negative working capital of $3.3 million at
March 31, 2011.
Liquidity and Capital Resources
Twelve Months Ended March 31,
2012
2011
(In thousands)
Consolidated Statement of Cash Flows Data:
Capital expenditures
Cash flows used in operating activities
Cash flows used in investing activities
Proceeds from new convertible debt
Issuance of shares for cash
Effect of exchange rate changes on cash and cash
equivalents
$
(17) $
(1,829)
-
7,000
2,700
(88)
(1,909)
(1,547)
2,500
-
100
(2)
48
The Company has incurred losses and negative annual cash flows since inception, although the operating loss increased from $11.5
million in fiscal year 2011 to $16.9 million as of March 31, 2012. A significant portion of the loss is represented by one-time non-cash
charges to stock compensation.
The consolidated financial statements included in this Annual Form 10-K include the accounts of the Company. The primary sources
of liquidity have historically been issuance of common and preferred stock and borrowings under credit facilities. In fiscal year 2012, the
Company raised $9.7 million through issuance of convertible debt and equity financings and through restructuring existing debt to convertible
debt. Until we become cash flow positive, we anticipate that our primary sources of liquidity will be our existing cash balances together with
cash generated by our operating activities, cash on hand, as well as further borrowings or further capital raises. Assuming there are no further
changes in expected sales and expense trends subsequent to March 31, 2012, the Company believes that its cash position will be sufficient to
continue operations for the next twelve months.
Operating Activities
In the year ended March 31, 2012, we used $1.8 million of net cash. Net cash used represents an increase in accounts payable and
accrued compensation of $0.8 million, decreases in accounts receivable and prepaid expense of $1.7 million, offset by decreases in accrued
license fees and other liabilities of $0.6 million. These changes flow from the loss for the period, but exclude impairment charge of $5.2
million, depreciation and amortization of $0.4 million, as well as interest, finance charges, debt extinguishment and debt discount costs of
$10.7 million incurred to restructure liabilities, derivative liability costs of $4.4 million, and $7.5 million for stock and warrants issued for
services, offset by supplier settlements of $1.4 million. In the year ended March 31, 2011, we used $1.0 million of net cash, including an
increase in accounts payable and other liabilities of $1.3 million , flowing from the loss excluding impairment charge of $6.0 million , offset by
non-cash stock based compensation and depreciation and amortization.
As of March 31, 2012, the Company had approximately $8.8 million of cash attributed to continuing operations.
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 cash resources 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 debt or equity financing will be available on acceptable terms, if at all.
Debt obligations include interest payments under the Senior Debt facility, and also under the Amended Taja Note. Under the Senior
Debt facility the Company may elect to add interest to the principal, until 18 months following June 21, 2010, with the full amount of the
principle and interest payable at the end of the term. Under the Amended Taja Note the Company may elect to add interest to the principal. The
full amount is payable two years from March 1, 2012, if it has not already been converted into shares of common stock of the Company. The
Company’s operating lease obligations include non-cancelable operating leases for the Company’s office facilities in several locations,
expiring at various dates through 2013.
49
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 believe, therefore, that we are 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
In April 2011, the Company issued an aggregate of 497,244 shares of the Company’s common stock in private placements (1) to two
former employees of a subsidiary of the Company as a severance payment, and (2) to a consultant for services.
In April 2011, the Company issued warrants to purchase 75,000 shares of the Company’s common stock at an exercise price of
$0.25 per share to a service provider of the Company as payment for past services to the Company.
In May 2011, the Company issued 150,000 shares of the Company’s common stock to a service provider to the Company as
payment for past services to the Company.
In June 2011, the Company issued warrants to purchase an aggregate of 300,000 shares of the Company’s common stock at an
exercise price of $0.47 per share to two advisory board members for consulting services.
In December 2011, the Company issued 50,000 shares of the Company’s common stock as part of the consideration for the assets of
Digital Turbine Group, LLC.
In December 2011, in connection with the acquisition of assets from Digital Turbine Group, LLC, the Company issued 12,450,000
shares of the Company’s common stock to consultants as payment for services. The shares vest based on certain conditions. As of March
2012, 9,037,500 of such shares have vested and 3,412,500 of such shares were unvested.
In December 2011, the Company issued an aggregate of 10,000,000 shares of the Company’s common stock with vesting conditions
to directors of the Company. As of March 2012, 3,000,000 of such shares have vested.
In January 2012, the Company issued 300,000 shares of common stock of the Company to two advisory board members for
consulting services. As of March 2012, 150,000 shares have vested.
In January 2012, the Company issued 1,375,000 shares of common stock of the Company with vesting provisions to three
employees. As of March 2012, 875,000 of such shares have vested.
In March 2012, the Company issued warrants to purchase 500,000 shares of the Company’s common stock at an exercise price of
$0.70 per share to a service provider of the Company.
In March 2012, the Company issued 10,053,333 shares of common stock of the Company in full payment of principle and interest of
the New Convertible Note.
In March 2012, the Company issued 200,000 shares of common stock of the Company to two vendors for services. As of March
2012, 50,000 of such shares have vested.
In March 2012, the Company sold 3,857,143 shares of common stock of the Company to certain investors.
50
In March 2012, the Company issued to certain investors warrants to purchase 964,286 shares of common stock of the Company at
an exercise price of $0.70 cents per share.
In March 2012, the Company issued warrants to purchase 3,071,429 shares of common stock of the Company at an exercise price of
$0.70 cents per share related to modification of an existing note to convertible debt.
In March 2012, the Company issued 2,600,000 shares of common stock of the Company as payment of $1,820,000 of principle of a
convertible note.
In May 2012, the Company issued 150,000 shares of common stock of the Company to an advisory board member for consulting
services.
In May 2012, the Company issued 433,333 shares of common stock of the Company to a director of the Company.
In June 2012, the Company issued 1,428,571 shares of common stock of the Company to certain investors.
In June 2012, the Company issued warrants to purchase 357,143 shares of common stock of the Company at an exercise price of
$0.70 cents per share.
Revenues
The discussion herein regarding our future operations pertain to the results and operations of Twistbox. Assets from the Digital
Turbine acquisition have yet to generate revenues due to the development cycle of the Digital Turbine products. The Company expects to begin
earning revenue from the Digital Turbine assets by the end of fiscal year ending March 31, 2013. Twistbox has historically generated and
expects to continue to generate the vast majority of its revenues from mobile phone carriers that market, distribute and/or bill for 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 content 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 transaction. 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 content 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 the improving quality and greater availability of smartphones 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
enablers that have the ability to provide high-quality mobile content services consistently and cost-effectively with the ability to enable mobile
billing across a wide variety of handsets and countries. Additionally, publishers and content owners are seeking enablers 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, distribution and billing technology and has achieved the scale to operate at a level that provides it with competitive advantages.
We also believe that leveraging existing carrier and publisher 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, our ability to leverage our distribution and content relationships, as well as our ability to continue to expand billing for
content in new regional markets. 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 should continue to grow in absolute dollars, assuming our revenues continue to
grow. As a percentage of revenues, we expect these expenses to decrease.
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Because many new mobile handset models are released in the fourth calendar quarter to coincide with the holiday shopping season,
and 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 the March quarter end. For a variety of reasons, we may experience seasonal sales decreases during the summer, particularly in
Europe, which is predominantly reflected in our second fiscal quarter. In addition to these possible seasonal patterns, our revenues may be
impacted by declines in users visiting carrier portals, 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.
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 platform and third
party delivery charges 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 product sold 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. 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 content 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
platform and 3rd party delivery charges, 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.
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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. For acquired content, typically we will receive content from our licensors which must be edited for use on mobile
phones, combined with other appropriate content, and packaged for end-users. 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 business.
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, capital raises 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 operations and, in the near term, additional accounting costs related to our operation as a public company.
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.
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Recent Accounting Pronouncements
Adopted Accounting Pronouncements
In December 2010, the FASB issued updated guidance on when and how to perform certain steps of the periodic goodwill impairment
test for public entities that may have reporting units with zero or negative carrying amounts. This guidance is effective for fiscal years, and
interim periods within those years, beginning after December 15, 2010, with early adoption prohibited. It is applicable to the Company’s fiscal
year beginning April 1, 2011. The Company evaluated this guidance, and determined it doesn’t have a material effect on its consolidated
financial statements.
In December 2010, the FASB also issued guidance to clarify the reporting of pro forma financial information related to business
combinations of public entities and to expand certain supplemental pro forma disclosures. This guidance is effective prospectively for business
combinations that occur on or after the beginning of the fiscal year beginning on or after December 15, 2010, with early adoption permitted. It
is applicable to the Company’s fiscal year beginning April 1, 2011. The Company evaluated this guidance, and determined it doesn’t have a
material effect on its consolidated financial statements.
In May 2011, the FASB issued guidance to amend certain measurement and disclosure requirements related to fair value measurements
to improve consistency with international reporting standards. This guidance is effective prospectively for public entities for interim and annual
reporting periods beginning after December 15, 2011, with early adoption by public entities prohibited, and is applicable to the Company’s
fiscal quarter beginning January 1, 2012. The Company evaluated this guidance, and determined it doesn’t have a material effect on its
consolidated financial statements.
In September 2011, the Financial Accounting Standards Board (FASB) issued amended accounting guidance related to goodwill
impairment testing. The new guidance provides the option to perform a qualitative assessment by applying a more likely than not scenario to
determine whether the fair value of a reporting unit is less than its carrying amount, which may then allow a company to skip the annual two-
step quantitative goodwill impairment test depending on the determination. The amended guidance is effective for annual and interim goodwill
impairment tests performed for fiscal years beginning after December 15, 2011. Earlier adoption is permitted. Management does not expect the
adoption of the amended guidance to have a material impact on the Company’s consolidated financial statements. The Company evaluated this
guidance, and determined it doesn’t have a material effect on its consolidated financial statements.
Recently Issued Accounting Pronouncements
In June 2011, the FASB issued new guidance on the presentation of comprehensive income that will require a company to present
components of net income and other comprehensive income in one continuous statement or in two separate, but consecutive statements. There
are no changes to the components that are recognized in net income or other comprehensive income under current GAAP. This guidance is
effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011, with early adoption permitted. It is
applicable to the Company’s fiscal year beginning April 1, 2012. The Company is currently evaluating this guidance, but does not expect its
adoption will have a material effect on its consolidated financial statements.
Other recent authoritative guidance issued by the FASB (including technical corrections to the FASB Accounting Standards
Codification), the American Institute of Certified Public Accountants, and the Securities and Exchange Commission (“SEC”) did not, or are
not expected to have a material effect on the Company’s consolidated financial statements.
Critical 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.
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.
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Revenue Recognition
The Company’s revenues are derived primarily by licensing material and software in the form of products (Image Galleries, Wallpapers,
video, WAP Site access, Mobile TV), developing and maintaining carrier platforms, mobile advertising, mobile billing and mobile games.
License arrangements with the end user can be on a perpetual or subscription basis.
A perpetual license gives an end user the right to use the product, image or game on the registered handset on a perpetual basis. A
subscription license gives an end user the right to use the product, image or game on the registered handset for a limited period of time,
ranging from a few days to as long as one month.
The Company either markets and distributes its products directly to consumers, or distributes products through mobile
telecommunications service providers (“carriers”), in which case the carrier markets the product, images or games to end users. License fees
for perpetual and subscription licenses are usually billed upon download of the product, image or game by the end user. In the case of
subscription licenses, many subscriber agreements provide for automatic renewal until the subscriber opts-out, while others provide opt-in
renewal. In either case, subsequent billings for subscription licenses are generally billed monthly. The Company applies the provisions of
FASB ASC 985-605, Software Revenue Recognition, to all transactions.
Revenues are recognized from the Company’s products, images and games when persuasive evidence of an arrangement exists, the
product, image or game has been delivered, the fee is fixed or determinable, and the collection of the resulting receivable is probable. For both
perpetual and subscription licenses, management considers a license agreement to be evidence of an arrangement with a carrier or aggregator
and a “clickwrap” agreement to be evidence of an arrangement with an end user. For these licenses, the Company defines delivery as the
download of the product, image or game by the end user.
The Company estimates revenues from carriers in the current period when reasonable estimates of these amounts can be made. Most
carriers only provide detailed sales transaction data on a one to two month lag. Estimated revenue is treated as unbilled receivables until the
detailed reporting is received and the revenues can be billed. Some carriers provide reliable interim preliminary reporting and others report
sales data within a reasonable time frame following the end of each month, both of which allow the Company to make reasonable estimates of
revenues and therefore to recognize revenues during the reporting period when the end user licenses the product, image or game.
Determination of the appropriate amount of revenue recognized involves judgments and estimates that the Company believes are reasonable,
but it is possible that actual results may differ from the Company’s estimates. The Company’s estimates for revenues include consideration of
factors such as preliminary sales data, carrier-specific historical sales trends, volume of activity on company monitored sites, seasonality, time
elapsed from launch of services or product lines, the age of games and the expected impact of newly launched games, successful introduction
of newer and more advanced handsets, promotions during the period and economic trends. When the Company receives the final carrier
reports, to the extent not received within a reasonable time frame following the end of each month, the Company records any differences
between estimated revenues and actual revenues in the reporting period when the Company determines the actual amounts. Revenues earned
from certain carriers may not be reasonably estimated. If the Company is unable to reasonably estimate the amount of revenues to be
recognized in the current period, the Company recognizes revenues upon the receipt of a carrier revenue report and when the Company’s
portion of licensed revenues are fixed or determinable and collection is probable. To monitor the reliability of the Company’s estimates,
management, where possible, reviews the revenues by country, by carrier and by product line on a regular basis to identify unusual trends
such as differential adoption rates by carriers or the introduction of new handsets. If the Company deems a carrier not to be creditworthy, the
Company defers all revenues from the arrangement until the Company receives payment and all other revenue recognition criteria have been
met.
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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:
Year Ended Year Ended
March 31,
March 31,
2012
2011
Potentially dilutive shares
21,943
11,992
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Comprehensive Loss
Comprehensive loss consists of two components, net loss and other comprehensive income. Other comprehensive income refers to
gains and losses that under generally accepted accounting principles are recorded as an element of stockholders’ equity, but are excluded from
net income. The Company’s other comprehensive income currently includes only foreign currency translation adjustments.
Cash and Cash Equivalents
The Company considers all highly liquid short-term investments purchased with a maturity of three months or less to be cash
equivalents.
Accounts Receivable
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts
receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in
customer payment patterns to evaluate the adequacy of these reserves.
Content Provider Licenses
Content Provider License Fees
The Company’s royalty expenses consist of fees that it pays to branded content owners for the use of their intellectual property in the
development of the Company’s games and other content, and other expenses directly incurred in earning revenue. Royalty-based obligations
are either, accrued as incurred and subsequently paid, or in the case of content acquisitions, paid in advance and capitalized on our balance
sheet as prepaid license fees. These royalty-based obligations are expensed to cost of revenues either at the applicable contractual rate related to
that revenue or over the estimated life of the content acquired. Minimum guarantee license payments that are not recoupable against future
royalties are capitalized and amortized over the lesser of the estimated life of the branded title or the term of the license agreement.
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 content acquired.
Software Development Costs
The Company applies the principles of FASB ASC 985-20, Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed (“ASC 985-20”). ASC 985-20 requires that software development costs incurred in conjunction with product
development be charged to research and development expense until technological feasibility is established. Thereafter, until the product is
released for sale, software development costs must be capitalized and reported at the lower of unamortized cost or net realizable value of the
related product.
The Company has adopted the “tested working model” approach to establishing technological feasibility for its products and games.
Under this approach, the Company does not consider a product or game in development to have passed the technological feasibility milestone
until the Company has completed a model of the product or game that contains essentially all the functionality and features of the final game
and has tested the model to ensure that it works as expected. To date, the Company has not incurred significant costs between the
establishment of technological feasibility and the release of a product or game for sale; thus, the Company has expensed all software
development costs as incurred. The Company considers the following factors in determining whether costs can be capitalized: the emerging
nature of the mobile market; the gradual evolution of the wireless carrier platforms and mobile phones for which it develops products and
games; the lack of pre-orders or sales history for its products and games; the uncertainty regarding a product’s or game’s revenue-generating
potential; its lack of control over the carrier distribution channel resulting in uncertainty as to when, if ever, a product or game will be available
for sale; and its historical practice of canceling products and games at any stage of the development process.
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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 costs of advertising, including direct response advertising, the first time the advertising takes place.
Advertising expense for continuing operations was $7 and $116 in the years ended March 31, 2012 and 2011, respectively. Advertising
expense for discontinued operations was $0 and $956 in the years ended March 31, 2012 and 2011, 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.
Presentation
In order to facilitate the comparison of financial information, certain amounts reported in the prior year have been reclassified to conform
to the current year presentation.
Fair Value of Financial Instruments
As of March 31, 2012 and 2011, the carrying value of cash and cash equivalents, accounts receivable, prepaid expenses and other
current assets, accounts payable, accrued license fees, accrued compensation, derivative liabilities and other current liabilities approximates fair
value due to the short-term nature of such instruments. The carrying value of long-term debt approximates fair value as the related interest rates
approximate rates currently available to the Company.
Derivative Liabilities
The Company applies ASC Topic 815, “Derivatives and Hedging,” which provides a two-step model to determine whether a financial
instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the scope exception in ASC 815-10-15-74.
Using the criteria in ASC 815, the Company determines which instruments or embedded features that require liability accounting and records
the fair values as a derivative liability. The changes in the values of the derivative liabilities are shown in the accompanying consolidated
statements of operations as “change in fair value of accrued derivative liabilities gain / (loss).”
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Foreign Currency Translation
The Company uses the United States dollar for financial reporting purposes. Assets and liabilities of foreign operations are translated
using current rates of exchange prevailing at the balance sheet date. Equity accounts have been translated at their historical exchange rates
when the capital transaction occurred. Statement of Operations amounts are translated at average rates in effect for the reporting period. The
foreign currency translation adjustment gains of $97 in the year ended March 31, 2012 and $128 in the year ended March 31, 2011 has been
reported as a component of comprehensive loss in the consolidated statements of stockholders’ equity and comprehensive income.
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, 2012, one major customer
represented approximately 39% of our gross accounts receivable outstanding, and 43% of gross accounts receivable outstanding as of March
31, 2011. This customer accounted for 41% of our gross revenues in the year ended March 31, 2012; and 49% in the year ended March 31,
2011.
Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization is calculated using the straight-line method over the estimated
useful lives of the related assets. Estimated useful lives are the lesser of 8 to 10 years or the term of the lease for leasehold improvements and 5
years for other assets.
Goodwill and Indefinite Life Intangible Assets
Goodwill represents the excess of cost over fair value of net assets of businesses acquired. In accordance with FASB ASC 350-20
Goodwill and Other Intangible Assets, the value assigned to goodwill and indefinite lived intangible assets, including trademarks and
tradenames, is not amortized to expense, but rather they are evaluated at least on an annual basis to determine if there are potential impairments.
If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the implied fair value of the
reporting unit goodwill is less than the carrying value. If the fair value of an indefinite lived intangible (such as trademarks and trade names) is
less than its carrying amount, an impairment loss is recorded. Fair value is determined based on discounted cash flows, market multiples or
appraised values, as appropriate. Discounted cash flow analysis requires assumptions about the timing and amount of future cash inflows and
outflows, risk, the cost of capital, and terminal values. Each of these factors can significantly affect the value of the intangible asset. The
estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management’s judgment. Any
changes in key assumptions about the Company’s businesses and their prospects, or changes in market conditions, could result in an
impairment charge. Some of the more significant estimates and assumptions inherent in the intangible asset valuation process include: the
timing and amount of projected future cash flows; the discount rate selected to measure the risks inherent in the future cash flows; and the
assessment of the asset’s life cycle and the competitive trends impacting the asset, including consideration of any technical, legal or regulatory
trends.
In the year ended March 31, 2012, the Company determined that there was an impairment of goodwill, amounting to $2,969. In the year
ended March 31, 2011, the Company determined that there was an impairment of goodwill, amounting to $1,546. In performing the related
valuation analysis, the Company used various valuation methodologies including probability weighted discounted cash flows, comparable
transaction analysis, and market capitalization and comparable company multiple comparison. The impairment is detailed in Note 9 below.
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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 life ranging from five to eight 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, 2012, the Company determined that there was an impairment of intangible assets amounting to $2,319. In
the year ended March 31, 2011, the Company determined that there was an impairment of intangible assets, amounting to $4,482. In
performing the related valuation analysis the Company used various valuation methodologies including probability weighted discounted cash
flows, comparable transaction analysis, and market capitalization and comparable company multiple comparison. The impairment is detailed in
Note 9 below.
Income Taxes
The Company accounts for income taxes in accordance with FASB ASC 740-10, Accounting for Income Taxes (“ASC 740-10”), which
requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in its
financial statements or tax returns. Under ASC 740-10, the Company determines deferred tax assets and liabilities for temporary differences
between the financial reporting basis and the tax basis of assets and liabilities along with net operating losses, if it is more likely than not the
tax benefits will be realized using the enacted tax rates in effect for the year in which it expects the differences to reverse. To the extent a
deferred tax asset cannot be recognized, a valuation allowance is established if necessary.
ASC 740-10 prescribes that a company should use a more-likely-than-not recognition threshold based on the technical merits of the tax
position taken. Tax positions that meet the “more-likely-than-not” recognition threshold should be measured as the largest amount of the tax
benefits, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement in the financial
statements. We recognize interest and penalties related to income tax matters as a component of the provision for income taxes. We do not
currently anticipate that the total amount of unrecognized tax benefits will significantly change within the next 12 months.
Stock-based compensation.
We have applied FASB ASC 718 Share-Based Payment (“ASC 718”) and accordingly, we record stock-based compensation expense
for all of our stock-based awards.
Under ASC 718, we estimate the fair value of stock options granted using the Black-Scholes option pricing model. The fair value for
awards that are expected to vest is then amortized on a straight-line basis over the requisite service period of the award, which is generally the
option vesting term. The amount of expense recognized represents the expense associated with the stock options we expect to ultimately vest
based upon an estimated rate of forfeitures; this rate of forfeitures is updated as necessary and any adjustments needed to recognize the fair
value of options that actually vest or are forfeited are recorded.
The Black-Scholes option pricing model, used to estimate the fair value of an award, requires the input of subjective assumptions,
including the expected volatility of our common stock, interest rates, dividend rates and an option’s expected life. As a result, the financial
statements include amounts that are based upon our best estimates and judgments relating to the expenses recognized for stock-based
compensation.
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The Company grants restricted stock subject to market or performance conditions that vest based on the satisfaction of the conditions of
the award. Unvested restricted stock entitles the grantees to dividends, if any, with voting rights determined in each agreement. The fair market
values of market condition-based awards are determined using the Monte Carlo simulation method. The Monte Carlo simulation method is
subject to variability as several factors utilized must be estimated, including the derived service period, which is estimated based on the
Company’s judgment of likely future performance and the Company’s stock price volatility. The fair value of performance-based awards is
determined using the market closing price on the grant date. Derived service periods and the periods charged with compensation expense for
performance-based awards are estimated based on the Company’s judgment of likely future performance and may be adjusted in future
periods depending on actual performance.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable as we are a smaller reporting company.
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.
64
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information that we are required to 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.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be
disclosed is accumulated and communicated to our management, including our principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure.
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 ineffective as of March 31, 2012 because
of the material weaknesses described below.
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, 2012 based on the
in Internal Control-Integrated Framework , published by the Committee of Sponsoring Organizations of the Treadway
framework
Commission (COSO). Based on our assessment, we have concluded that our internal controls over financial reporting were not effective as of
March 31, 2012 because of the material weaknesses identified below.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a
more than remote likelihood that a material misstatement of the company’s annual or interim financial statements will not be prevented or
detected on a timely basis.
During management’s annual review of our internal control over financial reporting, we determined the following processes contain
material weaknesses as of March 31, 2012:
Maintenance of Corporate Records and Contracts
Management did not maintain sufficient records of signed and approved records, contracts and board minutes. Board minutes were
not always prepared and approved on a timely basis and signed and executed versions were not readily available. Additionally, management
does not have a policy in place to track board minutes to ensure completeness that all board minutes have been prepared.
65
Management also did not maintain a systematic process for managing and controlling contracts such as corporate governance,
financing and employee agreements, signed and executed stock option agreements and amendments, to ensure they are authorized timely and
that the financial statement effect is properly recognized in the general ledger.
Financial Close and Reporting Process
The Company significantly reduced the number of post-closing journal entries from the previous year. However, the lack of
secondary review of key accounting and financial reporting functions results in a risk in that material accounting errors may not be detected
timely. The accounting close and financial reporting process is the responsibility of one individual without sufficient backup for review of
accounting functions such as preparation of journal entries and account reconciliations.
Management does not believe that any of our annual or interim financial statements issued to-date contain a material misstatement as a
result of the aforementioned weaknesses in our internal controls. However, these material weaknesses related to the entity as a whole affect all
of our significant accounts and could result in a material misstatement to our annual or interim consolidated financial statements that would not
be prevented or detected.
Our management is in the process of identifying the steps necessary to address the material weaknesses existing as of March 31,
2012 described above, as follows:
1. Recruiting a Chief Financial Officer that will oversee that accounting and financial reporting processes
2. Engaged a financial consultant that serves as a liaison between the Board, Senior Management and the Accounting Organization
3. Hiring additional accounting personnel with adequate experience, skills and knowledge to assist in the closing of our financial
statements and further segregate duties of financial personnel;
4. Documenting, to standards established by senior accounting personnel and the principal accounting officer, the review and analysis and
related conclusions with respect to complex, non-routine transactions;
5. Creating policy and guidelines to streamline the corporate reporting process as well as managing non-routine transactions
These remediation efforts are expected be implemented during the fiscal year ending March 31, 2013.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules
of the SEC that permit the Company to provide only management’s report in this annual report.
Changes in Internal Controls over Financial Reporting
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, 2012 that have materially
affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
66
ITEM 9B. OTHER INFORMATION
None.
67
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The following table sets forth the names, ages and positions of our directors and executive officers as of June 15, 2012. Each director
serves until removed or resigns, or a successor is elected. Officers serve at the discretion of the Board and subject to any employment
agreements as set forth below.
Name
Peter Adderton
Lisa Higgins-Lucero
Peter Guber
Robert S. Ellin
Paul Schaeffer
Chris Rogers
Age
45
46
70
47
65
54 Director
Position(s)
Chief Executive Officer and Director
Principal Financial Officer and CFO of Twistbox Entertainment Inc.
Chairman
Executive Chairman
Co-Chairman
Biographical information for our directors and executive officers are as follows:
Peter Adderton. Peter Adderton has served as our Chief Executive Officer and as a Director on the Board since December 2011.
Mr. Adderton founded Boost Mobile in 2000 and remains a Director and the largest shareholder of Boost Mobile Australia. Boost Mobile
USA is one of the fastest growing mobile brands in its category with annual revenues over $1 billion and over five million subscribers. Boost
Mobile USA was purchased by Nextel in 2004, and remains a wholly-owned subsidiary of Sprint Nextel. In 2005 Mr. Adderton also
founded Amp'd Mobile, creating the first integrated mobile entertainment company targeted for youth, young professionals and early adopters.
Amp’d Mobile filed for Chapter 11 bankruptcy in 2007.
Lisa Higgins-Lucero. Lisa Higgins-Lucero is the Chief Financial Officer of Twistbox Entertainment, Inc. Mrs. Higgins-Lucero
joined Twistbox Entertainment Inc. in August 2007. She is responsible for all financial reporting and for the strategic planning and reporting
of the Company's operations. She works closely with all areas of the business to insure profitability and success for each of the Company's
vertical revenue strategies. Her prior experience is with publicly traded manufacturing and engineering companies, including 12 years with
Odetics, Inc., (now Iteris, Inc. NYSE Amex: ITI).
Peter Guber. Mr. Guber has served as Co-Chairman of our Board of Directors from August 2007 and currently serves as a
Chairman of the Board. Mr. Guber is Chairman and CEO of the multimedia Mandalay Entertainment Group. Prior to Mandalay, Mr. Guber
was Chairman and CEO of Sony Pictures Entertainment, Chairman and CEO of Polygram Entertainment, Co-Founder of Casablanca Record
& Filmworks and President of Columbia Pictures. Mr. Guber produced or executive produced (personally or through his companies) films
that garnered five Best Picture Academy Award nominations (winning for Rain Man) and box office hits that include The Color Purple,
Midnight Express, Batman, Flashdance and The Kids Are All Right. Mr.Guber is the Owner and Co-executive Chairman of the NBA
franchise, the Golden State Warriors. He is as a weekly entertainment and media analyst for Fox Business News and a full professor at
UCLA. Mr. Guber serves on the board of directors of Demand Media, an online media publishing company (NYSE: DMD), and is Co-
Founder of Geek Chic Daily, a daily email newsletter with inside information on technology & apps, video games, comics, TV & film. Mr.
Guber is a noted author with works including “Inside The Deep” and “Shootout: Surviving Fame and (Mis)Fortune in Hollywood.” Mr.
Guber wrote the cover article for the Harvard Business Review titled, “The Four Truths of the Storyteller” and has also authored op-ed pieces
for the New York Times and the San Francisco Chronicle. Mr. Guber recently released his third book, “Tell To Win - Connect, Persuade, and
Triumph with the Hidden Power of Story”, which became a #1 New York Times bestseller.
68
Robert S. Ellin. In December 2011, Mr. Ellin was appointed Executive Chairman of the Board of Directors. Prior to that, Mr.
Ellin served as Co-Chairman of our Board of Directors since 2005. Mr. Ellin has more than twenty years of investment and turnaround
experience. Since 2004, he has served as Managing Director and Portfolio Manager of Trinad Capital, an activist hedge fund investing
primarily in micro-cap and small-cap publicly traded companies. Prior to founding Trinad, Mr. Ellin was Founder and President of Atlantis
Equities Inc., a private 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 played an active role in its investee companies including board
representation, management selection, corporate finance and other advisory services. He spearheaded world-class investments in ThQ, Inc.
(THQI), Grand Toys (GRIN), Forward Industries, Inc. (FORD), Majesco Entertainment (COOL), and iWon.com. Mr. Ellin also acquired
S&S Industries, Inc. the largest manufacturer in the world of underwires which had strong partnerships with leading companies including
Bally’s, Maidenform, and Sara Lee. Prior to Atlantis, he worked in Institutional Sales at LF Rothschild and was Manager of Retail Operations
at Lombard Securities. Mr. Ellin is the Chief Executive Officer, Chief Financial Officer, Chairman of the Board of Directors and holds certain
other positions of Loton Corporation (LTNR.QB), a company specializing in 3D rendering, animation and architectural visualization services.
Mr. Ellin is also a director of Infosearch Media, Inc. (ISHM.PK), a provider of search-targeted text and video content for the Internet. Mr.
Ellin currently also sits on the Board of Directors of Atrinsic, Inc. (ATRN), as well as the Board of Governors at Cedars-Sinai Hospital in
Los Angeles, California. Mr. Ellin holds a Bachelor of Arts degree from Pace University.
Paul Schaeffer. Mr. Schaeffer is a member of our Board of Directors and served as Vice-Chairman or Co-Chairman on our Board
of Directors since August 2007. He is the Vice Chairman, Chief Operating Officer and Co-Founder of Mandalay Entertainment Group.
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 (“SPE”), overseeing the worldwide corporate operations for SPE including Worldwide Administration,
Financial Affairs, Human Resources, Corporate Affairs, Legal Affairs and Corporate Communications. 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 time 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, where he also served as a chairman of its Audit Committee, and member of its Compensation Committee and Executive
Committee for more than five years.
Chris Rogers. Mr. Rogers has been a member of our Board of Directors since May 2012. Mr. Rogers served as a Senior Vice
President, Corporate Development and Spectrum, of Sprint Nextel Corporation, where he evaluated and executed strategic initiatives,
including mergers, acquisitions, divestitures, equity investments and joint ventures within the mobile communication and e-commerce sectors.
He also was responsible for management and oversight of wireless spectrum licenses and Sprint Nextel’s investment portfolio of emerging
technology start-ups. Prior to its merger with Sprint in 2005, Mr. Rogers was Co-Founder and Senior Vice President of Nextel
Communications, Inc. as well as Co-Founder of FleetCall Communications, the predecessor to Nextel Communications, and Founder and
Chairman of Dispatch Communications, Inc., which was sold to Fleet Call/Nextel in 1993. Rogers holds a JD in Communications Law and
has served as a Director on multiple public and private company Boards and as a Director for several Washington, DC-based philanthropic
organizations.
Except as noted below, none of our directors has, during the past ten years, been involved in any legal proceedings described in
subparagraph (f) of Item 401 of Regulation S-K.
