UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2016
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-35958
DIGITAL TURBINE, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
1300 Guadalupe Street, Suite 302, Austin TX
(Address of Principal Executive Offices)
22-2267658
(I.R.S. Employer
Identification No.)
78701
(Zip Code)
(512) 387-7717
(Issuer’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, Par Value $0.0001 Per Share
(Title of Class)
The Nasdaq Stock Market LLC
(NASDAQ Capital Market)
(Name of Each Exchange on Which Registered)
Securities registered under Section 12(g) of the Exchange Act:
None
(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 ý
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 ý
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 ý 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 ý 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)
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 ý
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 NASDAQ Capital Market on September 30, 2015 was $96,268,980.
As of June 8, 2016, the Company had 66,284,606 shares of its common stock, $0.0001 par value per share, outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
The Company’s definitive Proxy Statement for the Annual Meeting of Stockholders or amendments to Form 10-K, which the registrant will file with the
Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this report, is incorporated by reference in Part III of
this Form 10-K to the extent stated herein.
Digital Turbine, Inc.
ANNUAL REPORT ON FORM 10-K
FOR THE PERIOD ENDED March 31, 2016
TABLE OF CONTENTS
PART I
ITEM 1.
BUSINESS
ITEM 1A.
RISK FACTORS
ITEM 1B.
UNRESOLVED STAFF COMMENTS
ITEM 2.
PROPERTIES
ITEM 3.
LEGAL PROCEEDINGS
ITEM 4.
MINE SAFETY DISCLOSURE
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6.
SELECTED FINANCIAL DATA
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
ITEM 9A.
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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Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
PART I
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 decline in general economic conditions nationally and
internationally;
decreased market demand for our products and
services;
• market acceptance and brand awareness of our
•
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•
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•
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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 based on pricing and other
activities;
risks and costs in product
development;
the potential for unforeseen or underestimated cash requirements or
liabilities;
ability to comply with financial covenants in outstanding
indebtedness;
risks associated with adoption of our products among existing customers (including the impact of possible delays with major
carrier and OEM partners in the roll out for mobile phones deploying our products);
the impact of currency exchange rate fluctuations on our reported GAAP financial statements, particularly in regard to the
Australian dollar;
the challenges, given the Company’s comparatively small size, to expand the combined Company's global reach, accelerate
growth and create a scalable, low-capex business model that drives EBITDA (as well as Adjusted EBITDA);
the Company’s ability given the Company’s limited resources to identify and consummate acquisitions and successful integration
of acquired businesses;
varying and often unpredictable levels of
orders;
the challenges inherent in technology development necessary to maintain the Company’s competitive advantage such as adherence
to release schedules and the costs and time required for finalization and gaining market acceptance in new products;
technology management risk as the Company needs to adapt to complex specifications of different carriers and the management of
a complex technology platform given the Company's relatively limited resources;
new customer adoption and time to revenue with new carrier and OEM partners is subject to delays and factors out of our
control;
inability to raise capital to fund continuing
operations;
changes in government
regulation;
volatility in the price of our common stock and ability to satisfy exchange continued listing
requirements;
rapid and complex changes occurring in the mobile marketplace,
and
other risks described in the risk factors 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, our actual results may
differ significantly from those anticipated, believed, estimated, expected, intended or planned. Except as required by applicable law, we do
not undertake any obligation to update any forward-looking statements made in this Annual Report. Accordingly, investors should use
caution in relying on past forward-looking statements, which are based on known results and trends at the time they are made, to anticipate
future results or trends.
Unless the context otherwise indicates, the use of the terms “we,” “our”, “us”, “Digital Turbine”, “DT”, or the “Company”
refer to the collective business and operations of Digital Turbine, Inc. through its operating and wholly-owned subsidiaries, Digital Turbine
USA, Inc. (“DT USA”), Digital Turbine (EMEA) Ltd. (“DT EMEA”), Digital Turbine Australia
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Pty Ltd (“DT APAC”), Digital Turbine Singapore Pte. Ltd. (“DT Singapore”), Digital Turbine Luxembourg S.a.r.l. (“DT Luxembourg”),
Digital Turbine Germany, GmbH (“DT Germany”), and Digital Turbine Media, Inc. (“DT Media”). We refer to Appia, Inc., a company we
acquired on March 6, 2015, as “DT Media.”
ITEM 1.
BUSINESS
Current Operations
Digital Turbine, through its subsidiaries, innovates at the convergence of media and mobile communications, delivering end-
to-end products and solutions for mobile operators, application advertisers, device original equipment manufacturers ("OEMs"), and other
third parties to enable them to effectively monetize mobile content and generate higher value user acquisition. The Company operates its
business in two reportable segments – Advertising and Content.
The Company's Advertising business is comprised of two businesses:
•
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Operator and OEM ("O&O"), an advertiser solution for unique and exclusive carrier and OEM inventory
which is comprised of services including:
◦
◦
Ignite™ ("Ignite"), a mobile device management platform with targeted application distribution
capabilities, and
Discover™ ("Discover"), an intelligent application discovery
platform.
Advertiser and Publisher ("A&P"), a leading worldwide mobile user acquisition network which is
comprised of services including:
◦
◦
Syndicated network,
and
Real Time Bidding ("RTB" or "programmatic
advertising").
The Company's Content business is comprised of services including:
• Marketplace™ ("Marketplace"), an application and content store,
•
and
Pay™ ("Pay"), a content management and mobile payment
solution.
With global headquarters in Austin, Texas and offices in Durham, North Carolina, Berlin, San Francisco Singapore, Sydney
and Tel Aviv, Digital Turbine’s solutions are available worldwide.
Information about Segment and Geographic Revenue
In the fourth quarter of fiscal 2015, the Company made certain segment realignments in order to conform to the way the
Company manages segment performance. This realignment was driven primarily by the acquisition of Appia, Inc. on March 6, 2015. The
Company has recast prior period amounts to provide visibility and comparability. None of these changes impact the Company’s
previously reported consolidated net revenue, gross margin, operating income, net income, or earnings per share.
The Company manages its business in three operating segments: Operators and OEMs, Advertisers and Publishers, and
Content. The three operating segments have been aggregated into two reportable segments: Advertising and Content. Information about
segment and geographic revenue is set forth in Note 17 to our consolidated financial statements under Item 8 of this Annual Report.
Advertising
O&O Business
The Company's O&O business is an advertiser solution for unique and exclusive carrier and OEM inventory which is
comprised of services including Ignite and Discover.
Ignite is a mobile application management software that enables mobile operators and original equipment manufacturers
("OEMs") to control, manage, and monetize applications installed at the time of activation and over the life of a mobile device. Ignite
allows mobile operators to personalize the app activation experience for customers and monetize their home screens via Cost-Per-Install or
CPI arrangements, Cost-Per-Placement or CPP arrangements, and/or Cost-Per-Action or CPA arrangements with third party advertisers.
There are several different delivery methods available to operators and OEMs on first boot of the device: Wizard, Silent, Software
Development Kit ("SDK"), or Direct through Discover. Optional
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notification features are available throughout the lifecycle of the device, providing operators additional opportunity for advertising revenue
streams. The Company has launched Ignite with mobile operators and OEMs in North America, Latin America, Europe, Asia Pacific, India
and Israel.
Discover enables end user application and content discovery, both organic and sponsored, through a variety of user interfaces.
The recommendation engine powering Discover and other Digital Turbine products is AppSource, which provides intelligent
recommendations to the device end user. Monetization occurs through the display of and/or recommendation of applications via the CPI
commercial model. Discover has been deployed with mobile operators in North America and Asia Pacific.
A&P Business
The Company's A&P business, formerly Appia Core, is a leading worldwide mobile user acquisition network. Its mobile user
acquisition platform is a demand side platform, or DSP. This platform allows mobile advertisers to engage with the right customers for their
applications at the right time to gain them as customers. The A&P business, through its syndicated network service, accesses mobile ad
inventory through publishers including direct developer relationships, mobile websites, mobile carriers and mediated relationships. The
A&P business also accesses mobile ad inventory by purchasing inventory through exchanges using RTB. The advertising revenue
generated by A&P platform is shared with publishers according to contractual rates in the case of direct or mediated relationships. When
inventory is accessed using RTB, A&P buys inventory at a rate determined by the marketplace. Since inception, A&P has delivered over
150 million application installs for hundreds of advertisers.
Content
Pay is an Application Programming Interface ("API") that integrates billing infrastructure between mobile operators and
content publishers to facilitate mobile commerce. Increasingly, mobile content publishers want to go directly to consumers to sell their
content rather than sell through traditional distributors such as Google Play or the Apple Application Store, which are not as prominent in
select countries. Pay allows publishers and carriers to monetize those applications by allowing the content to be billed directly to the
consumer via carrier billing. Pay has been launched in Australia, Philippines, India, and Singapore.
Marketplace is a white-label solution for mobile operators and OEMs to offer their own branded content store. Marketplace
can be sold as an application storefront that manages the retailing of mobile content including features such as merchandising, product
placements, reporting, pricing, promotions, and distribution of digital goods. Marketplace also includes the distribution and licensing of
content across multiple content categories including music, applications, wallpapers, videos, and games. Marketplace is deployed with
many operators across multiple countries including Australia, Philippines, Singapore, and Indonesia.
Competition
The distribution of applications, mobile advertising, development, distribution and sale of mobile products and services is a
highly competitive business. We compete for end users primarily on the basis of positioning, brand, quality and price. We compete for
wireless carriers 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 with other mobile platform companies. We also compete for experienced and
talented employees.
Our primary competition for application and content distribution comes from the traditional application store businesses of
Apple and Google, existing operator solutions built internally, as well as companies providing app install products and services as offered
by Facebook, Snapchat, IronSource, InMobi, Cheetah Mobile, Baidu, Taptica, and others. These companies can be both customers and
publishers for Digital Turbines products, as well as competitors in certain cases. For the Discover product, there is some competition in the
space by home grown operator solutions, Quixey, and Aviate, but our main competitors are OEM launchers and Android launchers, which
allow customers to customize their handset. With Ignite, we compete with smaller competitors, such as IronSource, Wild Tangent, and
Sweet Labs, but the more material competition is internally developed operator solutions and specific mobile application management
solutions built in-house by OEMs and wireless operators. Some of our existing wireless operators could make a strategic decision to
develop their own solutions rather than continue to use our Discover and Ignite products, which could be a material source of competition.
And finally,
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although we don’t see any competition from larger Enterprise application players such as IBM, Citrix, Oracle, salesforce.com, or
MobileIron, it is possible they could decide to compete against our Ignite solution.
Digital Turbine has internally developed solutions for top-tier mobile operators and content providers including device
application management solutions, white label application and media stores, in-application payment solutions, application-based value
added services, and mobile social music and TV offerings. Ignite is a patent pending mobile application management solution that enables
operators and device OEMs to pre-install and manage applications from a single web interface. We see competitors in internally developed
operator solutions and specific mobile application management solutions built individually by OEMs.
Discover is a recommendation server that provides organic and sponsored application install recommendations. The Discover
front-end has different User Experience and User Interfaces that enables different customers to search and discover content from various
sources. We compete in this product range with traditional search engines such as Google, Yahoo, Android and manufacturers to launcher
applications.
Within our A&P group that is a leading worldwide mobile user acquisition network. Its mobile user acquisition platform is a
demand side platform, or DSP. This platform allows mobile advertisers to engage with the right customers for their applications at the right
time to gain them as customers. A&P accesses mobile ad inventory through publishers including direct developer relationships, mobile
websites, carriers and mediated relationships. We compete in this product range with traditional mobile advertising networks to multimedia
advertising companies seeking more efficient means to distribute content to end users including Facebook, Twitter, and Google, as well as
in-house solutions used by companies who choose to coordinate mobile advertising across their own properties, such as Yahoo! Pandora,
and other independent publishers.
Marketplace can be sold as an application storefront that manages the retailing of mobile content including features such as
merchandising, product placements, reporting, pricing, promotions, and distribution of digital goods. Marketplace also includes the
distribution and licensing of content across multiple content categories including music, applications, wallpapers, eBooks, and games.
Competitors in these two areas include Google Play and the Apple App store.
Pay is an API that integrates between mobile operators billing infrastructure and content publishers to facilitate mobile
commerce. Pay allows the publishers and the operators to monetize those applications by allowing the content to be billed directly to the
consumer via the operator bill. Some competitors to the Pay product are Google Wallet, Facebook Messenger, Amazon, Android Pay,
Bango, Fortumo, and home grown operator solutions.
Product Development and Research & Development
Our product development expenses consist primarily of salaries and benefits for employees working on campaign
management, creating, developing, editing, programming, performing quality assurance, obtaining carrier certification and deploying our
products across various mobile phone carriers and on our internal platforms. We devote substantial resources to the development,
technology support, and quality assurance of our products. Total product development costs incurred for the years ended March 31, 2016,
2015, 2014 were $11.0 million, $7.9 million, and 7.9 million, respectively. The amount spent on research and development activities for the
years ended March 31, 2016, 2015, 2014 were 1.1 million, 0.7 million, and 0.5 million, respectively.
Contracts with Customers
We have both exclusive and non-exclusive carrier and OEM agreements. Our agreements with advertisers and mobile web
and mobile application publishers are generally non-exclusive. Historically, our agreements with carriers for the Content business have had
terms of one or two years with automatic renewal provisions upon expiration of the initial term, absent a contrary notice from either party,
but going forward terms in carrier agreements may vary. Our carrier and OEM agreements for our Advertising business are multi-year
agreements, with terms that are generally longer than one to two years. 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, with regard to our Content products 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, or rejects the
content we provide, the total revenues received from these carriers will be significantly reduced. In our Content business most of our sales
are made directly to large national mobile phone carriers. In our Advertising business most of our
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sales are made either directly to application developers, advertising agencies representing application developers or through advertising
aggregators.
In our Advertising business, we generally have numerous advertisers who represent a significant level of business. Coupled
with advertiser concentration, we distribute a significant level of advertising through one operator. If such advertising clients or this operator
decided to materially reduce or discontinue its use of our platform, it could cause an immediate and significant decline in our revenue and
negatively affect our results of operations and financial condition.
One major carrier customer in our Content business accounted for 26.1% of our consolidated net revenues for the year ended
March 31, 2016, and this major carrier customer and another major carrier customer in our Content business accounted for 50.6% and
11.1% of our consolidated net revenues for the year ended March 31, 2015. For the year ended March 31, 2014, the two previously
mentioned major customers and a third major customer represented 45.8%, 22.2%, and 10.5% of our consolidated net revenues.
Business Seasonality
Our revenue, cash flow from operations, operating results and other key operating and financial measures may vary from
quarter to quarter due to the seasonal nature of advertiser spending. For example, many advertisers (and their agencies) devote a
disproportionate amount of their budgets to the fourth quarter of the calendar year to coincide with increased holiday spending. We expect
our revenue, cash flow, operating results and other key operating and financial measures to fluctuate based on seasonal factors from period
to period and expect these measures to be generally higher in the third and fourth fiscal quarters than in prior quarters.
Employees
As of March 31, 2016, the Company, including its subsidiaries, had 161 employees, 151 of whom were full-time and 10 of
whom were part-time. We consider our relationships with our employees to be satisfactory. As of March 31, 2016, none of our employees
are covered by a collective bargaining agreement. The Company also uses a number of contractors on an as needed basis.
History of Digital Turbine, Inc.
The Company was originally incorporated in the State of Delaware on November 6, 1998 and operated under operated under
several different company names including eB2B, Mediavest, Inc., Mandalay Media, Inc., NeuMedia, Inc., and Mandalay Digital Group,
Inc. In January 2015, the Company changed its name to Digital Turbine, Inc. and its NASDAQ ticker symbol to “APPS” with a new
CUSIP number of 25400W-102. In 2012, the Company increased its authorized shares of common stock and preferred stock to 200,000,000
and 2,000,000, respectively, and in 2013 the Company implemented a 1-for-5 reverse stock split of its common stock (without changing the
authorized number of shares or the par value of common stock).
From 2005 to February 12, 2008, the Company was a public shell company with no operations. Throughout the years, the
Company has made several acquisitions, such as (1) the acquisition in December 2011 by its wholly-owned subsidiary, Digital Turbine
USA, Inc., of assets of Digital Turbine LLC, which were re-branded as “Discover,” (2) the acquisition in September 2012 by DT EMEA of
” Logia Content Development and Management Ltd. (“Logia Content”), Volas Entertainment Ltd. (“Volas”) and Mail Bit Logia (2008)
Ltd. (“Mail Bit”), including the “LogiaDeck” software which has been rebranded as “DT Ignite,” (3) the acquisition in April 2013 of Mirror
Image International Holdings Pty Ltd, and (4) the acquisition in October 2014 of the intellectual property assets of Xyologic Mobile
Analysis, GmbH ("XYO" or "Xyologic). In February 2014, the Company disposed of its wholly-owned subsidiary, Twistbox
Entertainment, Inc. (“Twistbox”), and as such, it is no longer reflected as part of our continuing operations in this Report. In March 2015,
the Company, through its wholly-owned subsidiary, acquired Appia, Inc., which was renamed Digital Turbine Media, Inc. and which is
referred to in this Form 10-K and the consolidated financial statements as “DT Media.”
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to
reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of
charge on our website at http://www.digitalturbine.com generally when such reports are available on the Securities and Exchange
Commission (“SEC”) website. The contents of our website are not incorporated into this Annual Report on Form 10-K.
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The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE,
Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-
SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC at http://www.sec.gov.
ITEM 1A.
RISK FACTORS
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. The business, financial condition and operating results of the Company can be
affected by a number of factors, whether currently known or unknown, including but not limited to those described below, any one or more
of which could, directly or indirectly, cause the Company’s actual results of operations and financial condition to vary materially from past,
or from anticipated future, results of operations and financial condition. 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.
Past financial performance should not be considered to be a reliable indicator of future performance, and current and potential
investors should not use historical trends to anticipate results or trends in future periods.
Risks Related to Our Business
General Risks
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 losses and we 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 past years. Accordingly, we may not be able to achieve
profitability in the future.
If there are delays in the distribution of our products or if we are unable to successfully negotiate with advertisers, application
developers, carriers, mobile operators or OEMs or if these negotiations cannot occur on a timely basis, we may not be able to generate
revenues sufficient to meet the needs of the business in the foreseeable future or at all.
We have a limited operating history for our current portfolio of assets, which may make it difficult to evaluate our business.
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 application and
content entertainment industry, we face increased risks, uncertainties, expenses and difficulties. To address these risks and uncertainties, we
must do the following:
• maintain our current, and develop new, wireless carrier and OEM relationships, in both international and domestic
markets;
• maintain and expand our current, and develop new, relationships with compelling content
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owners;
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.
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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.
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 are not 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 and OEM relationships, represent meaningful
portions of our revenues and margins in any quarter.
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In addition to other risk factors discussed in this section, factors that may contribute to the variability of our results include:
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, and intangible
assets;
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;
changes in the mix of direct versus indirect advertising sales, which have varying margin
profiles;
changes in the mix of CPI, CPP and CPA advertising sales, which have varying revenue
profiles
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;
decisions by one or more of our partners and/or customers to terminate our business
relationship(s);
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, including seasonality attributable to the holiday seasons, 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.
Placement of our products, or the failure of the market to accept our products, 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 their mobile handsets.
The inherent limitation on the volume of products available on the handset is a function of the screen size of handsets and carriers’
perceptions of the depth of menus and numbers of choices end users will generally utilize. If carriers choose to give our products less
favorable placement or reduce our slot count on the phone, 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. In addition, if carriers or other participants in
the market favor another competitor’s products over our products, or opt not to enable and implement our technology to unify operating
systems, our future growth could suffer and our revenues could be negatively affected.
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.
10
We believe that establishing and maintaining our brand is critical to retaining and expanding our existing relationships with
wireless carriers, OEMs, advertisers, 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.
Our business is dependent on the continued growth in usage of smartphones, tablets and other mobile connected devices.
Our business depends on the continued proliferation of mobile connected devices, such as smartphones and tablets, which can
•
•
•
connect to the Internet over a cellular, wireless or other network, as well as the increased consumption of content through those devices.
Consumer usage of these mobile connected devices may be inhibited for a number of reasons, such as:
inadequate network infrastructure to support advanced features beyond just mobile web
access;
users’ concerns about the security of these
devices;
inconsistent quality of cellular or wireless
connection;
unavailability of cost-effective, high-speed Internet service;
and
changes in network carrier pricing plans that charge device users based on the amount of data
consumed.
new technology which is not compatible with our products and
offerings.
•
•
•
For any of these reasons, users of mobile connected devices may limit the amount of time they spend on these devices and the
number of applications or amount of content they download on these devices. If user adoption of mobile connected devices and consumer
consumption of content on those devices do not continue to grow, our total addressable market size may be significantly limited, which
could compromise our ability to increase our revenue and our ability to become profitable.
If mobile connected devices, their operating systems or content distribution channels, including those controlled by our competitors,
develop in ways that prevent advertising from being delivered to their users, our ability to grow our business will be impaired.
A portion of our business model depends upon the continued demand for mobile advertising on connected devices, as well as
the major operating systems that run on them and the thousands of applications that are downloaded onto them.
The design of mobile devices and operating systems is controlled by third parties with whom we do not have any formal
relationships. These parties frequently introduce new devices, and from time to time they may introduce new operating systems or modify
existing ones. Network carriers may also affect the ability of users to download applications or access specified content on mobile devices.
In some cases, the parties that control the development of mobile connected devices and operating systems include companies
that we regard as our competitors. For example, Google controls the Android™ platform operating system. If our mobile software platform
were unable to work on this operating systems, either because of technological constraints or because the developer of this operating
systems wishes to impair our ability to provide ads on the operating system, our ability to generate revenue could be significantly harmed.
If we fail to deliver our products and services ahead of the commercial launch of new mobile handset models, our sales may suffer.
Our business is dependent, in part, on the commercial sale of smartphone handsets. We do not control the timing of these
handset launches. Some new handsets are sold by carriers with certain of our products and applications pre-loaded, and
11
many end users who use our services do so after they purchase their new handsets to experience the new features of those handsets. Some
of our products require 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
seasonal increases in handset sales, 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 our offerings to a broad array of mobile operating systems, our attractiveness to
wireless carriers, application developers and branded content owners will be impaired, and our sales could suffer.
Changes to our design and development processes to address new features or functions of mobile operating systems or
networks might cause inefficiencies that might result in more labor-intensive software integration processes. In addition, we anticipate that
in the future we will be required to update existing and new products and applications to a broader array of mobile operating systems. If we
utilize more labor intensive processes, our margins could be significantly reduced and it might take us longer to integrate our products and
applications to additional mobile operating systems. This, in turn, could harm our business, operating results and financial condition.
A majority of our revenues are currently being derived from a limited number of wireless carriers, advertisers and application
developers, if any one of these customers were to terminate their agreement with us or if they were unable to fulfill their payment
obligations, our financial condition and results of operations would suffer.
If any of our primary customers were to terminate their commercial relationship with us or if they are unable to fulfill their
payment obligations to us under our agreements with them, our revenues could decline significantly and our financial condition will be
harmed.
We may be subject to legal liability associated with providing mobile and online services or content.
We provide a variety of products and services that enable carriers, content providers and users to engage in various mobile and
online activities both domestically and internationally. The law relating to the liability of providers of these mobile and online services and
products for such activities is still unsettled and constantly evolving in the U.S. and internationally. Claims have been threatened and have
been brought against us in the past for breaches of contract, copyright or trademark infringement, tort or other theories based on the
provision of these products and services. In addition, we are and have been and may again in the future be subject to domestic or
international actions alleging that certain content we have generated or third-party content that we have made available within our services
violates laws in domestic and international jurisdictions. We also arrange for the distribution of third-party advertisements to third-party
publishers and advertising networks, and we offer third-party products, services, or content. We may be subject to claims concerning these
products, services, or content by virtue of our involvement in marketing, branding, broadcasting, or providing access to them, even if we do
not ourselves host, operate, provide, own, or license these products, services, or content. While we routinely insert indemnification
provisions into our contracts with these parties, such indemnities to us, when obtainable, may not cover all damages and losses suffered by
us and our customers from covered products and services. In addition, recorded reserves and/or insurance coverage may be exceeded by
unexpected results from such claims which directly impacts profits. Defending such actions could be costly and involve significant time and
attention of our management and other resources, may result in monetary liabilities or penalties, and may require us to change our business
in an adverse manner.
12
Our business is dependent on our ability to maintain and scale our infrastructure, including our employees and 3rd parties; and any
significant disruption in our service could damage our reputation, result in a potential loss of customers and adversely affect our
financial results.
Our reputation and ability to attract, retain, and serve customers is dependent upon the reliable performance of our products
and services and the underlying infrastructure, both internal and from third party providers. Our systems may not be adequately designed
with the necessary reliability and redundancy to avoid performance delays or outages that could be harmful to our business. If our products
and services are unavailable, or if they do not load as quickly as expected, customers may not use our products as often in the future, or at
all. As our customer base is anticipated to continue to grow, we will need an increasing amount of infrastructure, including network
capacity, to continue to satisfy the needs of our customers. It is possible that we may fail to effectively scale and grow our infrastructure to
accommodate these increased demands. In addition, our business may be subject to interruptions, delays, or failures resulting from
earthquakes, adverse weather conditions, other natural disasters, power loss, terrorism, ineffective business execution or other catastrophic
events.
A substantial portion of our network infrastructure is provided by third parties. Any disruption or failure in the services we
receive from these providers could harm our ability to handle existing or increased traffic and could significantly harm our business. Any
financial or other difficulties these providers face may adversely affect our business, and we exercise little control over these providers,
which increases our vulnerability to problems with the services they provide.
Our products, services and systems rely on software that is highly technical, and if it contains undetected errors, our business could be
adversely affected.
Our products, services and systems rely on software, including software developed or maintained internally and/or by third
parties, that is highly technical and complex. In addition, our products, services and systems depend on the ability of such software to
transfer, store, retrieve, process, and manage large amounts of data. The software on which we rely has contained, and may now or in the
future contain, undetected errors, bugs, or vulnerabilities. Some errors may only be discovered after the code has been released for external
or internal use. Errors or other design defects within the software on which we rely may result in a negative experience for customers and
marketers who use our products, delay product introductions or enhancements, result in measurement or billing errors, or compromise our
ability to protect the data of our users and/or our intellectual property. Any errors, bugs, or defects discovered in the software on which we
rely could result in damage to our reputation, loss of users, loss of revenue, or liability for damages, any of which could adversely affect
our business and financial results.
We plan to continue to review opportunities and possibly make acquisitions, which could require significant management attention,
disrupt our business, result in dilution to our stockholders, and adversely affect our financial condition and results of operations.
As part of our business strategy, we have made and intend to continue to review opportunities and possibly make acquisitions
to add specialized employees and complementary companies, products, technologies or distribution channels. In some cases, these
acquisitions may be substantial and our ability to acquire and integrate such companies in a successful manner is unproven.
Any acquisitions we announce could be viewed negatively by mobile network operators, users, marketers, developers, or
investors. In addition, we may not successfully evaluate, integrate, or utilize the products, technology, operations, or personnel we acquire.
The integration of acquisitions may require significant time and resources, and we may not manage these integrations successfully. In
addition, we may discover liabilities or deficiencies that we did not identify in advance associated with the companies or assets we acquire.
The effectiveness of our due diligence with respect to acquisitions, and our ability to evaluate the results of such due diligence, is dependent
upon the accuracy and completeness of statements and disclosures made or actions taken by the companies we acquire or their
representatives. We may also fail to accurately forecast the financial impact of an acquisition transaction, including accounting charges. In
the future, we may not be able to find suitable acquisition candidates, and we may not be able to complete acquisitions on favorable terms,
if at all.
We may also incur substantial costs in making acquisitions. We may pay substantial amounts of cash or incur debt to pay for
acquisitions, which could adversely affect our liquidity. The incurrence of indebtedness would also result in increased fixed obligations,
interest expense, and could also include covenants or other restrictions that would impede our ability to manage our operations.
Additionally, we may issue equity securities to pay for acquisitions or to retain the employees of the acquired company, which could
increase our expenses, adversely affect our financial results, and result in dilution to our stockholders. In addition, acquisitions may result in
our recording of substantial goodwill and amortizable intangible assets on our balance sheet upon closing, which could adversely affect our
future financial results and financial condition. These factors
13
related to acquisitions may require significant management attention, disrupt our business, result in dilution to our stockholders, and
adversely affect our financial results and financial condition.
The Company has secured indebtedness, which could limit its financial flexibility.
The Company’s secured indebtedness could have significant negative consequences including:
•
•
•
•
•
•
•
increasing the Company’s vulnerability to general adverse economic and industry
conditions;
limiting the Company’s ability to obtain additional
financing;
violating a financial covenant, resulting in the indebtedness to be paid back immediately and thus negatively impacting our
liquidity;
requiring additional financial covenant measurement consents or default waivers without enhanced financial performance in the short
term;
requiring the use of a substantial portion of any cash flow from operations to service indebtedness, thereby reducing the amount of
cash flow available for other purposes, including capital expenditures;
limiting the Company’s flexibility in planning for, or reacting to, changes in the Company’s business and the industry in which it
competes, including by virtue of the requirement that the Company remain in compliance with certain negative
operating covenants included in the credit arrangements under which the Company will be obligated as well as meeting certain
reporting requirements; and
placing the Company at a possible competitive disadvantage to less leveraged competitors that are larger and may have better access
to capital resources.
Although we currently intend to refinance the indebtedness as soon as practicable, we cannot provide any assurance that we
will be successful or that we will be able to refinance the debt on acceptable terms.
The Company’s business is highly dependent on decisions and developments in the mobile device industry over which the Company has
no control.
The Company’s ability to maintain and grow its business will be impaired if mobile connected devices, their operating
systems or content distribution channels, including those controlled by the primary competitors of the Company, develop in ways that
prevent the Company’s advertising from being delivered to their users.
The Company’s business model will depend upon the continued compatibility of its mobile advertising platform with most
mobile connected devices, as well as the major operating systems that run on them and the thousands of apps that are downloaded onto
them.
The design of mobile devices and operating systems is controlled by third parties. These parties frequently introduce new
devices, and from time to time they may introduce new operating systems or modify existing ones. Network carriers, such as Verizon,
AT&T, Sprint, as well as other domestic and global operators, as well as OEMs, such as Samsung, may also affect the ability of users to
download apps or access specified content on mobile devices. The Company also has some relationships with various other mobile carriers
with relationships that are specific and subject to contractual performance which may not be achieved.
In some cases, the parties that control the development of mobile connected devices and operating systems include companies
that the Company would regard as its most significant competitors. For example, Apple controls two of the most popular mobile devices,
the iPhone® and the iPad®, as well as the iOS operating system that runs on them. Apple also controls the App Store for downloading apps
that run on Apple® mobile devices. Similarly, Google controls the Google Play and Android™ platform operating system. If the
Company’s mobile advertising platform were unable to work on these devices or operating systems, either because of technological
constraints or because a maker of these devices or developer of these operating systems wished to impair the Company’s ability to provide
ads on them or its ability to fulfill advertising space, or inventory, from developers whose apps are distributed through their controlled
channels, the Company’s ability to maintain and grow its business will be impaired.
The Company’s business may depend in part on its ability to collect and use location-based information about mobile connected device
users.
The Company’s business model will depend in part upon its ability to collect data about the location of mobile connected
device users when they are interacting with their devices, and then to use that information to provide effective targeted advertising on
behalf of its advertising clients. The Company’s ability to either collect or use location-based data could
14
be restricted by a number of factors, including new laws or regulations, technology or consumer choice. Limitations on its ability to either
collect or use location data could impact the effectiveness of the Company’s platform and its ability to target ads.
The Company does not have long-term agreements with its advertiser clients, and it may be unable to retain key clients, attract new
clients or replace departing clients with clients that can provide comparable revenue to the Company.
The Company’s success will depend on its ability to maintain and expand its current advertiser client relationships and to
develop new relationships. The Company’s contracts with its advertiser clients does not generally include long-term obligations requiring
them to purchase the Company’s services and are cancelable upon short or no notice and without penalty. As a result, the Company may
have limited visibility as to its future advertising revenue streams. The Company will not be able to provide assurance that its advertiser
clients will continue to use its services or that it will be able to replace, in a timely or effective manner, departing clients with new clients
that generate comparable revenue. If a major advertising client representing a significant portion of the Company’s business decides to
materially reduce its use of the Company’s platform or to cease using the Company’s platform altogether, it is possible that the Company
may not have a sufficient supply of ads to fill its developers’ advertising inventory, in which case the Company’s revenue could be
significantly reduced. Revenue derived from performance advertisers in particular is subject to fluctuation and competitive pressures. Such
advertisers, which seek to drive app downloads, are less consistent with respect to their spending volume, and may decide to substantially
increase or decrease their use of the Company’s platform based on seasonality or popularity of a particular app.
Advertisers in general may shift their business to a competitor’s platform because of new or more compelling offerings,
strategic relationships, technological developments, pricing and other financial considerations, or a variety of other reasons. Any non-
renewal, renegotiation, cancellation or deferral of large advertising contracts, or a number of contracts that in the aggregate account for a
significant amount of revenue, could cause an immediate and significant decline in the Company’s revenue and harm its business.
The Company’s business practices with respect to data could give rise to liabilities or reputational harm as a result of governmental
regulation, legal requirements or industry standards relating to consumer privacy and data protection.
In the course of providing its services, the Company will transmit and store information related to mobile devices and the ads
it places, which may include a device’s geographic location for the purpose of delivering targeted location-based ads to the user of the
device, with that user’s consent. Federal, state and international laws and regulations govern the collection, use, retention, sharing and
security of data that the Company will collect across its mobile advertising platform. The Company will strive to comply with all applicable
laws, regulations, policies and legal obligations relating to privacy and data protection. However, it is possible that these requirements may
be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or its practices.
Any failure, or perceived failure, by it to comply with U.S. federal, state, or international laws, including laws and regulations regulating
privacy, data security, or consumer protection, could result in proceedings or actions against the Company by governmental entities or
others. Any such proceedings could hurt the Company’s reputation, force it to spend significant amounts in defense of these proceedings,
distract its management, increase its costs of doing business, adversely affect the demand for its services and ultimately result in the
imposition of monetary liability. The Company may also be contractually liable to indemnify and hold harmless its clients from the costs or
consequences of inadvertent or unauthorized disclosure of data that it stores or handles as part of providing its services.
The regulatory framework for privacy issues worldwide is evolving, and various government and consumer agencies and
public advocacy groups have called for new regulation and changes in industry practices, including some directed at the mobile industry in
particular. For example, in early 2012, the State of California entered into an agreement with several major mobile application platforms
under which the platforms have agreed to require mobile applications to meet specified standards to ensure consumer privacy.
Subsequently, in January 2013, the State of California released a series of recommendations for privacy best practices for the mobile
industry. In January 2014, a California law also became effective amending the required disclosures for online privacy policies. It is
possible that new laws and regulations will be adopted in the United States and internationally, or existing laws and regulations may be
interpreted in new ways, that would affect the Company’s business, particularly with regard to location-based services, collection or use of
data to target ads, and communication with consumers via mobile devices.
The U.S. government, including the Federal Trade Commission, or FTC, and the Department of Commerce, is focused on the
need for greater regulation of the collection of consumer information, including regulation aimed at restricting some targeted advertising
practices. In December 2012, the FTC adopted revisions to the Children’s Online Privacy Protection Act, or COPPA, that went into effect
on July 1, 2013. COPPA imposes a number of obligations on operators of websites and
15
online services including mobile applications, such as obtaining parental consent, if the operator collects specified information from users
and either the site or service is directed to children under 13 years old or the site or service knows that a specific user is a child under 13
years old. The changes broaden the applicability of COPPA, including the types of information that are subject to these regulations, and
may apply to information that the Company will collect through mobile devices or apps that, prior to the adoption of these new regulations,
was not subject to COPPA. These revisions will impose new compliance burdens on the Company. In February 2013, the FTC issued a
staff report containing recommendations for best practices with respect to consumer privacy for the mobile industry. To the extent that the
Company or its clients choose to adopt these recommendations, or other regulatory or industry requirements become applicable to the
Company, it may have greater compliance burdens.
As the Company expands its operations globally, compliance with regulations that differ from country to country may also
impose substantial burdens on its business. In particular, the European Union has traditionally taken a broader view as to what is considered
personal information and has imposed greater obligations under data privacy regulations. In addition, individual EU member countries have
had discretion with respect to their interpretation and implementation of the regulations, which has resulted in variation of privacy standards
from country to country. Complying with any new regulatory requirements could force it to incur substantial costs or require us to change
its business practices in a manner that could compromise its ability to effectively pursue its growth strategy.
The Company’s business may involve the use, transmission and storage of confidential information, and the failure to properly
safeguard such information could result in significant reputational harm and monetary damages.
The Company may at times collect, store and transmit information of, or on behalf of, its clients that may include certain
types of confidential information that may be considered personal or sensitive, and that are subject to laws that apply to data breaches. The
Company intends to take reasonable steps to protect the security, integrity and confidentiality of the information it collects and stores, but
there is no guarantee that inadvertent or unauthorized disclosure will not occur or that third parties will not gain unauthorized access to this
information despite the Company’s efforts to protect this information. If such unauthorized disclosure or access does occur, the Company
may be required to notify persons whose information was disclosed or accessed. Most states have enacted data breach notification laws
and, in addition to federal laws that apply to certain types of information, such as financial information, federal legislation has been
proposed that would establish broader federal obligations with respect to data breaches. The Company may also be subject to claims of
breach of contract for such disclosure, investigation and penalties by regulatory authorities and potential claims by persons whose
information was disclosed. The unauthorized disclosure of information may result in the termination of one or more of its commercial
relationships or a reduction in client confidence and usage of its services. The Company may also be subject to litigation alleging the
improper use, transmission or storage of confidential information, which could damage its reputation among its current and potential
clients, require significant expenditures of capital and other resources and cause it to lose business and revenue.
Changes to current accounting principles could have a significant effect on the Company’s reported financial results or the way in
which it conducts its business.
We prepare our financial statements in conformity with U.S. GAAP, which are subject to interpretation by the Financial
Accounting Standards Board, the American Institute of Certified Public Accountants, the SEC, and various other authorities formed to
interpret, recommend, and announce appropriate accounting principles, policies, and practices. A change in these principles could have a
significant effect on our reported financial results and related financial disclosures, and may even retroactively affect the accounting for
previously reported transactions. Our accounting policies that recently have been or may in the future be affected by changes in the
accounting principles are as follows:
•
•
•
•
•
•
business
consolidations;
revenue
recognition;
leases;
stock-based
compensation;
disclosure of uncertainties about an entity's ability to continue as a going concern;
and
accounting for goodwill and other intangible
assets.
Changes in these or other rules may have a significant adverse effect on our reported financial results, disclosures, or in the
way in which we conduct our business. See the discussion in “Summary of Significant Accounting Policies” set forth in Note 4 to our
consolidated financial statements under Item 8 of this Annual Report, for additional information about our accounting policies and
estimates and associated risks.
System failures could significantly disrupt the Company’s operations and cause it to lose advertiser clients or advertising inventory.
16
The Company’s success will depend on the continuing and uninterrupted performance of its own internal systems, which the
Company will utilize to place ads, monitor the performance of advertising campaigns and manage its inventory of advertising space. Its
revenue will depend on the technological ability of its platforms to deliver ads. Sustained or repeated system failures that interrupt its
ability to provide services to clients, including technological failures affecting its ability to deliver ads quickly and accurately and to process
mobile device users’ responses to ads, could significantly reduce the attractiveness of its services to advertisers and reduce its revenue. The
combined systems are vulnerable to damage from a variety of sources, including telecommunications failures, power outages, malicious
human acts and natural disasters. In addition, any steps the Company takes to increase the reliability and redundancy of its systems may be
expensive and may not ultimately be successful in preventing system failures.
System security risks, data protection breaches, cyber attacks and systems integration issues could disrupt our internal operations or
information technology services provided to customers, and any such disruption could reduce our expected revenue, increase our
expenses, damage our reputation and adversely affect our stock price.
Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate or
compromise our confidential information or that of third-parties, create system disruptions or cause shutdowns. Computer programmers and
hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our products or
otherwise exploit any security vulnerabilities of our products. In addition, sophisticated hardware and operating system software and
applications that we produce or procure from third-parties may contain defects in design or manufacture, including ‘‘bugs’’ and other
problems that could unexpectedly interfere with the operation of the system. The costs to us to eliminate or alleviate cyber or other security
problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our efforts to address
these problems may not be successful and could result in interruptions, delays, cessation of service and loss of existing or potential
customers that may impede our sales or other critical functions. We manage and store various proprietary information and sensitive or
confidential data relating to our business. Breaches of our security measures or the accidental loss, inadvertent disclosure or unapproved
dissemination of proprietary information or sensitive or confidential data about us, our clients or customers, including the potential loss or
disclosure of such information or data as a result of fraud, trickery or other forms of deception, could expose us, our customers or the
individuals affected to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our brand and
reputation or otherwise harm our business. In addition, the cost and operational consequences of implementing further data protection
measures could be significant. Portions of our IT infrastructure also may experience interruptions, delays or cessations of service or
produce errors in connection with systems integration or migration work that takes place from time to time. We may not be successful in
implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time-consuming,
disruptive and resource intensive. Such disruptions could adversely impact our ability to provide services and interrupt other processes.
Delayed sales, lower margins, increased cost, or lost customers resulting from these disruptions could reduce our expected revenue,
increase our expenses, damage our reputation and adversely affect our stock price.
If our goodwill or amortizable intangible assets become impaired, we may be required to record a significant charge to earnings.
We review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying
value may not be recoverable. We test goodwill for impairment at least annually or sooner if an indicator of impairment is present. If such
goodwill or intangible assets are deemed impaired, an impairment loss would be recognized. We may be required to record a significant
charge in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is
determined, which would negatively affect our results of operations.
Advertising and Content Risks
Our revenues may fluctuate significantly based on mobile device sell-through, over which we have no control.
A significant portion of our revenue is impacted by the level of sell-through of mobile devices on which our software is
installed. Demand for mobile devices sold by carriers varies materially by device, and if our software is installed on devices for which
demand is lower than our expectations --a factor over which we have no control as we do not market mobile devices --our revenues will be
impacted negatively, and this impact may be significant. As our software is deployed on a diversified universe of devices, this risk will be
mitigated, as the relative performance of one device over another device will have less impact on us, but until we achieve diversification in
our device installations, we will continue to be subject to revenue fluctuations based on device sell-through, and such fluctuations can be
material. Further, it is difficult to predict the level of demand for a particular device, making our revenue projections correspondingly
difficult. These issues can be ameliorated as
17
we gain more significant carrier relationships and conversely these issues can be exacerbated with, as presently, a limited number of such
relationships.
Our revenues may fluctuate significantly based on level of advertiser spend, over which we have no control, and ability to sign up
publishers for our Advertising business.
A significant portion of our revenue is impacted by the level of advertising spend and our ability to sign up publishers for our
advertising business. If we are unable to sign up and retain publishers and advertising spend is lower than our expectations -- a factor over
which we have no control as we do not determine our customers' advertising budgets -- our revenues will be impacted negatively, and this
impact may be significant.
Activities of the Company’s advertiser clients could damage the Company’s reputation or give rise to legal claims against it.
The Company’s advertiser clients’ promotion of their products and services may not comply with federal, state and local laws,
including, but not limited to, laws and regulations relating to mobile communications. Failure of its clients to comply with federal, state or
local laws or its policies could damage its reputation and expose it to liability under these laws. The Company may also be liable to third
parties for content in the ads it delivers if the artwork, text or other content involved violates copyrights, trademarks or other intellectual
property rights of third parties or if the content is defamatory, unfair and deceptive, or otherwise in violation of applicable laws. Although
the Company will generally receive assurance from its advertisers that their ads are lawful and that they have the right to use any
copyrights, trademarks or other intellectual property included in an ad, and although it will normally be indemnified by the advertisers, a
third party or regulatory authority may still file a claim against the Company. Any such claims could be costly and time-consuming to
defend and could also hurt the Company’s reputation. Further, if it is exposed to legal liability as a result of the activities of its advertiser
clients, the Company could be required to pay substantial fines or penalties, redesign its business methods, discontinue some of its services
or otherwise expend significant resources.
Loss or reduction of business from the Company’s large advertiser clients could have a significant impact on the Company’s revenues,
results of operations and overall financial condition.
From time to time, a limited number of the Company’s advertiser clients will be expected to account for a significant share of
its advertising revenue. This customer concentration increases the risk of quarterly fluctuations in the Company’s revenues and operating
results. The Company’s advertiser clients may reduce or terminate their business with it at any time for any reason, including changes in
their financial condition or other business circumstances. If a large advertising client representing a substantial portion of its business
decided to materially reduce or discontinue its use of its platform, it could cause an immediate and significant decline in its revenue and
negatively affect its results of operations and financial condition.
The Company’s customer concentration also increases the concentration of its accounts receivable and its exposure to payment
defaults by key customers. The Company will generate significant accounts receivable for the services that it provides to its key advertiser
clients, which could expose it to substantial and potentially unrecoverable costs if it does not receive payment from them.
Mobile applications and advertising are relatively new, as are our products are evolving and growth in revenues from those areas is
uncertain and changes in the industry may negatively affect our revenue and financial results.
While we anticipate that mobile usage will continue to be the primary driver of revenues related to applications and
advertising for the foreseeable future, there could be changes in the industry of mobile carriers and OEM’s that could have a negative
impact on these growth prospects for our business and our financial performance. Additionally, advertising CPI (Cost per Install) revenue
realized could be negatively impacted by end user application “open-rates”. The open-rates realized on advertising campaigns in the
marketplace today could vary compared to the open-rates realized for applications distributed via our products. Reduced open-rates could
have a negative impact on the success of our products and our potential revenues earned from CPI. Mobile advertising market remains a
new and evolving market and if we are unable to grow revenues or successfully monetize our customer and potential customer
relationships, or if we incur excessive expenses in these efforts, our financial performance and ability to grow revenue would be negatively
affected.
Our growth and monetization on mobile devices depend upon effective operation with mobile operating systems, networks, and
standards that we do not control as we are largely an Android-based technology provider.
18
There is no guarantee that mobile carriers and devices will use our products and services rather than competing products. We
are dependent on the interoperability of our products and services with popular mobile operating systems that we do not control, such as
Android and any changes in such systems and terms of service that degrade our products’ functionality, reduce or eliminate our ability to
distribute applications, give preferential treatment to competitive products, limit our ability to target or measure the effectiveness of
applications, or impose fees or other charges related to our delivery of applications could adversely affect our monetization on mobile
devices. Currently, our product offerings are primarily compatible with Android only, and would require developmental modifications to
support other operating platforms. Additionally, in order to deliver high quality user experience, it is important that our products and
services work well with a range of mobile technologies, systems, networks, and standards that we do not control. We may not be successful
in developing relationships with key participants in the mobile industry or in developing products that operate effectively with these
technologies, systems, networks, or standards. In the event that our relationships with network operators, mobile operating systems or other
business partners deteriorate, our growth and monetization could be adversely affected and our business could be harmed.
We currently rely on wireless carriers and OEMs to 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 business is highly dependent upon maintaining successful relationships with the wireless carriers
and OEMs with which we currently work and establishing new carrier and OEM 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, on a go-forward basis, through relationships with a limited number of
carriers and publishers for the foreseeable future. Our failure to maintain our relationships with these carriers, establish relationships with
new carriers and publishers, or a loss or change of terms would materially reduce our revenues and thus harm our business, operating
results and financial condition.
We have both exclusive and non-exclusive carrier and OEM agreements. Historically, our carrier and OEM agreements have
had terms of one or two years with automatic renewal provisions upon expiration of the initial term, absent a contrary notice from either
party, but going forward terms in carrier and OEM agreements may vary. In addition, some carrier and OEM agreements provide that the
parties 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 and OEMs 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, with regard to our Content products 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, or rejects the content we provide, the total revenues received from these carriers will be significantly reduced.
Many other factors outside our control could impair our ability to generate revenues through a given carrier or OEM,
including the following:
•
•
•
•
•
•
•
•
•
•
the carrier or OEM's preference for our competitors’ products and services rather than
ours;
the carrier or OEM's decision not to include or highlight our products and services on the deck of its mobile
handsets;
the carrier or OEM'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 or OEM's decision to require market development funds from
publishers;
the carrier or OEM's decision to restrict or alter subscription or other terms for downloading our products and
services;
a failure of the carrier or OEM's merchandising, provisioning or billing
systems;
the carrier or OEM's decision to offer its own competing products and
services;
the carrier or OEM's decision to transition to different platforms and revenue models;
and
consolidation among carriers or
OEMs.
If any of our carriers or OEMs 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.
We currently rely on mobile web and mobile application publishers to distribute our advertising services and thus to generate some of
our revenues. The loss of or a change in any of these significant publisher relationships could cause us to materially reduce our
revenues.
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The future success of our business is highly dependent upon maintaining successful publisher relationships and establishing
new publisher relationships in geographies where we have not yet established a significant presence. We expect that we will continue to
generate a substantial portion of our revenues, on a go-forward basis, through relationships with our publisher base for the foreseeable
future. Our failure to maintain our relationships with these publishers, establish relationships with new publishers, or a loss or change of
terms would materially reduce our revenues and thus 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.
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.
Even if we are successful in gaining new licenses or extending existing licenses, we may fail to anticipate the entertainment,
shopping or mobile preferences of our end users when making choices about which brands or other content to license. If the entertainment,
shopping or mobile 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.
The mobile advertising business is an intensely competitive industry, and we may not be able to compete successfully.