Audit Committee
Our 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 our auditors, and monitors our compliance with our
obligations under the assessment of internal control over financial reporting.
69
Nominating Committee
The entire Board of Directors currently operates as our Nominating Committee.
Code of Ethics
We intend to establish a code of ethics during the fiscal year ended March 31, 2013.
Section 16 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. 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, 2012, all Section 16(a) filing requirements applicable to our officers, directors, and ten percent stockholders were met except
for the following: (i) one Form 4 report was not timely filed by Peter Adderton with respect to two transactions; (ii) one Form 3 report was
not timely filed by Peter Adderton with respect to one transaction; (iii) one Form 4 report was not timely filed by Lisa Higgins-Lucero with
respect to one transaction; (iv) one Form 3 report was not timely filed by Lisa Higgins-Lucero with respect to two transactions, (v) one Form
3 report and one Form 4 report was not timely filed by Chris Rogers with respect to one transaction, and (v) one Form 4 report was not filed
by Robert Ellin with respect to three transactions.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the total compensation paid during our fiscal year ended March 31, 2011, and
our fiscal year ended March 31, 2012, for (i) our Chief Executive Officer, (ii) our other three most highly compensated executive officers who
were serving as executive officers as of March 31, 2012, and (iii) two additional individuals who are former executive officers but were not
serving as an executive officer at the end of the fiscal year ended March 31, 2012 (collectively, our “named executive officers”).
Position
Peter Adderton (2)
Chief Executive Officer
Robert Ellin (3)
Executive Chairman
Lisa Higgins-Lucero (4)
Principal Financial Officer and
CFO of Twistbox Entertainment
Inc.
David Mandell (5)
Former Executive Vice President
and General Counsel
James Lefkowitz (6)
Former Chief Operating Officer
Ray Schaaf (7)
Former President and Chief
Executive Officer
Fiscal
Year
Ended
March 31,
2012
March 31,
2011
March 31,
2012
March 31,
2011
March 31,
2012
March 31,
2011
March 31,
2012
March 31,
2011
March 31,
2012
March 31,
2011
March 31,
2012
March 31,
2011
Salary
($)
Bonus
($)
Stock (1)
($)
Option (1)
($)
All Other
($)
Total
($)
112,500
125,000 2,025,504
-
26,741 2,289,745
-
-
-
-
25,751
25,751
112,500
- 3,110,515
-
20,000 3,243,015
-
-
-
-
360,000
360,000
120,000
34,000
162,475
-
10,999
327,474
120,000
-
-
-
-
120,000
253,828
24,000
243,713
-
19,991
541,532
332,600
50,000
226,403
19,950
-
-
-
-
-
49,916
16,251
398,767
-
-
17,773
67,773
-
26,137
28,856
281,396
-
-
-
19,950
285,960
125,000
75,000
-
30,268
516,228
70
(1) The amounts in the “Stock” column reflect the aggregate grant date fair value of each restricted stock award computed in accordance
with FASB ASC Topic 718. Under ASC 718, for Messer’s. Adderton and Ellin we estimated the fair value of the restricted stock
granted using the Monte Carlo pricing method model that values the restricted stock awards using various random hypothecations of
stock price; securities issuances for services; securities issuances for capital raises and acquisitions. The primary assumptions used in
this analysis are: Stock price ($0.61 as of December 28, 2011) is projected to fluctuate based on a future annual volatility of 100%;
Average monthly stock issuances for services is projected at 100,000 shares with a standard deviation of 50,000 shares; Average
monthly stock issuances for capital is projected at 200,000 shares with a standard deviation of 100,000 shares; Average monthly stock
issuances for acquisitions is projected at 200,000 with a standard deviation of 100,000 shares; Acquisition share issuances were not
assumed for the first 3 months; Market cap hurdles of $100 million and $200 million are based on maintaining those levels for 30
trading days; Dilutive share analysis included warrants, options, restricted stock grants and convertible debt with only fixed price
conversion and exercise prices; and restricted stock discount of 36.1%, risk-free rate of 0.1% and dividend yield of 0%. Forfeiture rate
was assumed to be 0% due to the lack of any service requirement related to these awards.
For the amounts for other recipients in the “Stock” and “Options” columns were also computed under ASC 718. We estimated the fair
value of restricted stock and stock options granted using the Black-Scholes 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 vesting term. The amount
of expense recognized represents the expense associated with the restricted stock or 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
restricted stock or options that actually vest or are forfeited are recorded. Vesting schedules for unvested stock grants or option grants for
each officer are described below under “Narrative Disclosure to Summary Compensation Table”.
(2) Mr. Adderton was appointed as our Chief Executive Officer on December 28, 2011 following a period of service as our interim Chief
Executive Officer that began on July 15, 2011. Mr. Adderton was previously serving as an advisor to us and received a warrant to
purchase 150,000 shares of our common stock at a per share price of $0.39 on September 27, 2010. In the fiscal year ended March 31,
2012, Mr. Adderton was reimbursed $20,000 for his personal assistant, through payment to Skycrest Ventures, LLC, and such
amounts are disclosed under “All Other”.
(3) Mr. Ellin was appointed Executive Chairman of the Board of Directors on December 28, 2011. Mr. Ellin also received $20,000 in
‘Other Compensation’ that consists of salary for a personal assistant that is reimbursed to Trinad Management, LLC. Prior to his
appointment as Executive Chairman, we were a party to a Management Agreement, dated September 14, 2006 with Trinad
Management, LLC, the manager of Trinad Capital Master Fund, which is one of our principal stockholders. Mr. Ellin is the managing
director of and portfolio manager for Trinad Management, LLC. Pursuant to the terms of the Management Agreement, Trinad
Management, LLC provides certain management services, including, without limitation, relating to the sourcing, structuring and
negotiation of a potential business combination involving the Company, for a fee of $90,000 per quarter.
(4) Ms. Higgins-Lucero was appointed as our Principal Financial Officer on July 26, 2011.
(5) On April 12, 2012, Mr. Mandell resigned from his positions with us. In February 2011, while an officer of the Company, Mr.
Mandell agreed to cancel 400,000 shares underlying an option to purchase 450,000 shares of common stock of the Company, and the
Company granted an option to purchase 400,000 shares of the Company’s common stock at an exercise price of $0.25 per share. The
Company determined the incremental fair value of the options issued to be $49,916, using the Black-Scholes option pricing model and
the following assumptions: expected life of 6.98 years, a risk free interest rate of 2.99%, a dividend yield of 0% and volatility of 75%.
71
(6) On January 31, 2012, James Lefkowitz resigned as our Chief Operating Officer. In February 2011, while an officer of the Company,
Lefkowitz agreed to cancel an option to purchase 500,000 shares of common stock of the Company, and the Company granted
Lefkowitz an option to purchase 500,000 shares of the Company’s common stock at an exercise price of $0.25 per share. The
Company determined the incremental fair value of the options issued to be $26,137, using the Black-Scholes option pricing model and
the following assumptions: expected life of 3.00 years, a risk free interest rate of 1.02%, a dividend yield of 0% and volatility of 75%.
(7) On May 9, 2011, Ray Schaaf resigned as our President and Chief Executive Officer. Amounts disclosed as salary represent salary paid
to Mr. Schaaf in his capacity as President and CEO, while amounts disclosed as “All Other” include fees prior to his appointment as
President and other benefits paid.
NARRATIVE DISCLOSURE TO SUMMARY COMPENSATION TABLE
Employment Agreement with Peter Adderton. On December 28, 2011, we entered into an employment agreement with Mr. Adderton
as the Company’s Chief Executive Officer. Mr. Adderton’s employment agreement provides for a one-year term and an annual salary of
$450,000, half of which was deferred until certain debt and/or equity financings were consummated. Such financings were consummated and
Mr. Adderton has received his full salary since April 1, 2012 and received a lump sum payment for the portion of his salary that was deferred
from December 28, 2011 to March 31, 2012 on April 9, 2012. Mr. Adderton is eligible to receive a special incentive bonus if certain debt
and/or equity financings are consummated, and is also eligible to receive an annual cash bonus in the amount of 100% of his base salary, upon
on the satisfaction of performance-related milestones to be agreed upon between Mr. Adderton and our board of directors.
Mr. Adderton also received a grant of 9,037,500 shares of our restricted common stock that vest in three equal tranches upon the
occurrence of the following events: (i) one or more debt or equity financings during the two years following the date of the agreement (the
“Measurement Period”) with gross proceeds of at least $5 million; (ii) our achievement on any date during the Measurement Period of a total
enterprise value (computed by multiplying the number of outstanding shares of common stock on a fully diluted (taking into account only
those stock options that are in-the-money on such date), as-converted basis by the average daily trading price for common stock for the 30-
trading day period immediately preceding the date of determination) of $100 million or more; and (iii) our achievement on any date during the
Measurement Period of a total enterprise value (calculated as set forth in clause (ii) above) of $200 million or more; provided, however, that all
unvested shares of restricted common stock will vest immediately upon the sale of all or substantially all of our assets, upon the merger or
reorganization of our Company following which the equity holders immediately prior to the consummation of such merger or reorganization
collectively own less than 50% of the voting power of the resulting entity, or upon the sale of our equity securities representing 50% or more
of our voting power or 50% or more of the economic interest in us in a single transaction or in a series of related transactions. The first tranche
of the grant of restricted common stock described above vested as of December 29, 2011 upon the funding of the $7 million financing from
Adage Capital Partners, L.P. Mr. Adderton will also be reimbursed for the annual fee of a personal assistant of up to $80,000 during the term
of his employment.
Mr. Adderton is also entitled to receive additional performance bonuses, in cash or shares of common stock at Mr. Adderton’s
election, upon our achievement of certain higher total enterprise values. All of Mr. Adderton’s shares of restricted common stock are subject to
a one-year prohibition on transfer from the applicable vesting date.
During the fiscal year ended March 31, 2012, we did not grant Mr. Adderton any stock options. Mr. Adderton also received a
warrant to purchase 150,000 shares of our common stock at a per share price of $0.39.
72
Executive Chairman Agreement with Robert Ellin. On December 28, 2011, we entered into an executive chairman agreement with
Mr. Ellin. Mr. Ellin’s executive chairman agreement provides for a one-year term and an annual fee of $450,000, half of which was deferred
until certain debt and/or equity financings were consummated. Such financings were consummated, and Mr. Ellin has received his full fee
since April 1, 2012 and received a lump sum payment for the portion of his fee that was deferred from December 28, 2011 to March 31, 2012
on April 6, 2012. Mr. Ellin shall be entitled to be paid an annual incentive bonus in cash in an amount of up to one hundred percent (100%) of
the annual fee based upon satisfaction of performance-related milestones to be agreed upon between Mr. Ellin and the other members of our
board of directors. Mr. Ellin shall also be reimbursed for the annual fee of a personal assistant of up to $80,000 during the term of this
executive chairman agreement.
Mr. Ellin also received three grants totaling 8,000,000 shares of our restricted common stock and vests as follows:
• The first grant of 3,400,000 was granted under the executive chairman agreement and vests as follows: (i) one third vested upon the
completion our most recent equity financing; (ii) one third shall vest if on any date during the term or within 12 months following the
term, our total enterprise value equals or exceeds $100,000,000; and (iii) one third shall vest immediately if on any date during the term
or within 12 months following the term our total enterprise value equals or exceeds $200,000,000; provided, however, that all
unvested shares of restricted common stock shall vest immediately change of control. These shares may not be transferred for a period
of one year from the vesting date.
• The second grant of 3,600,000 shares was granted on December 28, 2011 and vested fully on the date of the grant. These shares may
not be transferred for a period of two years from the date of grant.
• The third grant of 1,000,000 shares was granted on December 28, 2011 and vest one year from the date of grant. These shares may not
be transferred for a period of one year from the vesting date.
Mr. Ellin is also entitled to receive additional performance bonuses, in cash or shares of common stock at Mr. Ellin’s election, upon
our achievement of certain higher total enterprise values.
During the fiscal year ended March 31, 2012, we did not grant Mr. Ellin any additional stock options or warrants.
Employment Agreement with Lisa Higgins-Lucero. Ms. Higgins-Lucero joined us on August 27, 2007. Ms. Higgins-Lucero has a
written employment contract with our wholly owned subsidiary Twistbox which provides for a bonus of up to 10% of her then base salary, at
the discretion of management. She receives a base salary of $120,000 per year, payable in accordance with our payroll guidelines. She is
eligible for a bonus at the discretion of our board of directors. During the fiscal year ended March 31, 2012, we did not grant Ms. Higgins-
Lucero any stock options. Effective January 3, 2012, we granted Ms. Higgins-Lucero 500,000 shares of restricted common stock, of which
250,000 vested immediately and 250,000 will vest upon the achievement of performance criteria at the Chief Executive Officer’s discretion
and with the approval of the board of directors, however, all unvested shares will vest immediately upon the sale of all or substantially all of
our assets, upon the merger or reorganization of our Company following which the equity holders immediately prior to the consummation of
such merger or reorganization collectively own less than 50% of the voting power of the resulting entity, or upon the sale of our equity
securities representing 50% or more of our voting power or 50% or more of the economic interest in us in a single transaction or in a series of
related transactions.
Employment Agreement with David Mandell. On February 1, 2012, we entered into an employment agreement with Mr. Mandell,
our former Executive Vice President and General Counsel. The agreement provides Mr. Mandell a base salary of $250,000 per year. Mr.
Mandell was entitled to be paid an annual discretionary incentive bonus in an amount not to exceed 50% of his salary, based upon satisfaction
of performance-related milestones. On January 3, 2012 we granted Mr. Mandell 750,000 shares of restricted common stock, which vested as
follows: 375,000 shares vested immediately, and 375,000 shares are scheduled to vest upon the completion of an acquisition by us of all or
substantially all of the assets of or equity interests in another entity or similar transaction which is approved by our board of directors. During
the fiscal year ended March 31, 2012, we did not grant Mr. Mandell any stock options.
On April 12, 2012, we entered into a Separation and General Release Agreement with Mr. Mandell, under which Mr. Mandell
retains ownership of the 375,000 shares of vested common stock awarded under his employment agreement and waives all rights to the non-
vested common stock awards and any other shares awarded under such agreement. We will pay Mr. Mandell a total of $125,000 over a nine-
month period beginning March 9, 2012 as compensation for performing certain transition consulting services for us. Mr. Mandell’s first
payment was made on April 20, 2012 for the period March 9, 2012 to April 14, 2012. We will also pay Mr. Mandell’s monthly COBRA
premiums for a nine-month period or provide certain reimbursement payments in the event Mr. Mandell’s current health plan ceases to be
available before the end of such nine-month period. The agreement provides mutual releases from claims, reasonable cooperation covenants
(and reimbursements obligations for extended consultation), and continuation of non-disclosure obligations and various attorney-client
privilege, confidentiality, cooperation and non-solicitation clause of Mr. Mandell’s employment agreement.
Employment Agreement with James Lefkowitz. On February 21, 2011, we entered into an employment agreement with Mr.
Lefkowitz. The agreement provided Mr. Lefkowitz a base salary of $5,000 per month. We also granted Mr. Lefkowitz options to purchase
500,000 shares of common stock at an exercise price of $0.25 per share upon the cancellation of options to purchase 500,000 shares of
common stock previously granted to him. During the fiscal year ended March 31, 2012, we did not grant Mr. Lefkowitz any stock options.
On January 31, 2012, James Lefkowitz resigned as our Chief Operating Officer.
Employment Agreement with Ray Schaaf. Mr. Schaaf was appointed as President of the Company on October 27, 2009 following a
period of acting as a consultant to us. On February 22, 2011 Mandalay entered into a Confidential Separation, Transition and Release
Agreement and a Restricted Stock Agreement with Mr. Schaaf (together, the “Schaaf Agreements”). Pursuant to the Schaaf Agreements, Mr.
Schaaf entered into a transition period in his role with the Company that ended on May 9, 2011. At the end of the transition period, Mr.
Schaaf entered into a transition period in his role with the Company that ended on May 9, 2011. At the end of the transition period, Mr.
Schaaf ceased to be our President and resigned as a member of its Board of Directors. We paid Mr. Schaaf $45,000 in 3 installments, and we
issued 300,000 shares of the Company’s common stock to Mr. Schaaf as compensation for his services during the transition period. The
Schaaf Agreements included a mutual, general release, and if Mr. Schaaf had not reaffirmed the general release within 21 days of the transition
period, then we would have had the right to repurchase the 300,000 shares of the Company’s common stock issued to him.
Other than as described above, we have no plans or arrangements with respect to remuneration received or that may be received by
our named executive officers to compensate such officers in the event of termination of employment (as a result of resignation, retirement,
change of control) or a change of responsibilities following a change of control.
73
OUTSTANDING EQUITY AWARDS AT MARCH 31, 2012
The following table presents information regarding outstanding options and unvested stock awards held by our named executive
officers as of March 31, 2012.
Option Awards
Stock Awards
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
Number
of
Securities
Underlying
Unexercised
Unearned
Options
(#)
Number
of shares
or units
of stock
that have
not
vested (#)
Market
value of
shares or
units of
stock
that have
not
vested ($)
Option
Exercise
Price $
Option
expiration
date
-
500,000
-
9,759
400,000
50,000
500,000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2.75
-
-
6,175,000
1,519,563
6/18/18
-
1,000,000
2,266,667
155,880
555,333
0.81
10/9/17
250,000
232,500
0.25
4.75
2/12/2018
2/12/2018
375,000
-
348,750
-
0.25
2/21/2014
-
-
74
-
-
-
-
Name
Peter
Adderton
Chief
Executive
Officer(1)
Robert Ellin
Executive
Chaairman (2)
Lisa Higgins-
Lucero
Principal
Financial Officer
and CFO of
Twistbox
Entertainment
Inc.(3)
David Mandell
Former Executive
Vice President and
General Counsel
(4)
James Lefkowitz
Former Chief
Operating Officer
(5)
Ray Schaaf
Former President
and Chief
Executive Officer
Equity
incentive
plan
awards:
Number
of
unearned
shares,
units or
other
rights
that have
not
vested (#)
Equity
incentive
plan awards:
Market or
payout value
of unearned
shares, units
or other
rights that
have not
vested ($)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(1) Effective December 28, 2011, we granted Mr. Adderton 9,037,500 shares of restricted common stock, one third of which vested
as of December 29, 2011. The remaining 6,025,000 shares vest as described above under –“Narrative Disclosure to Summary Compensation
Table—Employment Agreement with Peter Adderton.” Mr. Adderton also received a warrant to purchase 150,000 shares of our common
stock at a per share price of $0.39 on September 27, 2010.
(2) Effective June 18, 2008, we granted Mr. Ellin 500,000 stock options. The stock options are exercisable at the exercise price of
$2.75 per share until June 18, 2018. Effective December 28, 2011, we granted Mr. Ellin 8,000,000 shares of restricted stock, of which
4,733,333 shares have vested. The remaining 3,266,667 shares vest as described above under –“Narrative Disclosure to Summary
Compensation Table—Executive Chairman Agreement with Robert Ellin.”
(3) Effective January 31, 2008, we granted Ms. Higgins-Lucero 9,759 stock options. The stock options are exercisable at the exercise
price of $0.81 per share until October 9, 2017. Effective January 3, 2012, we also granted Ms. Higgins-Lucero 500,000 shares of restricted
common stock, half of which were vested as of January 3, 2012. The remaining 250,000 shares vest as described above under –“Narrative
Disclosure to Summary Compensation Table—Employment Agreement with Lisa Higgins-Lucero.”
(4) Mr. Mandell resigned from his positions with us on April 12, 2012. Effective February 12, 2008, we granted Mr. Mandell
400,000 stock options. These stock options are exercisable at the exercise price of $0.25 per share until February 12, 2018. Effective February
12, 2008, we also granted Mr. Mandell 50,000 stock options, which are exercisable at the exercise price of $4.75 per share until February 12,
2018. Effective January 3, 2012, we granted Mr. Mandell 750,000 shares of restricted common stock, half of which shares vested
immediately. The remaining 375,000 shares vest as described above under –“Narrative Disclosure to Summary Compensation Table—
Employment Agreement with David Mandell.”
(5) Effective February 21, 2011, we granted Ms. Lefkowitz 500,000 stock options. The stock options are exercisable at the exercise
price of $0.25 per share until February 21, 2014.
DIRECTOR COMPENSATION
The following table presents information regarding compensation paid to our directors during the fiscal year ended March 31, 2012.
Name
Peter Guber (2)
Robert S. Ellin (3)
Paul Schaeffer (4)
Peter Adderton (5)
Ray Schaaf (6)
Adi McAbian (7)
Fees Earned or
Paid in Cash
($)
Stock Awards
($)(1)
Option Awards
($)(1)
All Other
Compensation ($)
-
-
19,950
-
-
-
620,000
-
620,000
-
-
-
-
-
-
-
-
-
Total
($)
620,000
-
639,950
-
-
-
-
-
-
-
-
-
(1) The amounts in this column reflect the aggregate grant date fair value of each restricted stock award computed in accordance with
FASB ASC Topic 718. 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 stock vesting term. The amount of expense recognized represents the expense associated with the
stock 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 stock that actually vest or are forfeited are recorded.
(2) As of March 31, 2012, Mr. Guber held 500,000 options with an exercise price of $ 2.75 per share, and 1,000,000 shares of
unvested restricted common stock.
75
(3) Mr. Ellin was appointed Executive Chairman of the Board of Directors on December 28, 2011. His compensation for fiscal year
2011 is fully reflected in the “Summary Compensation Table” above. Mr. Ellin received no additional compensation for his service as a
director.
(4) As of March 31, 2012, Mr. Schaeffer held 300,000 options with an exercise price of $2.75 per share, and 1,000,000 shares of
unvested restricted common stock.
(5) Mr. Adderton was appointed as our interim Chief Executive Officer on July 15, 2011 and was appointed as our Chief Executive
Officer on December 28, 2011. His compensation for fiscal year 2011 is fully reflected in the “Summary Compensation Table” above. Mr.
Adderton received no additional compensation for his service as a director.
(6) Mr. Schaaf resigned as a member of our board of directors on May 9, 2011. As of March 31, 2012, Mr. Schaaf held no options
and no shares of unvested restricted common stock.
(7) Mr. McAbian resigned as a member of our board of directors on April 27, 2011. As of March 31, 2012, Mr. McAbian held
54,725 options and no shares of unvested restricted common stock.
NARRATIVE TO DIRECTOR COMPENSATION TABLE
Non-employee director compensation for a new director is determined on an ad hoc basis by the existing members of the board of
directors at the time a director is elected.
76
NARRATIVE DISCLOSURE OF COMPENSATION POLICIES AND PRACTICES AS THEY RELATE TO THE
COMPANY’S RISK MANAGEMENT
We believe that our 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 us.
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 presents information regarding the beneficial ownership of all shares of our common stock and preferred stock
as of June 15, 2012 by:
Each person who beneficially owns more than five percent of the outstanding shares of our common stock;
·
Each person who beneficially owns outstanding shares of our preferred stock;
·
Each director;
·
Each named executive officer; and
·
· All directors and officers as a group.
Name of
Beneficial Owner (1)
Number of Shares
Beneficially Owned (2)
Percentage
Owned (%)
Robert S. Ellin (3)
Peter Guber (4)
Adage Capital Partners LP (5)
Peter Adderton (6)
Paul Schaeffer (7)
Lisa Higgins-Lucero (8)
All directors and named executive officers as a group (5 individuals)
30,201,385
18,786,293
12,553,333
9,187,500
2,300,000
509,759
60,984,937
26.4%
16.4%
11.0%
8.0%
2.0%
0.4%
53.3%
(1) Except as otherwise indicated, the address of each of the following persons is c/o Mandalay Digital Group, Inc., 4751 Wilshire
Boulevard, Third Floor, Los Angeles, CA 90010.
(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 Securities and Exchange 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 convertible or exercisable, convertible or issuable within 60 days of
May 20, 2012, are deemed outstanding. Such shares, however, are not deemed outstanding for the purpose of computing the percentage
ownership of any other person.
(3) Trinad Capital Master Fund, Ltd. is the beneficial owner of 21,701,385 shares of common stock, which includes (a) 4,262,233
issued and outstanding shares of common stock, (b) 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, (c) 12,058,253 (10,000,000 principal, 2,058,253 accrued interest) shares of
common stock issuable upon conversion of a convertible note issued by us with an aggregate principal amount of $1,500,000 held by Trinad
Capital Master Fund, Ltd. (at the time of conversion accrued interest will also be converted and increase total number of shares issued) and
which is convertible at a price per share of $0.15, and (d) 5,000,000 shares of common stock issuable upon exercise of warrants held by
Trinad Capital Master Fund, Ltd. at an exercise price of $0.25 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 21,250,007 shares of common stock which includes 21,150,007
shares of 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 30,201,385 shares of common stock, which includes (i) 21,701,385 shares of common
stock held by Trinad Capital Master Fund, Ltd., (ii) 100,000 shares of common stock issuable upon conversion of 100,000 shares of series A
convertible preferred stock held by Trinad Management LLC, (iii) 8,000,000 issued and outstanding shares of common stock owned by Mr.
Ellin, and (iv) options to purchase 500,000 shares of common stock owned by Mr. Ellin. Mr. 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 70.20% of the shares of Trinad Capital Master Fund, Ltd. as of March 31, 2012) and Trinad
Advisors II, LLC (as the general partner of Trinad Capital LP), are each deemed the beneficial owner of (a) 3,866,452 shares of common
stock (representing 84.53% of the shares of the 4,293,160 shares of common stock held directly, and not through a derivative security, by
Trinad Capital Master Fund, Ltd.), (b) 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, (c) 10,000,000 shares of common stock issuable upon conversion of a convertible note
issued by us with an aggregate principal amount of $1,500,000 held by Trinad Capital Master Fund, Ltd., and (d) 5,000,000 shares of
common stock issuable upon exercise of warrants held by Trinad Capital Master Fund, Ltd. at an exercise price of $0.25 per share. Trinad
Advisors II, LLC disclaims beneficial ownership of the shares of common stock beneficially owned by Trinad Capital LP, except to the extent
Advisors II, LLC disclaims beneficial ownership of the shares of common stock beneficially owned by Trinad Capital LP, except to the extent
of its pecuniary interest therein.
77
Each of the beneficial owners share the power to vote or to direct the vote and to dispose or to direct the disposition of common stock
it or he may be deemed to beneficially own, except that Mr. Ellin has the sole power to vote or to direct the vote of 8,000,000 shares of vested
and unvested stock owned by him and to dispose or to direct the disposition of 4,733,333 shares of fully vested common stock owned by him,
and will have the power to vote or to direct the vote and to dispose or to direct the disposition of 500,000 shares of common stock underlying
the options granted to Mr. Ellin on June 18, 2008 at an exercise price of $2.75 per share, upon their exercise. The address of each of the
beneficial owners is 4751 Wilshire Boulevard, Third Floor, Los Angeles, CA 90010.
(4) The Guber Family Trust (the “Trust”), of which Peter Guber serves as a trustee, is the beneficial owner of 17,286,293 shares of
common stock, which consists of: (a) 5,633,225 issued and outstanding shares of common stock, (b) 280,899 shares of common stock
issuable upon exercise of warrants at an exercise price of $2.67 per share, (c) 8,038,836 (6,666,667 principal, 1,372,169 accrued interest)
shares of common stock issuable upon conversion of a convertible note issued by us with an aggregate principal amount of $1,000,000 (at the
time of conversion accrued interest will also be converted and increase total number of shares issued) and which is convertible at a price per
share of $0.15, and (d) 3,333,333 shares of common stock issuable upon exercise of warrants at an exercise price of $0.25 per share. Peter
Guber disclaims beneficial ownership of the shares of common stock directly and beneficially owned by the Trust, except to the extent of his
pecuniary interest therein. Mr. Guber directly owns 1,500,000 shares of common stock, which consists of 1,000,000 unvested shares of
common stock, and options to purchase 500,000 shares of our common stock, which options are fully vested. Mr. Guber, as trustee of the
Trust, has the sole power to vote or to direct the vote and dispose or to direct the disposition of 16,991,822 shares of common stock. Mr.
Guber shall have the sole power to vote or to direct the vote and to dispose or to direct the disposition of 500,000 shares of common stock
underlying the options granted to Mr. Guber on June 18, 2008 at an exercise price of $2.75 per share, upon their exercise. The information set
forth herein is based solely on a Schedule 13D filed by the beneficial owners with the Securities and Exchange Commission on January 9,
2012.
(5) Adage Capital Partners LP is the beneficial owner of 12,553,333 shares of common stock, which consists of 10,053,333 issued
and outstanding shares of common stock, and 2,500,000 shares of common stock issuable upon exercise of warrants at an exercise price of
$0.70 per share. Adage Capital Partners LP has the sole power to vote or to direct the vote and dispose or to direct the disposition of
12,553,333 shares of common stock.
(6) Peter A. Adderton is the beneficial owner of 9,187,500 shares of common stock, which consists of (a) 9,037,500 issued and
outstanding shares of common stock and (b) 150,000 shares of common stock issuable upon exercise of warrants at an exercise price of $0.39
per share. Mr. Adderton has the sole power to vote or to direct the vote of 9,037,500 shares of common stock and to dispose or to direct the
disposition of 3,012,500 shares of common stock (subject to a one-year prohibition on transfer from the applicable vesting date).
(7) Paul & Judy Schaeffer Living Trust is the beneficial owner of 1,000,000 shares of common stock. 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. Mr. Schaeffer directly owns options to purchase 300,000
shares of our common stock, which options are fully vested, and 1,000,000 unvested shares of common stock Mr. Schaeffer will have the
sole power to vote or to direct the vote and to dispose or to direct the disposition of 300,000 shares of common stock underlying the options
granted to Mr. Schaeffer on June 18, 2008 at an exercise price of $2.75 per share, upon their exercise.
(8) Lisa Higgins-Lucero is the beneficial owner of 509,759 shares of common stock, which consists of 500,000 issued and
outstanding shares, and options to purchase 9,759 shares of common stock. Mrs. Higgins-Lucero has the sole power to vote or to direct the
vote and dispose or to direct the disposition of 250,000 shares of fully vested common stock, and will have the sole power to vote or to direct
the vote and to dispose or to direct the disposition of 9,759 shares of common stock underlying the options granted to Mrs. Higgins-Lucero
on January 31, 2008 at an exercise price of $0.81 per share, upon their exercise.
78
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Mandalay Digital Group, Inc.
Management Agreement
On September 14, 2006, the Company entered into a five year management agreement (“Agreement”) with Trinad Management, LLC
the manager of Trinad Capital Master Fund, which is one of our principal stockholders. In addition, Robert Ellin, our Executive Chairman, is
the managing director of and portfolio manager for Trinad Management. Pursuant to the terms of the Agreement, Trinad Management
provided certain management services, including, without limitation, relating to the sourcing, structuring and negotiation of a potential business
combination transaction involving the Company in exchange for a fee of $90,000 per quarter, plus reimbursements of all related expenses
reasonably incurred. The Agreement expired on September 14, 2011, but was extended to December 31, 2011. For the years ended March 31,
2012 and 2011, the Company incurred management fees under the agreement of $270,000 and $360,000 respectively. At March 31, 2012 and
March 31, 2011, the accrued payable to Trinad Management was $135,000 and $180,000 respectively.
In March 2008, we entered into a month-to-month lease for office space with Trinad Management for rent of $9,000 per month,
which was subsequently reduced to $5,000 per month. Rent expense in connection with this lease was $0 and $40,000 respectively for the
years ended March 31, 2012 and 2011. This lease was terminated in December 2010 when the Company moved to a new location.
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 Executive Chairman, Robert Ellin. Peter Guber, our Chairman, 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, we may, at our 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 our common stock at a conversion price of $0.15 per share, subject
to adjustment. The New Senior Secured Notes are secured by a first priority lien on substantially all of our and our subsidiaries’ assets. The
Amended ValueAct Note (described below) 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 $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.
Twistbox
Twistbox engages in various business relationships with its stockholders and officers and their related entities. The significant
relationships are as follows:
79
Loans
As part of the Merger, we 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 a
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. We also entered into a Guaranty with ValueAct whereby we 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, to provide that Twistbox was required maintain a cash balance of not less than
$2,500,000 at all times and we were required to maintain a cash balance of not less than $4,000,000 at all times.
On October 23, 2008, in connection with the AMV Acquisition, the Company, 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 the Company and Twistbox maintain
certain minimum combined cash balances and provided for certain covenants with respect to the indebtedness of the Company. and its
subsidiaries. Also on October 23, 2008, AMV granted to ValueAct a security interest in its assets to secure the obligations under the
ValueAct Note. In addition, Mandalay Digital Group, Inc. and ValueAct entered into an allonge to each of those certain warrants issued to
ValueAct in connection with the Merger, which, among other things, amended the exercise price of each of the warrants to $4.00 per share.