The mobile advertising market is highly competitive, with numerous companies providing mobile advertising services. The
Company’s mobile advertising platform will compete primarily with Facebook, Twitter, and Google, all of which are significantly larger
than us and have far more capital to invest in their mobile advertising businesses. The Company will also compete with in-house solutions
used by companies who choose to coordinate mobile advertising across their own properties, such as Yahoo!, Pandora, and other
independent publishers. They, or other companies that offer competing mobile advertising solutions, may establish or strengthen
cooperative relationships with their mobile operator partners, application developers or other parties, thereby limiting the Company’s
ability to promote its services and generate revenue. Competitors could also seek to gain market share from us by reducing the prices they
charge to advertisers or by introducing new technology tools for developers. Moreover, increased competition for mobile advertising space
from developers could result in an increase in the portion of advertiser revenue that we must pay to developers to acquire that advertising
space. The Company’s business will suffer to the extent that its developers and advertisers purchase and sell mobile advertising directly
from each other or through other companies that are able to become intermediaries between developers and advertisers. For example,
companies may have substantial existing platforms for developers who had previously not heavily used those platforms for mobile
advertising campaigns. These companies could compete with us to the extent they expand into mobile advertising. Other companies, such
as large application developers with a substantial mobile advertising business, may decide to directly monetize some or all of their
advertising space without utilizing the Company’s services. Other companies that offer analytics, mediation, exchange or other third party
services may also become intermediaries between mobile advertisers and developers and thereby compete with us. Any of these
developments would make it more difficult for the Company to sell its services and could result in increased pricing pressure, reduced
profit margins, increased sales and marketing expenses or the loss of market share.
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The mobile advertising market may develop more slowly than expected, which could harm the business of the Company.
Advertisers have historically spent a smaller portion of their advertising budgets on mobile media as compared to traditional
advertising methods, such as television, newspapers, radio and billboards, or online advertising over the internet, such as placing banner
ads on websites. Future demand and market acceptance for mobile advertising is uncertain. Many advertisers still have limited experience
with mobile advertising and may continue to devote larger portions of their advertising budgets to more traditional offline or online personal
computer-based advertising, instead of shifting additional advertising resources to mobile advertising. If the market for mobile advertising
deteriorates, or develops more slowly than we expect, the Company may not be able to increase its revenue.
The Company does not control the mobile networks over which it provides its advertising services.
The Company’s mobile advertising platform are dependent on the reliability of network operators and carriers who maintain
sophisticated and complex mobile networks, as well as its ability to deliver ads on those networks at prices that enable it to realize a profit.
Mobile networks have been subject to rapid growth and technological change, particularly in recent years. The Company does not control
these networks.
Mobile networks could fail for a variety of reasons, including new technology incompatibility, the degradation of network
performance under the strain of too many mobile consumers using the network, a general failure from natural disaster or a political or
regulatory shut-down. Individuals and groups who develop and deploy viruses, worms and other malicious software programs could also
attack mobile networks and the devices that run on those networks. Any actual or perceived security threat to mobile devices or any mobile
network could lead existing and potential device users to reduce or refrain from mobile usage or reduce or refrain from responding to the
services offered by the Company’s advertising clients. If the network of a mobile operator should fail for any reason, the Company would
not be able to effectively provide its services to its clients through that mobile network. This, in turn, could hurt the Company’s reputation
and cause it to lose significant revenue.
Mobile carriers may also increase restrictions on the amounts or types of data that can be transmitted over their networks. The
Company anticipates generating different amounts of revenue from its advertiser clients based on the kinds of ads the Company delivers,
such as display ads, rich media ads or video ads. In most cases, the Company will be paid by advertisers on a cost-per-install basis, when a
user downloads an advertised app. In other cases, the Company will be paid on a cost-per-thousand basis depending on the number of ads
shown, or on a cost-per-click, or cost-per-action, basis depending on the actions taken by the mobile device user. Different types of ads
consume differing amounts of bandwidth and network capacity. If a network carrier were to restrict the amounts of data that can be
delivered on that carrier’s network, or otherwise control the kinds of content that may be downloaded to a device that operates on the
network, it could negatively affect the Company’s pricing practices and inhibit its ability to deliver targeted advertising to that carrier’s
users, both of which could impair the Company’s ability to generate revenue. Mobile connected device users may choose not to allow
advertising on their devices.
The success of the Company’s advertising business model will depend on its ability to deliver targeted, highly relevant ads to
consumers on their mobile connected devices. Targeted advertising is done primarily through analysis of data, much of which is collected
on the basis of user-provided permissions. This data might include a device’s location or data collected when device users view an ad or
video or when they click on or otherwise engage with an ad. Users may elect not to allow data sharing for targeted advertising for a number
of reasons, such as privacy concerns, or pricing mechanisms that may charge the user based upon the amount or types of data consumed on
the device. Users may also elect to opt out of receiving targeted advertising from Company’s platform. In addition, the designers of mobile
device operating systems are increasingly promoting features that allow device users to disable some of the functionality, which may impair
or disable the delivery of ads on their devices, and device manufacturers may include these features as part of their standard device
specifications. Although we are not aware of any such products that are widely used in the market today, as has occurred in the online
advertising industry, companies may develop products that enable users to prevent ads from appearing on their mobile device screens. If any
of these developments were to occur, the Company’s ability to deliver effective advertising campaigns on behalf of its advertiser clients
would suffer, which could hurt its ability to generate revenue and become profitable.
The Company may not be able to enhance its mobile advertising platform to keep pace with technological and market developments.
The market for mobile advertising services is characterized by rapid technological change, evolving industry standards and
frequent new service introductions. To keep pace with technological developments, satisfy increasing advertiser and developer
requirements, maintain the attractiveness and competitiveness of the Company’s mobile advertising solutions and ensure compatibility with
evolving industry standards and protocols, the Company will need to regularly enhance its
21
current services and to develop and introduce new services on a timely basis. We have invested significant resources in building and
developing real-time bidding, or RTB, infrastructure to provide access to large amounts of advertising inventory and publishers. If the
Company’s RTB platform is not attractive to its customers or is not able to compete with alterative mobile advertising solutions, the
Company will not have access to as much advertising inventory and may experience increased pressure on margins.
In addition, advances in technology that allow developers to generate revenue from their apps without assistance from the
Company could harm its relationships with developers and diminish its available advertising inventory within their apps. Similarly,
technological developments that allow third parties to better mediate the delivery of ads between advertisers and developers by introducing
an intermediate layer between the Company and its developers could impair its relationships with those developers. The Company’s
inability, for technological, business or other reasons, to enhance, develop, introduce and deliver compelling mobile advertising services in
response to changing market conditions and technologies or evolving expectations of advertisers or mobile device users could hurt its
ability to grow its business and could result in its mobile advertising platform becoming obsolete.
The Company will depend on publishers, developers and distribution partners for mobile advertising space to deliver its
advertiser clients’ advertising campaigns, and any decline in the supply of advertising inventory could hurt its business.
The Company will depend on publishers, developers and distribution partners to provide it with space within their
applications, which we refer to as “advertising inventory,” on which the Company will deliver ads. We anticipate that a significant portion
of the Company’s revenue will derive from the advertising inventory provided by a limited number of publishers, developers and
distribution partners. The Company will have minimum or fixed commitments for advertising inventory with some but not all of its
publishers, developers and distribution partners, including certain wireless carriers in the United States and internationally. The Company
intends to expand the number of publishers, developers and distribution partners subject to minimum or fixed arrangements. Outside of
those relationships however, the publishers, developers and distribution partners that will sell their advertising inventory to the Company
are not required to provide any minimum amounts of advertising space to the Company, nor are they contractually bound to provide the
Company with a consistent supply of advertising inventory. Such publishers, developers and distribution partners can change the amount of
inventory they make available to the Company at any time. They may also change the price at which they offer inventory to the Company,
or they may elect to make advertising space available to its competitors who offer ads to them on more favorable economic terms. In
addition, publishers, developers and distribution partners may place significant restrictions on the Company’s use of their advertising
inventory. These restrictions may prohibit ads from specific advertisers or specific industries, or they could restrict the use of specified
creative content or format. They may also use a fee-based or subscription-based business model to generate revenue from their content, in
lieu of or to reduce their reliance on ads.
If publishers, developers and distribution partners decide not to make advertising inventory available to the Company for any
of these reasons, decide to increase the price of inventory, or place significant restrictions on the Company’s use of their advertising space,
the Company may not be able to replace this with inventory from others that satisfy the Company’s requirements in a timely and cost-
effective manner. If this happens, the Company’s revenue could decline or its cost of acquiring inventory could increase.
The Company’s advertising business depends on its ability to collect and use data to deliver ads, and any limitation on the collection
and use of this data could significantly diminish the value of the Company’s services and cause it to lose clients and revenue.
When the Company delivers an ad to a mobile device, it will often be able to collect anonymous information about the
placement of the ad and the interaction of the mobile device user with the ad, such as whether the user visited a landing page or installed an
application. As the Company collects and aggregates this data provided by billions of ad impressions, it intends to analyze it in order to
optimize the placement and scheduling of ads across the advertising inventory provided to it by developers. For example, the Company
may use the collected information to limit the number of times a specific ad is presented to the same mobile device, to provide an ad to only
certain types of mobile devices, or to provide a report to an advertiser client on the number of its ads that were clicked.
Although the data the Company will collect is not personally identifiable information, its clients might decide not to allow it
to collect some or all of this data or might limit its use of this data. For example, application developers may not agree to provide the
Company with the data generated by interactions with the content on their appliations, or device users may not consent to having
information about their device usage provided to the developer. Any limitation on the Company’s ability
22
to collect data about user behavior and interaction with mobile device content could make it more difficult for the Company to deliver
effective mobile advertising programs that meet the demands of its advertiser clients.
Although the Company’s contracts with advertisers will generally permit it to aggregate data from advertising campaigns,
these clients might nonetheless request that the Company discontinue using data obtained from their campaigns that have already been
aggregated with other clients’ campaign data. It would be difficult, if not impossible, to comply with these requests, and responding to these
kinds of requests could also cause the Company to spend significant amounts of resources. Interruptions, failures or defects in its data
collection, mining, analysis and storage systems, as well as privacy concerns and regulatory restrictions regarding the collection of data,
could also limit its ability to aggregate and analyze mobile device user data from its clients’ advertising campaigns. If that happens, the
Company may not be able to optimize the placement of advertising for the benefit of its advertiser clients, which could make its services
less valuable, and, as a result, it may lose clients and its revenue may decline.
If the Company fails to detect click fraud or other invalid clicks on ads, it could lose the confidence of its advertiser clients, which would
cause its business to suffer.
The Company’s business will rely on delivering positive results to its advertiser clients. The Company will be exposed to the
risk of fraudulent and other invalid clicks or conversions that advertisers may perceive as undesirable. Because of their smaller sizes as
compared to personal computers, mobile device usage could result in a higher rate of accidental or otherwise inadvertent clicks by a user.
Invalid clicks could also result from click fraud, where a mobile device user intentionally clicks on ads for reasons other than to access the
underlying content of the ads. If fraudulent or other malicious activity is perpetrated by others, and the Company is unable to detect and
prevent it, the affected advertisers may experience or perceive a reduced return on their investment. High levels of invalid click activity
could lead to dissatisfaction with its advertising services, refusals to pay, refund demands or withdrawal of future business. Any of these
occurrences could damage the Company’s brand and lead to a loss of advertisers and revenue.
The Company’s business depends on its ability to maintain the quality of its advertiser and developer content.
The Company must be able to ensure that its clients’ ads are not placed in developer content that is unlawful or inappropriate.
Likewise, its developers will rely upon the Company not to place ads in their apps that are unlawful or inappropriate. If the Company is
unable to ensure that the quality of its advertiser and developer content does not decline as the number of advertisers and developers it
works with continues to grow, then the Company’s reputation and business may suffer.
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 distribution of applications, mobile advertising, development, distribution and sale of mobile products and services is a
highly competitive business. We compete for end users primarily on the basis of positioning, brand, quality and price. We compete for
wireless carriers 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 competition for application and content distribution comes from the traditional application store businesses of
Apple and Google, existing operator solutions built internally, as well as companies providing app install products and services as offered
by Facebook, Twitter, Yahoo!, Pandora and other ad networks such as RocketFuel. These companies can be both customers and publishers
for Digital Turbines products, as well as competitors in certain cases. For the Discover product, there is some competition in the space by
everything.me, Quixey, and Aviate, but our main competitors are OEM launchers and Android launchers. With Ignite, we see some smaller
competitors, such as IronSource, Wild Tangent, and Sweet Labs, but the more material competition is internally developed operator
solutions and specific mobile application management solutions built in-house by OEMs and Wireless Operators. Some of our existing
wireless operators could make a strategic decision to develop their own solutions rather than continue to use our Discover and Ignite
products.
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.
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, in DT’s case, inhibit generation of sales), 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
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. Historically, the
majority of our revenues were derived via content purchases through traditional carrier application stores, which are in decline with
momentum shifting towards third parties (Google and Apple). 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 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, shopping, and mobile 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 and 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 related to our Content products, 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 related to content 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
related to content. 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 a 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 some of 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 rely on the current state of the law in certain territories where we operate our 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 applications, 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.
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We rely on our current understanding of regional regulatory requirements pertaining to the marketing, advertising and promotion of
our 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 and thereby adversely
impact our revenues, our operating results and our financial condition.
Some portions of our business rely extensively on marketing, advertising and promoting our products and services requiring it
to have an understanding of the local laws and regulations governing our business. Additionally, we rely on the policies and procedures of
wireless carriers and should those change, there could be an adverse impact on our products. 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 Company's businesses is in early stages and not completely proven or certain.
The business model that the Company is pursuing, mobile advertising and application installations, is in the early stages and
not completely proven. There are many different types of models including, but not limited to, set-up fees, Cost per Installation (CPI) Cost
per Placement (CPP), Cost per Action (CPA), up-front fees (including licensing), revenue shares, per device fees, as well as hybrids of each.
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 the Company entails offering its platform to existing and new customers. There can be no
assurance that we will be able to successfully market new services and offerings to existing and new customers. Moreover, in order to
credibly offer the Ignite and Discover platform, we will need to achieve additional operational and technical achievements to further
develop the products. Both Ignite and Discover are compatible with Android, and should the market shift to a different operating system
there would need to be modifications to our products to adapt to such a change. While we remain optimistic about our ability to complete
this change and build out, it will be subject to all of the risks attendant to these 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 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 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, application developers, mobile entertainment publishers and white label
storefront providers we 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 content 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 we develop and distribute. New or different mobile content 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 content industry, any of which could significantly harm our operating
results.
Our business is subject to risks that are generally associated with the content 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 operating systems capable of running applications, products and
services such as ours. Our development resources are concentrated in today’s most popular operating systems, and we have experience
developing applications for these operating systems. Specifically our Ignite and Discover products currently are compatible with the
Android and iOS operating system, with the iOS operating system now compatible through our Ignite Direct product. If this operating
system falls 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.
Mobile applications and content 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 or third party 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
26
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.
Actual or perceived security vulnerabilities in mobile handsets or wireless networks could adversely affect our revenues.
Maintaining the security of mobile handsets and wireless networks is critical for our business. There are individuals and
groups who develop and deploy viruses, worms and other illicit code or malicious software programs that may attack wireless networks
and handsets. Security experts have identified computer “worm” programs that target handsets running on certain operating systems.
Although these worms have not been widely released and do not present an immediate risk to our business, we believe future threats could
lead some end users to seek to reduce or delay future purchases of our products or reduce or delay the use of their handsets. Wireless
carriers and handset manufacturers may also increase their expenditures on protecting their wireless networks and mobile phone products
from attack, which could delay adoption of new handset models. Any of these activities could adversely affect our revenues and this could
harm our business, operating results and financial condition.
Changes in government regulation of the media and wireless communications industries may adversely affect our business.
A number of laws and regulations have been and likely will continue to 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 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 three people fill the position of Chief Financial Officer in the past three 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. Additionally,
our workforce is comprised of a relatively small number of employees operating in
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different countries around the globe who support our existing and potential customers. Given the size and geographic dispersion of our
workforce, we could experience challenges with execution as our business matures and expands.
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. Further, we conduct international operations in Germany, Israel, Singapore and Australia, areas that, similar to
our headquarters region, have high costs 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.
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.
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.
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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.
As we pursue and complete strategic acquisitions, divestitures or joint ventures, including our completed acquisitions of XYO and
Appia, Inc, we may not be able to successfully integrate acquired businesses.
We completed the acquisition of XYO and Appia, Inc. in fiscal 2015, and we continue to evaluate potential acquisitions, or
joint ventures with third parties. These transactions create risks such as:
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disruption of our ongoing business, including loss of management focus on existing
businesses;
problems retaining key personnel of the companies involved in the
transactions;
operating losses and expenses of the businesses we acquire or in which we
invest;
the potential impairment of tangible assets, intangible assets and goodwill acquired in the
acquisitions;
the difficulty of incorporating an acquired business into our business and unanticipated expenses related to such
integration;
potential operational deficiencies in the acquired business and personnel inexperienced in preparing and delivering disclosure
information required for a U.S. public company; and
potential unknown liabilities associated with a business we acquire or in which we
invest.
In the event of any future acquisitions, we might need to issue additional equity securities, spend our cash, incur debt, or take
on contingent liabilities, any of which could reduce our profitability and harm our business.
Risks Related to the Economy in the United States and Globally
The effects of the past 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:
•
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;
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
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controls;
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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.
The Company is expanding and developing internationally, and our increasing foreign operations and exposure to fluctuations in
foreign currency exchange rates may increase.
We have expanded, and we expect that we will continue to expand, our international operations. International operations
inherently subject us to a number of risks and uncertainties, including:
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changes in international regulatory and compliance requirements that could restrict our ability to develop, market and sell our
products;
social, political or economic instability or
recessions;
diminished protection of intellectual property in some countries outside of the United
States;
difficulty in hiring, staffing and managing qualified and proficient local employees and advisors to run international
operations;
the difficulty of managing and operating an international enterprise, including difficulties in maintaining effective communications
with employees and customers due to distance, language and cultural barriers;
differing labor regulations and business
practices;
higher operating costs due to local laws or
regulations;
fluctuations in foreign economies and currency exchange
rates;
difficulty in enforcing agreements;
and
potentially negative consequences from changes in or interpretations of tax laws, post-
acquisition.
Any of these factors may, individually or as a group, have a material adverse effect on our business and results of operations.
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; however applications have been submitted. Consequently, we may not be able to protect our technologies
from independent invention by third parties.
We also seek to maintain certain intellectual property as trade secrets. The secrecy could be compromised by outside parties,
or by our employees, which could cause us to lose the competitive advantage resulting from these trade secrets.
We also face risks associated with our trademarks. For example, there is a risk that our international trademark applications
may be considered too generic or that the words “Digital” or “Turbine” could be separately or compositely trademarked by third parties
with competitive products who may try and block our applications or sue us for trademark dilution which could have adverse effects on our
financial status.
Despite our efforts to protect our intellectual property rights, unauthorized parties may attempt to copy or otherwise to obtain
and use our intellectual property. Monitoring unauthorized use of our intellectual property is difficult and costly, and we cannot be certain
that the steps we have taken will prevent infringement, piracy, and other unauthorized uses of our intellectual property, particularly
internationally where the laws may not protect our intellectual property rights as fully as
30
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.
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, end-users 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. Carriers or other customers have and may try to include us as defendants in
suits brought against them by their own customers or third parties. In such cases, the risks and expenses would be similar to those where we
are the party directly involved in the litigation.
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, namely the Australian dollar. 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.
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.
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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.
Government regulation of our marketing methods could restrict our ability to adequately advertise and promote our content, products
and services available in certain jurisdictions.
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.
Risks Relating to Our Common Stock
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;
developments in the financial markets, and the worldwide or regional
economies;
announcements of innovations or new products or services by us or our
competitors;
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.
If we fail to comply with the continued listing requirements of the NASDAQ Capital Market, our common stock may be delisted and the
price of our common stock and our ability to access the capital markets could be negatively impacted.
Our common stock is listed for trading on the NASDAQ Capital Market (“NADSAQ”). We must satisfy NASDAQ’s
continued listing requirements, including, among other things, a minimum closing bid price requirement of $1.00 per share for 30
consecutive business days. If a company trades for 30 consecutive business days below the $1.00 minimum closing bid price requirement,
NASDAQ will send a deficiency notice to the company, advising that it has been afforded a “compliance period” of 180 calendar days to
regain compliance with the applicable requirements. Thereafter, if such a company does not regain compliance with the bid price
requirement, a second 180-day compliance period may be available.
A delisting of our common stock from NADSAQ could materially reduce the liquidity of our common stock and result in a
corresponding material reduction in the price of our common stock. In addition, delisting could harm our ability to raise capital through
alternative financing sources on terms acceptable to us, or at all, and may result in the potential loss of confidence by investors, employees
and fewer business development opportunities.
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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 complimentary 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 choose to raise additional capital to accelerate the growth of our business, and we may not be able to raise capital to grow our
business on terms acceptable to us or at all.
Should we choose to pursue alternatives to accelerate the growth or enhance our existing business, we may 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 may 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 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.
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.
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. Our management concluded that our internal controls over financial reporting were ineffective as of March 31, 2016; refer to
Item 9A of this 10K for more information about management’s assessment of internal controls. 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-
33
dealers to make a market in our common stock, which could further reduce our stock price and harm our business. Refer to Item 9A of this
10K for more information about management’s assessment of internal controls.
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.
Additionally, the time and effort required to maintain communications with shareholders and the public markets can be demanding on
senior management, which can divert focus from operational and strategic efforts. The requirements of the public markets and the related
regulatory requirements has resulted in an increase in our legal, accounting and financial compliance costs, may make some activities more
difficult, time-consuming and costly and may place undue strain on our personnel, systems and resources.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and
internal control over financial reporting. This can be difficult to do. For example, we depend on the reports of wireless carriers for
information regarding the amount of sales of our products and services and to determine the amount of royalties we owe branded content
licensors and the amount of our revenues. These reports may not be timely, and in the past they have contained, and in the future they may
contain, errors.
In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over
financial reporting, we expend significant resources and provide significant management oversight. We have a substantial effort ahead of
us to implement appropriate processes, document our system of internal control over relevant processes, assess their design, remediate any
deficiencies identified and test their operation. As a result, management’s attention may be diverted from other business concerns, which
could harm our business, operating results and financial condition. These efforts will also involve substantial accounting-related costs.
The Sarbanes-Oxley Act makes it more difficult and more expensive for us to maintain directors’ and officers’ liability
insurance, and we may be required in the future to accept reduced coverage or incur substantially higher costs to maintain coverage. If we
are unable to maintain adequate directors’ and officers’ insurance, our ability to recruit and retain qualified directors, and officers will be
significantly curtailed.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
The principal offices of Digital Turbine, Inc. are located at 1300 Guadalupe Street, Suite 302, Austin, Texas 78701. Digital
Turbine also leased property in Los Angeles, California, which were closed on May 31, 2015 as part of the Company’s headquarter
relocation move to Austin, Texas. Digital Turbine also leases property in Durham, North Carolina through its wholly-owned subsidiary, DT
Media, and internationally in Australia, Israel, and Germany through its wholly-owned subsidiaries, Digital Turbine Group Pty Ltd, DT
EMEA Ltd, and Digital Turbine Germany GmbH.
ITEM 3.
LEGAL PROCEEDINGS
The information required by this Item 3 is incorporated herein by reference to the information set forth under the caption
“Legal Matters” in Note 18 of the Notes to the Consolidated Financial Statements.
ITEM 4.
MINE SAFETY DISCLOSURE
Not applicable.
PART II
34
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
As of June 8, 2016, the closing price of our common stock was $1.08. Our common stock is traded on the NASDAQ Capital
Market under the symbol “APPS.” The following table sets forth the range of high and low closing sales prices reported on the NASDAQ
Capital Market for our common stock for the following periods:
Fiscal Year Ended March 31, 2016
First quarter
$
Second quarter
$
Third quarter
$
Fourth quarter
$
Fiscal Year Ended March 31, 2015
First quarter
$
Second quarter
$
Third quarter
$
Fourth quarter
$
High
Low
4.28 $
2.96 $
1.92 $
1.39 $
4.12 $
5.89 $
4.45 $
4.09 $
3.02
1.71
1.25
0.99
3.24
3.16
2.99
2.79
Holders
As of May 30, 2016, there were 2,559 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 Digital Turbine, Inc.
On May 26, 2011, our board of directors adopted the 2011 Equity Incentive Plan of Digital Turbine, Inc. and on April 27,
2012, our board of directors amended and restated the plan and the related plan documents and directed that they be submitted to our
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 Digital Turbine, Inc. (the “2011 Plan”), the Digital Turbine, Inc. Amended and
Restated 2011 Equity Incentive Plan Notice of Grant and Restricted Stock Agreement and the Digital Turbine, Inc. Amended and Restated
2011 Equity Incentive Plan Notice of Grant and Stock Option Agreement (collectively, the “Related Documents”).
The 2011 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”). On September 10, 2012, the Company increased the
2011 Plan shares available for issuance from 4,000,000 to 20,000,000, of which 11,886,707 remain available for issuance as of March 31,
2016.
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, our Appia, Inc. 2008 Stock Incentive Plan and individual compensation arrangements with
employees or consultants of the Company as of March 31, 2016.
35
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
Number of securities
remaining available for
future issuance under
equity compensation
plans
(excluding securities
reflected in column (a))
6,963,590 $
719,670 $
161,135 $
—
7,844,395
2.85
11.58
0.63
—
11,886,707
—
—
—
11,886,707
Plan Category
Equity compensation plan approved by security
holders
Amended and Restated 2011 Equity Incentive Plan
2007 Employee, Director and Consultant Stock Plan
Appia, Inc. 2008 Stock Incentive Plan
Equity compensation plans not approved by security
holders
Total
Recent Sale of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchaser
There were no purchases of equity securities by us during the year ended March 31, 2016.
Performance Graph
This performance graph shall not be deemed ‘‘soliciting material’’ or to be ‘‘filed’’ with the SEC for purposes of Section 18
of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities under Section 18, and shall not be deemed to be
incorporated by reference into any filing of ours under the Securities Act of 1933, as amended.
The graph set forth below compares the cumulative total stockholder return on an initial investment of $100 in our common
stock between March 31, 2011 and March 31, 2016, with the comparative cumulative total return of such amount on (i) the NASDAQ
Composite Index (IXIC), and (ii) the Russell 2000 Index (RUT) over the same period. We have not paid any cash dividends and, therefore,
the cumulative total return calculation for us is based solely upon stock price appreciation (depreciation) and not upon reinvestment of cash
dividends. The comparisons shown in the graph below are based upon historical data. We caution that the stock price performance shown
in the graph below is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock.
36
COMPARISON OF CUMULATIVE TOTAL RETURN
ITEM 6.
SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operation," and our consolidated financial statements and the related notes
included in Part II, Item 8, "Financial Statements and Supplementary Data," of this Annual Report on Form 10-K.
The consolidated statements of operations data for each of the three years ended March 31, 2016, 2015, and 2014 and the
consolidated balance sheet data as of March 31, 2016 and 2015 are derived from and qualified by reference to our audited consolidated
financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data," of this Annual Report on Form 10-K. The
consolidated statements of operations data for the two years ended March 31, 2013 and 2012 and the consolidated balance sheet data as of
March 31, 2014, 2013, and 2012 are derived from our audited financial statements not included elsewhere in this Annual Report on Form
10-K. Our historical results are not necessarily indicative of our results in any future period.
It is important to note that the table below excludes the operations of Twistbox in all periods presented as the Company
disposed of the Twistbox subsidiary on February 13, 2014, and as such, it is no longer reflected as part of our continuing operations in this
Report. Other notable business acquisitions made by the Company over the periods presented in the table below include the acquisition
which closed on April 12, 2013, where through its indirect, wholly-owned subsidiary organized under the laws of Australia, Digital Turbine
Group Pty Ltd (“DT APAC”), acquired Mirror Image International Holdings Pty Ltd (“MIAH”), and the acquisition which closed on
March 6, 2015, where the Company completed the acquisition of Appia, Inc. Appia was acquired into the Company’s wholly-owned
subsidiary DTM Merger Sub, Inc., which was renamed to Digital Turbine Media, Inc. and referred to in this Form 10-K and the
consolidated financial statements as DT Media. For further information see Part I, Item 1, "Business" under the heading "History of Digital
Turbine, Inc." of this Annual Report on Form 10-K.
37
Results of Operations
Net revenues
Loss from operations
Net loss from continuing operations, net of
taxes
Basic and diluted net loss per common
share from continuing operations
Weighted-average common shares
outstanding from continuing operations,
basic and diluted
Balance Sheet Data
Cash and cash equivalents
Working capital (deficit)
Total assets
Long-term obligations
Total stockholders' equity
Year Ended March 31,
2016
2015
2014
2013
2012
(in thousands, except per share amounts)
$
86,541 $
(25,936)
28,252 $
(23,737)
24,404 $
(15,524)
3,885 $
(11,029)
1,402
(10,952)
(28,032)
(24,647)
(17,202)
(12,658)
(22,161)
(0.46)
(0.63)
(0.63)
(0.72) $
(2.24)
61,763
38,967
27,478
17,631
9,884
$
$
11,231 $
(9,308)
122,068 $
815
82,271
7,069 $
(3,678)
122,571 $
7,090
91,529
21,805 $
15,575
45,095 $
238
32,951
1,149 $
(5,663)
12,485 $
2,093
737
8,746
3,966
11,642
2,524
4,061
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 7.
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,” “would,” “could,”
“may,” 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” set forth under Item IA and elsewhere in this
filing. Historical operating results are not necessarily indicative of the trends in operating results for any future period.
All numbers are in thousands, except share and per share amounts.
Company Overview
Digital Turbine, through its subsidiaries, innovates at the convergence of media and mobile communications, delivering end-
to-end products and solutions for mobile operators, application advertisers, device OEMs and other third parties to enable them to
effectively monetize mobile content and generate higher value user acquisition. The Company operates its business by providing services
in the Advertising and Content space.
The Company has grown through several recent acquisitions, which are relevant to understanding the Company’s current
business. The Company acquired Xyologic and Appia, Inc. in fiscal 2015. The Xyologic acquisition was key to developing Discover, which
is a product that provides application install recommendations. DT Media (formerly Appia, Inc.) provides the Company with a mobile user
acquisition network, which allows mobile advertisers to engage with the right customers for their applications.
The Company operates its business in two reportable segments – Advertising and Content.
The Company's Advertising business is comprised of two businesses:
•
O&O, an advertiser solution for unique and exclusive carrier and OEM inventory which is comprised of
services including:
◦
◦
Ignite, a mobile device management platform with targeted application distribution
capabilities,
Discover, an intelligent application discovery
platform,
38
•
A&P, a leading worldwide mobile user acquisition network which is comprised of services
including:
◦
Syndicated
network
RTB or programmatic
advertising
◦
The Company's Content business is comprised of services including:
• Marketplace, an application and content store,
•
and
Pay, a content management and mobile payment
solution.
With global headquarters in Austin, Texas and offices in Durham, North Carolina, Berlin, San Francisco Singapore, Sydney
and Tel Aviv, Digital Turbine’s solutions are available worldwide.
Advertising
O&O Business
The Company's O&O business is an advertiser solution for unique and exclusive carrier and OEM inventory which is
comprised of services including Ignite and Discover.
Ignite is a mobile application management software that enables mobile operators and OEMs to control, manage, and monetize
applications installed at the time of activation and over the life of a mobile device. Ignite allows mobile operators to personalize the app
activation experience for customers and monetize their home screens via Cost-Per-Install or CPI arrangements, Cost-Per-Placement or CPP
arrangements, and/or Cost-Per-Action or CPA arrangements with third party advertisers. There are several different delivery methods
available to operators and OEMs on first boot of the device: Wizard, Silent, SDK, or Direct through Discover. Optional notification features
are available throughout the lifecycle of the device, providing operators additional opportunity for advertising revenue streams. The
Company has launched Ignite with mobile operators and OEMs in North America, Latin America, Europe, Asia Pacific, India and Israel.
Discover enables end user application and content discovery, both organic and sponsored, through a variety of user interfaces.
The recommendation engine powering Discover and other Digital Turbine products is AppSource, which provides intelligent
recommendations to the device end user. Monetization occurs through the display of and/or recommendation of applications via the CPI
commercial model. Discover has been deployed with mobile operators in North America and Asia Pacific.
A&P Business
The Company's A&P business, formerly Appia Core, is a leading worldwide mobile user acquisition network. Its mobile user
acquisition platform is a demand side platform, or DSP. This platform allows mobile advertisers to engage with the right customers for their
applications at the right time to gain them as customers. The A&P business, through its syndicated network service, accesses mobile ad
inventory through publishers including direct developer relationships, mobile websites, mobile carriers and mediated relationships. The
A&P business also accesses mobile ad inventory by purchasing inventory through exchanges using RTB. The advertising revenue
generated by A&P platform is shared with publishers according to contractual rates in the case of direct or mediated relationships. When
inventory is accessed using RTB, A&P buys inventory at a rate determined by the marketplace. Since inception, A&P has delivered over
150 million application installs for hundreds of advertisers.
Content
Pay is an API that integrates billing infrastructure between mobile operators and content publishers to facilitate mobile
commerce. Increasingly, mobile content publishers want to go directly to consumers to sell their content rather than sell through traditional
distributors such as Google Play or the Apple Application Store, which are not as prominent in select countries. Pay allows publishers and
carriers to monetize those applications by allowing the content to be billed directly to the consumer via carrier billing. Pay has been
launched in Australia, Philippines, India, and Singapore.
Marketplace is a white-label solution for mobile operators and OEMs to offer their own branded content store. Marketplace
can be sold as an application storefront that manages the retailing of mobile content including features such as merchandising, product
placements, reporting, pricing, promotions, and distribution of digital goods. Marketplace also includes
39
the distribution and licensing of content across multiple content categories including music, applications, wallpapers, videos, and games.
Marketplace is deployed with many operators across multiple countries including Australia, Philippines, Singapore, and Indonesia.
All discussions in this Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
relate to continuing operations.
40
RESULTS OF OPERATIONS
Below are our revenues, cost of revenues, and expenses for fiscal 2016, 2015, and 2014. This information should be read in
conjunction with our Consolidated Financial Statements and notes thereto. All financial results of operations during the year ended March
31, 2015 do not include Appia, Inc. financial results, other than the 26 days in March 2015 after the Company acquired Appia, Inc., as the
acquisition did not close until March 6, 2015.
Years Ended
Years Ended
March 31, 2016 March 31, 2015
(in thousands, except per share
amounts)
% of
Change
March 31, 2015 March 31, 2014
(in thousands, except per share
amounts)
86,541 $
66,185
10,537
9,819
35,755
(25,936)
(1,816)
28,252
20,110
2,010
6,132
29,869
(23,737)
(234)
206.3 % $
229.1 %
424.2 %
60.1 %
19.7 %
9.3 %
676.1 %
28,252 $
20,110
2,010
6,132
29,869
(23,737)
(234)
24,404
14,789
1,769
7,846
23,370
(15,524)
(1,407)
% of
Change
15.8 %
36.0 %
13.6 %
(21.8)%
27.8 %
52.9 %
(83.4)%
(29)
32
(190.6)%
—
—
—
(37)
—
—
—
—
(9)
— %
— %
(100.0)%
2
(1,950.0)%
—
46
— %
(100.0)%
32
—
—
(9)
2
—
46
33
(3.0)%
(811)
(442)
74
(100.0)%
(100.0)%
(112.2)%
—
100.0 %
603
—
(100.0)%
100.0 %
(27,818)
214
(23,900)
747
16.4 %
(71.4)%
(23,900)
747
(17,474)
(272)
36.8 %
(374.6)%
(28,032) $
(24,647)
13.7 % $
(24,647) $
(17,202)
43.3 %
(0.46) $
(0.63)
(27.0)% $
(0.63) $
(0.68)
(7.4)%
61,763
38,967
58.5 %
38,967
27,478
41.8 %
Net revenues
$
License fees and revenue share
Other direct cost of revenues
Gross profit
Total operating expenses
Loss from operations
Interest expense, net
Foreign exchange transaction gain
/ (loss)
Change in fair value of warrant
derivative liabilities loss
Loss on extinguishment of debt
Gain / (loss) on settlement of debt
Gain / (loss) on disposal of fixed
assets
Gain on change in valuation of
long-term contingent liability
Other income
Loss from operations before income
taxes
Income tax provision / (benefit)
Net loss from continuing operations,
net of taxes
Basic and diluted net loss per common
share
Weighted-average common shares
outstanding, basic and diluted
$
$
Comparison of the Years Ended March 31, 2016, 2015, and 2014
Revenues
Year Ended March 31,
Year Ended March 31,
2016
2015
% of Change
2015
2014
% of Change
(in thousands)
(in thousands)
Revenues by type:
Content
Advertising
Total
$
$
28,765 $
57,776
86,541 $
22,009
6,243
28,252
30.7% $
825.5%
206.3% $
22,009 $
6,243
28,252 $
23,635
769
24,404
(6.9)%
711.8 %
15.8 %
41
Fiscal 2016 Compared to Fiscal 2015
During the year ended March 31, 2016 there was an approximately $58,289 or 206% increase in overall revenue, as compared
to the year ended March 31, 2015. During fiscal 2016, as compared to fiscal 2015, the Company experienced growth in both the Content
and Advertising businesses, with the Advertising growth stemming from both organic growth in Ignite and inorganic growth with a full
year of A&P revenue as opposed to only 26 days of A&P revenue in fiscal 2015. Organic growth in Advertising was driven primarily by
CPI and CPP revenue from new Advertising partners across two major US carrier distribution partners, and amounts earned from carrier
partners related to software customization and integration. The increase in the Content business was driven primarily from growth in Pay,
with overall increased demand for the product, the service being launched with new customers in Australia, as well as new Content services
provided in new markets in Southeast Asia.
Overall revenue growth year-over-year was offset by a moderate decline in Marketplace as our contract in Israel was
terminated during the quarterly period ended June 30, 2015. Additionally, the growth was further offset by continued decline in the foreign
exchange rate of the Australian dollar to the United States dollar.
Fiscal 2015 Compared to Fiscal 2014
During the year ended March 31, 2015, there was an approximately $3,848 or 15.8% increase in overall revenue, as compared
to the year ended March 31, 2014. During fiscal 2015, as compared to fiscal 2014, the Company experienced growth in the Advertising
business and a moderate decline in the Content business, with the Advertising growth stemming from both organic growth in Ignite and
inorganic growth with 26 days of A&P revenue in fiscal 2015. Organic growth in Advertising was driven primarily by CPI and CPP
revenue from new advertising partners across commercial deployments of Ignite with new carrier partners, amounts earned from the
Company’s carrier partners relating to sharing of costs of software customization and integration prior to device launch.
Overall revenue growth year-over-year was offset by a moderate decline in the Content business year-over-year driven
primarily by a decrease in Marketplace in the first half of the fiscal year as our contract in Israel was terminated during the quarterly period
ended June 30, 2015. The decline in Marketplace was partially mitigated by increased billing revenue as a result of new Pay customers.
Gross Margins
During fiscal 2016 the company changed its methodology for how hosting expense included in cost of revenues are allocated
to the Company's Advertising and Content operating segments as the new method of allocation is deemed by management to be a more
accurate representation for how the expenses relate to the operations of the Advertising and Content segments. Hosting expenses included
in costs of sales in fiscal 2015 and 2014 were previously allocated between the Advertising and Content segments based on geographic
location as the specific locations generally related only to either the Advertising or Content segment. Hosting expense included in cost of
revenues in fiscal 2016 are now being allocated based on the percentage of revenue between Advertising and Content for the Company as a
whole. Prior period fiscal 2015 and 2014 figures presented have been updated to reflect these changes and are comparable to the fiscal
2016 figures presented.
Year Ended March 31,
Year Ended March 31,
2016
2015
% of Change
2015
2014
% of Change
(in thousands)
(in thousands)
Gross margin by type:
Content gross margin $
Content gross margin %
Advertising gross margin $
Advertising gross margin %
$
$
Total gross margin $
Total gross margin %
$
1,231
$
4.3%
8,588
14.9%
9,819
$
$
11.3%
(71.2)% $
361.7 % $
$
$
4,272
19.4%
1,860
29.8%
60.1 % $
6,132
$
21.7%
7,083
30.0%
763
99.2%
7,846
32.2%
(39.7)%
143.8 %
(21.8)%
4,272
19.4%
1,860
29.8%
6,132
21.7%
42
Fiscal 2016 Compared to Fiscal 2015
Total gross margin, inclusive of the impact of other direct cost of revenues (amortization of intangibles) was approximately
$9,819 or 11.3% for the year ended March 31, 2016, versus approximately $6,132 or 21.7% for the year ended March 31, 2015. The
increase in gross margin dollars from $6,132 to $9,819 is primarily attributable to the inclusion of a full year of A&P operations during
fiscal 2016 as opposed to only 26 days of A&P operations in fiscal 2015, offset by increased amortization expense associated with the
Appia, Inc. acquisition. Overall gross margin percentage has declined with the mix shift within Content from Marketplace to Pay coupled
with the acquired Appia, Inc. A&P business which carries a significantly lower gross margin as compared to the O&O business within
Advertising.
Total gross margin dollars, inclusive of the impact of other direct cost of revenues (amortization of intangibles), increased
$3,687 or 60.1%, from $6,132 to $9,819 during the year ended March 31, 2015 and 2016, respectively. This increase includes the impact of
an approximate $2,400 accelerated amortization expense related to customer relationship intangible assets associated with customer
terminations related to our DT EMEA Content business. Excluding the effects of the approximately $2,400 amortization, total gross margin
dollars would have been $12,219 or 14.1% during the year ended March 31, 2016, which is an increase of approximately $6,087 or 99.3%
from the year ended March 31, 2015. This increase is due primarily to gross margin dollars attributable to the inclusion of a full year of
A&P operations during fiscal 2016 as opposed to only 26 days of A&P operations in fiscal 2015.
Content gross margin, inclusive of the impact of other direct cost of revenues (amortization of intangibles), was
approximately $1,231 or 4.3% for the year ended March 31, 2016, versus approximately $4,272 or 19.4% for the year ended March 31,
2015. Excluding the effects of the $2,400 amortization expense, Content gross margin dollars and percentage would have been $3,631 or
12.6% during the year ended March 31, 2016, which is a decrease in gross margin dollars of approximately $641 or 15.0% from the year
ended March 31, 2015. This decrease in Content gross margin dollars and percentage was due primarily to a mix shift from Marketplace to
Pay, which carries a lower gross margin. For more details on the Company's services included in the Content segment, see PART II Item 7
– Management’s Discussion and Analysis of Financial Condition and Results of Operations relate to continuing operations, section titled
"Revenue by Service Category".
Advertising gross margin, inclusive of the impact of other direct cost of revenues (amortization of intangibles), was
approximately $8,588 or 14.9% for the year ended March 31, 2016, versus approximately $1,860 or 29.8% for the year ended March 31,
2015. The increase in advertising gross margin dollars was primarily attributable to the inclusion of a full year of A&P operations during
fiscal 2016 as opposed to only 26 days of A&P operations in fiscal 2015. This increase in gross margin dollars was offset by the increase in
amortization expense associated with the Appia Inc. acquisition. Appia Inc. acquisition-related amortization expense for the year ended
March 31, 2016 and March 31, 2015 was approximately $6,995 and $495, respectively, an increase of approximately $6,500 or 1,313.1%.
Overall Advertising gross margin percentage has declined as the acquired Appia, Inc. A&P business carries a significantly lower gross
margin as compared to the O&O business within Advertising. For more details on the Company's services included in the Advertising
segment, see PART II Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations relate to
continuing operations, section titled "Revenue by Service Category".
Fiscal 2015 Compared to Fiscal 2014
Total gross margin, inclusive of the impact of other direct cost of revenues (amortization of intangibles) was approximately
$6,132 or 21.7% for the year ended March 31, 2015, versus approximately $7,846 or 32.2% for the year ended March 31, 2014. The
decrease in gross margin year-over-year is primarily attributable to the Content business being adversely impacted by a mix shift from
Marketplace to Pay, which carries a lower gross margin, offset by an increase in Advertising gross margin dollars attributable to the
inclusion of 26 days of A&P operations during fiscal 2015. Total gross margin was further decreased year-over-year by increased
amortization expense associated with the Appia acquisition during fiscal 2015. For more details on the Company's services included in the
Advertising and Content segments, see Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
relate to continuing operations, section titled "Revenue by Service Category".
43
Operating Expenses
Product development
Sales and marketing
General and administrative
$
Total operating expenses
$
Year Ended March 31,
Year Ended March 31,
2016
2015
% of Change
2015
2014
% of Change
(in thousands)
10,983 $
6,067
18,705
35,755 $
7,905
2,933
19,031
29,869
38.9 % $
106.9 %
(1.7)%
19.7 % $
(in thousands)
7,905 $
2,933
19,031
29,869 $
7,869
1,915
13,586
23,370
0.5%
53.2%
40.1%
27.8%
Product development expenses include , the development and maintenance of the Company's product suite, including A&P
and O&O, as well as the costs to support Pay and Marketplace through the optimization of content for consumption on a mobile phone.
Expenses in this area are primarily a function of personnel.
Sales and marketing expenses represent the costs of sales and marketing personnel, advertising and marketing campaigns, and
campaign management. Sales and marketing expenses have increased with bringing products to market and with the inclusion of the Appia
Inc. acquired A&P business. The increase in sales and marketing expenses is also attributable to increased commissions associated with the
sales team generating more revenue through new and existing advertising relationships.
General and administrative expenses represent management, finance, and support personnel costs in both the parent and
subsidiary companies, which include professional and consulting costs, in addition to other costs such as rent, stock-based compensation,
and depreciation expense.
Fiscal 2016 Compared to Fiscal 2015
Total operating expenses for the year ended March 31, 2016 and March 31, 2015 were approximately $35,755 and $29,869,
respectively, an increase of approximately $5,886 or 19.7%. The increase in operating expenses year-over-year was primarily attributable to
the inclusion of a full year of A&P operations during fiscal 2016 as opposed to only 26 days of A&P operations in fiscal 2015. The
additional A&P operating expenses are related to product and marketing headcount directly related to the Advertising business.
Product development expenses for the year ended March 31, 2016 and March 31, 2015 were approximately $10,983 and
$7,905, respectively, an increase of approximately $3,078 or 38.9%. The increase in product development expenses year-over-year was
primarily attributable to the Company's investment in offices in Israel, Germany and Singapore contributed to the increase in product
development expenses through additional headcount being added in those regions.
Sales and marketing expenses for the year ended March 31, 2016 and March 31, 2015 were approximately $6,067 and $2,933,
respectively, an increase of approximately $3,134 or 106.9%. The increase in sales and marketing expenses year-over-year was primarily
attributable to the inclusion of a full year of A&P operations during fiscal 2016 as opposed to only 26 days of A&P operations in fiscal
2015, due in part by increased commissions associated with the sales team generating more revenue through new and existing advertising
relationships.
General and administrative expenses for the year ended March 31, 2016 and March 31, 2015 were approximately $18,705 and
$19,031, respectively, a decrease of approximately $326 or 1.7%. The decrease in general and administrative expenses year-over-year
includes a decrease in total stock compensation expense of $378 from $6,340 to $5,962, for the years ended March 31, 2015 and 2016,
respectively.
Fiscal 2015 Compared to Fiscal 2014
Total operating expenses for the year ended March 31, 2015 and March 31, 2014 were approximately $29,869 and $23,370,
respectively, an increase of approximately $6,499 or 27.8%. The increase in operating expenses year-over-year was primarily attributable to
the inclusion of 26 days of A&P operations in fiscal 2015, investment in new offices in Germany and Singapore, transaction costs related
to the acquisitions of XYO and Appia, Inc., as well as an increase in stock-based compensation.
44
Product development expenses for the year ended March 31, 2015 and March 31, 2014 were approximately $7,905 and
$7,869, respectively, an increase of approximately $36 or 0.5%. The increase in product development expenses year-over-year was
primarily attributable to the inclusion of 26 days of A&P operations in fiscal 2015.
Sales and marketing expenses for the year ended March 31, 2015 and March 31, 2014 were approximately $2,933 and $1,915,
respectively, an increase of approximately $1,018 or 53.2%. The increase in sales and marketing expenses year-over-year was primarily
attributable to the inclusion of 26 days of A&P operations, due in part by increased commissions associated with the sales team generating
more revenue through new and existing advertising relationships.
General and administrative expenses for the year ended March 31, 2015 and March 31, 2014 were approximately $19,031 and
$13,586, respectively, an increase of approximately $5,445 or 40.1%. The decrease in general and administrative expenses year-over-year
was primarily attributable to the inclusion of 26 days of A&P operations in fiscal 2015, investment in new offices in Germany and
Singapore, transaction costs related to the acquisitions of XYO and Appia, Inc., as well as an increase in stock-based compensation.
Other Income and Expenses
Interest expense, net
Foreign exchange transaction gain /
(loss)
Change in fair value of warrant
derivative liabilities loss
Loss on extinguishment of debt
Gain / (loss) on settlement of debt
Gain / (loss) on disposal of fixed
assets
Gain on change in valuation of
long-term contingent liability
Other income
Total interest and other expense,
net
Year Ended March 31,
Year Ended March 31,
2016
2015
% of Change
2015
2014
% of Change
(in thousands)
$
(1,816) $
(234)
676.1 % $
(in thousands)
(234) $
(1,407)
(83.4)%
(29)
32
(190.6)%
—
—
—
(37)
—
—
—
—
(9)
— %
— %
(100.0)%
2
(1,950.0)%
—
46
— %
(100.0)%
32
—
—
(9)
2
—
46
33
(3.0)%
(811)
(442)
74
(100.0)%
— %
(112.2)%
—
100.0 %
603
—
(100.0)%
100.0 %
$
(1,882) $
(163)
1,054.6 % $
(163) $
(1,950)
(91.6)%
Fiscal 2016 Compared to Fiscal 2015
Total interest and expense, net, for the year ended March 31, 2016 and March 31, 2015 were approximately $1,882 and $163,
respectively, an increase in net expenses of approximately $1,719 or 1,054.6%. Interest and other expense, net, includes net interest
expense, foreign exchange transaction gain/(loss), loss on settlement of debt, gain/(loss) on disposal of fixed assets, and other ancillary
costs incurred by the Company. This increase in total interest and other expense, net, was primarily attributable to a full year of interest
expense incurred during fiscal 2016 related to the new debt brought on in connection with the acquisition of Appia, Inc. during March
2015, compared to the inclusion of only 26 days of interest expense during fiscal 2015.