On August 14, 2009, for $3,500,000 in principal (the “Amended ValueAct Note”). 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 the Company held by ValueAct were cancelled and all warrants and common stock of the Company held by AMV founders
Nate MacLeitch and Jonathan Cresswell, former directors of the Company, were repurchased by the Company for a price of $0.02 per share.
On August 14, 2009, the Company, Twistbox and ValueAct entered into a Third Amendment to the ValueAct Note. Pursuant to this
Third Amendment, the maturity date of the ValueAct Note was changed to July 31, 2010 and the interest rate of the ValueAct Note increased
from 10% to 12.5%.
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 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 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 that
Twistbox and the Company 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 a result of certain
alleged defaults, including the failure to provide weekly evidence of compliance with certain of Twistbox’s and the Company covenants under
the ValueAct Note, the failure to comply with limitations on certain payments by the Company and each of its subsidiaries, and the failure of
Twistbox and the Company to maintain minimum cash balances in deposit accounts of each of Twistbox and the Company. The Letter also
claimed that the Waiver had ceased to be effective as a result of the alleged failure of Mandalay Digital Group, Inc. 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 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. In connection with the Notice, ValueAct instituted an administration proceeding in
the United Kingdom against AMV.
80
On June 21, 2010, we 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”) election to the note through the revised term, and (3) stripped
out $3,000,000 of principal to create the Taja Convertible Note, leaving a principal balance of $500,000 plus accrued interest of $562,000 for a
total of $1,062,000. As consideration for amending the note, Taja also received a warrant (“Incentive Warrant”) to purchase 2,000,000 shares
of common stock of the Company at an exercise price of $0.25 per share, subject to adjustment. Taja also received 25% warrant coverage
(“Coverage Warrant”) determined by dividing the principal amount of the Taja Convertible Note by the conversion price multiplied by 25%.
The Incentive Warrant and the Coverage Warrant have a five year term and vest one year from issue date.
On December 16, 2011, the Amended ValueAct Note was purchased in its entirety by Taja LLC (“Taja) and was amended to remove
certain negative covenants from the Note (the “Amended Taja Note”). On December 29, 2011, the Company and Taja entered into a binding
term sheet for convertible note financing (“Taja Convertible Note”) and, effectively, a third amendment to the Second Amended Note (“Third
Amended Note”). The Third Amended Note (1) changed the maturity date of the Note from June 21, 2013 to June 21, 2015, (2) extended the
payment in kind (“PIK 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 March 1, 2012, the Company and Taja entered into a second binding term sheet (“Amended Taja Convertible Note”) to amend
certain provisions of the December 29, 2011 binding term sheet. Pursuant to the Amended Taja Convertible Note, (1) the maturity date was
revised to March 1, 2014, (2) the conversion price was amended to $0.70 share, (3) conversion of the note must not cause the holder to exceed
4.9% ownership, except that on the maturity date the entire remaining amount of principle and interest shall automatically convert into shares
of common stock of the Company, (4) the Amended Taja Convertible Note becomes accelerated and immediately due and payable upon the
consummation by the Company of one or more equity sales from and after March 1, 2012 resulting in aggregate net proceeds of at least
$10,000,000, (5) the conversion date is to occur the earlier of (x) the date that the long-form documents are executed and delivered to all
parties, and (y) March 19, 2012, (6) the 2,000,000 Incentive Warrants issued as consideration for the Third Amended Note were amended to
vest and be exercisable one year from March 1, 2012, and (7) the exercise date of the Coverage Warrants was amended to one year following
the conversion date.
On March 19, 2012, the Company issued 2,600,000 shares of its common stock to Taja for the conversion of $1,820,000 of the
Amended Taja Convertible Note.
The above description of the Restructure does not purport to be complete and is qualified in its entirety by reference to the Current
Reports on Form 8-K filed by us on June 23, 2010, January 4, 2012, and March 7, 2012, and relevant exhibits thereo, which are incorporated
by reference herein.
81
Director Independence
As of June 15, 2012, the independent directors of the Board were Paul Schaeffer and Chris Rogers, based on the standards of the
Nasdaq Stock Market.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees
Aggregate fees for professional services rendered to us by Singer Lewak, LLP, our independent registered public accounting firm
engaged to provide audit for the fiscal years ended March 31, 2012 and March 31, 2011 were:
Audit fees
Audit related fees
Tax fees
All other fees
Total
Year Ended
March 31, 2012
Year Ended
March 31, 2011
$
$
277,004 $
-
-
-
277,004 $
137,065
-
-
-
137,065
Policy on Pre-Approval of Audit and Permissible Non-audit Services of Independent Auditors
Consistent with the SEC policies regarding auditor independence, our Board of Directors has responsibility for appointing, setting
compensation and overseeing the work of the independent auditor. In recognition of this responsibility, our 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.
82
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
2012 and 2011.
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
2.4
2.5
2.6
2.7
2.8
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
2.9
Certificate of Ownership merging Mandalay Digital Group, Inc. into Neumedia, Inc., dated February 2, 2012*
83
3.1
3.2
Certificate of Incorporation. 2
Bylaws. 2
3.3
Certificate of Amendment of the Bylaws of NeuMedia, Inc., dated February 2, 2012. 28
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
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
Form of Warrant issued to Investors, dated October 23, 2008. 9
Warrant dated September 23, 2009 issued to Vivid Entertainment, LLC and related Registration Right Agreement. 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
4.10
Form of Warrant Relating to Equity Financing Binding Term Sheet, dated as of March 1, 2012*
4.11
Form of Warrant Relating to Equity Financing Binding Term Sheets, dated as of March 5, 2012*
4.12
Amended and Restated Warrant Issue Agreement, dated January 1, 2011*
4.13
Allonge to Warrant, dated January 1, 2011*
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
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†
84
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†
85
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
Telecommunications Company S.A. 4
- Master Global Content Reseller Agreement by VODAFONE-PANAFON Hellenic
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
86
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
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
87
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
10.75
Deed Poll Release, dated as of June 21, 2010, between NeuMedia, Inc., Twistbox Entertainment, Inc., James Lefkowitz and Russell
Burke.25
10.76
Non-Competition Agreement, dated as of June 21, 2010, among NeuMedia, Inc., Antiphony (Management Holdings) Limited, Jack
Cresswell and Nate MacLeitch.25
10.77
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
10.78
Amended and Restated Guaranty, dated as of June 21, 2010, by NeuMedia, Inc. to ValueAct SmallCap Master Fund, L.P.25
10.79
Letter Agreement, dated as of June 21, 2010, between ValueAct SmallCap Master Fund, L.P., NeuMedia, Inc., Rob Ellin and Trinad
Management, LLC.25
10.80
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
10.81
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.26†
10.82
Confidential Separation, Transition and Release Agreement, dated as of February 22, 2011, by and between Ray Schaaf and
NeuMedia, Inc.26†
10.83
Restricted Stock Agreement, dated as of February 22, 2011, by and between Ray Schaaf and NeuMedia, Inc.26†
10.84
Confidential Separation, Transition and Release Agreement, dated as of February 21, 2011, by and between Russell Burke and
NeuMedia, Inc.26†
10.85
Non-Qualified Stock Option Agreement, dated as of February 21, 2011, by and between Russell Burke and NeuMedia, Inc.26†
10.86
Amendment to Employment Letter Agreement, dated as of February 21, 2011, by and between James Lefkowitz and NeuMedia,
Inc.26†
88
10.87
Non-Qualified Stock Option Agreement, dated as of February 21, 2011, by and between James Lefkowitz and NeuMedia, Inc.26†
10.88
Subordinated Convertible Promissory Note, dated December 23, 2011, made by NeuMedia, Inc. in favor of Adage Capital
Management L.P. 29†
10.89
Warrant, dated December 23, 2011, made by NeuMedia, Inc. in favor of Adage Capital Management L.P. 29†
10.90
Letter Agreement, dated December 23, 2011, made by and between NeuMedia, Inc. and Adage Capital Management L.P. 29†
10.91
Letter Agreement, dated December 28, 2011, made by and between NeuMedia, Inc. and Trinad Management, LLC. 29†
10.92
Second Amended and Restated Senior Subordinated Secured Note due June 21, 2013, made by Twistbox Entertainment, Inc. in favor
of Taja, LLC. 29†
10.93
Restricted Stock Agreement, dated January 1, 2011.*
10.94
Employment Agreement, dated as of December 28, 2011, by and between NeuMedia, Inc. and Peter Adderton. (27)†
10.95
Asset Purchase Agreement, dated as of December 28, 2011, by and among Digital Turbine, Inc., Digital Turbine Group, LLC, Peter
Adderton and Fred Golding. (27)
10.96
Executive Chairman Agreement, dated as of December 28, 2011, by and between NeuMedia, Inc. and Robert Ellin. (27) †
10.97
Convertible Note Financing Binding Term Sheet, effective March 1, 2012 with TAJA, LLC.*
10.98
Convertible Note Financing Binding Term Sheet, effective March 1, 2012 with Adage Capital Partners, L.P.*
10.99
Form of Equity Financing Binding Term Sheet, effective as of March 1, 2012*
10.100 Form of Equity Financing Binding Term Sheet, dated as of March 5, 2012*
10.101 Form of Indemnification with Directors and Executive Officers. (30) †
10.102 Restricted Stock Agreement, dated December 28, 2011, between Mandalay Digital Group, Inc. and Peter Adderton, for 9,037,500
shares of common stock. (31) †
10.103 Restricted Stock Agreement, dated December 28, 2011, between Mandalay Digital Group, Inc. and Robert Ellin, for 3,600,000 shares
of common stock. (31) †
10.104 Restricted Stock Agreement, dated December 28, 2011 between Mandalay Digital Group, Inc. and Robert Ellin, for 3,400,000 shares
of common stock. (31) †
10.105 Restricted Stock Agreement, dated December 28, 2011, between Mandalay Digital Group, Inc. and Robert Ellin, for 1,000,000 shares
of common stock. (31) †
10.106 Amendment to Restricted Stock Agreement, dated May 18, 2012, between Mandalay Digital Group, Inc. and Peter Adderton. (31) †
10.107 Amendment to Restricted Stock Agreements, dated May 18, 2012, between Mandalay Digital Group, Inc. and Robert Ellin. (31) †
10.108 Amended and Restated 2011 Equity Incentive Plan of Mandalay Digital Group, Inc. (31)
10.109 Amended and Restated 2011 Equity Incentive Plan Notice of Grant and Restricted Stock Agreement of Mandalay Digital Group, Inc.
(31)
10.110 Amended and Restated 2011 Equity Incentive Plan Notice of Grant and Stock Option Agreement of Mandalay Digital Group, Inc.
(31)
10.111 Form of Equity Financing Binding Term Sheet, dated as of June 7, 2012.*
21
List of Subsidiaries *
31.1
Certification of Peter Adderton, Principal Executive Officer. *
31.2
Certification of Lisa Higgins-Lucero, Principal Financial Officer. *
32.1
Certification of Peter Adderton, Principal Executive Officer pursuant to U.S.C. Section 1350. *
32.2
Certification of Lisa Higgins-Lucero, Principal Financial Officer pursuant to U.S.C. Section 1350. *
* Filed herewith
† Management contract or compensatory plan or arrangement
(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.
89
(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.
(26)Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-10039), filed with the Commission on February 22,
2011.
90
(27)Incorporated by reference to our Current Report on Form 8-K (File No. 000-10039 ), filed with the Commission on January 4, 2012.
(28)Incorporated by reference to our Current Report on Form 8-K (File No. 000-10039), filed with the Commission on February 7, 2012.
(29)Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-10039 ), filed with the Commission on February 24,
2012.
(30)Incorporated by reference to our Current Report on Form 8-K (File No. 000-10039 ), filed with the Commission on May 10, 2012.
(31)Incorporated by reference to our Current Report on Form 8-K (File No. 000-10039), filed with the Commission on May 30, 2012.
(c) Financial Statement Schedules. Reference is made to Item 15(a)(2) above.
91
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: June 29, 2012
Mandalay Digital Group, Inc.
By:
/s/ Peter Adderton
Peter Adderton
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints
Peter Adderton, his attorney-in-fact, with full power of substitution, for him in any and all capacities, to sign any and all amendments to this
Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact or his substitute or substitutes, may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Exchange Act, this Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signatures
/s/ Robert Ellin
Robert S. Ellin
/s/ Peter Guber
Peter Guber
/s/ Paul Schaeffer
Paul Schaeffer
/s/ Peter Adderton
Peter Adderton
/s/ Chris Rogers
Chris Rogers
Title
Executive Chairman of the Board
Chairman of the Board
Co-Chairman of the Board
Chief Executive Officer and Director
(Principal Executive Officer)
Director
/s/ Lisa Higgins-Lucero
Lisa Higgins-Lucero
Chief Financial Officer, Twistbox Entertainment, Inc.
(Principal Financial Officer and Principal Accounting Officer)
92
Date
June 29, 2012
June 29, 2012
June 29, 2012
June 29, 2012
June 29, 2012
June 29, 2012
Exhibit
No.
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
3.1
3.2
3.3
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
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 Ownership merging Mandalay Digital Group, Inc. into Neumedia, Inc., dated February 2, 2012*
Certificate of Incorporation. 2
Bylaws. 2
Certificate of Amendment of the Bylaws of NeuMedia, Inc., dated February 2, 2012. 28
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
Form of Warrant issued to Investors, dated October 23, 2008. 9
Warrant dated September 23, 2009 issued to Vivid Entertainment, LLC and related Registration Right Agreement. 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
4.10
Form of Warrant Relating to Equity Financing Binding Term Sheet, dated as of March 1, 2012*
4.11
Form of Warrant Relating to Equity Financing Binding Term Sheets, dated as of March 5, 2012*
4.12
Amended and Restated Warrant Issue Agreement, dated January 1, 2011*
4.13
Allonge to Warrant, dated January 1, 2011*
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
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†
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
Telecommunications Company S.A. 4
- Master Global Content Reseller Agreement by VODAFONE-PANAFON Hellenic
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
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
10.75
Deed Poll Release, dated as of June 21, 2010, between NeuMedia, Inc., Twistbox Entertainment, Inc., James Lefkowitz and Russell
Burke.25
10.76
Non-Competition Agreement, dated as of June 21, 2010, among NeuMedia, Inc., Antiphony (Management Holdings) Limited, Jack
Cresswell and Nate MacLeitch.25
10.77
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
10.78
Amended and Restated Guaranty, dated as of June 21, 2010, by NeuMedia, Inc. to ValueAct SmallCap Master Fund, L.P.25
10.79
Letter Agreement, dated as of June 21, 2010, between ValueAct SmallCap Master Fund, L.P., NeuMedia, Inc., Rob Ellin and Trinad
Management, LLC.25
10.80
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
10.81
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.26†
10.82
Confidential Separation, Transition and Release Agreement, dated as of February 22, 2011, by and between Ray Schaaf and
NeuMedia, Inc.26†
10.83
Restricted Stock Agreement, dated as of February 22, 2011, by and between Ray Schaaf and NeuMedia, Inc.26†
10.84
Confidential Separation, Transition and Release Agreement, dated as of February 21, 2011, by and between Russell Burke and
NeuMedia, Inc.26†
10.85
Non-Qualified Stock Option Agreement, dated as of February 21, 2011, by and between Russell Burke and NeuMedia, Inc.26†
10.86
Amendment to Employment Letter Agreement, dated as of February 21, 2011, by and between James Lefkowitz and NeuMedia,
Inc.26†
10.87
Non-Qualified Stock Option Agreement, dated as of February 21, 2011, by and between James Lefkowitz and NeuMedia, Inc.26†
10.88
Subordinated Convertible Promissory Note, dated December 23, 2011, made by NeuMedia, Inc. in favor of Adage Capital
Management L.P. 29†
10.89
Warrant, dated December 23, 2011, made by NeuMedia, Inc. in favor of Adage Capital Management L.P. 29†
10.90
Letter Agreement, dated December 23, 2011, made by and between NeuMedia, Inc. and Adage Capital Management L.P. 29†
10.91
Letter Agreement, dated December 28, 2011, made by and between NeuMedia, Inc. and Trinad Management, LLC. 29†
10.92
Second Amended and Restated Senior Subordinated Secured Note due June 21, 2013, made by Twistbox Entertainment, Inc. in favor
of Taja, LLC. 29†
10.93
Restricted Stock Agreement, dated January 1, 2011.*
10.94
Employment Agreement, dated as of December 28, 2011, by and between NeuMedia, Inc. and Peter Adderton. (27)†
10.95
Asset Purchase Agreement, dated as of December 28, 2011, by and among Digital Turbine, Inc., Digital Turbine Group, LLC, Peter
Adderton and Fred Golding. (27)
10.96
Executive Chairman Agreement, dated as of December 28, 2011, by and between NeuMedia, Inc. and Robert Ellin. (27) †
10.97
Convertible Note Financing Binding Term Sheet, effective March 1, 2012 with TAJA, LLC.*
10.98
Convertible Note Financing Binding Term Sheet, effective March 1, 2012 with Adage Capital Partners, L.P.*
10.99
Form of Equity Financing Binding Term Sheet, effective as of March 1, 2012*
10.100 Form of Equity Financing Binding Term Sheet, dated as of March 5, 2012*
10.101 Form of Indemnification with Directors and Executive Officers. (30) †
10.102 Restricted Stock Agreement, dated December 28, 2011, between Mandalay Digital Group, Inc. and Peter Adderton, for 9,037,500
shares of common stock. (31) †
10.103 Restricted Stock Agreement, dated December 28, 2011, between Mandalay Digital Group, Inc. and Robert Ellin, for 3,600,000 shares
of common stock. (31) †
10.104 Restricted Stock Agreement, dated December 28, 2011 between Mandalay Digital Group, Inc. and Robert Ellin, for 3,400,000 shares
of common stock. (31) †
10.105 Restricted Stock Agreement, dated December 28, 2011, between Mandalay Digital Group, Inc. and Robert Ellin, for 1,000,000 shares
of common stock. (31) †
10.106 Amendment to Restricted Stock Agreement, dated May 18, 2012, between Mandalay Digital Group, Inc. and Peter Adderton. (31) †
10.107 Amendment to Restricted Stock Agreements, dated May 18, 2012, between Mandalay Digital Group, Inc. and Robert Ellin. (31) †
10.108 Amended and Restated 2011 Equity Incentive Plan of Mandalay Digital Group, Inc. (31)
10.109 Amended and Restated 2011 Equity Incentive Plan Notice of Grant and Restricted Stock Agreement of Mandalay Digital Group, Inc.
(31)
10.110 Amended and Restated 2011 Equity Incentive Plan Notice of Grant and Stock Option Agreement of Mandalay Digital Group, Inc.
(31)
10.111 Form of Equity Financing Binding Term Sheet, dated as of June 7, 2012.*
21
List of Subsidiaries *
31.1
Certification of Peter Adderton, Principal Executive Officer. *
31.2
Certification of Lisa Higgins-Lucero, Principal Financial Officer. *
32.1
Certification of Peter Adderton, Principal Executive Officer pursuant to U.S.C. Section 1350. *
32.2
Certification of Lisa Higgins-Lucero, Principal Financial Officer pursuant to U.S.C. Section 1350. *
* Filed herewith
† Management contract or compensatory plan or arrangement
(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.
(26) Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-10039), filed with the Commission on February 22,
2011.
(27) Incorporated by reference to our Current Report on Form 8-K (File No. 000-10039 ), filed with the Commission on January 4, 2012.
(28) Incorporated by reference to our Current Report on Form 8-K (File No. 000-10039), filed with the Commission on February 7,
2012.
(29) Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-10039 ), filed with the Commission on February 24,
2012.
(30) Incorporated by reference to our Current Report on Form 8-K (File No. 000-10039 ), filed with the Commission on May 10, 2012.
(31) Incorporated by reference to our Current Report on Form 8-K (File No. 000-10039), filed with the Commission on May 30, 2012.
(c) Financial Statement Schedules. Reference is made to Item 15(a)(2) above.
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
Consolidated Financial Statements
March 31, 2012
Consolidated Balance Sheets as of March 31, 2012 and March 31, 2011
Consolidated Statements of Operations for the years ended March 31, 2012 and March 31, 2011
Consolidated Statements of Stockholders’ Equity and Comprehensive Loss for the years ended March 31, 2012 and March 31,
2011
Consolidated Statements of Cash Flows for the years ended March 31, 2012 and March 31, 2011
Notes to Consolidated Financial Statements
Page(s)
F-3
F-4
F-5
F-6
F-7 to F-49
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Mandalay Digital Group, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Mandalay Digital Group, Inc. and Subsidiaries (collectively, the
“Company”) as of March 31, 2012 and 2011, and the related consolidated statements of operation, stockholders’ equity and comprehensive
loss, and cash flows for the years then ended. 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 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. The
Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the control over
financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, 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 the
Company as of March 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended in conformity with U.S.
generally accepted accounting principles.
/s/ SingerLewak LLP
Los Angeles, California
June 29, 2012
F-2
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
Consolidated Balance Sheets
(In thousands, except per share amounts)
ASSETS
Current assets
Cash and cash equivalents
Accounts receivable, net of allowances of $108 and $96, respectively
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Intangible assets, net
Goodwill
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable
Accrued license fees
Accrued compensation
Current portion of long term debt
Warrant derivative liabilities
Other current liabilities
Total current liabilities
Long term debt and convertible debt, net of discounts of $2,147 and $1,856, respectively
Total liabilities
Stockholders' equity
Preferred stock Series A convertible preferred stock at $0.0001 par value; 100,000 shares authorized,
issued and outstanding (liquidation preference of $1,000,000)
Common stock, $0.0001 par value: 100,000,000 shares authorized; 82,656,945 issued and 76,581,945
outstanding at March 31, 2012; 45,047,224 issued and 41,274,225 outstanding at March 31, 2011;
Additional paid-in capital
Treasury Stock (3,772,999 shares at March 31, 2012 and 2011)
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders' equity
March 31,
March 31,
2012
2011
$
$
$
$
8,799 $
1,190
120
10,109
230
817
3,640
14,796 $
3,051 $
1,155
582
75
452
705
6,020
3,077
9,097 $
845
2,699
296
3,840
388
3,366
6,609
14,203
3,807
1,189
371
273
223
1,261
7,124
4,461
11,585
100
100
7
133,300
(71)
(194)
(127,443)
4
99,612
(71)
(291)
(96,736)
5,699
2,618
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
14,796 $
14,203
F-3
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
Consolidated Statements 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 intangible assets
Impairment of goodwill
Total operating expenses
Loss from operations
Interest and other income / (expense)
Interest income/ (expense)
Foreign exchange transaction gain / (loss)
Change in fair value of accrued derivative liabilities gain / (loss)
Loss on extinguishment of debt
Gain / (loss) on settlement of debt
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:
Income from discontinued operations, net of taxes
Gain on disposal of discontinued operations, net of taxes
Net income from discontinued operations, net of taxes
Net (loss)/profit income
Other comprehensive (loss) / income:
Foreign currency translation adjustment
Comprehensive (loss) / income
Basic and diluted net income / (loss) per common share
Continuing operations
Discontinued operations
Weighted average common shares outstanding, basic and diluted
Weighted average common shares outstanding, diluted
F-4
12 Months Ended 12 Months Ended
March 31,
2012
March 31,
2011
$
7,230 $
9,186
2,643
230
2,873
4,357
2,154
873
13,013
-
2,319
2,969
21,328
2,915
295
3,210
5,976
3,528
2,142
5,698
54
4,482
1,546
17,450
(16,971)
(11,474)
(12,497)
(94)
(4,447)
2,004
1,393
15
(13,626)
(30,597)
(110)
(30,707)
-
-
-
(1,761)
(83)
-
-
(864)
(2)
(2,710)
(14,184)
(224)
(14,408)
809
4,215
5,024
$
$
$
$
$
(30,707) $
(9,384)
97
(30,610) $
(0.62) $
(0.62) $
- $
49,418
49,418
128
(9,256)
(0.25)
(0.38)
0.13
37,664
37,664
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
Consolidated Statements of Stockholders’ Equity and Comprehensive Loss
(In thousands, except share amounts)
Common Stock
Preferred Stock
Treasury Paid-In Comprehensive Accumulated
Shares
Amount
Shares
Amount
Stock
Capital
Income/(Loss)
Deficit
Total
Additional
Accumulated
Other
39,776,597 $
4 100,000 $
100 $
- $
95,741 $
(419) $
(87,352) $
8,074
(9,384)
(9,384)
Balance at March 31,
2010
Net loss
Foreign currency
translation gain
Deferred stock-based
compensation
Issuance of common
stock as part of
compensation
300,000
Stock voided as part of
disposal of subsidiary
(561,798)
Stock acquired by
company as part of
disposal of subsidiary (3,540,574)
Issuance of convertible
debt and associated
warrants
Repricing of options
Issuance of warrants to
vendor for services
rendered
Repricing of warrants
Stock issued for services 5,300,000
128
251
75
(197)
(71)
(1,168)
2,500
113
76
172
2,049
128
251
75
(197)
(1,239)
2,500
113
76
172
2,049
Balance at March 31, 2011 41,274,225 $
4 100,000 $
100 $
(71) $
99,612 $
(291) $
(96,736) $
2,618
Net loss
Foreign currency
translation
Issuance of common
stock as part of
compensation
Issuance of restricted
stock for services
Issuance of warrants to
vendor for services
rendered
Issuance of warrants
related to convertible
debt
Issuance of restricted
stock for acquisition of
assets
Reclassification of
derivative liabilities
Issuance of common
347,244
69
23,100,000
2
$
6,666
50,000
133
4,374
31
9,034
97
(30,707)
(30,707)
97
69
6,668
133
4,374
31
9,034
stock for cash
3,857,143
Issuance of restricted
stock as part of
compensation
Convertible debt
1,375,000
converted to stock
12,653,333
1
2,700
568
10,113
2,700
568
10,114
Balance at March 31, 2012 82,656,945 $
7 100,000 $
100 $
(71) $ 133,300 $
(194) $
(127,443) $
5,699
F-5
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities
Net (loss)/income
Adjustments to reconcile net income/(loss) to net cash used in operating activities:
Year Ended Year Ended
March 31,
March 31,
2012
2011
$
(30,707) $
(9,384)
Gain on disposal of discontinued operations, net of taxes, net of impact of foreign currency translation
Depreciation and amortization
Amortization of debt discount
Loss on extinguishment of debt
Settled debt with supplier
Finance costs
PIK interest expense
Allowance for doubtful accounts
Stock-based compensation
Impairment of goodwill and intangibles
Fair Value of warrants and conversion options issued for financing costs
Warrants issued for services
Stock issued for services
Repricing of options and compensation
Repricing of warrants
Change in fair value of derivative liabilities
(Increase) / decrease in assets, net of effect of disposal of subsidiary:
Accounts receivable
Prepaid expenses and other current assets
Increase / (decrease) in liabilities, net of effect of disposal of subsidiary:
Accounts payable
Accrued license fees
Accrued compensation
Other liabilities and other items
Net cash used in operating activities
Cash flows from investing activities
Purchase of property and equipment
Transaction costs
Cash remaining with disposed subsidiary
Net cash used in investing activities
Cash flows from financing activities
Proceeds from new convertible debt
Issuance of shares for cash
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosure of cash flow information:
Taxes paid
Interest paid
Supplemental disclosure of non-cash investing and financing activities:
-
429
9,709
(2,004)
(1,393)
1,194
575
(12)
-
5,288
1,255
133
7,302
-
-
4,447
1,521
176
637
(34)
211
(556)
(1,829)
(17)
-
-
(17)
7,000
2,700
9,700
100
(4,215)
638
644
-
-
-
-
(307)
326
6,028
-
76
2,049
113
172
-
3,303
160
(497)
(625)
(166)
(224)
(1,909)
(88)
(906)
(641)
(1,635)
2,500
-
2,500
(2)
7,954
(1,046)
845
1,891
$
8,799 $
845
$
$
119 $
226
- $
1,763
Conversion of convertible note and interest to shares of common stock
Issuance of warrants with convertible debenture
Beneficial conversion feature associated with convertible debenture
Reclassify derivative liability to additional paid in capital
$
$
$
$
8,852 $
4,636 $
8,915 $
13,786 $
-
-
1,496
-
F-6
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
Notes to Audited Consolidated Financial Statements
(all numbers in thousands except per share amounts)
1.
Organization
Mandalay Digital Group, Inc. (“we”, “us”, “our”, the “Company” or “Mandalay Digital”), formerly NeuMedia, Inc. (“NeuMedia”), formerly
Mandalay Media, Inc. (“Mandalay Media”) and formerly Mediavest, Inc. (“Mediavest”), was originally incorporated in the state of Delaware
on November 6, 1998 under the name eB2B Commerce, Inc. On April 27, 2000, it merged into DynamicWeb Enterprises Inc., a New Jersey
corporation, the surviving company, and changed its name to eB2B Commerce, Inc. On April 13, 2005, the Company changed its name to
Mediavest, Inc. Through January 26, 2005, the Company and its former subsidiaries were engaged in providing business-to-business
transaction management services designed to simplify trading between buyers and suppliers. The Company was inactive from January 26,
2005 until its merger with Twistbox Entertainment, Inc., February 12, 2008. On September 14, 2007, Mediavest was re-incorporated in the
state of Delaware as Mandalay Media, Inc. On May 11, 2010 the Company merged with a wholly-owned, newly formed subsidiary, changing
its name to NeuMedia, Inc. On February 6, 2012, the Company merged with a wholly-owned, newly formed subsidiary, changing its name to
Mandalay Digital Group, Inc.
Twistbox is a global publisher and distributor of branded entertainment content and services primarily focused on enabling the development,
distribution and billing of content across mobile networks. Twistbox publishes and distributes its content in a number of countries. Since
operations began in 2003, Twistbox has developed an intellectual property portfolio that includes mobile rights to global brands and content
from film, television and lifestyle media companies. Twistbox has built a proprietary mobile publishing platform that includes: tools that
automate device management for the distribution and billing of images and video; a mobile games development and distribution platform that
automates the porting of mobile games and applications to multiple handsets; and a content standards and ratings system globally adopted by
major wireless carriers to assist with the responsible deployment of age-verified content. Twistbox has distribution and service agreements
with many of the largest mobile operators in the world.
Twistbox is headquartered in the Los Angeles area and has offices in Europe that provide local sales and marketing support for both mobile
operators and third party distribution in their respective regions.
On October 23, 2008 the Company completed an acquisition of 100% of the issued and outstanding share capital of AMV Holding Limited, a
United Kingdom private limited company (“AMV”), and 80% of the issued and outstanding share capital of Fierce Media Ltd (“Fierce”).
AMV is a leading mobile media and marketing company delivering games and lifestyle content directly to consumers in the United Kingdom,
Australia, South Africa and various other European countries. AMV markets its well established branded services through a unique Customer
Relationship Management platform that drives revenue through mobile internet, print and TV advertising. AMV is headquartered in Marlow,
outside of London in the United Kingdom.
F-7
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
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 8 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.
On June 21, 2010, the Company signed and closed an agreement whereby ValueAct and the AMV Founders, acting through a newly formed
company, acquired the operating subsidiaries of AMV (the “Assets”) in exchange for the release of $23,231 of secured indebtedness,
comprising of a release of all amounts due and payable under the AMV Note and all of the amounts due and payable under the ValueAct Note
(as defined below) except for $3,500 in principal. The Company retained all assets and liabilities of Twistbox and the Company other than the
Assets. See Note 8 for further discussion on the discontinued operations.
On December 28, 2011, the Company issued 50,000 shares of the Company’s common stock as part of the consideration for in exchange for
the assets of Digital Turbine Group, LLC, the developer of Digital Turbine (“DT”), a technology platform that allows media companies,
mobile carriers, and their OEM handset partners to take advantage of multiple mobile operating systems across multiple networks, and offers
solutions that allow them to maintain their own branding and personalized, one-to-one relationships with each end-user. DT’s cross-platform
user interface and multimedia management system for carriers and OEMs can be integrated with different operating systems to provide a more
organized and unified experience for end-users of mobile content across search, discovery, billing, and delivery. Other aspects of the platform,
such as a smart content discovery toolbar, allows carriers and OEMs to control the data presented to their users while giving the end-user a
more efficient way of finding and purchasing the desired content.
2.
Liquidity
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the
United States of America. As reflected in the accompanying consolidated financial statements, the Company has losses from operations and
negative cash flows from operations.