Fiscal 2015 Compared to Fiscal 2014
Total interest and other expense, net, for the year ended March 31, 2015 and March 31, 2014 were approximately $163 and
$1,950, respectively, a decrease in net expenses of approximately $1,787 or 91.6%. Interest and other expense, net, includes net interest
expense, foreign exchange transaction gain, change in the fair value of warrant derivative liabilities loss, loss on extinguishment of debt,
gain/(loss) on settlement of debt, and gain on change in valuation of long-term contingent liability. This decrease in total interest and other
expense, net, was primarily attributable to significantly higher expenses in fiscal 2014 due to loan modification costs and interest expense
incurred through September 2013 when the outstanding debt balance was paid off, as compared to fiscal 2015, which included only 26 days
of interest expense related to the new debt brought on in connection with the acquisition of Appia, Inc.
45
Revenue by Service Categories
The following table summarizes our net revenues by service categories for each of the past three fiscal years. The amount or
percentage of total revenue contributed by class of services has been presented for those classes accounting for 10% or more of total net
revenue in any of the three latest years, with all other amounts individually representing less than 10% of total net revenue included in the
Other category.
Year Ended March 31,
Year Ended March 31,
Year Ended March 31,
2016
2015
2014
Net revenues
Dollars
(in thousands)
% of Net
Revenues
%
Change
Dollars
(in thousands)
% of Net
Revenues
%
Change
Dollars
(in thousands)
% of Net
Revenues
$
Syndicated
Network
Pay
Ignite
Marketplace
Other
35,593
22,727
21,577
6,038
606
41.1%
26.3%
25.0%
7.0%
0.7%
1,067.4 % $
78.6 %
647.6 %
(35.0)%
97.4 %
3,049
12,724
2,886
9,286
307
10.8%
45.0%
10.2%
32.9%
1.1%
100.0 % $
29.6 %
428.6 %
(32.8)%
100.0 %
—
9,819
546
13,816
223
—%
40.2%
2.3%
56.6%
0.9%
Total net
revenues
$
86,541
100.0%
206.3 % $
28,252
100%
15.8 % $
24,404
100.0%
As a result of the strategic acquisitions of the entities now known as DT EMEA (formally the combination of the three
operating subsidiaries of Logia Group Ltd, including Logia Content, Volas, and Mail Bit), DT APAC (formally MIAH), and DT Media
(formally Appia, Inc.), the company has identified revenue streams that best represent its services.
Fiscal 2016 Compared to Fiscal 2015
Advertising
The Company's A&P business, formerly Appia Core, is a leading worldwide mobile user acquisition network. Its mobile user
acquisition platform is a demand side platform, or DSP. This platform allows mobile advertisers to engage with the right customers for their
applications at the right time to gain them as customers. The A&P business, through its syndicated network service, accesses mobile ad
inventory through publishers including direct developer relationships, mobile websites, mobile carriers and mediated relationships. The
advertising revenue generated by A&P platform is shared with publishers according to contractual rates in the case of direct or mediated
relationships. During fiscal 2016, the main revenue driver for the A&P business was the syndicated network service. During the year ended
March 31, 2016 there was an approximately $32,544 or 1,067.4% increase in syndicated network net revenues, as compared to the year
ended March 31, 2015. During fiscal 2016, as compared to fiscal 2015, the Company experienced growth stemming primarily from
inorganic growth with a full year of A&P revenue during fiscal 2016 compared to only 26 days of A&P revenue in fiscal 2015.
The Company's O&O business is an advertiser solution for unique and exclusive carrier and OEM inventory. During fiscal
2016, the main revenue drive for the O&O business was the Ignite service. Ignite is a mobile application management software that enables
mobile operators and OEMs to control, manage, and monetize applications installed at the time of activation and over the life of a mobile
device. During the year ended March 31, 2016 there was an approximately $18,691 or 647.6% increase in Ignite net revenues, as compared
to the year ended March 31, 2015. During fiscal 2016, as compared to fiscal 2015, the Company experienced growth stemming from
organic growth in Ignite, driven primarily by CPI and CPP revenue from new advertising partners across commercial deployments of Ignite
with new carrier partners.
46
Content
Pay is an API that integrates billing infrastructure between mobile operators and content publishers to facilitate mobile
commerce. Increasingly, mobile content publishers want to go directly to consumers to sell their content rather than sell through traditional
distributors such as Google Play or the Apple Application Store, which are not as prominent in select countries. Pay allows publishers and
carriers to monetize those applications by allowing the content to be billed directly to the consumer via carrier billing. Pay has been
launched in Australia, Philippines, India, and Singapore. During the year ended March 31, 2016 there was an approximately $10,003 or
78.6% increase in Pay net revenues, as compared to the year ended March 31, 2015. During fiscal 2016, as compared to fiscal 2015, the
Company experienced growth driven primarily by overall increased demand for the service and the service being launched with new
customers in Australia.
Marketplace is a white-label solution for mobile operators and OEMs to offer their own branded content store. Marketplace
can be sold as an application storefront that manages the retailing of mobile content including features such as merchandising, product
placements, reporting, pricing, promotions, and distribution of digital goods. Marketplace also includes the distribution and licensing of
content across multiple content categories including music, applications, wallpapers, videos, and games. Marketplace is deployed with
many operators across multiple countries including Australia, Philippines, Singapore, and Indonesia. During the year ended March 31,
2016 there was an approximately $3,248 or 35.0% decrease in Marketplace net revenues, as compared to the year ended March 31, 2015.
During fiscal 2016, as compared to fiscal 2015, the Company experienced a decrease in Marketplace driven primarily by the contract in
Israel which was terminated during the quarterly period ended June 30, 2015, and due to the overall shift in the Content business with
overall consumer demand shifting away from acquiring content at carrier specific branded content stores and instead acquiring content from
other more popular content stores such as Google Play or the Apple Application Store and other distribution channels such as Facebook.
Additionally, the decline in Marketplace net revenues was further increased due to continued decline in the foreign exchange rate of the
Australian dollar to the United States dollar. The overall decrease in Marketplace net revenues was offset by a moderate increase in net
revenues due to new Content services provided in new markets in Southeast Asia.
Fiscal 2015 Compared to Fiscal 2014
Advertising
During fiscal 2015, the main revenue driver for the A&P business was the syndicated network service. During the year ended
March 31, 2015 there was an approximately $3,049 or 100% increase in syndicated network net revenues, as compared to the year ended
March 31, 2014. During fiscal 2015, as compared to fiscal 2014, the Company experienced growth stemming completely from inorganic
growth with inclusion of 26 days of A&P operations during fiscal 2015 with the acquisition of Appia, Inc. during March 2015.
The Company's O&O business is an advertiser solution for unique and exclusive carrier and OEM inventory. During fiscal
2015, the main revenue drive for the O&O business was the Ignite service. Ignite is a mobile application management software that enables
mobile operators and OEMs to control, manage, and monetize applications installed at the time of activation and over the life of a mobile
device. During the year ended March 31, 2015 there was an approximately $2,340 or 428.6% increase in Ignite net revenues, as compared
to the year ended March 31, 2014. During fiscal 2015, as compared to fiscal 2014, the Company experienced 428.6% growth in Ignite net
revenues, driven by the Company's acquisition on October 9, 2014, where the Company acquired certain intellectual property assets (now
branded as Ignite) of XYO, through its Luxembourg subsidiary, DT Luxembourg. The Ignite product was not commercially deployed until
late fiscal 2015 as compared to being in commercial use for all of fiscal 2016. During fiscal 2015, Ignite net revenues growth was driven
primarily by CPI and CPP revenue from new advertising partners across commercial deployments of Ignite with new carrier partners.
Content
Pay is an API that integrates billing infrastructure between mobile operators and content publishers to facilitate mobile
commerce. Increasingly, mobile content publishers want to go directly to consumers to sell their content rather than sell through traditional
distributors such as Google Play or the Apple Application Store, which are not as prominent in select countries. Pay allows publishers and
carriers to monetize those applications by allowing the content to be billed directly to the consumer via carrier billing. Pay has been
launched in Australia, Philippines, India, and Singapore. During the year ended March 31, 2015, there was an approximately $2,905 or
29.6% increase in Pay net revenues, as compared to the year ended March 31, 2014. During fiscal 2015, as compared to fiscal 2014, the
Company experienced growth driven primarily by overall increased demand for the service.
47
Marketplace is a white-label solution for mobile operators and OEMs to offer their own branded content store. Marketplace
can be sold as an application storefront that manages the retailing of mobile content including features such as merchandising, product
placements, reporting, pricing, promotions, and distribution of digital goods. Marketplace also includes the distribution and licensing of
content across multiple content categories including music, applications, wallpapers, videos, and games. Marketplace is deployed with
many operators across multiple countries including Australia, Philippines, Singapore, and Indonesia. During the year ended March 31,
2015, there was an approximately $4,530 or 32.8% decrease in Marketplace net revenues, as compared to the year ended March 31, 2014.
During fiscal 2015, as compared to fiscal 2014, the Company experienced a decrease in Marketplace driven primarily by the contract in
Israel which was terminated during the quarterly period ended June 30, 2015, and due to the overall shift in the Content business with
overall consumer demand shifting away from acquiring content at carrier specific branded content stores and instead acquiring content from
other more popular content stores such as Google Play or the Apple Application Store and other distribution channels such as Facebook.
Additionally, the decline in Marketplace net revenues was further increased due to continued decline in the foreign exchange rate of the
Australian dollar to the United States dollar. The overall decrease in Marketplace net revenues was offset by a moderate increase in net
revenues due to new Content services provided in new markets in Southeast Asia.
Liquidity and Capital Resources
Selected Financial Information
Period Ended
March 31, 2016 March 31, 2015
(in thousands)
Cash and cash equivalents
Restricted cash
$
11,231 $
—
Short-term debt
Term loan, principal
Revolving line of credit, principal
Senior secured debenture, net of discounts of $440 and $0, respectively
Total short-term debt
Long-term debt
Senior secured debenture, net of discounts of $0 and $910, respectively
Total long-term debt
—
3,000
7,560
10,560
—
—
7,069
200
600
3,000
—
3,600
7,090
7,090
Working capital
Current assets
Current liabilities
Working capital
29,674
38,982
(9,308) $
20,274
23,952
(3,678)
$
48
Working Capital
Cash and cash equivalents and restricted cash totaled approximately $11,231 and approximately $7,269 at March 31, 2016 and
March 31, 2015, respectively, an increase of approximately $3,962 or 54.5%. Current assets totaled approximately $29,674 and
approximately $20,274 at March 31, 2016 and March 31, 2015, respectively, an increase of approximately $9,400 or 46.4%. As of
March 31, 2016 and March 31, 2015, the Company had approximately $17,519 and $12,174, respectively, in accounts receivable, an
increase of $5,345 or 43.9%. As of March 31, 2016 and March 31, 2015 the Company's working capital deficit was $9,308 and $3,678,
respectively, an increase of $5,630 or 153.1%. The increase in working capital deficit was primarily attributable to the subordinated
debenture with North Atlantic maturing on March 6, 2017 amounting to $7,560 (net of discounts of $440) now included in short-term debt
as of March 31, 2016 as compared to long-term debt as of March 31, 2015, offset by the net proceeds of $12,627 received from the
completed public offering on October 2, 2015 and the net cash received from our investment in Sift of $875. Working capital deficit was
further increased due to working capital and liquidity management, with a focus on accounts receivable collections and utilizing the full and
extended payment terms on our accounts payable. Excluding the classification of the subordinated debenture with North Atlantic in current
assets at March 31, 2016, the Company's working capital deficit would have been $1,748 at March 31, 2016, an improvement of $1,930
compared to the working capital deficit of $3,678 at March 31, 2015.
Our primary sources of liquidity have historically been issuances of common and preferred stock and convertible debt. The
Company completed a public offering on October 2, 2015, netting cash proceeds to the Company of $12,627. The Company expects to use
the net proceeds from the offering for organic business opportunities, product development, general corporate purposes, working capital,
and capital expenditures. The Company believes that it has, after the public offering, sufficient cash, cash equivalents, and capital resources
to operate its business at least through March 31, 2017. As of March 31, 2016, we had cash and cash equivalents totaling approximately
$11,231, which includes the net cash proceeds of $875 received from the Sift Media, Inc. transaction. Additionally, the Company currently
has a $5,000 revolving credit facility in place with SVB, which it uses to fund working capital requirements, as needed. As of March 31,
2016, the Company also had $3,000 outstanding on its revolving credit facility with SVB, which is included in current liabilities. As of
March 31, 2016, the Company had fully paid off its term loan with Silicon Valley Bank.
On June 11, 2015, DT Media and SVB, entered into a Third Amended and Restated Loan and Security Agreement, pursuant to
which SVB agreed to increase the revolving line of credit available under such facility from $3,500 to $5,000, to extend the maturity date
under the facility to June 30, 2016, and to make certain other changes to the terms of the existing agreement.
On November 30, 2015, DT Media and SVB, entered into an amendment (the “Amendment”) to the Third Amended and Restated
Loan and Security Agreement dated June 11, 2015. Pursuant to the Amendment, the adjusted EBITDA financial covenant was removed and
replaced with the requirement to maintain an adjusted quick ratio of not less than 0.90:1.00 unless (a) there are no advances outstanding
under the revolving facility, or (b) if the Company’s cash and cash equivalents held at the SVB or SVB’s Affiliates is greater than or equal
to $15,000. Furthermore, the Streamline Period, which is not a financial covenant but applies to application of receivables, was amended so
that it is achieved if DT Media’s trailing three-month period revenue is not less than 85% of projections for the three months ending
August 31, 2015 through November 30, 2015, 75% of projections for the three months ending December 31, 2015 and thereafter, with the
projected revenue for such three month period as set forth in DT Media’s operating budget provided to the SVB. The Amendment also
added the requirement for the Company to deliver consolidated financial statements in addition to DT Media. The Company was non-
Streamline as of March 31, 2016. As of April 30, 2016, given the Company did not meet the requirements set forth in the Amendment,
specifically items (a) and (b) noted previously, the Company was required to maintain an adjusted quick ratio of not less than 0.90:1.00. As
of April 30, 2016, the Company's quick ratio was estimated at 0.89 versus the 0.90 minimum level.
On June 10, 2016, prior to the required testing of the above-mentioned covenant, SVB and DT Media entered into a Consent
Agreement, effective as of May 31, 2016, whereby SVB provided its consent to DT Media (for a de minimis fee) to not exercise any rights
or remedies solely in connection with the non-compliance with such covenant for the period ended April 30, 2016, without which consent
DT Media would have been in default of the Loan Agreement. Please see "Risk Factors" included in PART I Item 1A. of this Annual
Report on Form 10-K within section "General Risk - The Company has secured indebtedness, which could limit its financial flexibility",
regarding financial covenant compliance.
49
Cash Flow Summary
Consolidated Statement of Cash
Flows Data:
Net cash used in operating activities
Purchase and disposal of property
and equipment, net
Cash used in acquisition of assets
Net cash from investment in Sift
Settlement of contingent liability
Stock issued for cash in stock
offering, net
Options exercised
Warrant exercised
Repayment of debt obligations
Effect of exchange rate changes on
cash and cash equivalents
Operating Activities
Year Ended March 31,
Year Ended March 31,
2016
2015
% of Change
2015
2014
% of Change
(in thousands)
(in thousands)
(7,069)
(14,500)
(51.2)%
(14,500)
(7,807)
85.7 %
(1,549)
—
875
—
12,627
51
—
(600)
(67)
(2,125)
—
(49)
—
136
375
—
2,211.9 %
(100.0)%
100.0 %
(100.0)%
100.0 %
(62.5)%
(100.0)%
100.0 %
(173)
131
(232.1)%
(67)
(2,125)
—
(49)
—
136
375
—
131
(207)
—
—
—
33,297
—
—
(3,657)
(67.6)%
100.0 %
— %
100.0 %
(100.0)%
100.0 %
100.0 %
(100.0)%
(196)
(166.8)%
During the year ended March 31, 2016 and March 31, 2015, the Company's net cash used in operating activities was $7,069
and $14,500, respectively, a decrease of $7,431 or 51.2%. The decrease in net cash used in operating activities was primarily attributable to
the net loss during the year ended March 31, 2016 and March 31, 2015 of $28,032 and $24,647, respectively, an increase of $3,385 or
13.7%, offset by other non-cash expenses, most notably depreciation and amortization, which during fiscal 2016 and fiscal 2015 was
$10,974 and $2,108, respectively, an increase of $8,866 or 420.6%.
During the year ended March 31, 2016, net cash used in operating activities was $7,069, resulting from a net loss of $28,032,
offset by net non-cash expenses of $17,467, which included depreciation and amortization, stock-based compensation, stock-based
compensation related to vesting of restricted stock for services, stock issued for settlement of liability, amortization of debt discount, a
reduction in the allowance for doubtful accounts, and an increase in accrued interest of approximately $10,974, $5,095, $867, $283, $470,
$234, and $12 respectively. Depreciation and amortization expense increased $8,866 during fiscal 2016 compared to fiscal 2015, due
primarily to increased Appia, Inc. acquisition-related amortization expense of $6,500 or 1,313.1%, which for the years ended ended
March 31, 2016 and March 31, 2015 was approximately $6,995 and $495, respectively, and due to accelerated amortization expense of
approximately $2,400 related to customer relationship intangible assets associated with customer terminations related to our DT EMEA
Content business. Net cash used in operating activities during fiscal 2016 was positively impacted by the change in net working capital
accounts as of March 31, 2016 compared to March 31, 2015, with an increase over the comparative periods in accounts payable and accrued
license fees and revenue share of approximately $7,308 and $2,789, offset by an increase in accounts receivable of approximately $5,111.
The increase in accounts payable and accrued license fees and revenue share was driven by working capital and liquidity management, with
a focus on accounts receivable collections and utilizing the full and extended payment terms on our accounts payable. Accounts receivable
increased primarily due to the inclusion of the acquired Appia, Inc. business for all of fiscal 2016 compared to only 26 days of operations in
fiscal 2015. Net cash used in operating activities is further comprised of an increase in deposits and deferred financing costs of
approximately $104 and $128, respectively, offset by a decrease in restricted cash transferred to operating cash, prepaid expenses and other
current assets, accrued compensation, and other liabilities and other items of $200, $57, $831, and $266, respectively.
During the year ended March 31, 2015, net cash used in operating activities was $14,500, resulting from a net loss of $24,647,
offset by net non-cash expenses of $9,257, which included depreciation and amortization, stock-based compensation, stock-based
compensation related to vesting of restricted stock for services, amortization of debt discount, an increase in the allowance for doubtful
accounts, and an increase in accrued interest of approximately $2,108, $5,850, $490, $34, $698, and $77, respectively. Net cash used in
operating activities during fiscal 2015 was negatively impacted by the
50
change in net working capital accounts as of March 31, 2015 compared to March 31, 2014, with an increase in accounts receivable,
deposits, and prepaid expenses and other current assets of approximately $406, $63, $142, a decrease in accounts payable and other
liabilities and other items of $379 and $4,589, offset by an increase in accrued license fees and revenue share of approximately $2,988. The
increase in accrued license fees and revenue share was driven by working capital and liquidity management, with a focus on accounts
receivable collections and utilizing the full and extended payment terms on our accounts payable. Net cash used in operating activities is
further comprised of a decrease in deferred tax assets of $3,156 and an increase in accrued compensation of $325.
During the year ended March 31, 2014, net cash used in operating activities was $7,807, resulting from a net loss of $18,704,
offset by net non-cash expenses of $10,151, which included depreciation and amortization, loss on disposal of discontinued operations (net
of taxes), stock-based compensation, stock-based compensation related to vesting of restricted stock for services, finance costs, increase in
fair value of derivative liabilities, fair value of financing costs related to conversion options, warrants issued for services, impairment of
goodwill and intangibles, amortization of debt discount, an increase in accrued interest, settlement of debt with a supplier, stock issued as
settlement of debt with a supplier, and revaluation of contingent liability of approximately $1,856, $820, $1,938, $2,755, $1,173, $811,
$470, $406, $154, $187, $109, $51, $24, and $603, respectively. Net cash used in operating activities during fiscal 2014 was positively
impacted by the change in net working capital accounts as of March 31, 2015 and March 31, 2014, with an increase over the comparative
periods in accrued license fees and revenue share, accrued compensation, and other liabilities and other items of approximately $737, $650
and $3,229, offset by an increase in accounts receivable and prepaid expenses and other current assets of approximately $734 and $2,566,
respectively. The increase in accounts payable, accrued license fees and revenue share was driven by working capital and liquidity
management, with a focus on accounts receivable collections and utilizing the full and extended payment terms on our accounts payable.
Net cash used in operating activities is further comprised of a decrease in deposits and accounts payables of $523 and $893, respectively.
Investing Activities
During the year ended March 31, 2016, cash used in investing activities was approximately $674, which includes capital
expenditures of $1,549 comprised mostly of internally-developed software, offset by net cash received from the investment in Sift of $875.
During the year ended March 31, 2015, cash used in investing activities was approximately $878, which includes cash used in
the acquisition of the XYO assets of $2,125, capital expenditures net of disposals of $67, cash paid for settlement of contingent liability of
$49, offset by cash acquired with the acquisition of Appia, Inc. of $1,363.
During the year ended March 31, 2014, cash used in investing activities was approximately $981, which includes cash used
and acquired in the acquisition of MIA of $1,287 and $513, respectively, and capital expenditures, net of disposals, of $207.
Financing Activities
During the year ended March 31, 2016, cash used in financing activities was approximately $12,078, which is primarily
attributable to stock issued for cash (net) in stock offering of $12,627 and proceeds received from the exercise of stock options of
approximately $51, offset by repayment of principal on the credit facility and loss on exchange rate changes on cash and cash equivalents
of approximately $600 and $173, respectively.
During the year ended March 31, 2015, cash provided in financing activities was approximately $511, which is primarily
attributable to stock issued for options exercised and warrants exercised of $136 and $375, respectively.
During the year ended March 31, 2014, net cash provided in financing activities was approximately $29,640, which is
primarily attributable to stock issued for cash (net) in stock offering of $33,297, and repayment of debt obligations of $3,657.
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
51
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.
Contractual Cash Obligations
The following table summarizes our contractual cash obligations at March 31, 2016:
Contractual cash obligations
Principal payments on short-term debt
Operating leases
Interest
Uncertain tax positions (a)
Total contractual cash obligations
Total
11,000
4,299
1,043
—
16,342
Fiscal
2017
11,000
941
1,043
—
12,984
Payments Due by Period
Fiscal
2018 - 2019
Fiscal
2020-2021
—
1,769
—
—
1,769
Thereafter
—
525
—
—
525
—
1,064
—
—
1,064
(a) We have approximately $815 in additional liabilities associated with uncertain tax positions that are not expected to be liquidated in fiscal 2017. We are unable
to reliably estimate the expected payment dates for these additional non-current liabilities.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based on our financial statements, which
have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to contingencies,
litigation and goodwill and intangibles acquired relating to our acquisitions. We base our estimates on historical experience and on various
other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the
preparation of our financial statements.
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.
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.
Revenue Recognition
Advertising
Advertising revenues are generated via direct Cost-Per-Install (CPI), Cost-Per-Placement (CPP), or Cost-Per-Action (CPA)
arrangements with application developers, or indirect CPI, CPP or CPA arrangements through advertising aggregators (ad networks).
Transactions are processed by the Company’s software services: mobile application management through Ignite, and user experience and
discovery through Discover.
52
The Company recognizes as revenue the amount billed to the application developer or advertising aggregator. Revenue share
payments to the carrier are recorded as a cost of revenues. The Company has evaluated its agreements with the developers and aggregators
and the carriers in accordance with the guidance at FASB ASC 605-45 Revenue Recognition – Principal Agent Considerations and has
concluded that it is the principal under these agreements. Key indicators that it evaluated to reach this determination include:
•
•
•
•
•
The Company has the contractual relationship with the application developers or advertising aggregators (collectively, the
advertisers), and we have the performance obligation to these parties;
Through our Ignite and Discover software, we provide application installation and management as well as detailed reporting to
advertisers and carriers. We are responsible for billing the advertisers, and for reporting revenues and revenue share to the carriers;
As part of the application management process, we use our data, and post-install event data provided back to us by the advertisers, to
match applications to end users. We currently target end users based on carrier, geography, demographics (including by handset
type), among other attributes, by leveraging carrier data. We have discretion as to which applications are delivered to each end user;
Pricing is established in our agreements with advertisers. We negotiate pricing with the advertisers, based on prevailing rates typical
in the industry; and
The Company is responsible for billing and collecting the gross amount from the advertiser. Our carrier agreements do not include
any specific provisions that allow us to mitigate our credit risk by reducing the revenue share payable to the carrier.