The primary sources of liquidity have historically been issuance of common and preferred stock and borrowings under credit facilities. In
fiscal year 2012, the Company raised $9.7 million through issuance of convertible debt and equity financings and through restructuring
existing debt to convertible debt. Until we become cash flow positive, we anticipate that our primary sources of liquidity will be cash generated
by our operating activities, as well as further borrowings or further capital raises. Assuming there are no further changes in expected sales and
expense trends subsequent to March 31, 2012, the Company believes that its cash position will be sufficient to continue operations for the
foreseeable next twelve months.
F-8
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
3.
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.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and our wholly-owned subsidiaries. All material intercompany
balances and transactions have been eliminated in consolidation. Discontinued operations have been treated in accordance with Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 205-20, Discontinued Operations.
Revenue Recognition
The Company’s revenues are derived primarily by licensing material and software in the form of products (Image Galleries, Wallpapers,
video, WAP Site access, Mobile TV), developing and maintaining carrier platforms, mobile advertising, mobile billing and mobile games.
License arrangements with the end user can be on a perpetual or subscription basis.
F-9
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
A perpetual license gives an end user the right to use the product, image or game on the registered handset on a perpetual basis. A subscription
license gives an end user the right to use the product, image or game on the registered handset for a limited period of time, ranging from a few
days to as long as one month.
The Company either markets and distributes its products directly to consumers, or distributes products through mobile telecommunications
service providers (“carriers”), in which case the carrier markets the product, images or games to end users. License fees for perpetual and
subscription licenses are usually billed upon download of the product, image or game by the end user. In the case of subscription licenses,
many subscriber agreements provide for automatic renewal until the subscriber opts-out, while others provide opt-in renewal. In either case,
subsequent billings for subscription licenses are generally billed monthly. The Company applies the provisions of FASB ASC 985-605,
Software Revenue Recognition, to all transactions.
Revenues are recognized from the Company’s products, images and games when persuasive evidence of an arrangement exists, the product,
image or game has been delivered, the fee is fixed or determinable, and the collection of the resulting receivable is probable. For both perpetual
and subscription licenses, management considers a license agreement to be evidence of an arrangement with a carrier or aggregator and a
“clickwrap” agreement to be evidence of an arrangement with an end user. For these licenses, the Company defines delivery as the download
of the product, image or game by the end user.
The Company estimates revenues from carriers in the current period when reasonable estimates of these amounts can be made. Most carriers
only provide detailed sales transaction data on a one to two month lag. Estimated revenue is treated as unbilled receivables until the detailed
reporting is received and the revenues can be billed. Some carriers provide reliable interim preliminary reporting and others report sales data
within a reasonable time frame following the end of each month, both of which allow the Company to make reasonable estimates of revenues
and therefore to recognize revenues during the reporting period when the end user licenses the product, image or game. Determination of the
appropriate amount of revenue recognized involves judgments and estimates that the Company believes are reasonable, but it is possible that
actual results may differ from the Company’s estimates. The Company’s estimates for revenues include consideration of factors such as
preliminary sales data, carrier-specific historical sales trends, volume of activity on company monitored sites, seasonality, time elapsed from
launch of services or product lines, the age of games and the expected impact of newly launched games, successful introduction of newer and
more advanced handsets, promotions during the period and economic trends. When the Company receives the final carrier reports, to the
extent not received within a reasonable time frame following the end of each month, the Company records any differences between estimated
revenues and actual revenues in the reporting period when the Company determines the actual amounts. Revenues earned from certain carriers
may not be reasonably estimated. If the Company is unable to reasonably estimate the amount of revenues to be recognized in the current
period, the Company recognizes revenues upon the receipt of a carrier revenue report and when the Company’s portion of licensed revenues
are fixed or determinable and collection is probable. To monitor the reliability of the Company’s estimates, management, where possible,
reviews the revenues by country, by carrier and by product line on a regular basis to identify unusual trends such as differential adoption rates
by carriers or the introduction of new handsets. If the Company deems a carrier not to be creditworthy, the Company defers all revenues from
the arrangement until the Company receives payment and all other revenue recognition criteria have been met.
In accordance with FASB ASC 605-45, Reporting Revenue Gross as a Principal Versus Net as an Agent, the Company recognizes as
revenues the amount the carrier reports as payable upon the sale of the Company’s products, images or games. The Company has evaluated its
carrier agreements and has determined that it is not the principal when selling its products, images or games through carriers. Key indicators
that it evaluated to reach this determination include:
F-10
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
— 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:
Year Ended Year Ended
March 31, March 31,
2012
2011
Potentially dilutive shares
21,943
11,992
F-11
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
Comprehensive Loss
Comprehensive loss consists of two components, net loss and other comprehensive income. Other comprehensive income refers to gains and
losses that under generally accepted accounting principles are recorded as an element of stockholders’ equity, but are excluded from net
income. The Company’s other comprehensive income currently includes only foreign currency translation adjustments.
Cash and Cash Equivalents
The Company considers all highly liquid short-term investments purchased with a maturity of three months or less to be cash equivalents.
Accounts Receivable
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts
receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in
customer payment patterns to evaluate the adequacy of these reserves.
Content Provider Licenses
Content Provider License Fees
The Company’s royalty expenses consist of fees that it pays to branded content owners for the use of their intellectual property in the
development of the Company’s games and other content, and other expenses directly incurred in earning revenue. Royalty-based obligations
are either, accrued as incurred and subsequently paid, or in the case of content acquisitions, paid in advance and capitalized on our balance
sheet as prepaid license fees. These royalty-based obligations are expensed to cost of revenues either at the applicable contractual rate related to
that revenue or over the estimated life of the content acquired. Minimum guarantee license payments that are not recoupable against future
royalties are capitalized and amortized over the lesser of the estimated life of the branded title or the term of the license agreement.
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 content acquired.
F-12
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
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 costs of advertising, including direct response advertising, the first time the advertising takes place. Advertising
expense for continuing operations was $7 and $116 in the years ended March 31, 2012 and 2011, respectively. Advertising expense for
discontinued operations was $0 and $956 in the years ended March 31, 2012 and 2011, 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.
Presentation
In order to facilitate the comparison of financial information, certain amounts reported in the prior year have been reclassified to conform to the
current year presentation.
F-13
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
Fair Value of Financial Instruments
As of March 31, 2012 and 2011, the carrying value of cash and cash equivalents, accounts receivable, prepaid expenses and other current
assets, accounts payable, accrued license fees, accrued compensation, derivative liabilities and other current liabilities approximates fair value
due to the short-term nature of such instruments.
Derivative Liabilities
The Company applies ASC Topic 815, “Derivatives and Hedging,” which provides a two-step model to determine whether a financial
instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the scope exception in ASC 815-10-15-74.
Using the criteria in ASC 815, the Company determines which instruments or embedded features that require liability accounting and records
the fair values as a derivative liability. The changes in the values of the derivative liabilities are shown in the accompanying consolidated
statements of operations as “change in fair value of accrued derivative liabilities gain / (loss).”
Foreign Currency Translation
The Company uses the United States dollar for financial reporting purposes. Assets and liabilities of foreign operations are translated using
current rates of exchange prevailing at the balance sheet date. Equity accounts have been translated at their historical exchange rates when the
capital transaction occurred. Statement of Operations amounts are translated at average rates in effect for the reporting period. The foreign
currency translation adjustment gains of $97 in the year ended March 31, 2012 and $128 in the year ended March 31, 2011 has been reported
as a component of comprehensive loss in the consolidated statements of stockholders’ equity and comprehensive income.
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, 2012, one major customer represented
approximately 39% of our gross accounts receivable outstanding, and 43% of gross accounts receivable outstanding as of March 31, 2011.
This customer accounted for 41% of our gross revenues in the year ended March 31, 2012; and 49% in the year ended March 31, 2011.
F-14
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization is calculated using the straight-line method over the estimated useful
lives of the related assets. Estimated useful lives are the lesser of 8 to 10 years or the term of the lease for leasehold improvements and 5 years
for other assets.
Goodwill and Indefinite Life Intangible Assets
Goodwill represents the excess of cost over fair value of net assets of businesses acquired. In accordance with FASB ASC 350-20 Goodwill
and Other Intangible Assets, the value assigned to goodwill and indefinite lived intangible assets, including trademarks and tradenames, is not
amortized to expense, but rather they are evaluated at least on an annual basis to determine if there are potential impairments. If the fair value of
the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the implied fair value of the reporting unit
goodwill is less than the carrying value. If the fair value of an indefinite lived intangible (such as trademarks and trade names) is less than its
carrying amount, an impairment loss is recorded. Fair value is determined based on discounted cash flows, market multiples or appraised
values, as appropriate. Discounted cash flow analysis requires assumptions about the timing and amount of future cash inflows and outflows,
risk, the cost of capital, and terminal values. Each of these factors can significantly affect the value of the intangible asset. The estimates of
future cash flows, based on reasonable and supportable assumptions and projections, require management’s judgment. Any changes in key
assumptions about the Company’s businesses and their prospects, or changes in market conditions, could result in an impairment charge.
Some of the more significant estimates and assumptions inherent in the intangible asset valuation process include: the timing and amount of
projected future cash flows; the discount rate selected to measure the risks inherent in the future cash flows; and the assessment of the asset’s
life cycle and the competitive trends impacting the asset, including consideration of any technical, legal or regulatory trends.
In the year ended March 31, 2012, the Company determined that there was an impairment of goodwill, amounting to $2,969. In the year
ended March 31, 2011, the Company determined that there was an impairment of goodwill, amounting to $1,546. In performing the related
valuation analysis, the Company used various valuation methodologies including probability weighted discounted cash flows, comparable
transaction analysis, and market capitalization and comparable company multiple comparison. The impairment is detailed in Note 9 below.
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 life ranging from five to eight 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.
F-15
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
In the year ended March 31, 2012, the Company determined that there was an impairment of intangible assets amounting to $2,319. In the year
ended March 31, 2011, the Company determined that there was an impairment of intangible assets, amounting to $4,482. In performing the
related valuation analysis the Company used various valuation methodologies including probability weighted discounted cash flows,
comparable transaction analysis, and market capitalization and comparable company multiple comparison. The impairment is detailed in Note 9
below.
Income Taxes
The Company accounts for income taxes in accordance with FASB ASC 740-10, Accounting for Income Taxes (“ASC 740-10”), which
requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in its
financial statements or tax returns. Under ASC 740-10, the Company determines deferred tax assets and liabilities for temporary differences
between the financial reporting basis and the tax basis of assets and liabilities along with net operating losses, if it is more likely than not the
tax benefits will be realized using the enacted tax rates in effect for the year in which it expects the differences to reverse. To the extent a
deferred tax asset cannot be recognized, a valuation allowance is established if necessary.
ASC 740-10 prescribes that a company should use a more-likely-than-not recognition threshold based on the technical merits of the tax
position taken. Tax positions that meet the “more-likely-than-not” recognition threshold should be measured as the largest amount of the tax
benefits, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement in the financial
statements. We recognize interest and penalties related to income tax matters as a component of the provision for income taxes. We do not
currently anticipate that the total amount of unrecognized tax benefits will significantly change within the next 12 months.
Stock-based compensation.
We have applied FASB ASC 718 Share-Based Payment (“ASC 718”) and accordingly, we record stock-based compensation expense for all
of our stock-based awards.
Under ASC 718, we estimate the fair value of stock options granted using the Black-Scholes option pricing model. The fair value for awards
that are expected to vest is then amortized on a straight-line basis over the requisite service period of the award, which is generally the option
vesting term. The amount of expense recognized represents the expense associated with the stock options we expect to ultimately vest based
upon an estimated rate of forfeitures; this rate of forfeitures is updated as necessary and any adjustments needed to recognize the fair value of
options that actually vest or are forfeited are recorded.
F-16
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
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.
The Company grants restricted stock subject to market or performance conditions that vest based on the satisfaction of the conditions of the
award. Unvested restricted stock entitles the grantees to dividends, if any, with voting rights determined in each agreement. The fair market
values of market condition-based awards are determined using the Monte Carlo simulation method. The Monte Carlo simulation method is
subject to variability as several factors utilized must be estimated, including the derived service period, which is estimated based on the
Company’s judgment of likely future performance and the Company’s stock price volatility. The fair value of performance-based awards is
determined using the market closing price on the grant date. Derived service periods and the periods charged with compensation expense for
performance-based awards are estimated based on the Company’s judgment of likely future performance and may be adjusted in future
periods depending on actual performance.
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-17
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
Recently Adopted Accounting Pronouncements
In December 2010, the FASB issued updated guidance on when and how to perform certain steps of the periodic goodwill impairment test for
public entities that may have reporting units with zero or negative carrying amounts. This guidance is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2010, with early adoption prohibited. It is applicable to the Company’s fiscal year
beginning April 1, 2011. The Company evaluated this guidance, and determined it doesn’t have a material effect on its consolidated financial
statements.
In December 2010, the FASB also issued guidance to clarify the reporting of pro forma financial information related to business combinations
of public entities and to expand certain supplemental pro forma disclosures. This guidance is effective prospectively for business combinations
that occur on or after the beginning of the fiscal year beginning on or after December 15, 2010, with early adoption permitted. It is applicable
to the Company’s fiscal year beginning April 1, 2011. The Company evaluated this guidance, and determined it doesn’t have a material effect
on its consolidated financial statements.
In May 2011, the FASB issued guidance to amend certain measurement and disclosure requirements related to fair value measurements to
improve consistency with international reporting standards. This guidance is effective prospectively for public entities for interim and annual
reporting periods beginning after December 15, 2011, with early adoption by public entities prohibited, and is applicable to the Company’s
fiscal quarter beginning January 1, 2012. The Company evaluated this guidance, and determined it doesn’t have a material effect on its
consolidated financial statements.
In September 2011, the Financial Accounting Standards Board (FASB) issued amended accounting guidance related to goodwill impairment
testing. The new guidance provides the option to perform a qualitative assessment by applying a more likely than not scenario to determine
whether the fair value of a reporting unit is less than its carrying amount, which may then allow a company to skip the annual two-step
quantitative goodwill impairment test depending on the determination. The amended guidance is effective for annual and interim goodwill
impairment tests performed for fiscal years beginning after December 15, 2011. Earlier adoption is permitted. Management does not expect the
adoption of the amended guidance to have a material impact on the Company’s consolidated financial statements. The Company evaluated this
guidance, and determined it doesn’t have a material effect on its consolidated financial statements.
Recently Issued Accounting Pronouncements
In June 2011, the FASB issued new guidance on the presentation of comprehensive income that will require a company to present
components of net income and other comprehensive income in one continuous statement or in two separate, but consecutive statements. There
are no changes to the components that are recognized in net income or other comprehensive income under current GAAP. This guidance is
effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011, with early adoption permitted. It is
applicable to the Company’s fiscal year beginning April 1, 2012. The Company expects this guidance to have an impact on the disclosures
related to comprehensive income.
Other recent authoritative guidance issued by the FASB (including technical corrections to the FASB Accounting Standards Codification), the
American Institute of Certified Public Accountants, and the SEC did not, or are not expected to have a material effect on the Company’s
consolidated financial statements.
F-18
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
4.
Fair Value Measurements
The Company applies the provisions of ASC 820-10, “Fair Value Measurements and Disclosures.” ASC 820-10 defines fair value, and
establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value
measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial
instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments
and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
· Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.
· Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs
that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial
instrument.
·
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The Company analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities From
Equity” and ASC 815, “Derivatives and Hedging.” Derivative liabilities are adjusted to reflect fair value at each period end, with any increase
or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The effects of interactions
between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments. In addition, the
fair values of freestanding derivative instruments such as warrant and option derivatives are valued using the Black-Scholes model.
The Company uses Level 2 inputs for its valuation methodology for the warrant derivatives as their fair values were determined by using the
Black-Scholes option pricing model based on various assumptions. The Company’s derivative liabilities are adjusted to reflect fair value at
each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of
derivatives.
At March 31, 2012, the Company determined the fair value of the derivative warrant liability to be $452 using the Black-Scholes option
pricing model with the following assumptions: 1) expected life 4 years, 2) a risk free interest rate of .51%, 3) a dividend yield of 0% and 4) a
volatility of 175%.
F-19
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
The Company identified the following liabilities that are required to be presented on the balance sheet at fair value:
Total
Level 1
Level 2
Level 3
Measured at Fair Value on a Recurring Basis
Warrant derivative liabilities
(in thousands)
March 31, 2012
March 31, 2011
$
$
452 $
223 $
Balance at March 31, 2010
Total gains or losses (realized/unrealized) included in earnings
Purchases, issuances and settlements
Balance at March 31, 2011
Total gains or losses (realized/unrealized) included in earnings
Purchases, issuances and settlements
$
$
452 $
223 $
-
-
- $
- $
-
-
223
223
4,447
(4,218)
Balance at March 31, 2012
$
452
Total amount of gains and losses for the period included in earnings
attributable to the change in unrealized gains or losses related to
liabilities still held at March 31, 2012
4,447
The warrant derivative liability is included in the accompanying consolidated balance sheet, and is discussed further at Note 12.
The Company did not identify any other recurring assets and liabilities that are required to be presented in the consolidated balance sheets at
fair value in accordance with ASC 825.
Measured at Fair Value on A Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an
ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). 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, 2012 and 2011, for which a nonrecurring change in fair value has been recorded during the years ended
March 31, 2012 and 2011.
(in thousands)
Total
Level 1
Level 2
Level 3
Carrying value at March 31, 2012
Cumulative losses
as of March 31, 2012
Goodwill and other intangible
assets
4,457
4,457
74,058
(in thousands)
Total
Level 1
Level 2
Level 3
Carrying value at March 31, 2011
Cumulative losses
as of March 31, 2011
Goodwill and other intangible
assets
9,975
9,975
68,770
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 $74,058 and $68,770 represent the cumulative impairment charge related to these intangible assets
recorded in fiscal years 2012 and 2011, respectively. The fair value of these intangible assets was calculated based on the methods and criteria
described in Note 9 – Goodwill and Intangible Assets.
F-20
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
The Company performs a review of the fair value of goodwill and intangible assets. 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”.
5.
Accounts Receivable
Billed
Unbilled
Less: allowance for doubtful accounts
Net Accounts receivable
Net Accounts receivable of discontinued operations
March 31,
March 31,
2012
2011
$
$
$
709 $
589
(108)
1,190 $
1,523
1,272
(96)
2,699
- $
-
The Company had no significant write-offs or recoveries during the years ended March 31, 2012 and March 31, 2011.
6.
Property and Equipment
Equipment
Furniture & fixtures
Leasehold improvements
Accumulated depreciation
Net Property and Equipment
Net Property and Equipment of discontinued operations
March 31,
March 31,
2012
2011
$
$
$
1,310 $
484
184
1,978
(1,748)
230 $
- $
1,298
479
184
1,961
(1,573)
388
-
Depreciation expense for the years ended March 31, 2012 and 2011 was $199 and $291, respectively for continuing operations and $0 and
$27 for discontinued operations.
F-21
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
7.
Description of Stock Plans
On May 26, 2011, our board of directors adopted the 2011 Equity Incentive Plan of NeuMedia, Inc. and on April 27, 2012, our board of
directors amended and restated the plan and the related plan documents to change references to the name of our company from the “NeuMedia,
Inc.” to “Mandalay Digital Group, Inc.” and further directed that they be submitted to stockholders for their consideration and approval. On
May 23, 2012, our stockholders approved and adopted by written consent the Amended and Restated 2011 Equity Incentive Plan of Mandalay
Digital Group, Inc. (the “Plan”) and the Mandalay Digital Group, Inc. Amended and Restated 2011 Equity Incentive Plan Notice of Grant and
Restricted Stock Agreement and the Mandalay Digital Group, Inc. Amended and Restated 2011 Equity Incentive Plan Notice of Grant and
Stock Option Agreement (collectively, the “Related Documents”).
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 under the Company’s 2007 Employee, Director and Consultant Stock Plan equity
compensation plan for the years ended March 31, 2012 and 2011:
F-22
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
(in thousands)
Outstanding at March 31, 2010
Granted
Canceled
Exercised
Outstanding at March 31, 2011
Granted
Canceled
Forfeited
Exercised
Outstanding at March 31, 2012
Exercisable at March 31, 2012
Number of
Shares
Weighted Average
Exercise Price
6,187 $
- $
- $
- $
6,187 $
- $
(572) $
(817) $
- $
4,531 $
4,798 $
2.49
-
-
-
1.79
-
0.60
2.55
-
1.80
1.80
In April 2011, two former employees each agreed to cancel options to purchase 173,622 shares of common stock in connection with their
respective termination agreements.
In December 2011, the Company recorded the cancellation of 9,122 shares of common stock relating to three former employees.
In March 2012, the Company recorded the cancellation of 215,841 shares of common stock.
In March 2012, the Company recorded the forfeiture of 816,667 shares of common stock.
The exercise price for options outstanding and options exercisable at March 31, 2012 was as follows:
Weighted
Average
Remaining
Contractual Life
(Years)
Number
Outstanding
March 31, 2012
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
4.27
6.22
5.87
5.06
2,698 $
1,300 $
800 $
4,798 $
0.47 $
2.75 $
4.75 $
1.80 $
1,303,500
-
-
1,303,500
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 2007 Employee, Director and Consultant Stock Plan equity compensation plan, nonvested options
as of March 31, 2012 and 2011 pursuant to the Plan, and changes during the years ended March 31, 2012 and 2011 is presented below:
F-23
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
(in thousands)
Nonvested at March 31, 2010
Granted
Vested
Exercised
Nonvested at March 31, 2011
Granted
Vested
Exercised
Nonvested at March 31, 2012
Cumulative forfeited, March 31, 2011
Cumulative forfeited, March 31, 2012
Cumulative canceled, March 31, 2012
Number of
Shares
Weighted Average
Grant Date
Fair Value
- $
1,200 $
1,200 $
- $
- $
- $
- $
- $
- $
(218) $
(1,035) $
(572) $
-
0.25
0.25
-
-
-
-
-
-
0.61
2.55
0.60
As of March 31, 2012, under the Company’s 2007 Employee, Director and Consultant Stock Plan equity compensation plan, 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, 2012 was $0, and $0 was forfeited to cover individual tax withholdings. The total fair value
of shares vested during the year ended March 31, 2011 was $2,100, and $0 was forfeited to cover individual tax withholdings.
Option Plans and Stock Plans
Total stock compensation expense for the Company’s 2007 Employee, Director and Consultant Stock Plan equity compensation plan and
Amended and Restated 2011 Equity Incentive Plan is included in the following statements of operations components:
Twelve Months Ended Twelve Months Ended
March 31,
2012
March 31,
2011
Product development
Sales and marketing
General and administrative
$
$
7
19
413
439
69 $
-
7,233
7,302 $
F-24
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
8.
Discontinued Operations
The Company had been negotiating a restructuring of debt with its senior debt holder for some time. These negotiations were finalized on
June 21, 2010. On that date, the Company signed and closed a number of transactions, which included the sale of AMV. Pursuant to the
Agreement, ValueAct Small Cap Master Fund, L.P. (“ValueAct”) and Nate MacLeitch and Jonathan Cresswell (the “AMV Founders”),
acting through a newly formed company, acquired the operating subsidiaries of AMV in exchange for the release of $23,231 of secured
indebtedness, which included a release of all amounts due and payable under the secured promissory note in the aggregate principal amount of
$5,375 (the “AMV Note”) and all of the amounts due and payable under the Senior Secured Note, issued by Twistbox, due July 31, 2010, as
amended on February 12, 2008 (the “ValueAct Note”) except for $3,500 in principal, which is due in one lump sum principal payment on
June 21, 2013. In addition, all intercompany balances at that date were cancelled, and all shares of common stock and warrants of the
Company held by ValueAct were cancelled. In addition, approximately 3,541 shares of common stock of the Company held by two of the
founders of AMV were acquired by the Company. As of June 30, 2010 the Company accrued $300 to a related party pertaining to the sale of
AMV.
In accordance with FASB ASC 205-20, Discontinued Operations, the operating results and net assets and liabilities related to AMV were
reclassified as of June 21, 2010 and reported as discontinued operations in the accompanying consolidated financial statements.
In accordance with FASB ASC 360, Property, Plant and Equipment, the Company recorded a gain of $4,200 on the sale of AMV.
The following is a summary of assets and liabilities of the discontinued operations as of March 31, 2010 and as of the disposal date of June
21, 2010 and the resulting gain on sale:
Assets
Cash
Working Capital, net of cash
Property and Equipment, net
Goodwill and intangibles
Net Assets Sold
Direct costs associated with the sale
Currency translation adjustment
Other
Consideration
Gain on sale, net of taxes
F-25
June 21,
2010
March 31,
2010
1,251
1,501
668
15,955
19,375
$
$
641 $
1,536
591
15,948
18,716 $
1,173
234
5
$
20,128
24,343
$
4,215
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
9.
Goodwill and Intangible Assets
Goodwill
A reconciliation of the changes to the Company's carrying amount of goodwill for the years ended March 31, 2012 and 2011 was as follows:
Balance at March 31, 2010
Goodwill impairment
Balance at March 31, 2011
Goodwill impairment
Balance at March 31, 2012
$
$
$
8,155
(1,546)
6,609
(2,969)
3,640
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 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 $2,969 for the year ended March 31, 2012 and $1,546 for the year ended March 31, 2011 to write down goodwill. The impairment
charge is included “Impairment of goodwill and intangible assets” within operating expenses in the statements of operations.
Intangible Assets
A reconciliation of the changes to the Company's carrying amount of intangible assets for the years ended March 31, 2012 and 2011 was as
follows:
Balance at March 31, 2010
Amortization
Impairment of intangibles
Balance at March 31, 2011
Amortization
Impairment of intangibles
Balance at March 31, 2012
Total
Amortizable
Unamortizable
Intangible Assets Intangible Assets Intangible Assets
8,195
(347)
(4,482)
3,366
(230)
(2,319)
817
6,491
-
(4,018)
2,473
-
(2,319)
154 $
1,704
(347)
(464)
893
(230)
-
663 $
$
The Company performed its annual review of the fair value of intangible assets in the fourth quarter of fiscal 2012. The Company considered
the income and market approaches to derive an opinion of value. 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 $2,319 for the year ended March 31, 2012 and $4,018 for the
year ended March 31, 2011 to write down intangible assets. The impairment charge is included “Impairment of goodwill and intangible assets”
within operating expenses in the statements of operations.
F-26
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
The components of intangible assets as at March 31, 2011 and 2012 were as follows:
Software
Trade name / Trademark
Customer list
License agreements
Software
Trade name / Trademark
Customer list
License agreements
As of March 31, 2012
Accumulated
Amortization
Net
Cost
1,611 $
154
1,220
443
3,428 $
(948) $
- $
(1,220) $
(443) $
(2,611) $
663
154
(0)
(0)
817
As of March 31, 2011
Accumulated
Amortization
Net
Cost
1,611 $
2,473
1,220
443
5,747 $
(718) $
- $
(1,220) $
(443) $
(2,381) $
893
2,473
(0)
(0)
3,366
$
$
$
$
The Company has included amortization of acquired intangible assets directly attributable to revenue-generating activities in cost of revenues.
The Company has included amortization of acquired intangible assets not directly attributable to revenue-generating activities in operating
expenses. During the years ended March 31, 2012 and 2011, the Company recorded amortization expense for continuing operations in the
amount of $230 and $295, respectively, in cost of revenues; and amortization expense in the amount of $0 and $54 respectively, in operating
expenses. During the years ended March 31, 2012 and 2011 the Company recorded amortization expense for discontinued operations in the
amount of $0 and $26, respectively, in cost of revenues; and amortization expense in the amount of $0 and $40, respectively, in operating
expenses.
Based on the amortizable intangible assets as of March 31, 2012, we estimate amortization expense for the next five years to be as follows:
Year Ending March 31,
Amortization
Expense
(in thousands)
2013 $
2014
2015
$
232
232
199
663
F-27
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
Below is a summary impairment of Goodwill and Intangible assets:
Intangible
Assets Goodwill
$
9,676 $ 53,066
4,482
1,546
$ 14,158 $ 54,612
2,319
2,969
$ 16,477 $ 57,581
Balance as of March 31, 2010
Impairment
Balance as of March 31, 2011
Impairment
Balance as of March 31, 2012
10.
Debt
Short Term Debt
Note Payable
Equipment Leases and accrued interest on debt
Senior secured note, short term accrued interest
Secured Note, short term accrued interest
Long Term Debt
Senior secured note, including PIK interest, net of discount, of $1,020 and $1,856, respectively
Convertible note, including accrued interest, net of discount, of $1,132 and $0, respectively
Secured note, including PIK interest
Convertible Debt
F-28
March 31,
March 31,
2012
2011
$
$
- $
2
73
-
75 $
100
15
66
92
273
March 31,
March 31,
2012
2011
$
$
1,881 $
60
1,136
3,077 $
776
-
3,685
4,461
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
On December 29, 2011, the Company sold and issued $7,000 of subordinated short term convertible notes (the “New Convertible Note”). The
New Convertible Note is subordinated to the New Senior Secured Notes. The New Convertible Note bears interest at a rate of 3% per annum
payable at the time of conversion. The term of the New Convertible Note is the earlier of (i) the date of the Company’s next equity financing
round or (ii) the date that is one year following the date of the New Convertible Note. The New Convertible Note will automatically convert
into shares of the Company’s common stock one year from the date of the New Convertible Note at a conversion price equal to (x) if in
connection with a next equity financing round, a 25% discount to the actual or implied stock price in such financing or (y) if the Company
does not complete the next equity financing round within one year of the date of the New Convertible Note, at 75% of the average trading
price of the Company’s common stock for the 30-day period immediately prior to conversion. In no event shall the conversion price be less
than $0.50.
The purchaser of the New Convertible Note also received a warrant (“Convertible Note Warrant”) to purchase shares of common stock of the
Company. The number of shares which may be purchased under the Convertible Note Warrant is equal to an amount calculated by multiplying
25% by the quotient obtained by dividing the amount of the principal under the New Convertible Note outstanding immediately prior to
conversion by the conversion price. The conversion price is to be determined based on a qualified event or one year with an exercise price of
no less than $0.50 per share. The Convertible Note Warrant has a five year term and the issuer can require conversion of the Convertible Note
Warrant if (i) the common stock of issuer is traded on NASDAQ (or other national stock exchange); (ii) for at least (60) consecutive days at a
price equal to or greater than 150% of the Conversion Price, and (iii) the common stock has traded with an average daily volume of at least
200,000 shares. The Convertible Note Warrant was initially recorded as a derivative liability upon issuance. As discussed in Note 12, the
Company received a waiver from the Senior Secured Convertible note holders on March 26, 2012 which allowed the Company to reclassify
the Convertible Note Warrant from a derivative liability to additional paid-in capital.
The Company determined that the New Convertible Note has an embedded conversion feature that is required to be bifurcated and measured at
fair value at each reporting. At the date of issuance, the fair value of the embedded conversion feature and the Convertible Note Warrant of the
New Convertible Note was $6,078 using the Black-Scholes option pricing model with the following assumptions:
Expected life of 1 year
·
· Risk free interest rate of .12%
· Dividend yield of 0%
· Volatility of 175%
The Company determined the fair value of the Convertible Note Warrants to be $2,177, using the Black-Scholes option pricing model with the
following assumptions:
Expected life of 5 years
·
· Risk free interest rate of .88%
· Dividend yield of 0%
· Volatility of 175%
The combined total discount pertaining to the conversion feature of the New Convertible Note and the Convertible Note Warrant was
originally limited to the face value of the New Convertible Note of $7,000 and is being amortized over the term of the New Convertible Note,
with the $1,255 fair value that exceeded the face value being charged to operations as interest expense.
On March 1, 2012, the Company amended the New Convertible Note including the following amendments:
·
·
The conversion price was amended to $0.70 for the entire principal and all accrued and unpaid interest.
The warrants to become exercisable as of March 1, 2012. Previously the warrants could only be exercised by the holder on or after the
date on which the common stock had traded on NASDAQ (or any other nationally recognized securities exchange) at a price equal to
or greater than the conversion price for a period of 60 consecutive trading days with an average daily volume of at least 200,000
shares.
F-29
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
·
The warrant exercise price was amended to $0.70.
On March 1, 2012, the entire amount of the New Convertible Note of $7,000 including accrued interest of $37 was converted into 10,053
shares based on an agreed upon conversion rate of $0.70. The Company assessed the debt modification for the New Convertible Note and
determined that it met the requirements for extinguishment accounting per FASB ASC 470 and accordingly, recorded a gain on
extinguishment of debt of $2,117 for the year ended March 31, 2012.
The Company had recorded a debt discount based on the fair value of the Convertible Note Warrant and the embedded conversion feature.
Due to the conversion of the New Convertible Note, the Company expensed the $7,000 debt discount to interest expense.
ValueAct Note
As described in Note 8, in connection with the disposal of AMV on June 21, 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 $3,500 of principal (the “Amended ValueAct Note”).
On December 16, 2011, the ValueAct Note was purchased in its entirety by Taja LLC (“Taja) and was amended to remove certain negative
covenants from the Note (the “Amended Taja Note”). The Purchase of the ValueAct Note was independent of the Company, and the
Company did not receive or pay out any cash related to this transaction.
On December 29, 2011, the Company and Taja entered into a binding term sheet for convertible note financing (“Taja Convertible Note”) and
effectively a third amendment to the Second Amended Note (“Third Amended Note”). The Taja Convertible Note became effective on
February 27, 2012. The Third Amended Note (1) changed the maturity date from June 21, 2013 to June 21, 2015, (2) extended the payment in
kind (“PIK”) election to the note through the revised term, and (3) stripped out $3,000 of principal to create the Taja Convertible Note, leaving
a principal balance of $500 plus accrued interest of $562 for a total of $1,062. As consideration for amending the note, Taja also received a
warrant (“Incentive Warrant”) to purchase 2,000 shares of common stock of the Company at an exercise price of $0.25 per share, subject to
adjustment. Taja also received 25% warrant coverage (“Coverage Warrant”) determined by dividing the principal amount of the Taja
Convertible Note by the conversion price multiplied by 25%. The Incentive Warrant and the Coverage Warrant have a five year term and vest
one year from issue date. The Coverage Warrant was initially recorded as a derivative liability upon issuance. As discussed in Note 12, the
Company received a waiver from the Senior Secured Convertible note holders on March 26, 2012 which allowed the Company to reclassify
the Convertible Note Warrant from a derivative liability to additional paid-in capital. The Company assessed the debt modification for the Third
Amended Note and determined that it met the requirements for extinguishment accounting per FASB ASC 470 and accordingly, recorded a
loss on extinguishment of debt of $1,459 for the year ended March 31, 2012.
On March 1, 2012, the Company and Taja entered into a second binding term sheet (“Amended Taja Convertible Note”) to amend certain
provisions of the December 29, 2011 binding term sheet (1) the maturity date was revised to March 1, 2014, (2) the conversion price was
amended to $0.70 share, (3) conversion of the note must not cause the holder to exceed 4.9% ownership, except that on the maturity date the
entire remaining amount of principle and interest shall automatically convert into shares of common stock of the Company (4) the Amended
Taja Convertible Note becomes accelerated and immediately due and payable upon the consummation by the Company of one or more equity
sales from and after March 1, 2012 resulting in aggregate net proceeds of at least $10,000, (5) the conversion date is to occur the earlier of (x)
the date that the long-form documents are executed and delivered to all parties, and (y) March 19, 2012, (6) the 2,000 Incentive Warrants
issued as consideration for the Third Amended Note were amended to vest and be exercisable one year from March 1, 2012, (7) the exercise
date of the Coverage Warrants was amended to one year following the conversion date, and (8) the term sheet was binding on the parties and
their respective successors and assigns regardless of whether the parties execute long form agreements, as opposed to the previous term sheet
that contemplated going to long form agreements.
F-30
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
The Company determined that the Amended Taja Convertible Note has an embedded conversion feature that is required to be bifurcated and
measured at fair value at each reporting. At the date of issuance, the fair value of the embedded conversion feature was $2,250 using the
Black-Scholes option pricing model with the following assumptions:
Expected life of 1 years
·
· Risk free interest rate of .17%
· Dividend yield of 0%
· Volatility of 175%.
The Company determined the fair value of the Coverage Warrant and the Incentive Warrant to be $750 and $1,459, respectively, using the
Black-Scholes option pricing model with the following assumptions:
Expected life of 5 years
·
· Risk free interest rate of .84%
· Dividend yield of 0%
· Volatility of 175%.
The combined total discount pertaining to the conversion factor of the Taja Convertible Note and the Coverage warrant was originally limited
to the face value of the Taja Convertible Note of $3,000 and is being amortized over the term, with the $837 fair value of the embedded
conversion feature that exceeded the face value being charged to operations as interest expense.
On March 19, 2012, the Company issued 2,600 shares of its common stock to Taja for the conversion of $1,820 of the Amended Taja
Convertible Note. The Company expensed to interest expense the debt discount on a pro rata basis of the amount converted to the original debt
amount to reflect the conversion of the $1,820. During the year ended March 31, 2012, the Company recorded interest expense of $1,873
related to the amortization of the debt discount. The remaining discount of $1,127 will be amortized over the period ending March 1, 2014.
The Company assessed the conversion of $1,820 and determined that it met the requirements for extinguishment accounting per FASB ASC
470 and accordingly, recorded a gain on extinguishment of debt of $1,346 for the year ended March 31, 2012.
As of March 31, 2012, the $1,180 outstanding principal balance is convertible into approximately 1,686,000 shares of common stock at a
conversion price of $0.70. At March 31, 2012, the if-converted value exceeds the principal by approximately $405.
F-31
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
Senior Secured Convertible Notes
On June 21, 2010, for purposes of capitalizing the Company, the Company sold and issued $2,500 of Senior Secured Convertible Notes due
June 21, 2013 of the Company (the “New Senior Secured Notes”) to certain of the Company’s significant stockholders. The New Senior
Secured Notes have a three year term and bear interest at a rate of 10% per annum payable in arrears semi-annually. The entire principal
balance is due in one lump sum payment on June 21, 2013. Notwithstanding the foregoing, at any time on or prior to the 18th month
following the original issue date of the New Senior Secured Notes, the Company may, at its option, in lieu of making any cash payment of
interest, elect that the amount of any interest due and payable on any interest payment date on or prior to the 18th month following the original
issue date of the New Senior Secured Notes be added to the principal due under the New Senior Secured Notes. The accrued and unpaid
principal and interest due on the New Senior Secured Notes are convertible at any time at the election of the holder into shares of common
stock of the Company at a conversion price of $0.15 per share, subject to adjustment. The New Senior Secured Notes are secured by a first
lien on substantially all of the assets of the Company and its subsidiaries pursuant to the terms of that certain Guarantee and Security
Agreement, dated as of June 21, 2010, among Twistbox, the Company, each of the subsidiaries thereof party thereto, the investors party
thereto and Trinad Management. The Amended ValueAct Note is subordinated to the New Senior Secured Notes pursuant to the terms of that
certain Subordination Agreement, dated as of June 21, 2010, by and between Trinad Capital Master Fund, and ValueAct, and each of the
Company and Twistbox.
Each purchaser of a New Senior Secured Note also received a warrant (“Warrant”) to purchase shares of common stock of the Company at an
exercise price of $0.25 per share, subject to adjustment. For each $1 of New Senior Secured Notes purchased, the purchaser received a
Warrant to purchase 3.33 shares of common stock of the Company. Each Warrant has a five year term.
The Warrants granted to the New Senior Secured Note holders on June 21, 2010 and conversion feature in the New Senior Secured Notes are
not considered derivative instruments since the Warrants and the New Senior Secured Notes have a set conversion price and all of the
requirements for equity classification were met. The Company determined the fair value of the detachable warrants issued in connection with
the New Senior Secured Notes to be $1,678, using the Black-Scholes option pricing model and the following assumptions: expected life of 5
years, a risk free interest rate of 2.05%, a dividend yield of 0% and volatility of 54.62%. In addition, the Company determined the value of the
beneficial conversion feature to be $5,833. The combined total discount for the New Senior Secured Notes is limited to the face value of the
New Senior Secured Notes of $2,500 and is being amortized over the term of the New Senior Secured Notes. For the year ended March 31,
2012, the Company amortized $835 of the aforesaid discounts as interest and financing costs in the accompanying consolidated statements of
operations. The remaining discount of $1,020 will be amortized over the period ending June 21, 2013.
As of March 31, 2012, the $2,974 outstanding principal and accrued interest is convertible into approximately 19,827 shares of common stock
at a conversion price of $0.15. At March 31, 2012, the if-converted value exceeds the principal and accrued interest by approximately $474.
11. Related Party Transactions
The Company engages in various business relationships with shareholders and officers and their related entities. The significant relationships
are disclosed below.
On September 14, 2006, the Company entered into a five year management agreement (“Agreement”) with Trinad Management, the manager
of Trinad Capital Master Fund, which is one of our principal stockholders. In addition, Robert Ellin, our director, is the managing director of
and portfolio manager for Trinad Management. Pursuant to the terms of the Agreement, Trinad Management provides certain management
services, including, without limitation, relating to the sourcing, structuring and negotiation of a potential business combination transaction
involving the Company in exchange for a fee of $90 per quarter, plus reimbursements of all related expenses reasonably incurred. The
Agreement expired on September 14, 2011, but was extended to December 31, 2011. During the years ended March 31, 2012 and 2011, the
Company incurred management fees under the agreement of $270 and $360, respectively. At March 31, 2012 and March 31, 2011, the
accrued payable to Trinad Management was $135 and $180, respectively.
F-32
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
12. Capital Stock Transactions
Preferred Stock
There are 100 shares of Series A Convertible Preferred Stock (“Series A”) authorized, issued and outstanding. The Series A has a par value of
$0.0001 per share. The Series A holders are entitled to: (1) vote on an equal per share basis as common stock, (2) dividends paid to the
common stock holders on an as if-converted basis and (3) a liquidation preference equal to the greater of $10 per share of Series A (subject to
adjustment) or such amount that would have been paid to the common stock holders on an as if-converted basis.
Common Stock and Warrants
In addition, in connection with the New Senior Secured Notes described in Note 10, on June 21, 2010, each purchaser of a New Senior
Secured Note also received a warrant (“Warrant”) to purchase shares of common stock of the Company at an exercise price of $0.25 per share,
subject to adjustment. For each $1 of New Senior Secured Notes purchased, the purchaser received a Warrant to purchase 3.33 shares of
common stock of the Company. Each Warrant has a five year term. The warrants were valued at $1,678 using the Black Scholes pricing model
(see Note 10) and were originally recorded as equity.
In February 2011, a former officer of the Company, agreed to cancel 300,000 shares underlying an option to purchase 350,000 shares of
common stock of the Company, and the Company granted an option to purchase 300,000 shares of the Company’s common stock at an
exercise price of $0.25 per share. The Company determined the incremental fair value of the options issued to be $37, using the Black-Scholes
option pricing model and the following assumptions: expected life of 6.98 years, a risk free interest rate of 2.99%, a dividend yield of 0% and
volatility of 75%.
In February 2011, an officer of the Company, agreed to cancel 400,000 shares underlying an option to purchase 450,000 shares of common
stock of the Company, and the Company granted an option to purchase 400,000 shares of the Company’s common stock at an exercise price
of $0.25 per share. The Company determined the incremental fair value of the options issued to be $50, using the Black-Scholes option pricing
model and the following assumptions: expected life of 6.98 years, a risk free interest rate of 2.99%, a dividend yield of 0% and volatility of
75%.
In September 2010, the Company entered into a consulting agreement, pursuant to which, the Company issued warrants to purchase 150,000
shares of the Company’s common stock at an exercise price of $0.39 per share. The Company determined the fair value of the warrants issued
to be $26, using the Black-Scholes option pricing model and the following assumptions: expected life of 3.00 years, a risk free interest rate of
0.70%, a dividend yield of 0% and volatility of 75%. In February 2011, an officer of the Company, agreed to cancel an option to purchase
500,000 shares of common stock of the Company, and the Company granted an option to purchase 500,000 shares of the Company’s
common stock at an exercise price of $0.25 per share. The Company determined the incremental fair value of the options issued to be $26,
using the Black-Scholes option pricing model and the following assumptions: expected life of 3.00 years, a risk free interest rate of 1.02%, a
dividend yield of 0% and volatility of 75%.
On April 1, 2011, 347,244 shares of common stock of the Company were issued to two former employees of the Company, as compensation,
at the closing market price on that date of $0.58 cents per share, resulting in a total value of $201. In addition, the employees each agreed to
cancel options to purchase 173,622 shares of common stock in connection with their respective termination agreements which were valued at
$132. The Company determined the fair value of the cancelled options using the Black-Scholes option pricing model and the following
assumptions: expected life of 5.11 years, a risk free interest rate of 1.76%, a dividend yield of 0% and volatility of 75%. The net value of the
termination was $69.
On April 6, 2011, the Company entered into a consulting agreement. On January 3, 2012 the Company issued 150,000 shares of common
stock of the Company to the consultant. The shares vest over a one year period. The shares were valued at the closing market price on that date
of $0.58 cents per share. The overall value was determined to be $87, of which $87 was recorded through the period ended March 31, 2012.
On April 6, 2011, the Company issued warrants to purchase 75,000 shares of the Company’s common stock to a vendor, as compensation for
services rendered, at $0.25 cents per share. The Company determined the fair value of the warrants issued to be a $34, using the Black-
Scholes option pricing model and the following assumptions: expected life of 3.00 years, a risk free interest rate of .81%, a dividend yield of
0% and volatility of 75%. The warrants vest over a six month period and $34 of expense has been recorded through the period ended March
31, 2012.
In May 2011, 150,000 shares of common stock of the Company were issued to a vendor as a settlement, at the closing market price on that
date of $0.40 cents per share, resulting in a total value of $60.
F-33
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
In June 2011, the Company entered into a consulting agreement, pursuant to which, the Company issued warrants to purchase 150,000 shares
of the Company’s common stock at an exercise price of $0.47 cents per share. At June 30, 2011, the Company determined the fair value of the
warrants issued to be $53, using the Black-Scholes option pricing model and the following assumptions: expected life of 3.00 years, a risk
free interest rate of 0.81%, a dividend yield of 0% and volatility of 75%. The warrants vest over a one year period and $53 of expense has
been recorded through the period ended March 31, 2012.
In June 2011, the Company entered into a consulting agreement, pursuant to which, the Company issued warrants to purchase 150,000 shares
of the Company’s common stock at an exercise price of $0.47 cents per share. At June 30, 2011, the Company determined the fair value of the
warrants issued to be $92, using the Black-Scholes option pricing model and the following assumptions: expected life of 3.00 years, a risk
free interest rate of 0.83%, a dividend yield of 0% and volatility of 75%. The warrants vest over a one year period and $48 of expense has
been recorded in the period ended March 31, 2012.
On December 29, 2011, the Company issued a convertible promissory note for $7,000, pursuant to which the Company issued warrants to
purchase 3,500,000 shares based on 25% coverage and a conversion rate of $0.50. The exercise price was $0.50 at the date of issuance with a
five year life. At December 29, 2011, the Company determined the fair value of the warrants to be $2,177 using the Black-Scholes option
pricing model and the following assumptions: expected life of 5 years, a risk free interest rate of 0.88%, a dividend yield of 0% and volatility
of 175%. The fair value of the warrants was recorded as a debt discount. On March 1, 2012 the note was amended, changing the conversion
price to $0.70 cents per share, and the Company issued 10,053,333 shares of common stock of the Company in full payment of principle and
interest of the New Convertible Note at the new conversion price, and recognized the full expense of the warrants and debt discount in interest
expense as of March 31, 2012.
In December 2011, the Company issued 50,000 shares of common stock of the Company to Digital Turbine Group LLC for the purchase of
its assets. The shares were valued at the closing market price on that date of $0.65 cents per share. The overall value was determined to be $31,
and was recorded as production expense as of December 31, 2011.
In December 2011, the Company issued 50,000 shares of common stock of the Company to a consultant. The shares are partially vested, but
are restricted for a one year period. The vesting of the shares is both performance and market based, and as such, the Company performed a
valuation under ASC 718 and determined overall value to be $39, and $11 was recorded as an expense through March 31, 2012.
In December 2011, the Company issued 100,000 shares of common stock of the Company to a consultant. The shares are partially vested, but
are restricted for a one year period. The vesting of the shares is both performance and market based, and as such, the Company performed a
valuation under ASC 718 and determined the overall value to be $77, and $22 was recorded as an expense through March 31, 2012.
In December 2011, the Company issued 100,000 shares of common stock of the Company to a consultant. The shares are partially vested, but
are restricted for a one year period. The vesting of the shares is both performance and market based, and as such, the Company performed a
valuation under ASC 718 and determined the overall value to be $77, and $22 was recorded as an expense through March 31, 2012.
In December 2011, the Company issued 1,787,500 shares of common stock of the Company to a consultant. The shares are partially vested,
but are restricted for a one year period. The vesting of the shares is both performance and market based, and as such, the Company performed
a valuation under ASC 718 and determined the overall value to be $1,379, and $400 was recorded as an expense through March 31, 2012.
F-34
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
In December 2011, the Company issued 50,000 shares of common stock of the Company to a consultant. The shares are partially vested, but
are restricted for a one year period. The vesting of the shares is both performance and market based, and as such, the Company performed a
valuation under ASC 718 and determined the overall value to be $39, and $11 was recorded as an expense through March 31, 2012.
In December 2011, the Company issued 100,000 shares of common stock of the Company to a consultant. The shares are partially vested, but
are restricted for a one year period. The vesting of the shares is both performance and market based, and as such, the Company performed a
valuation under ASC 718 and determined the overall value to be $77, and $22 was recorded as an expense through March 31, 2012.
In December 2011, the Company issued 9,037,500 shares of common stock of the Company to a consultant. The shares are partially vested,
but are restricted for a one year period. The vesting of the shares is both performance and market based, and as such, the Company performed
a valuation under ASC 718 and determined the overall value to be $6,974, and $2,025 was recorded as an expense through March 31, 2012.
In December 2011, the Company issued 200,000 shares of common stock of the Company to a consultant. The shares are partially vested, but
are restricted for a one year period. The vesting of the shares is both performance and market based, and as such, the Company performed a
valuation under ASC 718 and determined the overall value to be $154, and $44 was recorded as an expense through March 31, 2012.
In December 2011, the Company issued 500,000 shares of common stock of the Company to a consultant. The shares are partially vested, but
are restricted for a one year period. The vesting of the shares is both performance and market based, and as such, the Company performed a
valuation under ASC 718 and determined the overall value to be $386, and $112 was recorded as an expense through March 31, 2012.
In December 2011, the Company issued 25,000 shares of common stock of the Company to a consultant. The shares are partially vested, but
are restricted for a one year period. The vesting of the shares is both performance and market based, and as such, the Company performed a
valuation under ASC 718 and determined the overall value to be $19, and $6 was recorded as an expense through March 31, 2012.
In December 2011, the Company issued 500,000 shares of common stock of the Company to a consultant. The shares are partially vested, but
are restricted for a one year period. The vesting of the shares is both performance and market based, and as such, the Company performed a
valuation under ASC 718 and determined the overall value to be $386, and $112 was recorded as an expense through March 31, 2012.
In December 2011, the Company issued 1,000,000 shares of common stock of the Company to a director. The shares vest over a period of
one year. The shares were valued at the closing market price on that date of $0.62 cents per share. The overall value was determined to be
$620, and $207 of expense was recorded through the period ended March 31, 2012.
In December 2011, the Company issued 1,000,000 shares of common stock of the Company to a director. The shares vest over a period of
one year. The shares were valued at the closing market price on that date of $0.62 cents per share. The overall value was determined to be
$620, and $207 of expense was recorded through the period ended March 31, 2012.
F-35
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
In December 2011, the Company issued 1,000,000 shares of common stock of the Company to a director. The shares vest over a period of
one year. The shares were valued at the closing market price on that date of $0.61 cents per share. The overall value was determined to be
$610, and $158 of expense was recorded through the period ended March 31, 2012.
In December 2011, the Company issued 3,400,000 shares of common stock of the Company to a director. The shares are partially vested, but
are restricted for a one year period. The vesting of the shares is both performance and market based, and as such, the Company performed a
valuation under ASC 718 and determined the overall value to be $2,624, and $1,454 of expense was recorded through the period ended March
31, 2012.
In December 2011, the Company issued 3,600,000 shares of common stock of the Company to a director. The shares are vested, but are
restricted for a one year period. The shares were valued at the closing market price on that date of $0.61 cents per share. The overall value was
determined to be $2,196, and $2,196 of expense was recorded in the period ended December 31, 2011.
In January 2012, the Company entered into a consulting agreement, pursuant to which, the Company issued 150,000 shares of common stock
of the Company. The shares are vested and were valued at the closing market price on that date of $0.65 cents per share. The overall value was
determined to be $98, and $98 of expense was recorded in the period ended January 31, 2012.
In January 2012, the Company entered into a consulting agreement, pursuant to which, the Company issued 150,000 shares of common stock
of the Company. The shares vest over one year and were valued at the closing market price on that date of $0.65 cents per share. The overall
value was determined to be $98, and $59 of expense was recorded through the period ended March 31, 2012.
In January 2012, the Company issued 1,375,000 shares of common stock of the Company to three employees. 875,000 of the shares are
vested, but are restricted for a two year period. The shares were valued at the closing market price on that date of $0.65 cents per share. The
overall value was determined to be $894, and $569 of expense was recorded through the period ended March 31, 2012.
In March 2012, the Company issued 50,000 shares of common stock of the Company to a vendor. The shares are vested, but restricted for a
one year period. The shares were valued at the closing market price on that date of $0.85 cents per share. The overall value was determined to
be $42, of which $42 was recorded in the period ended March 31, 2012.
In March 2012, the Company issued 150,000 shares of common stock of the Company to a vendor. The shares vest over one year and were
valued at the closing market price on that date of $0.90 cents per share. The overall value was determined to be $135, of which $2 was
recorded through the period ended March 31, 2012.
In March 2012, the Company sold 3,857,143 shares of common stock of the Company to investors for $0.70 cents per share. In connection
with this sale of common stock, the Company issued warrants to purchase 964,286 shares of common stock of the Company at an exercise
price of $0.70 cents per share with a term of 5 years.
In March 2012, the Company issued warrants to purchase 2,000,000 shares of common stock of the Company at an exercise price of $0.70
cents per share with a term of 5 years. The warrants were issued as consideration related to the modification of an existing note to convertible
debt and treated as debt modification expense of $1,459 as of March 31, 2012.
F-36
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
In March 2012, the Company issued 1,071,429 warrants to purchase shares of common stock of the Company at an exercise price of $0.70
cents per share. The Company recorded expense of $610 through the period ended March 31, 2012.
Derivative liabilities
As of March 31, 2012, the Company determined that certain warrants were considered derivatives because they did not meet the scope
exception in ASC 815-10-15-74. The fair value of these warrants was $452 and $223 at March 31, 2012 and 2011, respectively.
On December 29, 2011, the Company issued a $7,000 New Convertible Note with conversion rate at 75% of the average trading price of the
Company’s common stock for the 30-day period immediately prior to conversion with a floor of $0.50. Pursuant to the agreement, the
Company issued a Coverage Warrant equal to multiplying 25% by the quotient obtained by dividing the amount of the principal under the
convertible note outstanding immediately prior to conversion by the conversion price.
Previously issued warrants and embedded conversion features had met the scope exception in ASC 815-10-15-74; however, due to the
increased number of potential common shares that would need to be issued upon conversion of the note, the Company did not have sufficient
authorized and unissued shares as required by
ASC 815-40-25-10 (b) causing all outstanding derivatives and embedded conversion features to not meet the scope exception in ASC 815-10-
15-74. As a result, the Company was required to separately account for the outstanding warrants and embedded conversion options as
derivative liabilities, carried at fair value and marked-to-market each reporting period, with changes in the fair value each period being charged
or credited to operations.
On December 29, 2011, the Company valued all previously outstanding warrants and embedded conversion features using the Black-Scholes
model and reclassified $17,549 from additional paid-in capital to derivative liabilities. The Company also recorded a derivative liability of
$8,255 representing the fair value of the embedded conversion option and the Coverage Warrant issued with the New Convertible Note. The
Company determined the fair value using the Black-Scholes option pricing model with the following assumptions:
Estimated Life (years)
Risk Free Interest Rate
Dividend Yield
Volatility
Previously Outstanding Instruments
Embedded
Conversion
Options
Warrants
New Convertible Note
Embedded
Conversion
Option
Coverage
Warrant
1.82 – 4.5
.28 - .88%
0%
175%
1.48
0.12%
0%
175%
1
0.12%
0%
175%
5
0.88%
0%
175%
On March 26, 2012, the Senior Secured Convertible Note holders issued a waiver to the Company stating that they would not convert their
notes until the Company has notified them in writing that the Company has increased its authorized capital sufficiently so that the conversion,
exchange or exercise of all convertible securities can be effectuated without the Company exceeding its authorized capital.
F-37
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
With the issuance of the waiver, the Company determined that the outstanding warrants and embedded conversion options met the scope
exception of ASC 815-10-15-74 as it had sufficient authorized and unissued shares as required by ASC 815-40-25-10 (b). Therefore, the
Company valued all outstanding warrants and embedded conversion options on March 26, 2011 and reclassified $28,733 from derivative
liability to additional paid-in capital. The Company determined the fair value using the Black-Scholes option pricing model with the following
assumptions:
Warrants
1.60 - 4.93
0.36% - 1.04%
0%
175%
Embedded
Conversion
Options
1.24
0.12%
0%
175%
Estimated Life (years)
Risk Free Interest Rate
Dividend Yield
Volatility
Restricted Stock Agreements
During the year ended March 31, 2012, the Company entered into restrictive stock agreements (“RSAs”) with certain employees and
consultants. The RSAs have performance conditions, market conditions, time conditions or a combination. Once the stock vests, the individual
is restricted from selling the shares of stock for a certain defined period from three months to two years depending on the RSA. Certain RSA
are granted voting rights while other RSAs are not granted voting rights.
Performance and Market Condition RSAs
On December 28, 2011, the Company issued 15,850 restricted shares with vesting criteria based on both performance and market conditions.
The vesting is as follows: (i) one third (1/3) shall vest immediately upon the completion of one or more debt or equity financings during the
period ending two (2) years from the date hereof (the “Measurement Period”) in favor of the Company of gross proceeds of at least $5
million; (ii) one third (1/3) shall vest immediately if on any date during the Measurement Period the Company’s total enterprise value
(computed by multiplying the number of outstanding shares of Common Stock on a fully diluted (taking into account only those stock options
that are in-the-money on such date), as-converted basis by the average daily trading price for Common Stock for the thirty (30) trading day
period immediately preceding the date of determination) equals or exceeds $100 million; and (iii) one third (1/3) shall vest immediately if on
any date during the Measurement Period the Company’s total enterprise value (calculated as set forth in clause (ii) above) equals or exceeds
$200 million; provided, however, that all unvested shares of restricted common stock shall vest immediately upon the sale of all or
substantially all of the assets of the Company, upon the merger or reorganization of the Company following which the equity holders of the
Company immediately prior to the consummation of such merger or reorganization collectively own less than 50% of the voting power of the
resulting entity, or upon the sale of equity securities of the Company representing 50% or more of the voting power of the Company or 50%
or more of the economic interest in the Company in a single transaction or in a series of related transactions.
F-38
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
Each share is restricted from the individual selling the stock for a period of one year from the date of vesting.
Of the 15,850 restricted shares, the 5,283 vested shares and 8,292 unvested shares were granted voting rights and have been included in the
outstanding shares as of March 31, 2012. The remaining unvested shares do not have voting rights and have been excluded from the
outstanding shares as of March 31, 2012.
On December 28, 2011, one third of the restricted shares vested due to the $7,000 financing agreement entered into by the Company. The
Company valued the 5,283 vested RSAs at $3,223 using the Company’s ending share price at December 28, 2011 of $0.61.
For accounting purposes, the one third unvested shares related to the $100,000 enterprise value and the one third unvested shares related to the
$200,000 enterprise value are considered to have a market condition. The effect of the market condition is reflected in the grant date fair value
of the award and, thus compensation expense is recognized on this type of award provided that the requisite service is rendered (regardless of
whether the market condition is achieved). The Company estimated the grant date fair value to be $0.279 per share and $0.206 per share for
the $100,000 enterprise value and $200,000 enterprise value, respectively, using a Monte Carlo simulation that uses the following
assumptions:
· Volatility – 100%
· Restricted stock discount – 36.1%
· Risk free interest rate of 0.1%
· Dividend yield of 0%
The Company expensed $3,552 related to the 15,850 RSAs issued on December 28, 2011 and will expense the remaining $2,233 over the
period ended December 28, 2013.
F-39
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
Time and Performance Condition RSAs
On January 3, 2012, the Company issued 2,375 restricted shares with vesting criteria based on both time and performance conditions. At
January 3, 2012, 1,025 restricted shares vested immediately and the remaining 1,375 unvested shares must meet certain performance criteria
which has either not been defined by the Board of Directors or the Company has determined that the probability of meeting the performance
criteria is 0%.
Each share is restricted from the individual selling the stock for a period from one year up to two years from the date of vesting.
Of the 2,375 restricted shares, the 1,025 vested shares are determined to have voting rights and have been included in the outstanding shares
as of March 31, 2012. The remaining 1,350 unvested shares do not have voting rights and have been excluded from the outstanding shares as
of March 31, 2012.
For accounting purposes, the Company determined the grant date fair value to be $0.65 per share which is the closing price of the Company’s
stock price on January 3, 2012. The Company expensed $662, related to the 2,375 RSAs issued on January 3, 2012. No further expense will
be taken until the Board of Directors details the performance criteria.
Time Condition RSAs
On various dates during the year ended March 31, 2012, the Company issued 7,100 restricted shares with vesting criteria based on time
conditions. As of March 31, 2012, 3,650 restricted shares were vested with each share being restricted from the individual selling the stock for
a period from three months up to two years from the date of vesting.
Of the 7,100 restricted shares, the 3,650 vested shares are determined to have voting rights and have been included in the outstanding shares
as of March 31, 2012. The remaining 3,450 unvested shares do not have voting rights and have been excluded from the outstanding shares as
of March 31, 2012.
F-40
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
For accounting purposes, the Company determined the weighted average grant date fair value to be $0.62 per share based on the closing price
of the Company’s stock price on the various issue dates. The Company expensed $2,957 related to the 7,100 RSAs and will expense the
remaining $2,142 grant date fair value over the year ended March 31, 2013.
The following table summarizes the RSA activity:
(in thousands, except grant date fair value)
Unvested at March 31, 2010
Granted
Canceled
Vested
Unvested at March 31, 2011
Granted
Canceled
Vested
Unvested at March 31, 2012
13.
Employee Benefit Plans
Number of
Shares
Weighted
Average
Grant Date
Fair Value
-
300
-
300
- $
25,325
-
(9,958)
15,667 $
-
0.250
-
-
0.25
0.463
-
0.618
0.36
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.
F-41
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
14.
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 diff
Foreign Expense
Increase in Valuation Allowance
Income tax provision (benefit)
Less discontinued Operations
Income tax provision (benefit) for Continuing Ops
Deferred tax assets and liabilities consist of the following:
Net Operating Loss Carryforward
Amortization of Intangible Asset
Stock-based compensation
Credit Carryforwards
Other
Deferred Tax
Valuation Allowance
Net Deferred Tax Asset
Year Ended Year Ended
March 31
March 31
2012
2011
(10,086)
(1,447)
1,790
88
9,765
110
-
110
(2,528)
(440)
535
(809)
2,680
(562)
809
247
Year Ended Year Ended
March 31,
March 31,
2012
2011
24,188
(1,404)
11,735
(248)
54
34,326
(34,326)
-
22,891
(1,404)
3,358
-
(15)
24,830
(24,830)
-
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, 2012, the Company had net operating loss (NOL) carry-forwards to reduce future Federal income taxes of approximately
$60,355, expiring in various years ranging through 2031. 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.
F-42
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
As of March 31, 2012, realization of the Company's net deferred tax asset of approximately $34,326 was not considered more likely than not
and, accordingly, a valuation allowance of $34,326 has been provided. During the year ended March 31, 2012, the valuation allowance
increased by $9,496.
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, 2012 and March 31, 2011. The Company recognized no interest
and penalties on income taxes in its statement of operations for the year ended March 31, 2012; or the year ended March 31,
2011. 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, 2012. The Company’s Federal and State income tax returns remain subject to examination for all tax years
ended 2008 and 2007, respectively. The Company is currently under audit examination by the IRS of the tax year December 31, 2010.
15.
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, 2012:
Twelve Months ended March 31, 2012
Net sales to unaffiliated customers
Property and equipment, net
at March 31, 2012
North
America
Europe
Other
Regions
Consolidated
215
4,977
2,038 $
7,230
177
52
1 $
230
F-43
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
Twelve Months ended March 31, 2011
Net sales to unaffiliated customers
Property and equipment, net
at March 31, 2011
North
America
Europe
Other
Regions
Consolidated
688
6,819
1,679 $
9,186
322
65
1 $
388
Our largest customer accounted for 41% of gross revenues in the year ended March 31, 2012; and 49% in the year ended March 31, 2011.