In certain instances the carrier may enter directly into a CPI, CPP or CPA arrangement with a developer, where the
installation will be made using the Company’s Ignite and Discover software services. In these instances, the Company receives a share of
the carrier’s revenue, which is recognized on a net basis.
In addition to revenues from application developers and advertising aggregators, the Company may receive fees from the
carriers relating to the initial set-up of the arrangements with the carriers. Set-up activities typically include customization, testing and
implementation of the Ignite software for specific handsets. When the Company determines that the set-up fees do not have standalone
value, such fees are deferred and recognized over the estimated period the carrier benefits from the set-up fee, which is generally the
estimated life of the related handsets.
The Company has determined that certain set-up activities are within the scope of FASB ASC 985-605 Software Revenue
Recognition and, accordingly, the Company applies the provisions of ASC 985-605 to the software components. As a result, the Company
typically defers recognition of the set-up fee until all elements of the arrangement have been delivered. In those instances where the set-up
fee covers ongoing support and maintenance, the fee is deferred and amortized over the term of the carrier agreement.
Content and Billing
The Company’s Content and Billing revenues are derived primarily from transactions with the carriers’ customers (end users).
The carriers bill the end users upon the sale of content, including music, images or games, and the Company shares the end user revenues
with the carrier. The end user transactions are processed by the Company’s software services: white labeled mobile storefront and content
management solutions through Marketplace, and mobile payments with direct operator billing through Pay.
The Company utilizes its reporting system to capture and recognize revenue due from carriers, based on monthly transactional
reporting and other fees earned upon delivery of content to the end user. Determination of the appropriate amount of revenue recognized is
based on the Company’s reporting system, but it is possible that actual results may differ from the Company’s estimates once the reports
are reconciled with the carrier. 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. The Company has not experienced material adjustments to its
estimates when the final amounts were reported by carriers. If the Company deems a carrier not to be credit worthy, the Company defers all
revenues from the arrangement until the Company receives payment and all other revenue recognition criteria have been met.
The Company recognizes as revenues the amount billed to the carrier upon the sale of content, which is net of sales taxes, the
carrier’s fees and other deductions. The Company has evaluated its agreements with carriers in accordance with
53
the guidance at FASB ASC 605-45 Revenue Recognition – Principal Agent Considerations and has concluded that it is not the principal
under these agreements.
•
•
•
•
•
•
Key indicators that it evaluated to reach this determination include:
End users 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; the Company has the content
provider relationships and has discretion, within the parameters set by the carriers, regarding the actual offerings;
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 content
sale;
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.
The Company has also evaluated its agreements with content providers, and has concluded that it is the principal under these
agreements. Accordingly, payments to content providers are reported as cost of revenues.
Content Provider Licenses and Carrier Revenue Share
Carrier Revenue Share
Revenues generated from advertising via direct CPI, CPP or CPA arrangements with application developers, or indirect
arrangements through advertising aggregators (ad networks) are shared with the carrier and the shared revenue is recorded as a cost of
goods sold. In each case the revenue share with the carrier varies depending on the agreement with the carrier, and, in some cases, is based
upon revenue tiers.
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 music, 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.
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 in development to have passed the technological feasibility
milestone until the Company has completed a model of the product that contains essentially all the functionality and features of the final
product 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 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.
54
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.
Concentrations of Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of
cash and accounts receivable. A significant portion of the Company’s cash is held at one major financial institution that the Company's
management has assessed to be of high credit quality. The Company has not experienced any losses in such accounts.
The Company mitigates its credit risk with respect to accounts receivable by performing credit evaluations and monitoring
advertisers' and carriers' accounts receivable balances. As of March 31, 2016, two major customers represented 15.6% and 11.0% of the
Company's net accounts receivable balance within both the Content and Advertising businesses, respectively. As of March 31, 2015, the
previously mentioned first major Content customer represented 21.1% of the Company's net accounts receivable balance.
With respect to revenue concentration, the Company defines a customer as an advertiser or a carrier that is a distinct source of
revenue and is legally bound to pay for the services that the Company delivers on the advertiser’s or carrier's behalf. The Company counts
all advertisers and carriers within a single corporate structure as one customer, even in cases where multiple brands, branches, or divisions
of an organization enter into separate contracts with the Company. During the year ended March 31, 2016, the previously mentioned first
major customer represented 26.1% of revenue. During the year ended March 31, 2015, the two previously mentioned major customers
represented 50.6% and 11.1%, respectively, of revenue and during the year ended March 31, 2014, the two previously mentioned major
customers and a third major customer represented 45.8%, 22.2%, and 10.5% of revenue.
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 is not amortized to
expense, but rather they are evaluated at least on an annual basis to determine if there are potential impairments. For goodwill and
indefinite lived intangible assets, we complete what is referred to as the “Step 0” analysis which involves evaluating qualitative factors
including macroeconomic conditions, industry and market considerations, cost factors, and overall financial performance. If our “Step 0”
analysis indicates it is more likely than not that the fair value is less than the carrying amount, we would perform a quantitative two-step
impairment test. The quantitative analysis compares the fair value of our reporting unit or indefinite-lived intangible assets to the carrying
amounts, and an impairment loss is recognized equivalent to the excess of the carrying amount over the fair value. 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, 2015, the Company determined that there was no impairment of goodwill. 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. There were no indications of
impairment present during the period ended March 31, 2016.
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
55
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.
There were no indications of impairment present during the period ended March 31, 2016. 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.
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.
The Company’s income is subject to taxation in both the U.S. and foreign jurisdictions, including Israel, Germany,
Luxembourg, Singapore and Australia. Significant judgment is required in evaluating the Company’s tax positions and determining its
provision for income taxes. The Company establishes reserves for income tax-related uncertainties based on estimates of whether, and the
extent to which, additional taxes will be due. These reserves for tax contingencies are established when the Company believes that positions
do not meet the more-likely-than-not recognition threshold. The Company adjusts uncertain tax liabilities in light of changing facts and
circumstances, such as the outcome of a tax audit or lapse of a statute of limitations. The provision for income taxes includes the impact of
uncertain tax liabilities and changes in liabilities that are considered appropriate.
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.
In the past, the Company granted 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
56
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.
Recently Issued Accounting Pronouncements
Recent accounting pronouncements are detailed in Note 4 to our Consolidated Financial Statements included in PART II, Item
8 of this Annual Report on Form 10-K.
Recent Developments
On June 13, 2016, DT Media and North Atlantic entered into a Third Amendment to Securities Purchase Agreement, where
DT Media agreed to pay North Atlantic the amount of $60 as consideration to extend the Retirement Date (defined below) to July 15, 2016.
On May 6, 2016, DT Media and North Atlantic, entered into a Second Amendment to Securities Purchase Agreement, where
DT Media agreed to pay North Atlantic the amount of $140 as a fee in connection with the preparation, negotiation, and execution of this
amendment. Pursuant to this amendment, the warrant vesting date was modified to June 15, 2016 (the “Retirement Date”) and provided
that the vesting date may be further extended by North Atlantic to no later than June 22, 2016, if North Atlantic believes, in its reasonable
discretion, that (i) DT Media is unable to refinance the obligations by the vesting date, (ii) reasonable progress has been made by DT
Media in refinancing the obligations, and (iii) in all likelihood, DT Media will be able to refinance the obligations by June 22, 2016. If
these conditions are not satisfied or the debt is not refinanced by June 15, 2016, then a warrant for 400,000 shares would be issued to North
Atlantic and North Atlantic would receive a board observer. The payment of $140 to North Atlantic was in lieu of any prepayment
premium described below.
On February 17, 2016, DT Media and North Atlantic, entered into an amendment to the Securities Purchase Agreement dated
March 6, 2015 where DT Media agreed to the prepayment premium in the table below if the debt is retired within the date ranges set forth.
Although the Company’s debt to North Atlantic is not due until March 6, 2017, if the debt is not retired by May 6, North Atlantic has a
right to receive a warrant for 400,000 shares (0.6% of outstanding as of March 31, 2016) and a board observer right. As the Company is in
discussions to refinance its debt, it sought to defer the issuance of the warrant (and board observer rights) in exchange for the prepayment
premium. Accordingly, pursuant to this amendment, the warrant vesting was modified to May 6, 2016.
Period
Prepayment Premium (in thousands)
From March 6, 2016 to and including April 6, 2016
From April 7, 2016 until the maturity date
$
$
40
80
On December 28, 2015, DT Media entered into a license with respect to certain of DT Media’s intellectual property assets
with Sift Media, Inc. ("Sift"), in exchange for 9.9% of Sift’s newly-issued Preferred Stock and a cash payment of $1,000. Judson Bowman, a
former director of the Company, is the founder, CEO, and majority shareholder of Sift. Mr Bowman stepped down from Digital Turbine's
board effective January 25, 2016. For so long as DT Media holds Preferred Stock in Sift, DT Media shall be entitled to nominate for
election one member of the five-member Board of Sift, which DT Media nominated as director CEO of Digital Turbine, Bill Stone.
57
On November 30, 2015, DT Media and Silicon Valley Bank ("SVB"), entered into an amendment to the Third Amended and
Restated Loan and Security Agreement dated June 11, 2015. Pursuant to this amendment, the adjusted EBITDA financial covenant was
removed and replaced with the requirement to maintain an adjusted quick ratio of not less than 0.90:1.00 unless (a) there are no advances
outstanding under the revolving facility, or (b) if Digital Turbine’s cash and cash equivalents held at the SVB or SVB's Affiliates is greater
than or equal to $15,000. Furthermore, the Streamline Period, which is not a financial covenant but applies to application of receivables,
was amended so that it is achieved if DT Media’s trailing three-month period revenue is not less than 85% of projections for the three
months ending August 31, 2015 through November 30, 2015, 75% of projections for the three months ending December 31, 2015 and
thereafter, with the projected revenue for such three month period as set forth in DT Media’s operating budget provided to the SVB. This
amendment also added the requirement for the Digital Turbine to deliver consolidated financial statements in addition to DT Media.
On June 11, 2015, DT Media and SVB, entered into a Third Amended and Restated Loan and Security Agreement, pursuant
to which SVB agreed to amend and restate the existing Second Amended and Restated Loan and Security Agreement to increase the
revolving line of credit available under such facility from $3,500 to $5,000, to extend the maturity date under the facility to June 30, 2016,
and to make certain other changes to the terms of the existing agreement. The revolving line of credit under the this amendment allows DT
Media to borrow up to the lesser of $5,000 or the borrowing base, which is 80% of eligible accounts receivable after consideration of other
amounts outstanding, under the revolving line of credit. The revolving line requires interest payable monthly at a floating annual rate equal
to (a) during any month for which DT Media maintained an adjusted quick ratio (as customarily defined) of not less than 1.00:1.00 as of the
last day of a month, the prime rate as reported by The Wall Street Journal, plus (1.75%) and (b) at all other times, the prime rate as reported
by The Wall Street Journal, plus (2.75%).
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A.
We have operations both within the United States and internationally, and we are exposed to market risks in the ordinary
course of our business. These risks primarily consist of interest rate and foreign currency exchange risks.
Interest Rate Fluctuation Risk
The primary objective of our investment activities is to preserve principal while maximizing income without significantly
increasing risk. Our cash and cash equivalents consist of cash and deposits which are not insensitive to interest rate changes.
Our borrowings under our credit facility are subject to variable interest rates and thus expose us to interest rate fluctuations
depending on the extent to which we utilize the credit facility. If market interest rates materially increase, our results of operations could be
adversely affected. Our borrowings under our credit facility are subject to variable interest rates and thus expose us to interest rate
fluctuations depending on the extent to which we utilize the credit facility. If market interest rates materially increase, our results of
operations could be adversely affected. A hypothetical increase in market interest rates of 100 basis points would result in an increase in our
interest expense of $0.01 million per year for every $1 million of outstanding debt under the credit facility.”
Foreign Currency Exchange Risk
We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S.
dollar, primarily the Australian dollar.
While a portion of our sales are denominated in these foreign currencies and then translated into the U.S. dollar, the vast
majority of our media costs are billed in the U.S. dollar, causing both our revenue and, disproportionately, our operating loss and net loss to
be impacted by fluctuations in the exchange rates. In addition, gains (losses) related to translating certain cash balances, trade accounts
receivable balances and intercompany balances that are denominated in these currencies impact our net income (loss). As our foreign
operations expand, our results may be more impacted by fluctuations in the exchange rates of the currencies in which we do business. At
this time we do not, but we may in the future, enter into financial instruments to hedge our foreign currency exchange risk.
58
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DIGITAL TURBINE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Income / (Loss)
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
The supplementary financial information required by this Item 8 is set forth in Note 19 of the Notes to the
Consolidated Financial Statements under the caption "Supplemental Consolidated Financial Information".
59
60
64
65
66
68
70
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Digital Turbine, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Digital Turbine, Inc. and Subsidiaries (collectively, the “Company”) as
of March 31, 2016 and 2015, and the related consolidated statements of operations and comprehensive loss, stockholders' equity, and cash
flows for each of the three years in the period ended March 31, 2016. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the
Company as of March 31, 2016 and 2015, and the results of its operations and its cash flows for each of the three years in the period ended
March 31, 2016, in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of March 31, 2016, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Our report dated June 14, 2016
expressed an opinion that the Company had not maintained effective internal control over financial reporting as of March 31, 2016, based
on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission in 2013.
/s/ SingerLewak LLP
Los Angeles, California
June 14, 2016
60
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Digital Turbine, Inc. and Subsidiaries
We have audited Digital Turbine, Inc. and Subsidiaries’ (collectively, the “Company”) internal control over financial reporting as of March
31, 2016, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission in 2013. The Company's management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process 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. A company's internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected
on a timely basis. The following material weakness has been identified and included in management's assessment. The Company’s control
environment did not sufficiently promote effective internal control over financial reporting; this includes deficiencies in the design and
operations of monitoring controls over information technology systems. Furthermore, the Company’s financial reporting and close process
is not operating effectively, specifically related to the aggregation of deficiencies related to the lack of formal accounting policies,
processes and technical resources restraints, and a reliance on a manual close process. This material weakness was considered in
determining the nature, timing, and extent of audit tests applied in our audit of the 2016 consolidated financial statements, and this report
does not affect our report dated June 14, 2016 on those financial statements.
In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria,
the Company has not maintained effective internal control over financial reporting as of March 31, 2016, based on criteria established in
Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
61
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of the Company as of March 31, 2016 and 2015 and the related consolidated statements of operations and
comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended March 31, 2016, and our report
dated June 14, 2016 expressed an unqualified opinion.
/s/ SingerLewak LLP
Los Angeles, California
June 14, 2016
Digital Turbine, Inc. and Subsidiaries
62
63
Digital Turbine, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
March 31, 2016 March 31, 2015
ASSETS
Current assets
Cash and cash equivalents
Restricted cash
Accounts receivable, net of allowances of $464 and $698, respectively
Deposits
Deferred financing costs
Deferred tax assets
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Investment in Sift
Deferred tax assets
Intangible assets, net
Goodwill
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable
Accrued license fees and revenue share
Accrued compensation
Short-term debt, net of discounts of $440 and 0, respectively
Deferred tax liabilities
Other current liabilities
Total current liabilities
Long-term debt, net of discounts of $0 and 910, respectively
Other non-current liabilities
Total liabilities
Stockholders' equity
Preferred stock
Series A convertible preferred stock at $0.0001 par value;
2,000,000 shares authorized, 100,000 issued and outstanding
(liquidation preference of $1,000)
$
$
$
11,231 $
—
17,519
213
128
—
583
29,674
1,784
999
500
12,490
76,621
122,068 $
15,300 $
9,622
1,353
10,560
—
2,147
38,982
—
815
39,797
7,069
200
12,174
109
—
82
640
20,274
614
—
—
24,936
76,747
122,571
8,118
6,833
2,184
3,600
217
3,000
23,952
7,090
—
31,042
100
100
Common stock
$0.0001 par value: 200,000,000 shares authorized;
67,019,703 issued and 66,284,606 outstanding at March 31, 2016;
57,917,565 issued and 57,162,967 outstanding at March 31, 2015;
Additional paid-in capital
Treasury stock (754,599 shares at March 31, 2016 and March 31, 2015)
Accumulated other comprehensive loss
Accumulated deficit
8
295,423
(71)
(202)
(212,987)
82,271
122,068 $
The accompanying notes are an integral part of these consolidated financial statements.
Total stockholders' equity
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
7
276,500
(71)
(52)
(184,955)
91,529
122,571
64
Digital Turbine, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income / (Loss)
(in thousands, except per share amounts)
Year Ended March 31,
2016
2015
2014
$
86,541 $
28,252 $
24,404
Net revenues
Cost of revenues
License fees and revenue share
Other direct cost of revenues
Total cost of revenues
Gross profit
Operating expenses
Product development
Sales and marketing
General and administrative
Total operating expenses
Loss from operations
Interest and other expense, net
Interest expense, net
Foreign exchange transaction gain / (loss)
Change in fair value of warrant derivative liabilities loss
Loss on extinguishment of debt
Gain / (loss) on settlement of debt
Gain / (loss) on disposal of fixed assets
Gain on change in valuation of long-term contingent liability
Other income
Total interest and other expense, net
Loss from operations before income taxes
Income tax provision / (benefit)
Net loss from continuing operations, net of taxes
Discontinued operations, net of taxes
Loss from operations of discontinued component (including
gain on disposal of $1,077)
Net loss from discontinued operations, net of taxes
Net loss
Other comprehensive income/(loss)
66,185
10,537
76,722
9,819
10,983
6,067
18,705
35,755
(25,936)
(1,816)
(29)
—
—
—
(37)
—
—
(1,882)
(27,818)
214
(28,032)
—
—
(28,032)
20,110
2,010
22,120
6,132
7,905
2,933
19,031
29,869
(23,737)
(234)
32
—
—
(9)
2
—
46
(163)
(23,900)
747
(24,647)
—
—
(24,647)
Foreign currency translation adjustment
Comprehensive loss
Basic and diluted net loss per common share
147
(24,500) $
(0.63) $
(0.63)
—
(0.63)
38,967
The accompanying notes are an integral part of these consolidated financial statements.
(150)
(28,182) $
(0.46) $
(0.46)
—
(0.46)
61,763
$
$
Weighted-average common shares outstanding, basic and diluted
Continuing operations
Discontinued operations
Net loss
65
14,789
1,769
16,558
7,846
7,869
1,915
13,586
23,370
(15,524)
(1,407)
33
(811)
(442)
74
—
603
—
(1,950)
(17,474)
(272)
(17,202)
(1,502)
(1,502)
(18,704)
67
(18,637)
(0.68)
(0.63)
(0.05)
(0.68)
27,478
Digital Turbine, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(in thousands, except share amounts)
Common
Stock
Shares
Preferred
Stock
Shares
Treasury
Stock
Shares
Amount
Amount
Amount
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income/(Loss)
Accumulated
Deficit
Total
Balance at March 31,
2013
18,467,894 $
7 100,000 $ 100 754,599 $ (71) $142,571 $
(266)
$ (141,604) $
737
(118)
254,020
992,046
154,048
Net loss
Foreign currency
translation
Fractional shares
due to split
Warrants
exercised
Options exercised
Vesting of shares
issued to
employees
Vesting of
options issued to
employees
Vesting of
restricted stock
for services
Shares of
restricted stock
issued for
services
Vesting of
restricted stock
related to
acquisition
Issuance of
common stock for
financing costs
related to
acquisition
Issuance of
common stock
related to
acquisition
Change in fair
value of
convertible debt
Issuance of
common stock for
cash
Issuance of
convertible debt
Vesting of
warrants issued
for services
rendered
Issuance of
warrants and
extend existing
warrants related
to convertible
debt
Issuance of shares
related to
convertible debt
Convertible debt
converted to stock 4,783,378
1,516,044
109,964
771,428
80,000
67
640
1,938
1,351
390
374
472
5,485
313
2,700
1,064
406
476
248
4,373
(18,704) (18,704)
67
—
—
—
640
1,938
1,351
390
374
472
5,485
313
2,700
1,064
406
476
248
4,373
Shares issued as
settlement of debt
Issuance of
common stock as
part of public
offering, less
costs
9,750
24
24
10,249,975
30,597
30,597
Balance at March 31,
2014
37,388,429 $
7 100,000 $ 100 754,599 $ (71) $193,422 $
(199)
$ (160,308) $32,951
66
Net loss
Foreign currency
translation
Vesting of shares
issued to employees
Shares vested in
connection with a
separation agreement
Cancellation of shares
issued to employee
Vesting of options
issued to employees
Vesting of restricted
stock for services
Shares issued as
settlement of debt
Issuance of common
stock related to debt
Shares issued to
employees assumed in
acquisition
Options assumed in
acquisition
Warrant issued to
debt-holder in
connection with new
debt
Issuance of common
stock related to
acquisition
Options exercised
Warrant exercised
Balance at March 31,
2015
Net loss
Foreign currency
translation
Cancellation of shares
issued to employees
Stock-based
compensation
Stock-based
compensation related
to vesting of restricted
stock for services
Options exercised
Cashless exercise of a
warrant
Cancellation of shares
held in escrow related
to Appia acquisition
Stock issued for
settlement of liability
Shares cancelled
Stock issued for cash
in stock offering
Balance at March 31,
2016
80,064
(8,131)
119,305
65,000
200,000
67,827
18,883,723
53,333
313,417
147
576
1,967
(27)
3,292
490
248
788
42
633
156
74,402
136
375
57,162,967
7 100,000 100 754,599
(71)
276,500
(52)
(150)
(454,164)
233,928
66,682
452,974
(10,874)
117,000
(23,907)
5,096
867
51
283
(24,647) (24,647)
147
576
1,967
(27)
3,292
490
248
788
42
633
156
74,402
136
375
(184,955) $91,529
(28,032) (28,032)
(150)
—
5,096
867
51
—
—
283
—
8,740,000
1
12,626
12,627
66,284,606
(202)
The accompanying notes are an integral part of these consolidated financial statements.
8 100,000 100 754,599
295,423
(71)
(212,987) $82,271
67
Digital Turbine, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Year Ended March 31,
2016
2015
2014
(28,032 )
(24,647 )
(18,704 )
Loss on disposal of discontinued operations, net of taxes
Depreciation and amortization
Change in allowance for doubtful accounts
Amortization of debt discount
Accrued interest
Finance costs
Fair value of financing costs related to conversion options
Stock-based compensation
Stock-based compensation related to restricted stock for services
rendered
Warrants issued for services
Stock issued as settlement of debt with a supplier
Settlement of debt with a supplier
Revaluation of contingent liability
Impairment of intangibles
Increase in fair value of derivative liabilities
Stock issued for settlement of liability
(Increase)/decrease in assets:
Restricted cash transferred to/(from) operating cash
Accounts receivable
Deposits
Deferred tax assets
Deferred financing costs
Prepaid expenses and other current assets
Increase/(decrease) in liabilities:
Accounts payable
Accrued license fees and revenue share
Accrued compensation
Other liabilities and other items
Net cash used in operating activities
Cash flows from investing activities
Purchase and disposal of property and equipment, net
Settlement of contingent liability
Cash used in acquisition of assets
Net cash from investment in Sift
Cash used in acquisition of subsidiary
Cash acquired with acquisition of subsidiary
Net cash used in investing activities
Cash flows from financing activities
Stock issued for cash in stock offering, net
Repayment of debt obligations
Options exercised
Warrant exercised
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
—
10,974
(234)
470
12
—
—
5,095
867
—
—
—
—
—
—
283
200
(5,111)
(104)
(418)
(128)
57
7,308
2,789
(831)
(266)
(7,069)
(1,549)
—
—
875
—
—
(674)
12,627
(600)
51
—
12,078
(173)
—
2,108
698
34
77
—
—
5,850
490
—
—
—
—
—
—
—
—
(406)
(63 )
3,156
—
(142)
(379)
2,988
325
(4,589)
(14,500 )
(67 )
(49 )
(2,125)
—
—
1,363
(878)
—
—
136
375
511
131
820
1,856
—
187
109
1,173
470
1,938
2,755
406
24
51
(603)
154
811
—
(200)
(734)
523
—
—
(2,566)
(893)
737
650
3,229
(7,807)
(207)
—
—
—
(1,287)
513
(981)
33,297
(3,657)
—
—
29,640
(196)
Net change in cash and cash equivalents
4,162
(14,736 )
20,656
Cash and cash equivalents, beginning of year
7,069
21,805
1,149
Cash and cash equivalents, end of year
$
11,231 $
7,069 $
21,805
68
Supplemental disclosure of cash flow information
Interest paid
$
1,011 $
— $
—
Supplemental disclosure of non-cash investing and financing activities:
Contingency earn out on acquisition of subsidiary, net of discount
Common stock of the Company issued for acquisition of subsidiary
Cashless exercise of options to purchase common stock of the Company
Cashless exercise of warrants to purchase common stock of the Company
$
$
$
$
— $
— $
— $
566 $
— $
75,035 $
— $
— $
238
4,449
854
5,914
The accompanying notes are an integral part of these consolidated financial statements.