16. Commitments and Contingencies
Operating Lease Obligations
The Company leases office facilities and equipment under noncancelable operating leases expiring in various years through 2014.
Following is a summary of future minimum payments under initial terms of leases as of:
Year Ending March 31,
2013
2014
Total minimum lease payments
$
$
$
32
5
37
These amounts do not reflect future escalations for real estate taxes and building operating expenses. Rental expense for continuing operations
amounted to $170 and $291, respectively, for the years ended March 31, 2012 and 2011.
Other Obligations
As of March 31, 2012, the Company was obligated for payments under various distribution agreements, equipment lease agreements,
employment contracts and consulting agreements with initial terms greater than one year at March 31, 2012. Annual payments relating to
these commitments at March 31, 2012 are as follows:
Year Ending March 31,
2013
Total minimum payments
$
$
1,108
1,108
F-44
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
On December 28, 2011, the Company entered into an employment agreement with Peter Adderton to serve as the Company’s Chief Executive
Officer and as a member of the Company’s Board of Directors. The term of the agreement is one year. Pursuant to the agreement, the
Company agreed to the following:
· Annual Fees: For all services rendered by the Chief Executive Officer under this agreement, the Company shall pay the Executive an
aggregate fee of four hundred fifty thousand dollars ($450,000) per annum.
·
Special Incentive Bonus: Mr. Adderton is to receive a bonus of $250,000 payable (A) 50% upon completion of a $5 million
financing(s) during the two years following the date of the employment agreement (“Measurement Period”) and (B) the remaining
$125,000 upon the successful completion of additional debt or equity financing(s) during the Measurement Period, which, when
aggregated with any prior financings during the Measurement Period, result in the Company realizing at least $10 million of gross
proceeds.
· Annual Bonus: Mr. Adderton shall be entitled to be paid an annual incentive bonus in cash in an amount of up to 100% of his salary
based upon satisfaction of performance-related milestones. The performance-related milestones shall be mutually determined by the
Board of Directors and Mr. Adderton within sixty (60) days of the effective Date of the employment agreement.
· Restricted Stock Grant: The Company granted Mr. Adderton 9,037,500 shares of the Company’s restricted common stock, subject to
the certain terms and conditions specified in the restricted stock agreement, which shall vest as follows: (i) one third (1/3) shall vest
immediately upon the completion of one or more debt or equity financings during the Measurement Period in favor of the Company of
gross proceeds of at least $5 million; (ii) one third (1/3) shall vest immediately if on any date during the Measurement Period the
Company’s total enterprise value (computed by multiplying the number of outstanding shares of the Employer’s common stock on a
fully diluted (taking into account only those stock options that are in-the-money on such date), as-converted basis by the average daily
trading price for the Company’s common stock for the thirty (30) trading day period immediately preceding the date of determination)
equals or exceeds $100 million; and (iii) one third (1/3) shall vest immediately if on any date during the Measurement Period the
Company’s total enterprise value (calculated as set forth in clause (ii) above) equals or exceeds $200 million; provided , however , that
all unvested shares of restricted common stock shall vest immediately upon the sale of all or substantially all of the assets of the
Company, upon the merger or reorganization of the Company following which the equity holders of the Company immediately prior to
the consummation of such merger or reorganization collectively own less than 50% of the voting power of the resulting entity, or upon
the sale of equity securities of the Company representing 50% or more of the voting power of the Company or 50% or more of the
economic interest in the Company in a single transaction or in a series of related transactions (i.e., a “Change of Control”). All shares
shall be subject to a one (1) year lock-up following the vesting of such shares.
· Additional Performance Bonuses: Mr. Adderton shall be entitled to payment of (i) a performance bonus equal to $2.5 million in cash
or registered and freely tradable stock of the Company, at Mr. Adderton’s choice, if, on any date during the Measurement Period the
Company’s total enterprise value (calculated as set forth in Section 4(e)(ii) above) equals or exceeds $150 million; and (ii) payment of a
performance bonus equal to $10 million in cash or registered and freely tradable stock of the Company, at Mr. Adderton’s choice, if,
on any date during the Measurement Period, the Company’s total enterprise value (calculated as set forth in Section 4(e)(ii) above)
equals or exceeds $1 billion. Any bonus payable under this subsection (f) shall vest upon the achievement of the specified criteria and
shall be paid on or within thirty (30) days of such vesting date.
F-45
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
The Company entered into an agreement with Robert Ellin to serve as the Company’s Executive Chairman. The term of the agreement is one
year. Pursuant to the agreement, the Company agreed to the following:
· Annual Fees: For all services rendered by the Chairman under this agreement, the Company shall pay the Chairman an aggregate fee of
four hundred fifty thousand dollars ($450,000) per annum.
· Annual Bonus: Mr. Ellin shall be entitled to be paid an annual incentive bonus in cash in an amount of up to 100% of his salary based
upon satisfaction of performance-related milestones. The performance-related milestones shall be mutually determined by the Board of
Directors and Mr. Ellin within sixty (60) days of the effective Date of the employment agreement.
· Restricted Stock Grant: The Company granted Mr. Ellin 3,400,000 shares of the Company’s restricted common stock, subject to the
certain terms and conditions specified in the restricted stock agreement, which shall vest as follows: (i) one third (1/3) shall vest
immediately upon the completion of one or more debt or equity financings during the Measurement Period in favor of the Company of
gross proceeds of at least $5 million; (ii) one third (1/3) shall vest immediately if on any date during the Measurement Period the
Company’s total enterprise value (computed by multiplying the number of outstanding shares of the Employer’s common stock on a
fully diluted (taking into account only those stock options that are in-the-money on such date), as-converted basis by the average daily
trading price for the Company’s common stock for the thirty (30) trading day period immediately preceding the date of determination)
equals or exceeds $100 million; and (iii) one third (1/3) shall vest immediately if on any date during the Measurement Period the
Company’s total enterprise value (calculated as set forth in clause (ii) above) equals or exceeds $200 million; provided , however , that
all unvested shares of restricted common stock shall vest immediately upon the sale of all or substantially all of the assets of the
Company, upon the merger or reorganization of the Company following which the equity holders of the Company immediately prior to
the consummation of such merger or reorganization collectively own less than 50% of the voting power of the resulting entity, or upon
the sale of equity securities of the Company representing 50% or more of the voting power of the Company or 50% or more of the
economic interest in the Company in a single transaction or in a series of related transactions (i.e., a “Change of Control”). All shares
shall be subject to a one (1) year lock-up following the vesting of such shares.
· Additional Performance Bonuses: Mr. Ellin shall be entitled to payment of (i) a performance bonus equal to $1.5 million in cash or
registered and freely tradable stock of the Company, at Mr. Ellin’s choice, if, on any date during the Measurement Period the
Company’s total enterprise value (calculated as set forth in Section 4(e)(ii) above) equals or exceeds $150 million; and (ii) payment of a
performance bonus equal to $3.3 million in cash or registered and freely tradable stock of the Company, at Mr. Ellin’s choice, if, on
any date during the Measurement Period, the Company’s total enterprise value (calculated as set forth in Section 4(e)(ii) above) equals
or exceeds $1 billion. Any bonus payable under this subsection (f) shall vest upon the achievement of the specified criteria and shall be
paid on or within thirty (30) days of such vesting date.
F-46
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
Litigation
Twistbox’s wholly owned subsidiary, WAAT Media Corp. (“WAAT”) and General Media Communications, Inc. (“GMCI”) were 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
counter-sued claiming GMCI was not entitled to the claimed amount and that it had 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 filed a demurrer to the counter-
claim. WAAT subsequently filed an amended counter-claim. On August 16, 2011, the LA Superior Court ruled in favor of WAAT’s
Summary Judgment Motion. As a result, GMCI’s potential damages were limited to the amount of minimum royalty installments that accrued
prior to termination of the content license agreement in the amount of approximately $800. Trial had been scheduled for April 16, 2012,
however on December 22, 2011 the parties agreed to a settlement of $300 in favor of GMCI, pursuant to which WAAT will be required to
pay GMCI $300 over a 30 month period, beginning December 28, 2011. As of March 31, 2012 the Company has accrued $260, which is
included in Accounts Payable on the balance sheet.
On March 6, 2012 the Company received a notice of levy in the amount of $73 pertaining to a dispute with a service provider. The Company
has recorded the full amount in Accounts Payable on the consolidated balance sheet.
On May 4, 2012 the Company received notice of a judgment in the amount of £23 pertaining to a dispute with a previous employee. The
Company has recorded the full amount in Accrued Compensation on the consolidated balance sheet.
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.
17.
Subsequent Events
As previously reported on a Current Report on Form 8-K filed March 23, 2012, on February 22, 2012, the Company received notice from the
OTC Bulletin Board (OTC BB) that its common stock would be removed from OTC BB under NASD Rule 6530(e), under which any OTC
BB issuer that is delinquent in its reporting obligations three times in a 24-month period is ineligible for quotation on the OTC BB for a period
of one year. The Company requested and received a hearing to review the OTC BB's determination, which occurred on April 2, 2012 before
the Financial Industry Regulatory Authority (FINRA). On May 16, 2012, the Company received notice of decision from FINRA that the
Company’s securities are not eligible for continued quotation on the OTC BB and would be promptly removed from the OTC BB. The
Company believes that while it is seeking a long term solution to enhanced stockholder liquidity, its common stock will continue to be traded
in other over the counter markets under its same ticker symbol (MNDL or MNDLE), such as the OTC Market's OTC QB (accessed through
www.otcmarkets.com, but not incorporated by reference herein). Although there are no guarantees of success, the Company is actively
pursuing appropriate steps to ensure the long term liquidity of the Company's common stock, including seeking listing on a national securities
exchange.
F-47
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
On April 12, 2012, the Company entered into a Separation and General Release Agreement with Mr. David Mandell, Executive Vice
President and General Counsel of Mandalay Digital Group, Inc.
On May 6, 2012, the Board of Directors of the Company elected Mr. Christopher Rogers as a director.
As previously reported on a Current Report on Form 8-K filed May, 30, 2012, on May 18, 2012 the Company entered into amendments to the
restricted stock agreements governing grants of shares of restricted common stock made to Mr. Peter Adderton, chief executive officer, and
Mr. Robert Ellin, executive chairman, the original details of which were previously disclosed on the Company’s Current Report on Form 8-K
filed on January 4, 2012. These amendments clarified that the holders of such shares have all rights of a stockholder with respect to those
shares (vested or unvested), including voting and dividend rights, subject to the restrictions and forfeiture provisions of the restricted stock
agreements.
On May 23, 2012, the Company received the written consent from stockholders holding a majority of its outstanding common stock to permit
(but not require) the Board of Directors of the Company to amend its Amended and Restated Certificate of Incorporation to (i) effect a reverse
stock split of the Company’s common stock at any time prior to April 26, 2013, by a ratio of not less than one-for-two and not more than one-
for-ten, with the exact ratio to be set at a whole number within this range as determined by the Board of Directors in its sole discretion (the
“Reverse Stock Split”) and (ii) to increase the number of authorized shares of the Company’s capital stock to 202,000,000 shares of stock, of
which 200,000,000 shares would be classified as Company common stock and 2,000,000 shares would be classified as Company preferred
stock (the “Authorized Stock Increase”). In addition, such stockholders, pursuant to the written consent, also approved the Company’s
Amended and Restated 2011 Equity Incentive Plan of the Company, and related forms of Equity Incentive Plan Notice of Grant Restricted
Stock Agreement, and Notice of Grant and Stock Option Agreement (the “Plan Approval”).
On June 7, 2012, the Company entered into an Equity Financing Binding Term Sheet, with an accredited investor, pursuant to which the
Company agreed to issue an aggregate of 1,428,571 shares of its common stock and warrants to purchase 357,142 shares of its common stock
(subject to adjustment), for an aggregate purchase price of $1,000,000. The warrants have an exercise price of $0.70 per share (subject to
adjustment) and a five year term. In addition, the Equity Agreement provides that (a) the Company will use its best efforts to file a registration
statement covering the shares of common stock issued and the shares of common stock issuable upon exercise of the warrants within 120
calendar days after the date of the Equity Agreements and use its best efforts to cause the registration statement to become effective as soon as
possible thereafter; and (b) the applicable investor will have a right to participate in future financings by the Company (subject to standard
exceptions) for a period of two years on a pro rata basis in accordance with his ownership interests in the Company (on a fully diluted basis
assuming exercise of the applicable warrant).
F-48
Mandalay Digital Group, Inc. and Subsidiaries
(formerly known as NeuMedia, Inc.)
On June, 7, 2012, Adage Capital Partners, LP agreed that it would not to abstain from exercising its warrant to purchase 2,500,000 shares of
common stock, issued December 29, 2011, as amended March 1, 2012, until informed in writing by the Company that the Company has
increased its authorized capital sufficiently so that exercise can be effectuated without the Company being in an over-issuance position with
respect to the shares underlying such warrants.
On June, 7, 2012, TAJA, LLC agreed that it would abstain from exercising the following warrants and convertible note, until informed in
writing by the Company that the Company has increased its authorized capital sufficiently so that exercise can be effectuated without the
Company being in an over-issuance position with respect to the shares underlying such warrants and note: (1) Warrant to Purchase 1,071,429
shares of Common Stock, issued December 29, 2011, as amended on March 1, 2012; (2) Warrant to Purchase 2,000,000 shares of Common
Stock issued December 29 ,2011 as amended on March 1, 2012; (3) Unsecured Subordinated Convertible Note, due June 21, 2015, in the
original principal amount of $3,000,000.
F-49
STATE OF DELAWARE
CERTIFICATE OF OWNERSHIP
SUBSIDIARY INTO PARENT
Section 253
CERTIFICATE OF OWNERSHIP
MERGING
MANDALAY DIGITAL GROUP, INC., A DELAWARE CORPORATION
INTO
NEUMEDIA, INC., A DELAWARE CORPORATION
(Pursuant to Section 253 of the General Corporation Law of Delaware)
NeuMedia, Inc., a corporation incorporated on the 14th day of September 2007 pursuant to the provisions of the General Corporation Law of
the State of Delaware (the “Corporation”);
DOES HEREBY CERTIFY, that the Corporation owns 100% of the capital stock of Mandalay Digital Group, Inc., a corporation
incorporated on the 3rd day of February 2012, pursuant to the provisions of the General Corporation Law of the State of Delaware (the
“Subsidiary”), and that the Corporation, by unanimous written consent of the Board of Directors duly adopted on the 1st day of February
2012, determined to and did merge into itself said Subsidiary, which resolution is in the following words to wit:
WHEREAS, the Corporation lawfully owns 100% of the outstanding stock of the Subsidiary; and
WHEREAS, the Corporation desires to merge into itself said Subsidiary and to be possessed of all the estate, property, rights, privileges and
franchises of said Subsidiary.
NOW, THEREFORE, BE IT RESOLVED, that the Corporation merge into itself said Subsidiary and assumes all of its liabilities and
obligations;
FURTHER RESOLVED, that an authorized officer of the Corporation be and is hereby directed to make and execute a certificate of
ownership setting forth a copy of the resolution to merge said Subsidiary and assume its liabilities and obligations, and the date of adoption
thereof, and to file the same in the office of the Secretary of State of Delaware, and a certified copy thereof in the office of the Recorder of
Deeds of Kent County;
RESOLVED FURTHER, that the Corporation relinquishes its corporate name and assumes in place thereof the name Mandalay Digital
Group, Inc.; and
RESOLVED FURTHER, that the officers of the Corporation be and they hereby are authorized and directed to do all acts and things
whatsoever, whether within or without the State of Delaware, which may be in any way necessary or proper to effect said merger.
[signature page follows]
IN WITNESS WHEREOF, said parent Corporation hag caused this certificate to be signed by an authorized officer this 2nd day of February
2012.
NEUMEDIA, INC.
A Delaware corporation
/s/ David Mandell
By:
Name: David Mandell
Title: Secretary
THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED WITH THE SECURITIES
AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”),
AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN
ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO
THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY.
MANDALAY DIGITAL GROUP, INC.
COMMON STOCK WARRANT
Effective Date: March 19, 2012
Documentation Date: May 16, 2012
Mandalay Digital Group, Inc., a Delaware corporation (the “Company”) hereby certifies that, for value received, (together with
his/its registered assigns, “Holder”), is entitled to purchase from the Company up to shares of Common Stock (each such share, a
“Warrant Share” and all such shares, the “Warrant Shares”), at any time and from time to time from and after March 19, 2013 (the “First
Exercise Date”), through and including March 19, 2017 (the “Expiration Date”), subject to the following terms and conditions set forth
below.
The parties agree and acknowledge that this Warrant (i) is being documented and signed on the Documentation Date listed above but
is effective and issued as of the Effective Date listed above and (ii) fully satisfies all agreements between the parties that called for the issuance
of a warrant in connection with equity and/or debt investments made by the Holder in the Company.
1. Definitions. As used in this Warrant, the following terms shall have the respective definitions set forth in this Section 1.
“Business Day” means any day except Saturday, Sunday and any day that is a federal legal holiday in the United States or a day on
which banking institutions in the State of California are authorized or required by law or other government action to close.
“California Courts” means the state and federal courts sitting in Los Angeles County, California.
“Common Stock” means the common stock of the Company, par value $0.0001 per share, and any securities into which such
common stock may hereafter be reclassified.
“ Exercise Price” means $0.70, subject to adjustment in accordance with Section 9.
“Fundamental Transaction” means any of the following: (1) the Company effects any merger or consolidation of the Company
with or into another Person, (2) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions,
(3) any tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common
Stock are permitted to tender or exchange their shares for other securities, cash or property, or (4) the Company effects any reclassification of
the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for
other securities, cash or property.
“Person” means any entity, corporation, company, association, joint venture, joint stock company, partnership (whether general,
limited or limited liability), trust, limited liability company, real estate investment trust, organization, individual (including any personal
representative, executor or heir of a deceased individual), nation, state, government (including any agency, department, bureau, board, division
or instrumentality thereof), trustee, receiver or liquidator.
“Trading Day” means (i) a day on which the Common Stock is traded on a Trading Market (other than the OTC Bulletin Board), or
(ii) if the Common Stock is not listed on a Trading Market (other than the OTC Bulletin Board), a day on which the Common Stock is traded
in the over-the-counter market, as reported by the OTC Bulletin Board, or (iii) if the Common Stock is not quoted on any Trading Market, a
day on which the Common Stock is quoted in the over-the-counter market as reported by the highest tier of the OTC Markets on which the
Common Stock is then quoted (or any similar organization or agency succeeding to its functions of reporting prices); provided, that in the
event that the Common Stock is not listed or quoted as set forth in (i), (ii) and (iii) hereof, then Trading Day shall mean a Business Day.
“Trading Market” means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on
the date in question: the NYSE AMEX, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New
York Stock Exchange or the OTC Bulletin Board (or any successors to any of the foregoing).
2. Registration of Warrant. The Company shall register this Warrant upon records to be maintained by the Company for that
purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company may deem and treat the
registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for
all other purposes, absent actual notice to the contrary.
3. Registration of Transfers. The Company shall register the transfer of any portion of this Warrant in the Warrant Register,
upon surrender of this Warrant, with the Form of Assignment attached hereto duly completed and signed, to the Company at its address
specified herein. Upon any such registration or transfer, a new Warrant to purchase Common Stock, in substantially the form of this Warrant
(any such new Warrant, a “New Warrant”), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New
Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. The acceptance
of the New Warrant by the transferee thereof shall be deemed the acceptance by such transferee of all of the rights and obligations of a holder
of a Warrant.
2
4. Exercise and Duration of Warrants. This Warrant shall be exercisable by the registered Holder at any time and from time to
time from and after the First Exercise Date through and including the Expiration Date. At 5:00 p.m., Los Angeles time on the Expiration Date,
the portion of this Warrant not exercised prior thereto shall be and become void and of no value. The Company may not call or redeem any
portion of this Warrant without the prior written consent of the affected Holder.
5. Delivery of Warrant Shares.
(a) To effect exercises hereunder, the Holder shall not be required to physically surrender this Warrant unless the
aggregate Warrant Shares represented by this Warrant is being exercised. Upon delivery of the Exercise Notice (in the form attached hereto) to
the Company (with the attached Warrant Shares Exercise Log) at its address for notice set forth herein and upon payment of the Exercise Price
multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder, the Company shall promptly issue and deliver to
the Holder, a certificate for the Warrant Shares issuable upon such exercise, which shall bear a restricted stock legend under the Securities Act,
similar to the one on the face of this Warrant, unless (i) such exercise is pursuant to Section 10(b) and (ii) as of the Date of Exercise the
Holder is not, and has not been for the previous 90 days, an “affiliate” of the Company (as defined in Rule 144 under the Securities Act). A
“Date of Exercise” means the date on which the Holder shall have delivered to the Company: (i) the Exercise Notice (with the Warrant
Exercise Log attached to it), appropriately completed and duly signed and (ii) if such Holder is not utilizing the cashless exercise provisions set
forth in the Warrant, payment of the Exercise Price for the number of Warrant Shares so indicated by the Holder to be purchased.
(b) The Company’s obligations to issue and deliver Warrant Shares in accordance with the terms hereof are absolute
and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any
provision hereof, the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim, recoupment,
limitation or termination, or any breach or alleged breach by the Holder or any other Person of any obligation to the Company or any violation
or alleged violation of law by the Holder or any other Person, and irrespective of any other circumstance which might otherwise limit such
obligation of the Company to the Holder in connection with the issuance of Warrant Shares. Nothing herein shall limit a Holder’s right to
pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or
injunctive relief with respect to the Company’s failure to timely deliver certificates representing Warrant Shares upon exercise of the Warrant
as required pursuant to the terms hereof.
6. Charges, Taxes and Expenses. Issuance and delivery of Warrant Shares upon exercise of this Warrant shall be made without
charge to the Holder for any issue or transfer tax, withholding tax, transfer agent fee or other incidental tax or expense in respect of the
issuance of such certificates, all of which taxes and expenses shall be paid by the Company; provided, however, that the Company shall not be
required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or
Warrants in a name other than that of the Holder. The Holder shall be responsible for all other tax liability that may arise as a result of holding
or transferring this Warrant or receiving Warrant Shares upon exercise hereof.
3
7. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued
in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon
receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and customary and reasonable indemnity (which
shall not include a surety bond), if requested. Applicants for a New Warrant under such circumstances shall also comply with such other
reasonable regulations and procedures and pay such other reasonable third-party costs as the Company may prescribe. If a New Warrant is
requested as a result of a mutilation of this Warrant, then the Holder shall deliver such mutilated Warrant to the Company as a condition
precedent to the Company’s obligation to issue the New Warrant.
8. Reservation of Warrant Shares. The Company covenants that it will at all times reserve and keep available out of the
aggregate of its authorized but unissued and otherwise unreserved Common Stock, solely for the purpose of enabling it to issue Warrant
Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the
exercise of this entire Warrant (taking into account the adjustments and restrictions of Section 9). The Company covenants that all Warrant
Shares so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof,
be duly and validly authorized, issued and fully paid and nonassessable.
9. Certain Adjustments. The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to
adjustment from time to time as set forth in this Section 9.
(a) Stock Dividends and Splits. If the Company (i) pays a stock dividend on its Common Stock or otherwise makes a
distribution on any class of capital stock that is payable in shares of Common Stock, (ii) subdivides outstanding shares of Common Stock into
a larger number of shares, or (iii) combines outstanding shares of Common Stock into a smaller number of shares, then in each such case the
Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock outstanding
immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after
such event. Any adjustment made pursuant to clause (i) of this paragraph shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution, and any adjustment pursuant to clause (ii) or (iii) of this
paragraph shall become effective immediately after the effective date of such subdivision or combination.
4
(b) Fundamental Transactions. If, at any time while this Warrant is outstanding there is a Fundamental Transaction, then
the Holder shall have the right thereafter to receive, upon exercise of this Warrant, the same amount and kind of securities, cash or property as
it would have been entitled to receive upon the occurrence of such Fundamental Transaction if it had been, immediately prior to such
Fundamental Transaction, the holder of the number of Warrant Shares then issuable upon exercise in full of this Warrant (the “Alternate
Consideration”). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such
Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such
Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner
reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as
to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the
Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. The terms of any agreement
pursuant to which a Fundamental Transaction is effected shall include terms requiring any such successor or surviving entity to comply with
the provisions of this paragraph (b) and insuring that the Warrant (or any such replacement security) will be similarly adjusted upon any
subsequent transaction analogous to a Fundamental Transaction.
(c) Number of Warrant Shares. Simultaneously with any adjustment to the Exercise Price pursuant to this Section 9, the
number of Warrant Shares that may be purchased upon exercise of this Warrant shall be increased or decreased proportionately, so that after
such adjustment the aggregate Exercise Price payable hereunder for the adjusted number of Warrant Shares shall be the same as the aggregate
Exercise Price in effect immediately prior to such adjustment.
(d) Calculations. All calculations under this Section 9 shall be made to the nearest cent or the nearest 1/100th of a share,
as applicable. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the
account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock.
(e) Notice of Adjustments. Upon the occurrence of each adjustment pursuant to this Section 9, the Company at its
expense will promptly compute such adjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such
adjustment, including a statement of the adjusted Exercise Price and adjusted number or type of Warrant Shares or other securities issuable
upon exercise of this Warrant (as applicable), describing the transactions giving rise to such adjustments and showing in detail the facts upon
which such adjustment is based. Upon written request, the Company will promptly deliver a copy of each such certificate to the Holder and to
the Company’s Transfer Agent.
(f) Notice of Corporate Events. If the Company (i) declares a dividend or any other distribution of cash, securities or
other property in respect of its Common Stock, including without limitation any granting of rights or warrants to subscribe for or purchase any
capital stock of the Company or any subsidiary of the Company, (ii) authorizes or approves, enters into any agreement contemplating or
solicits stockholder approval for any Fundamental Transaction or (iii) authorizes the voluntary dissolution, liquidation or winding up of the
affairs of the Company, then the Company shall deliver to the Holder a notice describing the material terms and conditions of such transaction
(but only to the extent such disclosure would not result in the dissemination of material, non-public information to the Holder) at least 10
calendar days prior to the applicable record or effective date on which a Person would need to hold Common Stock in order to participate in or
vote with respect to such transaction, and the Company will take all steps reasonably necessary in order to insure that the Holder is given the
practical opportunity to exercise this Warrant prior to such time so as to participate in or vote with respect to such transaction; provided,
however, that the failure to deliver such notice or any defect therein shall not affect the validity of the corporate action required to be described
in such notice.
5
10. Payment of Exercise Price. The Holder may pay the Exercise Price in one of the following manners:
(a) Cash Exercise. The Holder may deliver immediately available funds; or
(b) Cashless Exercise. If an Exercise Notice is delivered at a time when a registration statement permitting the Holder to
resell the Warrant Shares is not then effective or the prospectus forming a part thereof is not then available to the Holder for the resale of the
Warrant Shares, then the Holder may notify the Company in an Exercise Notice of its election to utilize cashless exercise, in which event the
Company shall issue to the Holder the number of Warrant Shares determined as follows:
X = Y [(A-B)/A]
where:
X = the number of Warrant Shares to be issued to the Holder.
Y = the number of Warrant Shares with respect to which this Warrant is being exercised.
A = the average of the closing prices for the 30 Trading Days immediately prior to (but not including) the
Date of Exercise.
B = the Exercise Price.
For purposes of Rule 144 promulgated under the Securities Act, it is intended, understood and acknowledged that the Warrant Shares issued
in a cashless exercise transaction shall be deemed to have been acquired by the Holder, and the holding period for the Warrant Shares shall be
deemed to have commenced, on the date this Warrant was originally issued.
11. No Fractional Shares. No fractional shares of Warrant Shares will be issued in connection with any exercise of this Warrant.
In lieu of any fractional shares which would, otherwise be issuable, the Company shall pay cash equal to the product of such fraction
multiplied by the closing price of one Warrant Share as reported by the applicable Trading Market on the Date of Exercise.
6
12. Notices. Any and all notices or other communications or deliveries hereunder (including, without limitation, any Exercise
Notice) shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number specified in this Section prior to 5:00 p.m. (Los Angeles time) on a Trading
Day, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number
specified in this Section on a day that is not a Trading Day or later than 5:00 p.m. (Los Angeles time) on any Trading Day, (iii) the Trading
Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom
such notice is required to be given. The addresses for such communications shall be: (i) if to the Company, to Mandalay Digital Group, Inc.,
4751 Wilshire Blvd., 3rd Floor, Los Angeles, California 90010, Attn: Chief Executive Officer, or to Facsimile No.: (323) 549-9824 (or such
other address as the Company shall indicate in writing in accordance with this Section), or (ii) if to the Holder, to the address or facsimile
number appearing on the Warrant Register or such other address or facsimile number as the Holder may provide to the Company in
accordance with this Section.
13. Warrant Agent. The Company shall serve as warrant agent under this Warrant. Upon 10 days’ notice to the Holder, the
Company may appoint a new warrant agent. Any corporation into which the Company or any new warrant agent may be merged or any
corporation resulting from any consolidation to which the Company or any new warrant agent shall be a party or any corporation to which the
Company or any new warrant agent transfers substantially all of its corporate trust or shareholders services business shall be a successor
warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as
warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder’s last address as shown on the Warrant Register.
14. Investor Representations.
(a) Holder hereby confirms that this Warrant and any shares of Common Stock or other securities of the Company
issued upon exercise hereof (collectively, “Securities”) are or will be acquired for investment for the Holder’s own account, not as a nominee
or agent, and not with a view to the resale or distribution of any part thereof, and that the Holder has no present intention of selling, granting
any participation in, or otherwise distributing the same. The Holder further represents that it does not presently have any contract, undertaking,
agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of
the Securities.
Regulation D promulgated under the Securities Act.
(b) Holder is, and upon any issuance of Securities will be, an “accredited investor” as defined in Rule 501(a) of
(c) Holder has the requisite knowledge and experience in financial and business matters to assess the relative merits and
risks of investment in the Securities and has had a full opportunity to discuss with the Company all material aspects of investment in the
Securities, including the opportunity to ask, and to receive answers to its full satisfaction, regarding such questions as it has deemed necessary
to evaluate such investment.
respect to the Company or the Securities.
(d) Except to the extent specifically set forth herein, the Company is making no representations and warranties with
7
15. Miscellaneous.
(a) This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and
assigns. Subject to the preceding sentence, nothing in this Warrant shall be construed to give to any Person other than the Company and the
Holder any legal or equitable right, remedy or cause of action under this Warrant. This Warrant may be amended only in writing signed by the
Company and the Holder and their successors and assigns.
(b) All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be governed
by and construed and enforced in accordance with the internal laws of the State of California, without regard to the principles of conflicts of
law thereof. Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of this Warrant and the
transactions herein contemplated (“Proceedings”) (whether brought against a party hereto or its respective affiliates, employees or agents)
shall be commenced exclusively in the California Courts. Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the
California Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or
discussed herein, and hereby irrevocably waives, and agrees not to assert in any Proceeding, any claim that it is not personally subject to the
jurisdiction of any California Court, or that such Proceeding has been commenced in an improper or inconvenient forum. Each party hereto
hereby irrevocably waives personal service of process and consents to process being served in any such Proceeding by mailing a copy thereof
via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this
Warrant and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall
be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereto hereby irrevocably waives, to the
fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Warrant or
the transactions contemplated hereby. If either party shall commence a Proceeding to enforce any provisions of this Warrant, then the
prevailing party in such Proceeding shall be reimbursed by the other party for its attorney’s fees and other costs and expenses incurred with
the investigation, preparation and prosecution of such Proceeding.
limit or affect any of the provisions hereof.
(c) The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to
(d) In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the
validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the
parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor,
and upon so agreeing, shall incorporate such substitute provision in this Warrant.
of a stockholder with respect to the Warrant Shares.
(e) Prior to exercise of this Warrant, the Holder hereof shall not, by reason of being a Holder, be entitled to any rights
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK, SIGNATURE PAGE FOLLOWS]
8
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first
indicated above.
AGREED AND ACKNOWLEDGED:
MANDALAY DIGITAL GROUP, INC.
/s/ Peter Adderton
By:
Name: Peter Adderton
Title:
CEO
Signature Page to Warrant
EXERCISE NOTICE
MANDALAY DIGITAL GROUP, INC.
WARRANT EFFECTIVE MARCH 19, 2012
The undersigned Holder hereby irrevocably elects to purchase _____________ shares of Common Stock pursuant to the above referenced
Warrant. Capitalized terms used herein and not otherwise defined have the respective meanings set forth in the Warrant.
(1) The undersigned Holder hereby exercises its right to purchase _________________ Warrant Shares pursuant to the Warrant.
(2) The Holder intends that payment of the Exercise Price shall be made as (check one):
£ “Cash Exercise” under Section 10
£ “Cashless Exercise” under Section 10
(3) If the holder has elected a Cash Exercise, the holder shall pay the sum of $____________ to the Company in accordance with the
terms of the Warrant.
(4) Pursuant to this Exercise Notice, the Company shall deliver to the holder _______________ Warrant Shares in accordance with the
terms of the Warrant.
Dated:___________________,_________
Name of Holder:
(Print)
By:
Name:
Title:
(Signature must conform in all respects to name of holder as
specified on the face of the Warrant)
Warrant Shares Exercise Log
Date
Number of Warrant
Shares Available to be
Exercised
Number of Warrant Shares
Exercised
Number of
Warrant Shares
Remaining to
be Exercised
MANDALAY DIGITAL GROUP, INC.
WARRANT ORIGINALLY ISSUED MARCH 19, 2012
WARRANT
FORM OF ASSIGNMENT
[To be completed and signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ________________________________ the
right represented by the above-captioned Warrant to purchase ____________ shares of Common Stock to which such Warrant relates and
appoints ________________ attorney to transfer said right on the books of the Company with full power of substitution in the premises.
Dated: _______________, ____
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant)
Address of Transferee
In the presence of:
THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED WITH THE SECURITIES
AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”),
AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN
ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO
THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY.
MANDALAY DIGITAL GROUP, INC.
COMMON STOCK WARRANT
Effective Date: March 19, 2012
Documentation Date: May 16, 2012
Mandalay Digital Group, Inc., a Delaware corporation (the “Company”) hereby certifies that, for value received, (together
with his/its registered assigns, “Holder”), is entitled to purchase from the Company up to shares of Common Stock (each such share, a
“Warrant Share” and all such shares, the “Warrant Shares”), at any time and from time to time from and after March 19, 2013 (the “First
Exercise Date”), through and including March 19, 2017 (the “Expiration Date”), subject to the following terms and conditions set forth
below.
The parties agree and acknowledge that this Warrant (i) is being documented and signed on the Documentation Date listed above but
is effective and issued as of the Effective Date listed above and (ii) fully satisfies all agreements between the parties that called for the issuance
of a warrant in connection with equity and/or debt investments made by the Holder in the Company.
1. Definitions. As used in this Warrant, the following terms shall have the respective definitions set forth in this Section 1.
“Business Day” means any day except Saturday, Sunday and any day that is a federal legal holiday in the United States or a day on
which banking institutions in the State of California are authorized or required by law or other government action to close.
“California Courts” means the state and federal courts sitting in Los Angeles County, California.
“Common Stock” means the common stock of the Company, par value $0.0001 per share, and any securities into which such
common stock may hereafter be reclassified.
“Exercise Price” means $0.70, subject to adjustment in accordance with Section 9.
“Fundamental Transaction” means any of the following: (1) the Company effects any merger or consolidation of the Company
with or into another Person, (2) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions,
(3) any tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common
Stock are permitted to tender or exchange their shares for other securities, cash or property, or (4) the Company effects any reclassification of
the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for
other securities, cash or property.
“Person” means any entity, corporation, company, association, joint venture, joint stock company, partnership (whether general,
limited or limited liability), trust, limited liability company, real estate investment trust, organization, individual (including any personal
representative, executor or heir of a deceased individual), nation, state, government (including any agency, department, bureau, board, division
or instrumentality thereof), trustee, receiver or liquidator.
“Trading Day” means (i) a day on which the Common Stock is traded on a Trading Market (other than the OTC Bulletin Board), or
(ii) if the Common Stock is not listed on a Trading Market (other than the OTC Bulletin Board), a day on which the Common Stock is traded
in the over-the-counter market, as reported by the OTC Bulletin Board, or (iii) if the Common Stock is not quoted on any Trading Market, a
day on which the Common Stock is quoted in the over-the-counter market as reported by the highest tier of the OTC Markets on which the
Common Stock is then quoted (or any similar organization or agency succeeding to its functions of reporting prices); provided, that in the
event that the Common Stock is not listed or quoted as set forth in (i), (ii) and (iii) hereof, then Trading Day shall mean a Business Day.
“Trading Market” means any of the following markets or exchanges on which the
Common Stock is listed or quoted for trading on the date in question: the NYSE AMEX, the Nasdaq Capital Market, the Nasdaq Global
Market, the Nasdaq Global Select Market, the New York Stock Exchange or the OTC Bulletin Board (or any successors to any of the
foregoing).
2. Registration of Warrant. The Company shall register this Warrant upon records to be maintained by the Company for that
purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company may deem and treat the
registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for
all other purposes, absent actual notice to the contrary.
3. Registration of Transfers. The Company shall register the transfer of any portion of this Warrant in the Warrant Register,
upon surrender of this Warrant, with the Form of Assignment attached hereto duly completed and signed, to the Company at its address
specified herein. Upon any such registration or transfer, a new Warrant to purchase Common Stock, in substantially the form of this Warrant
(any such new Warrant, a “New Warrant”), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New
Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. The acceptance
of the New Warrant by the transferee thereof shall be deemed the acceptance by such transferee of all of the rights and obligations of a holder
of a Warrant.
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4. Exercise and Duration of Warrants. This Warrant shall be exercisable by the registered Holder at any time and from time to
time from and after the First Exercise Date through and including the Expiration Date. At 5:00 p.m., Los Angeles time on the Expiration Date,
the portion of this Warrant not exercised prior thereto shall be and become void and of no value. The Company may not call or redeem any
portion of this Warrant without the prior written consent of the affected Holder.
5. Delivery of Warrant Shares.
(a) To effect exercises hereunder, the Holder shall not be required to physically surrender this Warrant unless the
aggregate Warrant Shares represented by this Warrant is being exercised. Upon delivery of the Exercise Notice (in the form attached hereto) to
the Company (with the attached Warrant Shares Exercise Log) at its address for notice set forth herein and upon payment of the Exercise Price
multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder, the Company shall promptly issue and deliver to
the Holder, a certificate for the Warrant Shares issuable upon such exercise, which shall bear a restricted stock legend under the Securities Act,
similar to the one on the face of this Warrant, unless (i) such exercise is pursuant to Section 10(b) and (ii) as of the Date of Exercise the
Holder is not, and has not been for the previous 90 days, an “affiliate” of the Company (as defined in Rule 144 under the Securities Act). A
“Date of Exercise” means the date on which the Holder shall have delivered to the Company: (i) the Exercise Notice (with the Warrant
Exercise Log attached to it), appropriately completed and duly signed and (ii) if such Holder is not utilizing the cashless exercise provisions set
forth in the Warrant, payment of the Exercise Price for the number of Warrant Shares so indicated by the Holder to be purchased.
(b) The Company’s obligations to issue and deliver Warrant Shares in accordance with the terms hereof are absolute
and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any
provision hereof, the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim, recoupment,
limitation or termination, or any breach or alleged breach by the Holder or any other Person of any obligation to the Company or any violation
or alleged violation of law by the Holder or any other Person, and irrespective of any other circumstance which might otherwise limit such
obligation of the Company to the Holder in connection with the issuance of Warrant Shares. Nothing herein shall limit a Holder’s right to
pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or
injunctive relief with respect to the Company’s failure to timely deliver certificates representing Warrant Shares upon exercise of the Warrant
as required pursuant to the terms hereof.
6. Charges, Taxes and Expenses. Issuance and delivery of Warrant Shares upon exercise of this Warrant shall be made without
charge to the Holder for any issue or transfer tax, withholding tax, transfer agent fee or other incidental tax or expense in respect of the
issuance of such certificates, all of which taxes and expenses shall be paid by the Company; provided, however, that the Company shall not be
required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or
Warrants in a name other than that of the Holder. The Holder shall be responsible for all other tax liability that may arise as a result of holding
or transferring this Warrant or receiving Warrant Shares upon exercise hereof.
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7. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued
in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon
receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and customary and reasonable indemnity (which
shall not include a surety bond), if requested. Applicants for a New Warrant under such circumstances shall also comply with such other
reasonable regulations and procedures and pay such other reasonable third-party costs as the Company may prescribe. If a New Warrant is
requested as a result of a mutilation of this Warrant, then the Holder shall deliver such mutilated Warrant to the Company as a condition
precedent to the Company’s obligation to issue the New Warrant.
8. Reservation of Warrant Shares. The Company covenants that it will at all times reserve and keep available out of the
aggregate of its authorized but unissued and otherwise unreserved Common Stock, solely for the purpose of enabling it to issue Warrant
Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the
exercise of this entire Warrant (taking into account the adjustments and restrictions of Section 9). The Company covenants that all Warrant
Shares so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof,
be duly and validly authorized, issued and fully paid and nonassessable.
9. Certain Adjustments. The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to
adjustment from time to time as set forth in this Section 9.
(a) Stock Dividends and Splits. If the Company (i) pays a stock dividend on its Common Stock or otherwise makes a
distribution on any class of capital stock that is payable in shares of Common Stock, (ii) subdivides outstanding shares of Common Stock into
a larger number of shares, or (iii) combines outstanding shares of Common Stock into a smaller number of shares, then in each such case the
Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock outstanding
immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after
such event. Any adjustment made pursuant to clause (i) of this paragraph shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution, and any adjustment pursuant to clause (ii) or (iii) of this
paragraph shall become effective immediately after the effective date of such subdivision or combination.
4
(b) Fundamental Transactions. If, at any time while this Warrant is outstanding there is a Fundamental Transaction,
then the Holder shall have the right thereafter to receive, upon exercise of this Warrant, the same amount and kind of securities, cash or
property as it would have been entitled to receive upon the occurrence of such Fundamental Transaction if it had been, immediately prior to
such Fundamental Transaction, the holder of the number of Warrant Shares then issuable upon exercise in full of this Warrant (the “Alternate
Consideration”). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such
Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such
Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner
reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as
to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the
Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. The terms of any agreement
pursuant to which a Fundamental Transaction is effected shall include terms requiring any such successor or surviving entity to comply with
the provisions of this paragraph (b) and insuring that the Warrant (or any such replacement security) will be similarly adjusted upon any
subsequent transaction analogous to a Fundamental Transaction.
(c) Number of Warrant Shares. Simultaneously with any adjustment to the Exercise Price pursuant to this Section 9,
the number of Warrant Shares that may be purchased upon exercise of this Warrant shall be increased or decreased proportionately, so that
after such adjustment the aggregate Exercise Price payable hereunder for the adjusted number of Warrant Shares shall be the same as the
aggregate Exercise Price in effect immediately prior to such adjustment.
(d) Calculations. All calculations under this Section 9 shall be made to the nearest cent or the nearest 1/100th of a
share, as applicable. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for
the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock.
(e) Notice of Adjustments. Upon the occurrence of each adjustment pursuant to this Section 9, the Company at its
expense will promptly compute such adjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such
adjustment, including a statement of the adjusted Exercise Price and adjusted number or type of Warrant Shares or other securities issuable
upon exercise of this Warrant (as applicable), describing the transactions giving rise to such adjustments and showing in detail the facts upon
which such adjustment is based. Upon written request, the Company will promptly deliver a copy of each such certificate to the Holder and to
the Company’s Transfer Agent.
(f) Notice of Corporate Events. If the Company (i) declares a dividend or any other distribution of cash, securities or
other property in respect of its Common Stock, including without limitation any granting of rights or warrants to subscribe for or purchase any
capital stock of the Company or any subsidiary of the Company, (ii) authorizes or approves, enters into any agreement contemplating or
solicits stockholder approval for any Fundamental Transaction or (iii) authorizes the voluntary dissolution, liquidation or winding up of the
affairs of the Company, then the Company shall deliver to the Holder a notice describing the material terms and conditions of such transaction
(but only to the extent such disclosure would not result in the dissemination of material, non-public information to the Holder) at least 10
calendar days prior to the applicable record or effective date on which a Person would need to hold Common Stock in order to participate in or
vote with respect to such transaction, and the Company will take all steps reasonably necessary in order to insure that the Holder is given the
practical opportunity to exercise this Warrant prior to such time so as to participate in or vote with respect to such transaction; provided,
however, that the failure to deliver such notice or any defect therein shall not affect the validity of the corporate action required to be described
in such notice.
5
10. Payment of Exercise Price. The Holder may pay the Exercise Price in one of the following manners:
(a) Cash Exercise. The Holder may deliver immediately available funds; or
(b) Cashless Exercise. If an Exercise Notice is delivered at a time when a registration statement permitting the Holder
to resell the Warrant Shares is not then effective or the prospectus forming a part thereof is not then available to the Holder for the resale of the
Warrant Shares, then the Holder may notify the Company in an Exercise Notice of its election to utilize cashless exercise, in which event the
Company shall issue to the Holder the number of Warrant Shares determined as follows:
X = Y [(A-B)/A]
where:
X = the number of Warrant Shares to be issued to the Holder.
Y = the number of Warrant Shares with respect to which this Warrant is being exercised.
A = the average of the closing prices for the 30 Trading Days immediately prior to (but not including) the
Date of Exercise.
B = the Exercise Price.
For purposes of Rule 144 promulgated under the Securities Act, it is intended, understood and acknowledged that the Warrant Shares issued
in a cashless exercise transaction shall be deemed to have been acquired by the Holder, and the holding period for the Warrant Shares shall be
deemed to have commenced, on the date this Warrant was originally issued.
11. No Fractional Shares. No fractional shares of Warrant Shares will be issued in connection with any exercise of this Warrant.
In lieu of any fractional shares which would, otherwise be issuable, the Company shall pay cash equal to the product of such fraction
multiplied by the closing price of one Warrant Share as reported by the applicable Trading Market on the Date of Exercise.
6
12. Notices. Any and all notices or other communications or deliveries hereunder (including, without limitation, any Exercise
Notice) shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number specified in this Section prior to 5:00 p.m. (Los Angeles time) on a Trading
Day, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number
specified in this Section on a day that is not a Trading Day or later than 5:00 p.m. (Los Angeles time) on any Trading Day, (iii) the Trading
Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom
such notice is required to be given. The addresses for such communications shall be: (i) if to the Company, to Mandalay Digital Group, Inc.,
4751 Wilshire Blvd., 3rd Floor, Los Angeles, California 90010, Attn: Chief Executive Officer, or to Facsimile No.: (323) 549-9824 (or such
other address as the Company shall indicate in writing in accordance with this Section), or (ii) if to the Holder, to the address or facsimile
number appearing on the Warrant Register or such other address or facsimile number as the Holder may provide to the Company in
accordance with this Section.
13. Warrant Agent. The Company shall serve as warrant agent under this Warrant. Upon 10 days’ notice to the Holder, the
Company may appoint a new warrant agent. Any corporation into which the Company or any new warrant agent may be merged or any
corporation resulting from any consolidation to which the Company or any new warrant agent shall be a party or any corporation to which the
Company or any new warrant agent transfers substantially all of its corporate trust or shareholders services business shall be a successor
warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as
warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder’s last address as shown on the Warrant Register.
14. Investor Representations.
(a) Holder hereby confirms that this Warrant and any shares of Common Stock or other securities of the Company
issued upon exercise hereof (collectively, “Securities”) are or will be acquired for investment for the Holder’s own account, not as a nominee
or agent, and not with a view to the resale or distribution of any part thereof, and that the Holder has no present intention of selling, granting
any participation in, or otherwise distributing the same. The Holder further represents that it does not presently have any contract, undertaking,
agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of
the Securities.
Regulation D promulgated under the Securities Act.
(b) Holder is, and upon any issuance of Securities will be, an “accredited investor” as defined in Rule 501(a) of
(c) Holder has the requisite knowledge and experience in financial and business matters to assess the relative merits
and risks of investment in the Securities and has had a full opportunity to discuss with the Company all material aspects of investment in the
Securities, including the opportunity to ask, and to receive answers to its full satisfaction, regarding such questions as it has deemed necessary
to evaluate such investment.
respect to the Company or the Securities.
(d) Except to the extent specifically set forth herein, the Company is making no representations and warranties with
7
15. Miscellaneous.
(a) This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and
assigns. Subject to the preceding sentence, nothing in this Warrant shall be construed to give to any Person other than the Company and the
Holder any legal or equitable right, remedy or cause of action under this Warrant. This Warrant may be amended only in writing signed by the
Company and the Holder and their successors and assigns.
(b) All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be
governed by and construed and enforced in accordance with the internal laws of the State of California, without regard to the principles of
conflicts of law thereof. Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of this Warrant
and the transactions herein contemplated (“Proceedings”) (whether brought against a party hereto or its respective affiliates, employees or
agents) shall be commenced exclusively in the California Courts. Each party hereto hereby irrevocably submits to the exclusive jurisdiction of
the California Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or
discussed herein, and hereby irrevocably waives, and agrees not to assert in any Proceeding, any claim that it is not personally subject to the
jurisdiction of any California Court, or that such Proceeding has been commenced in an improper or inconvenient forum. Each party hereto
hereby irrevocably waives personal service of process and consents to process being served in any such Proceeding by mailing a copy thereof
via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this
Warrant and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall
be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereto hereby irrevocably waives, to the
fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Warrant or
the transactions contemplated hereby. If either party shall commence a Proceeding to enforce any provisions of this Warrant, then the
prevailing party in such Proceeding shall be reimbursed by the other party for its attorney’s fees and other costs and expenses incurred with
the investigation, preparation and prosecution of such Proceeding.
limit or affect any of the provisions hereof.
(c) The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to
(d) In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the
validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the
parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor,
and upon so agreeing, shall incorporate such substitute provision in this Warrant.
of a stockholder with respect to the Warrant Shares.
(e) Prior to exercise of this Warrant, the Holder hereof shall not, by reason of being a Holder, be entitled to any rights
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,
SIGNATURE PAGE FOLLOWS]
8
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first
indicated above.
MANDALAY DIGITAL GROUP, INC.
/s/ Peter Adderton
By:
Name: Peter Adderton
Title: CEO
AGREED AND ACKNOWLEDGED:
Signature Page to Warrant
EXERCISE NOTICE
MANDALAY DIGITAL GROUP, INC.
WARRANT EFFECTIVE MARCH 19, 2012
The undersigned Holder hereby irrevocably elects to purchase _____________ shares of Common Stock pursuant to the above referenced
Warrant. Capitalized terms used herein and not otherwise defined have the respective meanings set forth in the Warrant.
(1) The undersigned Holder hereby exercises its right to purchase _________________ Warrant Shares pursuant to the Warrant.
(2) The Holder intends that payment of the Exercise Price shall be made as (check one):
¨ “Cash Exercise” under Section 10
¨ “Cashless Exercise” under Section 10
(3) If the holder has elected a Cash Exercise, the holder shall pay the sum of $____________ to the Company in accordance with the
terms of the Warrant.
(4) Pursuant to this Exercise Notice, the Company shall deliver to the holder _______________ Warrant Shares in accordance with the
terms of the Warrant.
Dated: ___________, ____
Name of Holder:
(Print)
By:
Name:
Title:
(Signature must conform in all respects to name of holder as specified on
the face of the Warrant)
Warrant Shares Exercise Log
Date
Number of Warrant
Shares Available to be
Exercised
Number of Warrant Shares
Exercised
Number of
Warrant Shares
Remaining to
be Exercised
MANDALAY DIGITAL GROUP, INC.
WARRANT ORIGINALLY ISSUED MARCH 19, 2012
WARRANT
FORM OF ASSIGNMENT
[To be completed and signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ________________________________ the
right represented by the above-captioned Warrant to purchase ____________ shares of Common Stock to which such Warrant relates and
appoints ________________ attorney to transfer said right on the books of the Company with full power of substitution in the premises.
Dated: _______________, ____
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant)
Address of Transferee
In the presence of:
AMENDED AND RESTATED WARRANT ISSUE AGREEMENT
THIS AGREEMENT (the “Agreement”) is made and effective as of January 1, 2011 (“Effective Date”) by and between
NEUMEDIA, INC. (f/k/a Mandalay Media, Inc.), a Delaware corporation, with its principal office located at 2121 Avenue of the Stars, Suite
250, Los Angeles California (“NeuMedia”) and VIVID ENTERTAINMENT, LLC, a California limited liability company, with its
principal office located at 3599 Cahuenga Boulevard, 4th Floor, Los Angeles, California (“Vivid”). Neumedia and Vivid may be collectively
referred to herein as the “Parties” or individually as a “Party.”
RECITALS
Whereas, Vivid and The WAAT Corp. are parties to that certain Addendum No. 1 to Exclusive License Agreement dated January 1,
2003, as amended by two letters dated as of November 3, 2004 (collectively, the “2003 Agreement”);
Whereas, in or about October 2006, The WAAT Corp. (d/b/a WAAT Media Corporation), a California corporation, merged into and
became Twistbox Entertainment, Inc., a Delaware corporation (“Twistbox”) and, contemporaneous therewith, Twistbox formed WAAT, a
wholly-owned subsidiary, to which all right, title and interest under the Prior Agreement was assigned or otherwise transferred; and
Whereas, on July 1, 2009, WAAT, Twistbox, AMV Holding Limited (“AMV”) and Vivid entered into an Amended and restated
Content License and Output Agreement concerning the licensing and distribution of adult content accessible on the mobile web from a
wireless device (the “2009 Agreement”); and
Whereas, WAAT, Twistbox and AMV are indebted to Vivid under the 2009 Agreement (the “Debt”); and
Whereas, Twistbox is a direct wholly owned subsidiary of NeuMedia; and
Whereas, Vivid had agreed to forbear collection of certain claims under the 2003 Agreement in exchange for a warrant to acquire
One Million Two Hundred Thousand (1,200,000) shares of the common stock of NeuMedia at an exercise price of One Dollar Twenty-Five
Cents ($1.25) per share (the “2009 Warrant”); and
Whereas, NeuMedia issued the 2009 Warrant to Vivid; and
Whereas, Vivid has agreed to forbear collection of Five Hundred Fifty Thousand ($550,000) Dollars of the Debt provided
NeuMedia amends the 2009 Warrant by granting Vivid the right to acquire One Million Five Hundred Thousand (1,500,000) shares of the
common stock of NeuMedia at an exercise price of Twenty-Five Cents ($0.25) per share.
NOW, THEREFORE, in consideration of the mutual promises made herein, and other good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, the Parties agree as follows:
1
1. Warrant. On or before March 15, 2011, NeuMedia shall issue to Vivid (or its designees) an amended warrant (the
“Amended Warrant”) increasing the number of shares to 1,500,000 shares of Common Stock, par value $0.0001 per share, of NeuMedia
and reducing the purchase price per share to amount equal to $0.25 per share based on the terms and conditions set forth in the Amended
Warrant.
2. Counterparts. This Agreement and any amendment hereto or any other agreement (or document) delivered pursuant hereto
may be executed in one or more counterparts and by different parties in separate counterparts. All of such counterparts will constitute one and
the same agreement (or other document) and will become effective (unless otherwise provided therein) when one or more counterparts have
been signed by each party and delivered to the other party.
3. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California.
Any action, suit, or other legal proceeding that is commenced to resolve any matter arising under or relating to any provision of this
Agreement shall be commenced only in a court of the State of California (or, if appropriate, a federal court located within California, and Vivid
and NeuMedia each consents to the jurisdiction of such a court.
IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement or caused this Agreement to be executed by its
duly authorized officers as of the day and year first above written.
NEUMEDIA, INC.
By:
[ILLEGIBLE]
Name:
[ILLEGIBLE]
Title:
CFO
VIVID ENTERTAINMENT, LLC
By:
[ILLEGIBLE]
Name:
[ILLEGIBLE]
Title:
CEO
2
ALLONGE TO WARRANT TO PURCHASE 1,200,000 SHARES
This Allonge (this “Allonge”) to that certain warrant issued by Mandalay Media, Inc., now known as NeuMedia, Inc., (the
“Company”) to Vivid Entertainment, LLC (“Holder”) to purchase up to a total of 1,200,000 shares of common stock, $0.0001 par value per
share (“Common Stock”) of the Company, at an exercise price equal to $1.25 per share (the “Warrant”), is made and entered into as of January
1, 2011, by and between the Company and the Holder, and is firmly affixed to and made a part of the Warrant.
FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of which are hereby acknowledged, the Company
and Holder hereby agree that the Warrant is hereby amended as set forth below. Capitalized terms used but not defined herein shall have the
meaning set forth in the Warrant.
1. All references to “1,200,000 shares of Common Stock” are hereby deleted and “1,500,000 shares of Common Stock” is hereby
substituted in its place.
2. The Exercise Price of “$1.25 per share” is hereby deleted and “$0.25 per share” is hereby substituted in its place.
3. All references to the “Warrant” and any other instrument or document delivered in connection therewith shall be deemed to
mean the Warrant as amended by this Allonge.
4. As hereby amended, the Warrant is hereby ratified and confirmed in all respects.
[Remainder of page intentionally left blank]
IN WITNESS WHEROF, THE EXECUTION hereof as an instrument under seal as of the date first set forth above and shall be governed by
the laws of the State of Delaware.
NEUMEDIA, INC.
By:
[ILLEGIBLE]
Name: [ILLEGIBLE]
Its:
CFO
VIVID ENTERTAINMENT, LLC
By:
[ILLEGIBLE]
Name: [ILLEGIBLE]
Its:
CEO
2
RESTRICTED STOCK AGREEMENT
This Restricted Stock Agreement (the “Agreement”) is entered into by and between NeuMedia, Inc., a Delaware corporation (the
“Company”), and Vivid Entertainment, LLC, a California limited liability company (”Vivid”).
WHEREAS, the Company and Vivid have entered into that certain [Settlement Agreement] (the “Settlement Agreement”) as of the
date hereof pursuant to which the Company has agreed to issue Two Million Five Hundred Thousand (2,500,000) shares of Common Stock
(the “Shares”) of the Company to Vivid in connection with the terms of the Settlement Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and other agreements contained in this Agreement and the
Settlement Agreement, the Company and Vivid hereby agree as follows:
1. Issue of Common Stock.
and Vivid hereby accepts as payment in full in accordance with the terms of the Settlement Agreement, the Shares.
(a) Subject to the terms and conditions of this Agreement and the Settlement Agreement, the Company hereby issues,
(b) The Board of Directors of the Company has authorized the issue of the Shares pursuant to the terms of the
Settlement Agreement.
2. Closing.
(a) On the date hereof, the Company shall deliver or cause to be delivered the following:
(i) a duly executed copy of the Settlement Agreement; and
by Vivid.
(ii) the Shares registered in the name of Vivid to a brokerage account designated in writing to the Company
(b) On the date hereof, Vivid shall deliver or cause to be delivered a duly executed copy of the Settlement Agreement.
3. Company Representations and Warranties. The Company hereby represents and warrants to Vivid that as of the date hereof:
(a) Organization and Business. The Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware and has all requisite corporate power and authority to carry on its business as now conducted and as
proposed to be conducted. The Company is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction
in which its ownership or use of property or the nature of the business conducted by it makes such qualification necessary except where the
failure to be so qualified or in good standing would not have a Material Adverse Effect. As used in this Agreement, the term “Material
Adverse Effect” means any material adverse effect on the business, operations, assets (including intangible assets), liabilities (actual or
contingent), financial condition, or prospects of the Company and its subsidiaries, taken as a whole.
C-0
(b) Valid Issuance. When issued and delivered in accordance with the terms of this Agreement and the Settlement
Agreement, the Shares will be duly and validly issued, fully paid, and non-assessable, and will be free of Liens other than restrictions on
transfer. The Shares are not subject to preemptive rights or any other similar rights.
(c) Authorization; Enforceability. All corporate action on the part of the Company and its officers necessary for the
authorization, execution and delivery of this Agreement and the authorization, issuance, sale and delivery of the Shares has been taken, and
this Agreement constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its
terms, except to the extent limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application
affecting enforcement of creditors’ rights and general principles of equity that restrict the availability of equitable or legal remedies.
(d) No Conflict. The execution, delivery and performance of this Agreement and the consummation by the Company
of the transactions contemplated hereby and thereby will not: (i) conflict with or result in a violation of any provision of the charter or by-laws
of the Company or (ii) violate or conflict with, or result in a breach of any provision of, or constitute a default (or an event which with notice
or lapse of time or both could become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of,
any agreement or instrument to which the Company is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment or
decree (including federal and state securities laws and regulations and regulations of any self-regulatory organizations to which the Company
or its securities are subject) applicable to the Company or by which any property or asset of the Company is bound or affected. Except for
filings pursuant to Regulation D of the Securities Act, and applicable state securities laws, which have been made or will be made by the
Company in connection with the issuance of the Shares, the Company is not required to obtain any consent, authorization or order of, or make
any filing or registration with, any court, governmental agency, regulatory agency, self regulatory organization or stock market or any third
party in order for it to execute, deliver or perform any of its obligations under this Agreement.
(e) No General Solicitation. Neither the Company nor any person participating on the Company’s behalf in the
transactions contemplated hereby has conducted any “general solicitation,” as such term is defined in Regulation D promulgated under the
Securities Act, with respect to the Shares.
(f) Offering. Subject to the accuracy of the representations and warranties of Vivid in Section 4 of this Agreement, the
issuance of the Shares pursuant to this Agreement constitutes transactions exempt from the registration requirements of Section 5 of the
Securities Act and from the registration or qualification requirements of applicable state securities laws.
4. Vivid Representations and Warranties. Vivid represents and warrants to the Company that as of the date hereof:
1
(a) Authorization; Enforcement. This Agreement has been duly and validly authorized by Vivid, (ii) has been duly
executed and delivered by Vivid, and (iii) will constitute, upon execution and delivery by Vivid and the Company, the valid and binding
agreements of Vivid enforceable in accordance with their terms, except to the extent limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting enforcement of creditors’ rights and general principles of equity that
restrict the availability of equitable or legal remedies.
(b) Investment Purpose. Vivid is acquiring the Shares for investment for its own account only and not with a view to,
or for resale in connection with, any “distribution” thereof within the meaning of the Securities Act. Vivid further represents that it does not
presently have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or
to any third person, with respect to any of the Shares.
(c) Professional Advice; Investment Experience. Vivid has reviewed, or caused its representatives to review, the
publicly available filings made by the Company with the SEC, and Vivid has carefully considered such filings in connection with its entry into
this Agreement. Vivid has such knowledge, skill, and experience in technical, business, financial, and investment matters so that it is capable
of evaluating the merits and risks of an investment in the Shares. Vivid has retained, and relied upon, appropriate professional advice
regarding the technical, investment, tax, and legal merits and consequences of this Agreement and owning the Shares.
(d) Reliance on Exemptions. Vivid understands that the Shares are being issued to it in reliance upon specific
exemptions from the registration requirements of United States federal and state securities laws (the “Securities Laws”) and that the Company
is relying upon the truth and accuracy of, and Vivid’s compliance with, the representations, warranties, agreements, acknowledgments and
understandings of Vivid set forth herein in order to determine the availability of such exemptions. Vivid is an “accredited investor” within the
meaning of Regulation D under the Securities Act.
(e) Restricted Securities. Vivid understands that the Shares are “restricted securities” under applicable Securities Laws
and that, pursuant to these laws, Vivid must hold the Shares indefinitely unless they are registered with the SEC and qualified by state
authorities, or an exemption from such registration and qualification requirements is available. Vivid acknowledges that the Company has no
obligation to register or qualify the Shares for resale, except as provided in this Agreement. Vivid further acknowledges that if an exemption
from registration or qualification is available, it may be conditioned on various requirements including, but not limited to, the time and manner
of sale, the holding period for the Shares, and requirements relating to the Company which are outside of Vivid’s control, and which the
Company is under no obligation and may not be able to satisfy.
(f) Risk of Loss. The Purchaser is capable of sustaining a complete loss of the investment in the Shares, and Vivid has
no need for liquidity in the investment in the Shares. Vivid understands and acknowledges that an investment in the Shares is highly risky and
that it could suffer a complete loss of its investment.
(g) No Other Representations. Other than the representations and warranties contained herein [or in the Settlement
Agreement], Vivid has not received and is not relying on any representation, warranties or assurances as to the Company, its business or its
prospects from the Company or any other person or entity.