69
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
1. Organization
Digital Turbine was incorporated in the state of Delaware in 1998. Digital Turbine, through its subsidiaries, works at the
convergence of media and mobile communications, delivering end-to-end products and solutions for mobile operators, app advertisers,
device OEMs and other third parties to enable them to effectively monetize mobile content and generate higher value user acquisition.
2. Liquidity
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America, which contemplate continuation of the Company as a going concern.
Our primary sources of liquidity have historically been issuance of common and preferred stock and convertible debt. In
fiscal 2014, the Company raised $33,297 through equity financings. The Company completed a public offering on October 2, 2015, netting
cash proceeds to the Company of $12,627. The Company expects to use net cash proceeds from the offering for organic business
opportunities, product development, general corporate purposes, working capital, and capital expenditures. The Company believes that it
has, after the public offering, sufficient cash, cash equivalents, and capital resources to operate its business at least through March 31, 2017.
As of March 31, 2016, the Company had approximately $11,231 of cash and cash equivalents, which includes the cash gross proceeds of
$1,000 received from the Sift transaction. Additionally, the Company currently has a $5,000 revolving credit facility in place with SVB
which it uses to fund working capital requirements, as needed. As of March 31, 2016, the Company also had $3,000 outstanding on its
revolving credit facility with SVB. As of March 31, 2016, the Company had fully paid off its term loan with SVB.
Pursuant to the amendment to the Third Amended and Restated Loan and Security Agreement dated June 11, 2015, entered
into by DT Media and SVB on November 30, 2015, the covenant requirement was put in place for the Company to maintain an adjusted
quick ratio of not less than 0.90:1.00 unless (a) there are no advances outstanding under the revolving facility, or (b) if the Company’s cash
and cash equivalents held at SVB or SVB's Affiliates is greater than or equal to $15,000. As of April 30, 2016, given the Company did not
meet the requirements set forth in (a) and (b) noted previously, the Company was required to maintain an adjusted quick ratio of not less
than 0.90:1.00. As of April 30, 2016, the Company's quick ratio was estimated at 0.89 versus the 0.90 minimum level.
On June 10, 2016, prior to the required testing of the above-mentioned covenant, SVB and DT Media entered into a Consent
Agreement, effective as of May 31, 2016, whereby SVB provided its consent to DT Media (for a de minimis fee) to not exercise any rights
or remedies solely in connection with the non-compliance with such covenant for the period ended April 30, 2016, without which consent
DT Media would have been in default of the Loan Agreement. Please see "Risk Factors" included in PART I Item 1A. of this Annual
Report on Form 10-K within section "General Risk - The Company has secured indebtedness, which could limit its financial flexibility",
regarding financial covenant compliance.
Until the Company becomes cash flow positive, the Company anticipates that its primary source of liquidity will be cash on
hand and access to the $5,000 revolving credit facility, which matures on June 30, 2016. In addition, the Company may make acquisitions,
make new investments in under-capitalized opportunities, or invest in organic opportunities, including Real-Time Bidding ("RTB"),
integration of Content/Pay into advertising infrastructure, or new product development, and may need to raise additional capital through
future debt or equity financing to provide for greater flexibility to fund any such acquisitions and organic growth opportunities. Additional
financing may not be available on acceptable terms or at all. If the Company issues additional equity securities to raise funds, the
ownership percentage of its existing stockholders would be reduced. New investors may demand rights, preferences, or privileges senior to
those of existing holders of common stock.
In view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts
shown in the accompanying consolidated balance sheet is dependent upon continued operations of the Company, which, in turn, is
dependent upon the Company’s ability to generate positive cash flows from operations. The financial statements do not include any
adjustments related to the recoverability and classification of recorded asset amounts, or amounts and classifications of liabilities, that
might be necessary should the Company be unable to continue its existence.
70
3. Acquisitions and Disposals
Mirror Image Access
On April 12, 2013, Digital Turbine acquired all of the issued and outstanding stock of Mirror Image Australia Holdings,
which directly or indirectly owns subsidiaries Mirror Image Access (Australia) Pty Ltd, MIA Technology Australia Pty Ltd and MIA
Technology IP Pty Ltd.
The purpose of the acquisition was an effort not only to build on the Company’s current distribution network, but to enhance
its mobile content infrastructure with the intellectual property acquired in the purchase.
The acquisition of was capitalized through a combination of intercompany debt and the issuance of equity.
The purchase consideration for the transaction was comprised of cash, a note, and common stock of the Company, as follows:
(1) At closing AUD 1,220 in cash, translated to $1,287 for U.S. GAAP reporting purposes;
(2) Convertible Note payable of AUD 2,280, translated to $2,404;
(3) Shares of common stock of the Company (the “Closing Shares”) equivalent to AUD 3,500, translated to $3,691 and under the
agreement, converted to shares at $3.65 per share, or 1,011,164 shares of the common stock of the Company. The closing price of the stock
on that day was $4.40 per share, for a total value of $4,449.
The Closing Shares are subject to a Registration Rights Agreement that provides for piggyback rights for 3 years and were
included on the Company’s Form S-3 filed August 30, 2013, and subsequently made effective on October 31, 2013.
The following table summarizes the final fair values of the assets acquired and liabilities assumed at the date of acquisition.
Cash
Accounts receivable
Prepaid expenses and other assets
Property, plant and equipment
Customer relationships
Developed technology
Trade names/trademarks
Library
Goodwill
Accounts payable
Accrued liabilities
Accrued compensation
Purchase price
$
$
513
2,809
896
300
1,600
3,400
54
300
2,654
(1,151)
(2,890)
(345)
8,140
In addition to the value assigned to the acquired workforce, the Company recorded the excess of the purchase price over the
estimated fair value of the assets acquired as an increase in goodwill. This goodwill arises because the purchase price reflects the strategic
fit and resulting synergies that the acquired business brings to the Company’s existing operations. In the fiscal year ended March 31, 2014,
the Company recorded an impairment charge of $54 to write down trade names pursuant to its decision to rename and rebrand trade names
associated with Logia and MIA. In the period ended June 30, 2014, the Company finalized the purchase price allocation which resulted in
an adjustment from intangibles to goodwill of $1,472.
The amortization period for the intangible assets acquired in the MIA transaction is as follows:
71
Customer relationships
Developed technology
Trade names/trademarks
Library
Goodwill
Remaining
Useful Life
14 years
5 years
5 years
5 years
Indefinite
Xyologic Mobile Analysis
On October 9, 2014, the Company acquired certain intellectual property assets of Xyologic Mobile Analysis, GmbH
("XYO"), related to mobile application recommendation, search and discovery. The Company has completed the integration of the
acquired technology into the DT Discover software solution.
The acquisition was effected pursuant to an Asset Purchase Agreement dated October 8, 2014 (the “Asset Purchase
Agreement”). The aggregate purchase price was US $2,500, paid in cash, subject to a twelve (12) month hold-back of US $375, which acts
as partial security for potential future indemnification claims. During April 2016, the Company reached a settlement with the sellers of
XYO, whereby the Company was relieved of the $375 liability.
The purchase price fair values have been allocated to goodwill of $1,000 and developed technology of $1,500. The Company
finalized the purchase price allocation in the year ended March 31, 2015.
Appia, Inc.
On March 6, 2015, the Company completed the merger of Appia, Inc. into its wholly owned subsidiary, DT Media Merger
Sub, Inc. The surviving entity was renamed Digital Turbine Media, Inc. (“DT Media”). Under the Merger Agreement, the Company is to
issue shares of its common stock in exchange for all of Appia Inc's outstanding common and preferred stock and warrants.
The number of shares that were issued by the Company is subject to adjustment based on Appia Inc's working capital and net
indebtedness as of the closing date of the merger. Based on Appia Inc's working capital and net indebtedness as of March 6, 2015, the
Company issued 18,883,723 shares of its common stock and reserved 245,955 of its common stock for Appia Inc's equity awards
outstanding at the closing date that are assumed by the Company and converted into equity awards for Digital Turbine common stock.
Vested equity awards held by Appia Inc's employees and service providers are considered part of the purchase price; accordingly, the
estimated purchase price includes an estimated fair value of equity awards to be issued by the Company of approximately $633. The value
of the Company’s common stock used to estimate the purchase price was $3.94 per share, the closing price on March 6, 2015. The
following table summarizes the final fair values of the assets acquired and liabilities assumed at the date of acquisition, based on
information available as of March 31, 2016. These final fair values differ from the estimated fair values reflected in the pro forma financial
information included in the Company’s previously filed S-4 to the availability of additional and updated information. In the year ended
March 31, 2016, the Company adjusted the purchase price allocation of DT Media due to the finalization of the working capital
adjustment, which resulted in a net decrease in goodwill of $126, from $69,438 down to $69,312 as detailed in the table below.
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The following table summarizes the final fair values of the assets acquired and liabilities assumed at the date of acquisition.
Cash
Accounts receivable
Prepaid expenses and other assets
Property, plant and equipment
Developed technology
Advertiser relationships
Publisher relationships
Trade names/trademarks
Goodwill
Accounts payable
Accrued expenses
Debt
Purchase price
$
$
1,363
7,364
171
229
7,700
6,500
3,200
380
69,312
(5,179)
(4,531)
(11,600)
74,909
The amortization period for the intangible assets acquired in the DT Media transaction is as follows:
Developed technology
Trade names/trademarks
Publisher relationships
Advertiser relationships
Goodwill
Useful Life
4 years
2 years
2 years
2 years
Indefinite
The pro forma financial information of the Company’s consolidated operations if the acquisition of DT Media, Inc. had
occurred as of April 1, 2013 is presented below.
Revenues
Cost of goods sold
Gross profit
Operating expenses
Loss from operations
Non-operating expense
Provision for income taxes
Net loss
Basic and diluted loss per share
$
$
$
Unaudited
Year Ended March 31,
2015
2014
57,978 $
45,580
12,398
43,644
31,246
3,372
541
35,159 $
0.90 $
73,533
52,638
20,895
37,072
16,177
1,950
864
18,991
0.49
The operating results of DT Media are included in the accompanying consolidated statements of operations from the
acquisition date. The combined consolidated operating results from the acquisition date to March 31, 2015 are included in the table below.
The combined consolidated operating results for fiscal 2016 include a full year of operating results of DT Media.
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Unaudited
$
Revenues
Cost of goods sold
Gross profit
Operating expenses
Loss from operations
Non-operating expense
Provision for income taxes
Net loss
$
3,251
3,227
24
1,194
1,170
113
—
1,283
TWISTBOX
On February 13, 2014, the Company sold its wholly-owned subsidiary, Twistbox, and its subsidiaries.
The Company sold Twistbox for $0.001 at closing plus potential future payments from the buyer (seller earn-out) related to
contracts assumed by the buyer and contracts sourced by the Company post-closing. Under the stock purchase agreement, the buyers
assumed net liabilities of $2,300, while the Company left $100 in the Twistbox bank account, and took financial responsibility for the
French and German employees and the facility lease in Germany. The Company indemnified the buyer for any losses that may result from
select liabilities assumed by the buyer up to $336 for a period of eighteen months following the closing. This amount, along with other
liabilities related to accrued compensation, total $440.
In accordance with FASB ASC 205-20, Discontinued Operations, the operating results and net assets and liabilities related to
Twistbox were reclassified as of February 13, 2014 and reported as discontinued operations in the accompanying consolidated financial
statements.
The Company recorded a loss on the sale of $1,502.
The following is a summary of the assets and liabilities of the discontinued operations as of February 13, 2014:
Working capital, net of cash
Accounts receivable
Prepaid expenses
Deposits
Property, plant and equipment
Intangible assets
Goodwill
Accounts payable
Accrued liabilities
Loss on sale, net of taxes
$
$
2,833
436
49
16
32
228
142
(1,394)
(840)
1,502
4. 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.
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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. See Part I for a detailed listing of the Company's wholly-
owned subsidiaries.
Revenue Recognition
Advertising
Advertising revenues are generated via direct Cost-Per-Install (CPI), Cost-Per-Placement (CPP), or Cost-Per-Action (CPA)
arrangements with application developers, or indirect CPI, CPP or CPA arrangements through advertising aggregators (ad networks).
Transactions are processed by the Company’s software services: mobile application management through Ignite, and user experience and
discovery through Discover. The Company recognizes advertising related revenue when it has persuasive evidence of an arrangement,
delivery of has occurred or services have been performed, the price is fixed or determinable, and collectability is reasonably assured.
The Company recognizes as revenue the amount billed to the application developer or advertising aggregator. Revenue share
payments to the carrier are recorded as a cost of revenues. The Company has evaluated its agreements with the developers and aggregators
and the carriers in accordance with the guidance at FASB ASC 605-45 Revenue Recognition – Principal Agent Considerations and has
concluded that it is the principal under these agreements. Key indicators that it evaluated to reach this determination include:
•
•
•
•
•
The Company has the contractual relationship with the application developers or advertising aggregators (collectively, the
advertisers), and we have the performance obligation to these parties;
Through our Ignite and Discover software, we provide application installation and management as well as detailed reporting to
advertisers and carriers. We are responsible for billing the advertisers, and for reporting revenues and revenue share to the carriers;
As part of the application management process, we use our data, and post-install event data provided back to us by the advertisers, to
match applications to end users. We currently target end users based on carrier, geography, demographics (including by handset
type), among other attributes, by leveraging carrier data. We have discretion as to which applications are delivered to each end user;
Pricing is established in our agreements with advertisers. We negotiate pricing with the advertisers, based on prevailing rates typical
in the industry; and
The Company is responsible for billing and collecting the gross amount from the advertiser. Our carrier agreements do not include
any specific provisions that allow us to mitigate our credit risk by reducing the revenue share payable to the carrier.
In certain instances the carrier may enter directly into a CPI, CPP or CPA arrangement with a developer, where the
installation will be made using the Company’s Ignite and Discover software services. In these instances, the Company receives a share of
the carrier’s revenue, which is recognized on a net basis.
In addition to revenues from application developers and advertising aggregators, the Company may receive fees from the
carriers relating to the initial set-up of the arrangements with the carriers. Set-up activities typically include customization, testing and
implementation of the Ignite software for specific handsets. When the Company determines that the set-up fees do not have standalone
value, such fees are deferred and recognized over the estimated period the carrier benefits from the set-up fee, which is generally the
estimated life of the related handsets.
The Company has determined that certain set-up activities are within the scope of FASB ASC 985-605 Software Revenue
Recognition and, accordingly, the Company applies the provisions of ASC 985-605 to the software components. As a result, the Company
typically defers recognition of the set-up fee until all elements of the arrangement have been delivered. In those instances where the set-up
fee covers ongoing support and maintenance, the fee is deferred and amortized over the term of the carrier agreement.
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Content and Billing
The Company’s Content and Billing revenues are derived primarily from transactions with the carriers’ customers (end users).
The carriers bill the end users upon the sale of content, including music, images or games, and the Company shares the end user revenues
with the carrier. The end user transactions are processed by the Company’s software services: white labeled mobile storefront and content
management solutions through Marketplace, and mobile payments with direct operator billing through Pay. The Company recognizes
Content related revenue when it has persuasive evidence of an arrangement, delivery of has occurred or services have been performed, the
price is fixed or determinable, and collectability is reasonably assured.
The Company utilizes its reporting system to capture and recognize revenue due from carriers, based on monthly transactional
reporting and other fees earned upon delivery of content to the end user. Determination of the appropriate amount of revenue recognized is
based on the Company’s reporting system, but it is possible that actual results may differ from the Company’s estimates once the reports
are reconciled with the carrier. 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. The Company has not experienced material adjustments to its
estimates when the final amounts were reported by carriers. 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.
The Company recognizes as revenues the amount billed to the carrier upon the sale of content, which is net of sales taxes, the
carrier’s fees and other deductions. The Company has evaluated its agreements with carriers in accordance with the guidance at FASB ASC
605-45 Revenue Recognition – Principal Agent Considerations and has concluded that it is not the principal under these agreements. Key
indicators that it evaluated to reach this determination include:
•
•
•
•
•
•
End users 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; the Company has the content
provider relationships and has discretion, within the parameters set by the carriers, regarding the actual offerings;
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 content
sale;
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.
The Company has also evaluated its agreements with content providers, and has concluded that it is the principal under these
agreements. Accordingly, payments to content providers are reported as cost of revenues.
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.
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Deposits
As of March 31, 2016, the Company has deposits of $213 comprised of facility and equipment lease deposits, as compared to
$109 as of March 31, 2015.
Carrier Revenue Share and Content Provider License Fees
Carrier Revenue Share
Revenues generated from advertising via direct CPI, CPP or CPA arrangements with application developers, or indirect
arrangements through advertising aggregators (ad networks) are shared with the carrier and the shared revenue is recorded as a cost of
goods sold. In each case the revenue share with the carrier varies depending on the agreement with the carrier, and, in some cases, is based
upon revenue tiers.
Content Provider License Fees
The Company’s royalty expenses consist of fees that it pays to content owners for the use of their intellectual property in the
distribution of music, games and other content services, 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.
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.
Under this approach, the Company does not consider a product in development to have passed the technological feasibility milestone until
the Company has completed a model of the product that contains essentially all the functionality and features of the final product 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 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; the lack of pre-orders or sales
history for its products; the uncertainty regarding a product’s revenue-generating potential; its lack of control over the carrier distribution
channel resulting in uncertainty as to when, if ever, a product will be available for sale; and its historical practice of canceling products at
any stage of the development process.
The Company also applies the principles of FASB ASC 350-40, Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use (“ASC 350-40”). ASC 350-40 requires that software development costs incurred before the preliminary project
stage be expensed as incurred. We capitalize development costs related to these software applications once the preliminary project stage is
complete and it is probable that the project will be completed and the software will be used to perform the function intended. For fiscal
2016, 2015, and 2014 the Company capitalized software development costs in the amount of $1,263, $62, and $0.
Product Development Costs
The Company charges costs related to research, design and development and deployment 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.
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Advertising Expenses
The Company expenses the costs of advertising the first time the advertising takes place. Advertising expense was $396,
$406, and $186 in the years ended March 31, 2016, 2015, and 2014, respectively.
Fair Value of Financial Instruments
As of March 31, 2016 and 2015, the carrying value of cash and cash equivalents, accounts receivable, prepaid expenses and
other current assets, accounts payable, accrued license fees, accrued compensation, and other current liabilities approximates fair value due
to the short-term nature of such instruments.
Foreign Currency Translation
The Company uses the United States dollar for financial reporting purposes. Assets and liabilities of foreign operations are
translated using current rates of exchange prevailing at the balance sheet date. Equity accounts have been translated at their historical
exchange rates when the capital transaction occurred. Statement of Operations amounts are translated at average rates in effect for the
reporting period. The foreign currency translation adjustment loss of $(150), $147, and $67 in the years ended March 31, 2016, 2015, and
2014 has been reported as a component of comprehensive loss in the consolidated statements of stockholders’ equity and comprehensive
loss.
Concentrations of Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of
cash and accounts receivable. A significant portion of the Company’s cash is held at one major financial institution that the Company's
management has assessed to be of high credit quality. The Company has not experienced any losses in such accounts.
The Company mitigates its credit risk with respect to accounts receivable by performing credit evaluations and monitoring
advertisers' and carriers' accounts receivable balances. As of March 31, 2016, two major customers represented 15.6% and 11.0% of the
Company's net accounts receivable balance within both the Content and Advertising businesses, respectively. As of March 31, 2015, the
previously mentioned first major Content customer represented 21.1% of the Company's net accounts receivable balance.
With respect to revenue concentration, the Company defines a customer as an advertiser or a carrier that is a distinct source of
revenue and is legally bound to pay for the services that the Company delivers on the advertiser’s or carrier's behalf. The Company counts
all advertisers and carriers within a single corporate structure as one customer, even in cases where multiple brands, branches, or divisions
of an organization enter into separate contracts with the Company. During the year ended March 31, 2016, the previously mentioned first
major customer represented 26.1% of our consolidated net revenues. During the year ended March 31, 2015, the two previously mentioned
major customers represented 50.6% and 11.1%, respectively, of our consolidated net revenues, and during the year ended March 31,
2014, the two previously mentioned major customers and a third major customer represented 45.8%, 22.2%, and 10.5% of our consolidated
net revenues.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and amortization. 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 3-5 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 trade names, 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
78
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.
Goodwill is tested annually during the fourth fiscal quarter and whenever events or circumstances indicate an impairment may
have occurred. Based on the results of the annual impairment tests performed during the fourth quarter of fiscal 2016, no impairment of
goodwill existed at March 31, 2016. See disclosure surrounding additional procedures performed by the Company in performing its fiscal
2016 annual impairment test at “Goodwill” in Note 9 of the Notes to the Consolidated Financial Statements.
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 two to fourteen 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.
There were no indications of impairment present or that the carrying amounts may not be recoverable during the fiscal years
ended March 31, 2016 and March 31, 2015. In the fiscal year ended March 31, 2014, the Company determined that there was an
impairment of intangible assets of $154 related to the change in trade names as the Company has rebranded its acquisitions under the
Digital Turbine name. The impairment is detailed in Note 10 to our consolidated financial statements under Item 8 of this Annual Report.
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.
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.
79
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 accordance with GAAP requires the use of management's estimates. These
estimates are subjective in nature and involve judgments that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at fiscal year-end, and the reported amounts of revenues and expenses during the fiscal year. Actual results
could differ from those estimates.
Recently Issued Accounting Pronouncements
February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 842
(“ASC 842”), “Leases” which replaces the existing guidance in ASC 840, Leases. The amendment is effective for the Company for fiscal
years, and interim periods within those years, beginning after December 15, 2018. ASC 842 requires a dual approach for lessee accounting
under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in
the lessee recognizing a right-of-use ("ROU") asset and a corresponding lease liability. For finance leases the lessee would recognize
interest expense and amortization of the ROU asset and for operating leases the lessee would recognize a straight-line total lease expense.
The Company is evaluating the impact of the adoption on the consolidated financial statements.
In November 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-17, Balance Sheet Classification of
Deferred Taxes (“ASU 2015-17”), which simplifies the presentation of deferred income taxes by eliminating the need for entities to
separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. The
standard is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those
annual periods. Early adoption is permitted for financial statements that have not been previously issued. The ASU may be applied either
prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. We adopted this ASU on a prospective basis
in the fourth quarter of the 2016 fiscal year.
In September 2015, the FASB issued accounting guidance which simplifies measurement period adjustments in a business
combination under ASU 2015-16. The guidance is effective for fiscal years beginning after December 15, 2015, including interim periods
within those fiscal years and early adoption is permitted. The Company is evaluating the impact of the adoption on the consolidated
financial statements.
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In June 2015, the FASB issued ASU No. 2015-10, Technical Corrections and Improvements. The amendments in this update
cover a wide range of topics in the Codification and are generally categorized as follows: Amendments Related to Differences between
Original Guidance and the Codification; Guidance Clarification and Reference Corrections; Simplification; and Minor Improvements. The
amendments in the ASU that require transition guidance are effective for all entities for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2015. All other amendments were effective upon the issuance of the ASU on June 12, 2015.
In May 1, 2015, the FASB issued ASU No. 2015-5, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
("ASU No. 2015-5") to reduce the diversity in practice, and reduce the costs and complexity of assessing fees paid in a Cloud Computing
Arrangements (“CCA”). While the new standard does not provide explicit guidance on how to account for fees paid in a CCA, it does
provide guidance on which existing accounting model should be applied. ASU No. 2015-5 is effective for annual reporting periods
beginning on or after December 15, 2015, and interim periods within those annual periods. The Company expects to adopt this guidance
during its 2017 fiscal year and does not expect it will have a significant impact on its consolidated results of operations, financial condition
and cash flows.
In April 2015, the FASB issued accounting guidance which requires that debt issuance costs related to a recognized debt
liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability under ASU 2015-03. The
guidance is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years and early
adoption is permitted. The Company expects to adopt this guidance during its 2017 fiscal year and does not expect it will have a significant
impact on its consolidated results of operations, financial condition, and cash flows.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation
Analysis. The amendments in this ASU provide guidance which changes the analysis that a reporting entity must perform to determine
whether it should consolidate certain types of legal entities. The ASU is effective for public business entities for fiscal years, and for
interim periods within those fiscal years, beginning after December 15, 2015.