2
5. Market Stand-Off. Except as otherwise expressly provided in this Agreement, during the two (2) year period (the “Restricted
Period”) beginning on the date hereof, Vivid shall not, without the prior written consent of the Company (i) lend, offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise
transfer or dispose of, directly or indirectly, any Shares, or (ii) enter into any swap or other arrangement that transfers to another, in whole or
in part, any of the economic consequences of ownership of the Shares, whether any such transaction described in clause (i) or (ii) above is to
be settled by delivery of stock or such other securities, in cash or otherwise. In the event of the declaration of a stock dividend, a spin-off, a
stock split, a recapitalization or a similar transaction affecting the Company’s outstanding securities without receipt of consideration, any new,
substituted or additional securities that are by reason of such transaction distributed with respect to the Shares, any such new, substituted or
additional securities shall immediately be subject to the restrictions set forth in this Section 5. To enforce the restrictions set forth in this
Section 5, the Company may impose stop-transfer instructions with respect to the Shares until the end of the Restricted Period. In the event
that any holders of the Company’s equity securities that are affiliated with any of Trinad Capital, Coast Asset Management or Peter Guber
(together, the “Specified Stockholders”) agree to subject to any restrictions on transfer that extend beyond the end of the Restricted Period with
respect to their respective equity securities of the Company, Vivid agrees that the Restricted Period with respect to its Shares shall be extended
for the same period of time as is applicable to the shortest period applicable to any of the Specified Stockholders, provided, that, in no event
shall the Restricted Period applicable to the Shares be extended more than one (1) year after the end of the Restricted Period.
6. Restrictive Legends and Stop-Transfer Orders.
legends required by applicable state corporate law and the Securities Laws):
(a) Legends. The certificate or certificates representing the Shares shall bear the following legends (as well as any
(i)
(ii)
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN
OPINION OF COUNSEL (OR OTHER EVIDENCE) IN A FORM SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT
OF 1933.
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN
ACCORDANCE WITH THE TERMS OF A RESTRICTED STOCK AGREEMENT BETWEEN THE
COMPANY AND THE SHAREHOLDER DATED JANUARY 1,2011, A COPY OF WHICH IS ON
FILE WITH THE SECRETARY OF THE COMPANY.
3
(iii)
Any legend required to be placed thereon by any appropriate securities commissioner.
(b) Stop-Transfer Notices. Vivid agrees that, to ensure compliance with the restrictions referred to herein, the
Company may issue appropriate “stop transfer” instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it
may make appropriate notations to the same effect in its own records.
7. Piggyback Registration.
(a) Piggyback Registration Rights. The Company agrees that if, after the date hereof, the Board shall authorize the
filing of a registration statement under the Securities Act (other than a registration statement on Form S-8, Form S-4 or any other form that
does not include substantially the same information as would be required in a form for the general registration of securities) in connection with
the proposed offer of shares of Common Stock of the Company, the Company shall: (A) promptly notify Vivid that such registration
statement will be filed and that the Shares issued pursuant to this Agreement and then held by Vivid (hereinafter the “Registrable Securities”)
may be included in such registration statement at the request of Vivid; (B) use its commercially reasonable efforts to cause the registration of
such Registrable Securities that Vivid requests to be registered; and (C) use its commercially reasonable efforts to cause such registration
statement to become effective as promptly as reasonably practicable. If Vivid desires to include in such registration statement all or any part of
the Registrable Securities held by /it, it shall, within ten (10) days after the above-described notice from the Company, so notify the Company
in writing. If Vivid decides not to include all of its Registrable Securities in any registration statement thereafter filed by the Company, Vivid
shall nevertheless continue to have the right to include any Registrable Securities in any subsequent registration statement or registration
statements as may be filed by the Company with respect to offerings of its securities, all upon the terms and conditions set forth herein.
Notwithstanding the foregoing, if any of the Specified Stockholders at any time desire to register any shares of stock of the Company held by
them: (i) the Company shall, at Vivid’s option, use its commercially reasonable efforts to cause registration of the Restricted Stock,
simultaneously with registration of the stock of the Specified Stockholders, to the extent necessary to permit their unrestricted sale and (ii) the
restrictions set forth in Section 5 shall immediately terminate should any Specified Stockholders sell stock of the Company.
(b) Underwriting Requirements. In connection with any registration statement subject to Section 7(a) involving an
underwritten offering of shares of the Company’s capital stock, the Company shall not be required to include any of the Registrable Securities
in such underwriting unless Vivid accepts the terms of the underwriting as agreed upon between the Company and its underwriters, and then
only in such quantity as such underwriter in its sole discretion determines will not jeopardize the success of the offering by the Company. If
the underwriter determines that less than all of the Registrable Securities that Vivid has requested to be registered (the “Requested Securities”)
can be included in such offering, then the securities to be registered and sold by any person other than the Company shall be allocated among
such persons in proportion (as nearly as practicable to) the number of shares of Common Stock requested to be registered by each such
person. Notwithstanding the foregoing, in no event shall the number of Requested Securities included in the offering be reduced if any shares
of Common Stock of the Company owned by any of the Specified Stockholders are included in such offering.
4
(c) Abandonment or Delay of Registration. Notwithstanding any other provision of this Section 7, the Company may
at any time abandon or delay any registration commenced by the Company. In the event of such abandonment by the Company, the Company
shall not be required to continue registration of the Registrable Securities requested by the Vivid for inclusion and the Purchaser shall retain
the right to request inclusion of the Registrable Securities as set forth above.
(d) Expenses. Vivid shall be responsible for all underwriting discounts and selling commissions with respect to the
Registrable Securities being sold by Vivid to the extent paid, or to be paid, by all other holders of equity securities of the Company and all fees
and expenses of any counsel retained by Vivid. The Company will pay all other expenses incurred by the Company associated with each
registration, including, without limitation, all filing and printing fees, the Company’s counsel and accounting fees and expenses, costs
associated with clearing the Vivid’s Registrable Securities for sale under applicable Securities Laws, and listing fees.
(e) Effectiveness.
(i) The Company may delay the disclosure of material non-public information concerning the Company by
suspending the use of any prospectus included in any registration statement contemplated hereunder required to contain such information, the
disclosure of which at the time is not, in the good faith opinion of the Company, in the best interests of the Company (an “Allowed Delay”);
provided, that the Company shall promptly (a) notify Vivid of the existence of an Allowed Delay, (b) advise Vivid in writing to cease all sales
under the registration statement until the end of the Allowed Delay and (c) use commercially reasonable efforts to terminate an Allowed Delay
as promptly as practicable.
(f) Other Registration Rights Agreements. Nothing in this Agreement shall limit the Company’s right to grant
registration rights to other persons. In the event of any change or changes in the Company’s outstanding Common Stock by reason of any
stock dividend, recapitalization, reorganization, merger, consolidation, split-up, combination or any similar transaction, the Company shall
adjust the number of shares of the Company’s Common Stock granted to Vivid to prevent substantial dilution of the rights granted to Vivid.
8. Miscellaneous.
(a) Governing Law. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the
parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to
principles of conflicts of law.
(b) Entire Agreement; Enforcement of Rights. This Agreement sets forth the entire agreement and understanding of
the parties relating to the subject matter herein and merges all prior discussions between them. No modification of or amendment to this
Agreement, nor any waiver of any rights under this Agreement, shall be effective unless in writing signed by the parties to this Agreement.
The failure by either party to enforce any rights under this Agreement shall not be construed as a waiver of any rights of such party.
5
(c) Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the
parties agree to renegotiate such provision in good faith. If the parties cannot reach a mutually agreeable and enforceable replacement for such
provision, then (i) such provision shall be excluded from this Agreement, (ii) the balance of the Agreement shall be interpreted as if such
provision were so excluded and (iii) the balance of the Agreement shall be enforceable in accordance with its terms.
(d) Construction. This Agreement is the result of negotiations between and has been reviewed by each of the parties
hereto and their respective counsel, if any; accordingly, this Agreement shall be deemed to be the product of all of the parties hereto, and no
ambiguity shall be construed in favor of or against any one of the parties hereto.
(e) Notices. Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient
when delivered personally or sent by fax or 48 hours after being deposited in the U.S. mail, as certified or registered mail, with postage
prepaid, and addressed to the party to be notified at such party’s address or fax number as set forth below or as subsequently modified by
written notice.
original and all of which together shall constitute one instrument.
(f) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an
(g) Successors and Assigns. The rights and benefits of this Agreement shall inure to the benefit of, and be enforceable
by the Company’s successors and assigns. The rights and obligations of Vivid under this Agreement may only be assigned with the prior
written consent of the Company.
permitted successors and assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other person.
(h) Third Party Beneficiary. This Agreement is intended for the benefit of the undersigned parties and their respective
(i) Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and
things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably
request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated
hereby.
delivery and performance of the Agreement.
(j) Expenses. Each party shall pay all costs and expenses that it incurs with respect to the negotiation, execution,
[Remainder of Page Intentionally Left Blank]
6
IN WITNESS WHEREOF, the Company and Vivid have executed this Agreement effective as of January 1, 2011.
VIVID ENTERTAINMENT, LLC:
By:
[ILLEGIBLE]
Name: [ILLEGIBLE]
Its:
CEO
NEUMEDIA, INC.:
By:
[ILLEGIBLE]
Name: [ILLEGIBLE]
Its:
CFO
7
Convertible Note Financing
Binding Term Sheet
March 1, 2012
This binding term sheet (this “Term Sheet”), dated as of the date first written above, is made with respect to the transactions
contemplated by that binding term sheet, dated as of December 29, 2011 (the “Original Term Sheet”) between Mandalay Digital Group, Inc.
(formerly known as NeuMedia, Inc.), a Delaware corporation (“Issuer”), and TAJA, LLC (”Investor”). Capitalized terms used and not
defined in this Term Sheet have the meanings ascribed to such terms in the Original Term Sheet.
Existing Note Warrant:
The warrants described under the heading “Existing Note Warrant” in the Original Term Sheet shall vest
and be exercisable one (1) year from the date of this Term Sheet.
Existing Note Prepayment:
All outstanding principal and accrued and unpaid interest under the Existing Note shall become accelerated
and immediately due and payable by Issuer upon the consummation by Issuer of one or more equity sales
from and after the date of this Term Sheet resulting in aggregate net proceeds to Issuer of at least
$10,000,000.
Conversion of Principal:
Term:
Convertibility:
On the Conversion Date (as defined below), a portion of the principal amount of the New Note shall be
converted into shares of common stock, par value $0.0001 per share (“Common Stock”), of Issuer at a
conversion price of $0.70 per share (as adjusted for customary dilution and anti-dilution events, the
“Conversion Price”), such that Investor’s ownership of the issued and outstanding shares of Common
Stock (including all shares of Common Stock held by Investor) shall be as nearly as possible, without
exceeding, 4.9%.
The section of the Original Term Sheet entitled “Term” is hereby amended and restated in its entirety as
follows: The earlier of (x) the date on which all outstanding principal and accrued and unpaid interest under
the New Note shall have converted or is then convertible into shares of Common Stock pursuant to the
provisions of this Term Sheet and (y) the date that is two (2) years following the date of this Term Sheet
(the “Maturity Date”).
The section of the Original Term Sheet entitled “Convertibility” is hereby amended and restated in its
entirety as follows: On the last business day of each calendar month, the Convertible Portion of the Note (as
defined below) shall automatically convert into shares of Common Stock at the Conversion Price.
“Convertible Portion of the Note” means an amount of outstanding principal and accrued and unpaid
interest such that, giving effect to such conversion, and the simultaneous conversion of any other
convertible debt of the Company subject to ownership limitations, the total number of shares of Common
Stock then beneficially owned by Investor and any other persons whose beneficial ownership of Common
Stock would be aggregated with Investor’s shares of Common Stock for purposes of Section 13(d) of the
Securities Exchange Act of 1934, as amended, would not exceed 4.9% of the total number of issued and
outstanding shares of Common Stock, including the shares of Common Stock issuable on such conversion.
If, on the date specified in clause (y) of the definition of Maturity Date, there remains any outstanding
principal or accrued and unpaid interest under the New Note, all of such outstanding principal and accrued
and unpaid interest shall automatically convert into shares of Common Stock at the conversion price
specified above, notwithstanding the ownership limitations set forth above.
Warrant Coverage:
Limits on Exercise:
The following sentence is hereby added to the end of the section of the Original Term Sheet entitled
“Warrant Coverage”: The Warrant may be exercised only following the first anniversary of the Conversion
Date.
Notwithstanding anything to the contrary contained herein, the number of warrant shares that may be
acquired by Investor upon any exercise of the Warrant (or otherwise in respect thereof) shall be limited to
the extent necessary to insure that, following such exercise (or other issuance), the total number of shares of
Common Stock then beneficially owned by Investor and its affiliates and any other persons whose
beneficial ownership of Common Stock would be aggregated with Investor’s for purposes of Section 13(d)
of the Securities Exchange Act of 1934, as amended, does not exceed 4.9% of the total number of issued
and outstanding shares of Common Stock (including for such purpose the shares of Common Stock
issuable upon such exercise). This provision shall not restrict the number of shares of Common Stock
which Investor may receive or beneficially own in order to determine the amount of securities or other
consideration that Investor may receive in the event of customary fundamental transactions.
Registration Rights:
This section of the Original Term Sheet is hereby deleted.
Rights of Participation:
Subject to standard carveouts, Investor shall have a right of participation for future financings undertaken
by Issuer for a period of two (2) years following the Maturity Date on a pro rata basis in accordance with
Investor’s ownership interests in Issuer, on a fully diluted basis assuming exercise of the Warrant.
Voting Agreement:
For a period beginning on the date hereof and ending on the first anniversary of the Conversion Date,
notwithstanding any consent rights Investor may have under the Existing Note, Investor hereby irrevocably
agrees to vote all shares of voting stock (including Common Stock) held by Investor in favor of any
amendment to Issuer’s Certificate of Incorporation providing for one or more of the following: (x) up to a
10-for-l reverse stock split affecting all shares of Common Stock, and/or (y) an increase in the number of
authorized shares of any class or series of capital stock of Issuer.
Conversion Date:
The term “Conversion Date” means the earlier to occur of (x) the date that the long-form documents are
executed and delivered by all parties hereto with respect to the transactions contemplated by this Term
Sheet, and (y) March 19, 2012.
-2-
This Term Sheet shall be binding on the parties hereto and their respective successors and assigns. Although the parties anticipate entering into
long-form documents with respect to the terms of this Term Sheet and containing such other provisions as are customary for transactions of
the type contemplated, until they are able to do so, and in any case in the event they are unable to do so, the terms of this Term Sheet shall be
binding and shall govern the parties’ respective rights and obligations. This Term Sheet will be governed by and construed in accordance with
the laws of the State of California. Any disputes arising out of or relating to this Term Sheet shall be heard exclusively in state or federal
courts located in California, each party waiving any and all objections to such venue. This Term Sheet, together with the provisions of the
Original Term Sheet not amended or superseded hereby, sets forth the entire understanding of the parties with respect to the subject matter
hereof. This Term Sheet shall not be amended, or any provision hereof waived, except in a writing signed by each party hereto. This Term
Sheet may be executed in any number of original, facsimile or other electronic counterparts.
[Remainder of Page Intentionally Blank]
-3-
IN WITNESS WHEREOF, the parties hereto have executed this Term Sheet as of the date first above written.
Issuer:
MANDALAY DIGITAL GROUP, INC.
Investor:
TAJA, LLC
/s/ David Mandell
By:
Name: David Mandell
Title:
Corporate Secretary
Signature:
Name:
Title:
/s/ Gina Robins
Gina Robins
[ILLEGIBLE]
Binding Term Sheet
Convertible Note Financing
Convertible Note Financing
Binding Term Sheet
March 1, 2012
This binding term sheet (this “Term Sheet”), dated as of the date first written above, is made with respect to the transactions
contemplated by the (i) Subordinated Convertible Promissory Note (the “Note”) in the original principal amount of $7,000,000, issued by
Mandalay Digital Group, Inc. (formerly known as NeuMedia, Inc.), a Delaware corporation (“Issuer”), to Adage Capital Partners, L.P.
(“Investor”) on December 29, 2011, (ii) the Warrant, dated December 29, 2011 (the “Warrant”), issued by Issuer to Investor, and (iii) the side
letter, dated December 29, 2011 (the “Side Letter”), between Issuer and Investor. The parties hereby agree that the Note, the Warrant and the
Side Letter are hereby amended, and otherwise agree, as follows:
Conversion of Principal:
On the date hereof, the entire outstanding principal amount of the Note, and all accrued and unpaid interest
thereon, shall be converted into shares of common stock, par value $0.0001 per share (“Common Stock”), of
Issuer at a conversion price of $0.70 per share (as adjusted for customary dilution and anti-dilution events, the
“Conversion Price”), whereupon the Note shall terminate.
Warrant Amendments:
Notwithstanding anything contained in the Warrant to the contrary, the Warrant is hereby amended to include
or modify, as applicable, the following provisions: The Warrant shall become effective as of the date of this
Term Sheet. All references to the “Conversion Price” of the Warrant are hereby amended to refer to the
Conversion Price, as defined in this Term Sheet. All references to the “Note” in the Warrant are hereby
amended to refer to the Note as converted hereby. The definition of “Qualified Equity Financing” and all
references to such term are hereby deleted. Section 4 of the Warrant is hereby deleted in its entirety.
Registration Rights:
Issuer shall be required to file a registration statement on the terms specified in the Side Letter within one
hundred twenty (120) calendar days after the date of this Term Sheet.
Rights of Participation:
Subject to the carveouts set forth in the Side Letter, Investor shall have a right of participation for future
financings undertaken by Issuer for a period of two (2) years following the date hereof on a pro rata basis in
accordance with Investor’s ownership interests in Issuer, on a fully diluted basis assuming exercise of the
Warrant.
Voting Agreement:
For a period beginning on the date hereof and ending on the first anniversary of the date hereof, Investor
hereby irrevocably agrees to vote all shares of voting stock (including Common Stock) held by Investor in
favor of any amendment to Issuer’s Certificate of Incorporation providing for one or more of the following:
(x) up to a 10-for-l reverse stock split affecting all shares of Common Stock, and/or (y) an increase in the
number of authorized shares of any class or series of capital stock of Issuer.
Except as amended hereby, the terms of the Warrant and the Side Letter remain in full force and effect. This Term Sheet shall be binding on the
parties hereto and their respective successors and assigns. Although the parties anticipate entering into long-form documents with respect to
the terms of this Term Sheet and containing such other provisions as are customary for transactions of the type contemplated, until they are
able to do so, and in any case in the event they are unable to do so, the terms of this Term Sheet shall be binding and shall govern the parties’
respective rights and obligations. This Term Sheet will be governed by and construed in accordance with the laws of the State of California.
Any disputes arising out of or relating to this Term Sheet shall be heard exclusively in state or federal courts located in California, each party
waiving any and all objections to such venue. This Term Sheet, together with the provisions of the Warrant and Side Letter not amended or
superseded hereby, sets forth the entire understanding of the parties with respect to the subject matter hereof. This Term Sheet shall not be
amended, or any provision hereof waived, except in a writing signed by each party hereto. This Term Sheet may be executed in any number of
original, facsimile or other electronic counterparts.
[Remainder of Page Intentionally Blank]
-2-
IN WITNESS WHEREOF, the parties hereto have executed this Term Sheet as of the date first above written.
Issuer:
Investor:
MANDALAY DIGITAL GROUP, INC.
ADAGE CAPITAL PARTNERS, L.P.
/s/ David Mandell
By:
Name: David Mandell
Title: Corporate Secretary
Signature:[ILLEGIBLE]
Name:
[ILLEGIBLE]
Title:
[ILLEGIBLE]
Binding Term Sheet
Convertible Note Financing
Equity Financing
Binding Term Sheet
March 1, 2012
This binding term sheet (this “Term Sheet”), dated as of the date first written above, is between Mandalay Digital Group, Inc., a
Delaware corporation (“’Issuer”), and (“Investor”). The parties hereby agree as follows:
Security:
shares of common stock, par value $0.0001 per share (“Common Stock”), of Issuer (the “Shares”).
Purchase Price:
($0.70 per share).
Warrant Coverage:
Closing:
Registration Rights:
Investor shall receive 25% warrant coverage (i.e., a warrant exercisable for shares of Common Stock)
(the “Warrant”). The Warrant shall be at the option of Investor cash or cashless, have a five (5) year term from
the date of issuance and an exercise price equal to $0.70 per share (which shall be adjusted from time to time
for customary dilution and anti-dilution events). The Warrant may be exercised only following the first
anniversary of the date of issuance.
As soon as possible after the date of this Term Sheet but in no event later than March 19, 2012; provided that
the transactions contemplated herein have been duly authorized by Issuer and Issuer has received all requisite
third party consents with respect to the issuance of the Shares.
Issuer shall use best efforts to file a Registration Statement on Form S-3 or, if Issuer is not eligible for Form
S-3, on Form S-l (the “Registration Statement”) covering the Shares and the shares of Common Stock
underlying the Warrant within one hundred twenty (120) calendar days after the date of this Term Sheet and
shall use its best efforts to cause the Registration Statement to become effective as soon as possible thereafter.
Rights of Participation:
Subject to standard carveouts, Investor shall have a right of participation for future financings undertaken by
Issuer for a period of two (2) years following the date of issuance of the Shares on a pro rata basis in
accordance with Investor’s ownership interests in Issuer, on a fully diluted basis assuming exercise of the
Warrant.
Voting Agreement:
For a period beginning on the date hereof and ending on the first anniversary of the date of issuance of the
Shares, Investor hereby irrevocably agrees to vote all shares of voting stock (including the Shares and the
shares issued to Investor upon exercise of the Warrant, if any) held by Investor in favor of any amendment to
Issuer’s Certificate of Incorporation providing for one or more of the following: (x) up to a 10-for-1 reverse
stock split affecting all shares of Common Stock, and/or (y) an increase in the number of authorized shares of
any class or series of capital stock of Issuer.
Transferability:
Until the Shares and the shares issuable to Investor upon exercise of the Warrant have been registered
pursuant to the Registration Statement, Investor may assign its right and interests to the Shares and shares
issued to Investor upon exercise of the Warrant, if any, subject to the consent of Issuer, which consent shall
not be unreasonably withheld.
This Term Sheet shall be binding on the parties hereto and their respective successors and assigns. Although the parties anticipate entering into
long-form documents with respect to the terms of this Term Sheet and containing such other provisions as are customary for transactions of
the type contemplated, until they are able to do so, and in any case in the event they arc unable to do so, the terms of this Term Sheet shall be
binding and shall govern the parties’ respective rights and obligations. This Term Sheet will be governed by and construed in accordance with
the laws of the State of California, Any disputes arising out of or relating to this Term Sheet shall be heard exclusively in state or federal
courts located in California, each parry waiving any and all objections to such venue. This Term Sheet sets forth the entire understanding of
the parties with respect to the subject matter hereof. This Term Sheet shall not be amended, or any provision hereof waived, except in a writing
signed by each party hereto. This Term Sheet may be executed in any number of original, facsimile or other electronic counterparts.
[Remainder of Page Intentionally Blank]
-2-
IN WITNESS WHEREOF, the parties hereto have executed this Term Sheet as of the date first above written.
Issuer:
MANDALAY DIGITAL GROUP, INC.
By:
Name: David Mandell
Title: Corporate Secretary
Investor:
Signature:
Name:
Title:
Binding Terms Sheet
Equity Financing
Equity Financing
Binding Term Sheet
March 5, 2012
This binding term sheet (this "Term Sheet"), dated as of the date first written above, is between Mandalay Digital Group, Inc., a
Delaware corporation ("Issuer"), and ("Investor"). The parties hereby agree as follows:
Security:
shares of common stock, par value $0.0001 per share ("Common Stock"), of Issuer (the
"Shares").
Purchase Price:
($0.70 per share).
Warrant Coverage:
Closing:
Registration Rights:
Investor shall receive 25% warrant coverage (i.e., a warrant exercisable for shares of Common
Stock) (the "Warrant"). The Warrant shall be at the option of Investor cash or cashless, have a five (5) year
term from the date of issuance and an exercise price equal to $0.70 per share (which shall be adjusted from
time to time for customary dilution and anti-dilution events). The Warrant may be exercised only following the
first anniversary of the date of issuance.
As soon as possible after the date of this Term Sheet but in no event later than March 19,
2012; provided that the transactions contemplated herein have been duly authorized by Issuer and Issuer has
received all requisite third party consents with respect to the issuance of the Shares.
Issuer shall use best efforts to file a Registration Statement on Form S-3 or, if Issuer is not eligible
for Form S-3, on Form S-1 (the "Registration Statement") covering the Shares and the shares of Common
Stock underlying the Warrant within one hundred twenty (120) calendar days after the date of this Term Sheet
and shall use its best efforts to cause the Registration Statement to become effective as soon as possible
thereafter.
Rights of Participation:
Subject to standard carveouts, Investor shall have a right of participation for future financings undertaken by
Issuer for a period of two (2) years following the date of issuance of the Shares on a pro rata basis in
accordance with Investor's ownership interests in Issuer, on a fully diluted basis assuming exercise of the
Warrant.
Voting Agreement:
For a period beginning on the date hereof and ending on the first anniversary of the date of issuance
of the Shares, Investor hereby irrevocably agrees to vote all shares of voting stock (including the Shares and
the shares issued to Investor upon exercise of the Warrant, if any) held by Investor in favor of any amendment
to Issuer's Certificate of Incorporation providing for one or more of the following: (x) up to a 10-for-1 reverse
stock split affecting all shares of Common Stock, and/or (y) an increase in the number of authorized shares of
any class or series of capital stock of Issuer.
Transferability:
Until the Shares and the shares issuable to Investor upon exercise of the Warrant have been registered
pursuant to the Registration Statement, Investor may assign its right and interests to the Shares and shares
issued to Investor upon exercise of the Warrant, if any, subject to the consent of Issuer, which consent shall
not be unreasonably withheld.
This Term Sheet shall be binding on the parties hereto and their respective successors and assigns. Although the parties anticipate entering into
long-form documents with respect to the terms of this Term Sheet and containing such other provisions as are customary for transactions of
the type contemplated, until they are able to do so, and in any case in the event they are unable to do so, the terms of this Term Sheet shall be
binding and shall govern the parties' respective rights and obligations. This Term Sheet will be governed by and construed in accordance with
the laws of the State of California. Any disputes arising out of or relating to this Term Sheet shall be heard exclusively in state or federal
courts located in California, each party waiving any and all objections to such venue. This Term Sheet sets forth the entire understanding of the
parties with respect to the subject matter hereof. This Term Sheet shall not be amended, or any provision hereof waived, except in a writing
signed by each party hereto. This Term Sheet may be executed in any number of original, facsimile or other electronic counterparts.
[Remainder of Page Intentionally Blank]
-2-
IN WITNESS WHEREOF, the parties hereto have executed this Term Sheet as of the date first above written.
Issuer:
MANDALAY DIGITAL GROUP, INC.
By:
Name:
Title:
/s/ Peter Adderton
Peter Adderton
CEO
Investor:
Signature:
Name:
Binding Terms Sheet
Equity Financing
-3-
Equity Financing
Binding Term Sheet
June 7, 2012
This binding term sheet (this “Term Sheet”), dated as of the date first written above, is between Mandalay Digital Group, Inc., a
Delaware corporation (“Issuer”), and (“Investor”). The parties hereby agree as follows:
Security:
shares of common stock, par value $0.0001 per share (“Common Stock”), of Issuer (the
“Shares”).
Purchase Price:
($0.70 per share).
Warrant Coverage:
Closing:
Registration Rights:
Rights of Participation:
Voting Agreement:
Transferability:
Investor shall receive 25% warrant coverage (i.e., a warrant exercisable for shares of Common
Stock) (the “Warrant”). The Warrant shall be at the option of Investor cash or cashless, have a five (5) year
term from the date of issuance and an exercise price equal to $0.70 per share (which shall be adjusted from
time to time for customary dilution and anti-dilution events). The Warrant may be exercised only following
the first anniversary of the date of issuance.
As soon as possible after the date of this Term Sheet but in no event later than June 23, 2012; provided that
the transactions contemplated herein have been duly authorized by Issuer and Issuer has received all
requisite third party consents with respect to the issuance of the Shares.
Issuer shall use best efforts to file a Registration Statement on Form S-3 or, if Issuer is not eligible for
Form S-3, on Form S-l (the “Registration Statement”) covering the Shares and the shares of Common
Stock underlying the Warrant within one hundred twenty (120) calendar days after the date of this Term
Sheet and shall use its best efforts to cause the Registration Statement to become effective as soon as
possible thereafter.
Subject to standard carveouts, Investor shall have a right of participation for future financings undertaken
by Issuer for a period of two (2) years following the date of issuance of the Shares on a pro rata basis in
accordance with Investor’s ownership interests in Issuer, on a fully diluted basis assuming exercise of the
Warrant.
For a period beginning on the date hereof and ending on the first anniversary of the date of issuance of the
Shares, Investor hereby irrevocably agrees to vote all shares of voting stock (including the Shares and the
shares issued to Investor upon exercise of the Warrant, if any) held by Investor in favor of any amendment
to Issuer’s Certificate of Incorporation providing for one or more of the following: (x) up to a 10-for-l
reverse stock split affecting all shares of Common Stock, and/or (y) an increase in the number of authorized
shares of any class or series of capital stock of Issuer.
Until the Shares and the shares issuable to Investor upon exercise of the Warrant have been registered
pursuant to the Registration Statement, Investor may assign its right and interests to the Shares and shares
issued to Investor upon exercise of the Warrant, if any, subject to the consent of Issuer, which consent shall
not be unreasonably withheld.
This Term Sheet shall be binding on the parties hereto and their respective successors and assigns. Although the parties anticipate entering into
long-form documents with respect to the terms of this Term Sheet and containing such other provisions as are customary for transactions of
the type contemplated, until they are able to do so, and in any case in the event they are unable to do so, the terms of this Term Sheet shall be
binding and shall govern the parties’ respective rights and obligations. This Term Sheet will be governed by and construed in accordance with
the laws of the State of California. Any disputes arising out of or relating to this Term Sheet shall be heard exclusively in state or federal
courts located in California, each party waiving any and all objections to such venue. This Term Sheet sets forth the entire understanding of the
parties with respect to the subject matter hereof. This Term Sheet shall not be amended, or any provision hereof waived, except in a writing
signed by each party hereto. This Term Sheet may be executed in any number of original, facsimile or other electronic counterparts.
[Remainder of Page Intentionally Blank]
-2-
IN WITNESS WHEREOF, the parties hereto have executed this Term Sheet as of the date first above written.
Issuer:
MANDALAY DIGITAL GROUP, INC.
[ILLEGIBLE]
By:
Name:
Title:
Investor:
Signature:
Name:
Title: Trustees
Binding Term Sheet
Equity Financing
-3-
Entity
Twistbox Entertainment, Inc.
WAAT Media Corp.
Twistbox Entertainment Ltd.
(Russia)
Twistbox Entertainment
Limited (UK)
Chief Executive Offices or
Principal Place of Business
Jurisdiction of
Organization
FEIN
Exhibit 21
Company
Organizational
Numbers
14242 Ventura Blvd., 3rd Floor
Sherman Oaks, CA 91423
14242 Ventura Blvd., 3rd Floor
Sherman Oaks, CA 91423
Smolensky Passage, 3
Smolenskaya sq. 7th floor,
Moscow 121099, Russia
Central Court
25 Southhampton
Buildings Chancery Lane
London WC2A 1AL-UK
Delaware
80-0058995
4207607
Delaware
4253647
Russian Federation
43909
United Kingdom
5418091
Twistbox Entertainment LTDA
(Brazil)
Rua Frei Duarte Jorge de
Mendonca, 100, 12 andar,
Sao Paulo, SP 05725-060, Brazil
Brazil
09.091.052/00001-95
WAAT Media Chile SA
Moneda Nº 970, Piso 8,
Chile
76-615-370-4
Santiago de Chile
Twistbox Games Ltd. & Co
KG (DE)
Lohbachstr. 12
58239 Schwerte Germany
Germany
DE814164894
Twistbox Games Ltd (UK)
Central Court
United Kingdom
05145811
25 Southhampton Buildings
Chancery Lane London
WC2A 1AL-UK
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Peter Adderton, certify that:
1. I have reviewed this Annual Report on Form 10-K of Mandalay Digital Group, 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: June 29, 2012
By:
/s/ Peter Adderton
Peter Adderton
Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Lisa Higgins-Lucero, certify that:
1. I have reviewed this Annual Report on Form 10-K of Mandalay Digital Group, 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: June 29, 2012
By:
/s/ Lisa Higgins-Lucero
Lisa Higgins-Lucero
CFO, Twistbox Entertainment, Inc.
(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 Mandalay Digital Group, 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, 2012 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.
Date: June 29, 2012
By:
/s/ Peter Adderton
Peter Adderton
Chief Executive Officer
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 Mandalay Digital Group, 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, 2012 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.
Date: June 29, 2012
By:
/s/ Lisa Higgins-Lucero
Lisa Higgins-Lucero
CFO, Twistbox Entertainment, Inc.
(Principal Financial Officer)