In January 2015, the FASB issued ASU No. 2015-1, Income Statement—Extraordinary and Unusual Items (Subtopic 225-
20). The objective is to identify, evaluate, and improve areas of GAAP for which cost and complexity can be reduced while maintaining or
improving the usefulness of the information provided to the users of the financial statements. The pronouncement is effective for reporting
periods beginning after December 15, 2015. The adoption of this ASU is not expected to have a material impact on our financial position,
results of operations, cash flows, or presentation thereof.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going concern (Subtopic 205-
40). The amendments in this update provide guidance in GAAP about management’s responsibility to evaluate whether there is substantial
doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. In doing so, the amendments
should reduce diversity in the timing and content of footnote disclosures. The pronouncement is effective for reporting periods beginning
after December 15, 2016. The adoption of this ASU is not expected to have a material impact on our financial position, results of
operations, cash flows, or presentation thereof.
In June 2014, the FASB issued ASU No. 2014-12, Compensation – Stock Compensation (Topic 718). The pronouncement
was issued to clarify the accounting for share-based payments when the terms of an award provide that a performance target could be
achieved after the requisite service period. The pronouncement is effective for reporting periods beginning after December 15, 2015. The
adoption of this ASU is not expected to have a material impact on our financial position, results of operations, cash flows, or presentation
thereof.
In May 2014, the FASB issued ASU 2014-9, Revenue from Contracts with Customers, which requires an entity to recognize
the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new standard is
effective as of the first interim period within annual reporting periods beginning on or after December 15, 2018, and will replace most
existing revenue recognition guidance in U.S. GAAP. Early application is not permitted. The standard permits the use of either the
retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-9 will have on our consolidated
financial statements and related disclosures. The Company has not yet selected a transition method or determined the effect of the standard
on our financial position, results of operations, cash flows, or presentation thereof.
In April 2014, the FASB issued ASU 2014-8, Presentation of Financial Statements and Property, Plant, and Equipment:
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-8 limits the requirement to report
discontinued operations to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an
entity’s operations and financial results. The amendments also require expanded
81
disclosures concerning discontinued operations and disclosures of certain financial results attributable to a disposal of a significant
component of an entity that does not qualify for discontinued operations reporting. These amendments are effective prospectively for
reporting periods beginning on or after December 15, 2014, with early adoption permitted. The adoption of this ASU is not expected to
have a material impact on our financial position, results of operations, cash flows, or presentation thereof.
Other 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.
5. 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 did not identify any recurring assets and liabilities that are required to be presented in the consolidated balance
sheets at fair value in accordance with ASC 825.
6. Accounts Receivable
Billed
Unbilled
Allowance for doubtful accounts
Accounts receivable, net
March 31,
2016
13,220 $
4,763
(464)
17,519 $
$
$
March 31,
2015
8,408
4,464
(698)
12,174
Billed accounts receivable represent amounts billed to customers that have yet to be collected. Unbilled accounts receivable
represent revenue recognized, but billed after period end. All unbilled receivables as of March 31, 2016 are expected to be billed and
collected within twelve months.
The Company recorded $132, $505, and $13 of bad debt expense during the years ended March 31, 2016, 2015, and 2014.
7. Property and Equipment
82
Computer-related equipment
Furnitures and fixtures
Leasehold improvements
Accumulated depreciation
Property and equipment, net
March 31,
2016
March 31,
2015
$
$
2,775 $
33
74
2,882
(1,098)
1,784 $
727
28
32
787
(173)
614
Depreciation expense for the years ended March 31, 2016, 2015, and 2014 was $437, $98, and $87, respectively.
8. Description of Stock Plans
Employee Stock Plan
The Company is currently issuing stock awards under the Amended and Restated Digital Turbine, Inc. 2011 Equity Incentive
Plan (the “2011 Plan”), which was approved and adopted by our stockholders by written consent on May 23, 2012. No future grants will be
made under the previous plan, the 2007 Employee, Director and Consultant Stock Plan (the “2007 Plan”). In the year ended March 31,
2016, in connection with the acquisition of Appia, the Company assumed the Appia, Inc. 2008 Stock Incentive Plan (the “Appia Plan”).
The 2011 Plan and 2007 Plan are collectively referred to as “Digital Turbine’s Incentive Plans.” Digital Turbine’s Incentive Plans and the
Appia Plan are all collectively referred to as the “Stock Plans.”
The 2011 Plan provides for grants of stock-based incentive awards to our and our subsidiaries’ officers, employees, non-
employee directors and consultants. Awards issued under the 2011 Plan can include stock options, stock appreciation rights (“SARs”),
restricted stock and restricted stock units (sometimes referred to individually or collectively as “Awards”). 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 2011 Plan reserves 20,000,000 shares for issuance, of which approximately 11,886,707 and 14,393,741 remained
available for future grants as of March 31, 2016 and 2015, respectively.
Stock Option Agreements
Stock options granted under the Company’s Incentive Plans typically vest over a three to four years period. These options,
which are granted with option exercise prices equal to the fair market value of the Company’s common stock on the date of grant, generally
expire up to ten years from the date of grant. In the year ended March 31, 2016, in connection the Appia acquisition, the Company
exchanged stock options previously granted under the Appia Plan for options to purchase the shares of the Company’s common stock.
These assumed Appia options typically vest over a period of four years and generally expire within ten years from the date of grant.
Compensation expense for all stock options is recognized on a straight-line basis over the requisite service period.
Restricted Stock Awards
Awards of restricted stock may be either grants of restricted stock or performance-based restricted stock units that are issued
at no cost to the recipient. The cost of these awards is determined using the fair market value of the Company’s common stock on the date
of the grant. Compensation expense for restricted stock awards with a service condition is recognized on a straight-line basis over the
requisite service period.
Stock Option Activity
The following table summarizes stock option activity for the Stock Plans during the years ended March 31, 2016 and 2015:
83
Options Outstanding, March 31, 2014
Assumed through acquisitions (a)
Granted
Forfeited/Canceled
Exercised
Options Outstanding, March 31, 2015
Granted
Forfeited/Canceled
Exercised
Options Outstanding, March 31, 2016
Vested and expected to vest (net of estimated
forfeitures) at March 31, 2016 (b)
Exercisable, March 31, 2016
Number of
Shares
3,467,810 $
245,955
3,124,200
(994,874)
(53,333)
5,789,758
3,959,150
(1,857,830)
(66,683)
7,824,395 $
Weighted Average
Exercise Price
(per share)
Weighted Average
Remaining Contractual
Life (in years)
Aggregate Intrinsic
Value
(in thousands)
5.05
0.64
4.06
3.24
2.56
4.65
2.05
3.37
0.77
3.61
8.33 $
2,318
8.35
1,319
8.24 $
110
103
90
(a)During fiscal year ended March 31, 2015, in connection with the Appia acquisition, Digital Turbine, Inc. assumed approximately 246,000 stock
6,116,010
2,943,295 $
7.96
6.57 $
3.92
5.42
options, with a weighted-average exercise price per share of $0.64.
(b)For options vested and expected to vest, options exercisable, and options outstanding, the aggregate intrinsic value in the table above represents the
total pre-tax intrinsic value (the difference between Digital Turbine's closing stock price on March 31, 2016 and the exercise price multiplied by
the number of in-the-money options) that would have been received by the option holders had the holders exercised their options on March 31,
2016. The intrinsic value changes based on changes in the price of Digital Turbine's common stock.
Information about options outstanding and exercisable at March 31, 2016 is as follows:
Exercise Price
Number of Shares
Options Outstanding
Options Exercisable
Weighted-Average
Exercise Price
Weighted-Average
Remaining Life
(Years)
Number of Shares
Weighted-Average
Exercise Price
$0.00 - 0.50
$0.51 - 1.00
$1.01 - 1.50
$1.51 - 2.00
$2.01 - 2.50
$2.51 - 3.00
$3.51 - 4.00
$4.01 - 4.50
$4.51 - 5.00
$5.01 and over
8,065 $
153,071
2,064,650
407,167
253,776
1,214,888
1,626,634
1,566,144
60,000
470,000 $
7,824,395
0.24
0.65
1.38
1.51
2.43
2.62
3.93
4.20
4.65
16.32
3.99
6.30
5.05
9.60
4.83
8.51
8.67
7.68
6.99
2.76
8,065 $
149,297
6,250
37,500
170,443
577,128
718,717
777,145
60,000
438,750 $
2,943,295
0.24
0.65
1.18
1.51
2.41
2.65
3.93
4.21
4.65
17.06
Other information pertaining to stock options for the Stock Plans is as follows:
Total fair value of options vested
Total intrinsic value of options exercised (a)
2016
March 31,
2015
$
$
5,288 $
3 $
3,155 $
71 $
2014
580
554
(a) The total intrinsic value of options exercised represents the total pre-tax intrinsic value (the difference between the stock price at exercise and the exercise price
multiplied by the number of options exercised) that was received by the option holders who exercised their options during the fiscal year.
The weighted-average grant-date fair value for the options granted during the fiscal years ended March 31, 2016, 2015, and
2014 was $1.60, $3.44, and $3.33 respectively.
84
At March 31, 2016 and March 31, 2015, there was $9,377 and $11,492 of total unrecognized stock-based compensation
expense, net of estimated forfeitures, related to unvested stock options expected to be recognized over a weighted-average period of 2.6
years and 2.4 years, respectively.
Valuation of Awards
For stock options granted under Digital Turbine’s Incentive Plans, Digital Turbine Inc. typically uses the Black-Scholes
option pricing model to estimate the fair value of stock options at grant date. The Black-Scholes option pricing model incorporates various
assumptions, including volatility, expected term risk-free interest rates, and dividend yields. The fair value of options assumed under the
Appia Plan was estimated as of the March 6, 2015 closing date using the Black-Scholes option pricing model. The assumptions utilized in
this model during fiscal 2016 and 2015 are presented below.
Risk-free interest rate
Expected life of the options
Expected volatility
Expected dividend yield
Expected forfeitures
2016
March 31,
2015
1.37% to 2.27%
5.73 to 10 years
78% to 145%
—%
10% to 35%
1.37% to 1.79%
5.73 to 6 years
115% to 145%
—%
10% to 35%
2014
1.36% to 1.71%
5.27 to 6 years
150% to 155%
—%
10% to 35%
Expected volatility is based on a blend of implied and historical volatility of Digital Turbine's common stock over the most
recent period commensurate with the estimated expected term of Digital Turbine’s stock options. Digital Turbine uses this blend of implied
and historical volatility, as well as other economic data, because management believes such volatility is more representative of prospective
trends. The expected term of an award is based on historical experience and on the terms and conditions of the stock awards granted to
employees.
Total stock compensation expense for the Company’s equity plans, which includes both stock options and restricted stock is
included in the following statements of operations components. Please see Note 13 regarding restricted stock:
Product development
Sales and marketing
General and administrative
Total
9. Goodwill
Year Ended March 31,
2016
2015
2014
$
$
— $
—
5,963
5,963 $
— $
—
6,340
6,340 $
—
—
4,693
4,693
A reconciliation of the changes to the Company’s carrying amount of goodwill for the periods or as of the dates indicated:
Goodwill as of March 31, 2013
Adjustments
Goodwill as of March 31, 2014
Adjustments
Goodwill as of March 31, 2015
Adjustments
Goodwill as of March 31, 2016
Content
$
2,523 $
1,249
3,772 $
1,472
5,244
—
5,244 $
O&O
A&P
Total
1,065 $
—
1,065 $
41,203
42,268
—
42,268 $
— $
—
— $
29,235
29,235
(126)
29,109 $
3,588
1,249
4,837
71,910
76,747
(126)
76,621
$
$
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,
85
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.
Goodwill is recorded when the purchase price for an acquisition exceeds the estimated fair value of the net tangible and
identified intangible assets acquired. Goodwill is allocated to our reporting units based on relative fair value of the future benefit of the
purchased operations to our existing business units as well as the acquired business unit. Reporting units may be operating segments as a
whole or an operation one level below an operating segment, referred to as a component. Our reporting units are consistent with the
operating segments identified in Part I, Item 1 under the section “Business” of this Form 10-K.
We perform an annual impairment assessment in the fourth quarter of each year, or more frequently if indicators of potential
impairment exist, to determine whether it is more likely than not that the fair value of a reporting unit in which goodwill resides is less than
its carrying value. For reporting units in which this assessment concludes that it is more likely than not that the fair value is more than its
carrying value, goodwill is not considered impaired and we are not required to perform the two-step goodwill impairment test. Qualitative
factors considered in this assessment include industry and market considerations, overall financial performance, and other relevant events
and factors affecting the reporting unit.
For reporting units in which the impairment assessment concludes that it is more likely than not that the fair value is less than
its carrying value, we perform the first step of the goodwill impairment test, which compares the fair value of the reporting unit to its
carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not
considered impaired and we are not required to perform additional analysis. If the carrying value of the net assets assigned to the reporting
unit exceeds the fair value of the reporting unit, then we must perform the second step of the goodwill impairment test to determine the
implied fair value of the reporting unit’s goodwill. If we determine during the second step that the carrying value of a reporting unit’s
goodwill exceeds its implied fair value, we record an impairment loss equal to the difference.
Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. The goodwill
impairment test we utilized in the fourth quarter ended March 31, 2016 utilized an income method to estimate a reporting unit’s fair value.
The Company believes that the income method is the best method of determining fair value for our Company. The income method is based
on a discounted future cash flow approach that uses the following reporting unit estimates: revenue, based on assumed growth rates;
estimated costs; and appropriate discount rates based on a reporting unit's weighted average cost of capital as determined by considering the
observable weighted average cost of capital of comparable companies. We test the reasonableness of the inputs and outcomes of our
discounted cash flow analysis against available comparable market data and against the Company’s market capitalization value which
includes a control premium estimate. A reporting unit’s carrying value represents the assignment of various assets and liabilities.
Based on the valuation performed for fiscal 2016, all goodwill reporting units have an estimated fair value in excess of their
respective carrying values. The estimated fair values of two of the goodwill reporting units exceeded their carrying values by over 10%.
One of the goodwill reporting unit’s estimated fair value exceeded the carrying value by less than 10%.
As a result of all goodwill reporting units having an estimated fair value in excess of their respective carrying values, the
second step of the goodwill impairment test was not necessary.
In the year ended March 31, 2016, the Company adjusted the purchase price allocation of DTM due to the finalization of the
working capital adjustment, which resulted in a net decrease in goodwill of $126.
In the year ended March 31, 2015, the Company finalized the purchase price allocation of MIA, which resulted in an
adjustment to goodwill of $1,472, and acquired XYO and Appia, Inc. which resulted in an increase in goodwill of $1,000 and $69,438,
respectively.
In the year ended March 31, 2014, there was a net increase in goodwill of $1,249, which included an increase in goodwill of
$1,182 related to acquisition of MIA, an increase in goodwill of $209 related to adjustment to goodwill for tax, and a decrease in goodwill
of $142 related to discontinued operations.
86
10. Intangible Assets
We make judgments about the recoverability of purchased finite-lived intangible assets whenever events or changes in
circumstances indicate that an impairment may exist. Recoverability of finite-lived intangible assets is measured by comparing the carrying
amount of the asset to the future undiscounted cash flows that the asset is expected to generate. We perform an annual impairment
assessment in the fourth quarter of each year for indefinite-lived intangible assets, or more frequently if indicators of potential impairment
exist, to determine whether it is more likely than not that the carrying value of the assets may not be recoverable. Recoverability of
indefinite-lived intangible assets is measured by comparing the carrying amount of the asset to the future undiscounted cash flows that the
asset is expected to generate. If we determine that an individual asset is impaired, the amount of any impairment is measured as the
difference between the carrying value and the fair value of the impaired asset.
The assumptions and estimates used to determine future values and remaining useful lives of our intangible and other long-
lived assets are complex and subjective. They can be affected by various factors, including external factors such as industry and economic
trends, and internal factors such as changes in our business strategy and our forecasts.
We complete our annual impairment tests in the fourth quarter of each year unless events or circumstances indicate that an
asset may be impaired. There were no other indications of impairment present during the fiscal year ended March 31, 2016. In the fiscal
year ended March 31, 2015, the Company determined there to be a need to accelerate amortization expense by $224 due to the Company's
decision to stop using the Appia trade name, rename, and re-brand the trademarks acquired through the Appia acquisition. There were no
other indications of impairment present during the period ended March 31, 2015. In the fiscal year ended March 31, 2014, the Company
recorded an impairment charge of $154 to write down trade names pursuant to its decision to rename and rebrand the subsidiaries under DT
to DT EMEA and DT APAC. There were no other indications of impairment present during the period ended March 31, 2014.
The components of intangible assets as at March 31, 2016 and 2015 were as follows:
Software
Trade name/trademark
Customer list
License agreements
Total
Software
Trade name/trademark
Customer list
License agreements
Total
$
$
$
$
As of March 31, 2016
Accumulated
Amortization
Cost
11,544 $
380
11,300
355
23,579 $
(4,949) $
(380)
(5,534)
(226)
(11,089) $
As of March 31, 2015
Accumulated
Amortization
Cost
13,480 $
380
14,755
355
28,970 $
(2,489) $
(14)
(1,379)
(152)
(4,034) $
Net
6,595
—
5,766
129
12,490
Net
10,991
366
13,376
203
24,936
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, 2016, 2015, and 2014, the Company recorded amortization expense in the amount of
$10,537, $2,010, and $1,769, respectively.
Included in the $10,537 amortization expense recorded during the year ended March 31, 2016 is $2,404 of amortization
expense recorded for customer relationship intangible assets related to a customer relationship the Company terminated from our
September 2012 acquisition of Logia Mobile Ltd.
87
In connection with the Company's investment in Sift, the Company recorded approximately a $1,874 reduction to the cost
basis of internal use software acquired in the Appia Inc. transaction as the licensing technology in the Sift agreement was specifically tied to
such software. We do not expect any further adjustments to the software intangibles related to this transaction.
Based on the amortizable intangible assets as of March 31, 2016, we estimate amortization expense for the next five years to
be as follows:
As of Year Ending March 31,
Amortization
Expense
2017 $
2018
2019
2020
2021
$
7,129
2,530
1,756
271
114
690
12,490
Future
Total
Below is a summary of intangible assets:
Balance as of March 31, 2013
Amortization of intangibles
Acquisition
Impairment
Disposal of subsidiary
Balance as of March 31, 2014
Amortization of intangibles
Purchase price allocation adjustment
Acquisition of XYO
Acquisition of Appia
Capitalized developed software
Balance as of March 31, 2015
Amortization of intangibles
Customer relationship intangible asset write-off
Reduction in software intangibles related to Sift Transaction
Balance as of March 31, 2016
11. Debt
Short-Term Debt
Term loan, principal
Revolving line of credit, principal
Senior secured debenture, net of discounts of $440 and $0, respectively
Total
88
Intangible Assets
4,757
(1,769)
6,826
(154)
(586)
9,074
(2,010)
(1,472)
1,500
17,780
64
24,936
(8,168)
(2,404)
(1,874)
12,490
$
March 31,
2016
March 31,
2015
$
— $
3,000
7,560
$ 10,560 $
600
3,000
—
3,600
Long-Term Debt
Senior secured debenture, net of discounts of $0 and $910, respectively
Senior Debt
March 31,
2016
March 31,
2015
$
— $
7,090
On March 6, 2015, in connection with the Company’s acquisition of Appia, Inc., DT Media entered into a Second Amended
and Restated Loan and Security Agreement with SVB in connection with the closing of the Appia, Inc. acquisition, which included a term
loan and revolving line of credit. This amendment replaced and restated Appia Inc's prior loan agreement with SVB, and was then amended
and restated in June 2015 (as described under "Revolving Line of Credit"). As of March 31, 2016, the term loan has been fully paid off,
whereas at March 31, 2015 the balance was $600.
Revolving Line of Credit
On June 11, 2015, DT Media, and SVB, entered into a Third Amended and Restated Loan and Security Agreement, pursuant
to which SVB agreed to amend and restate the existing Second Amended and Restated Loan and Security Agreement to increase the
revolving line of credit available under such facility from $3,500 to $5,000, to extend the maturity date under the facility from June 30,
2015 to June 30, 2016, and to make certain other changes to the terms of the existing agreement.
The revolving line of credit under this amendment allows DT Media to borrow up to the lesser of $5,000 or the Borrowing
Base, which is 80% of eligible accounts receivable after consideration of other amounts outstanding, under the revolving line of credit. At
March 31, 2016 and March 31, 2015, DT Media had borrowed $3,000 under the revolving line. The revolving line matures on June 30,
2016, with interest payable monthly at a floating annual rate equal to (a) during any month for which DT Media maintained an adjusted
quick ratio (as customarily defined) of not less than 1.00:1.00 as of the last day of a month, the prime rate as reported by The Wall Street
Journal, plus (1.75%) and (b) at all other times, the prime rate as reported by The Wall Street Journal, plus (2.75%). At March 31, 2016, the
interest rate was 6.25%.
On November 30, 2015, DT Media and SVB, entered into an amendment to the Third Amended and Restated Loan and
Security Agreement dated June 11, 2015. Pursuant to this amendment, the adjusted EBITDA financial covenant was removed and replaced
with the requirement to maintain an adjusted quick ratio of not less than 0.90:1.00 unless (a) there are no advances outstanding under the
revolving facility, or (b) if the Company’s cash and cash equivalents held at SVB or SVB's Affiliates is greater than or equal to $15,000.
Furthermore, the Streamline Period, which is not a financial covenant but applies to application of receivables, was amended so that it is
achieved if DT Media’s trailing three-month period revenue is not less than 85% of projections for the three months ending August 31,
2015 through November 30, 2015, 75% of projections for the three months ending December 31, 2015 and thereafter, with the projected
revenue for such three month period as set forth in DT Media’s operating budget provided to SVB. This amendment also added the
requirement for the Company to deliver consolidated financial statements in addition to DT Media. At March 31, 2016, DT Media and the
Company were compliant with all covenants. The Company was non-Streamline as of March 31, 2016.
DT Media’s obligations under this amendment are secured by substantially all of DT Media’s assets. Additionally, Digital
Turbine, Inc. has guaranteed DT Media’s obligations under this amendment, and pledged substantially all of its assets, including its
intellectual property, to SVB in support of this amendment.
Pursuant to the amendment to the Third Amended and Restated Loan and Security Agreement dated June 11, 2015, entered
into by DT Media and SVB on November 30, 2015, the covenant requirement was put in place for the Company to maintain an adjusted
quick ratio of not less than 0.90:1.00 unless (a) there are no advances outstanding under the revolving facility, or (b) if the Company’s cash
and cash equivalents held at SVB or SVB's Affiliates is greater than or equal to $15,000. As of April 30, 2016, given the Company did not
meet the requirements set forth in (a) and (b) noted previously, the Company was required to maintain an adjusted quick ratio of not less
than 0.90:1.00. As of April 30, 2016, the Company's quick ratio was estimated at 0.89 versus the 0.90 minimum level.
On June 10, 2016, prior to the required testing of the above-mentioned covenant, SVB and DT Media entered into a Consent
Agreement, effective as of May 31, 2016, whereby SVB provided its consent to DT Media (for a de minimis fee) to not exercise any rights
or remedies solely in connection with the non-compliance with such covenant for the period ended April 30, 2016, without which consent
DT Media would have been in default of the Loan Agreement. Please see "Risk Factors"
89
included in PART I Item 1A. of this Annual Report on Form 10-K within section "General Risk - The Company has secured indebtedness,
which could limit its financial flexibility", regarding financial covenant compliance.
Subordinated Debenture and Warrant
On March 6, 2015, in connection with the acquisition of DT Media, the Company entered into a Securities Purchase
Agreement with North Atlantic, pursuant to which DT Media sold a senior secured debenture with a principal amount of $8,000 (the “New
Debenture”) to North Atlantic. The New Debenture was issued in exchange for two debentures previously sold by Appia, Inc. to North
Atlantic, which were cancelled.
The New Debenture matures on March 6, 2017, at which time the principal amount is due and payable. The Company may
prepay the New Debenture in whole or in part at any time without penalty. The New Debenture bears interest at 10% per annum for the
first twelve months, and 14% thereafter; interest is payable monthly.
DT Media’s obligations under the New Debenture are secured by all of DT Media’s assets; additionally, Digital Turbine, Inc.
has guaranteed DT Media’s obligations under the New Debenture, and pledged substantially all of its assets, including its intellectual
property, to North Atlantic in support of the New Debenture. The New Debenture is subordinated to the Amended and Restated Credit
Facility.
In connection with the issuance of the New Debenture, the Company issued to North Atlantic (i) 200,000 shares of the
Company’s common stock, and (ii) a warrant to purchase an additional 400,000 shares of the Company’s common stock at an exercise price
of $0.001 per share. The warrant is not exercisable until the one year anniversary of the closing date of the merger and would have
terminated if the Company had repaid the New Debenture prior to such one year anniversary. The value of the common shares, and the
estimated value of the warrant, have been recorded as debt discount and are being amortized over the term of the New Debenture during
the years ended March 31, 2016, 2015. During the years ended March 31, 2016 and 2015, debt discount amortized amounted to $470 and
$34, respectively, with the debt discount balance amounting to $440 and $910 at March 31, 2016 and 2015, respectively.
On February 17, 2016, DT Media and North Atlantic, entered into an amendment to the Securities Purchase Agreement dated
March 6, 2015 where DT Media agreed to the prepayment premium in the table below if the debt is retired within the date ranges set forth.
Although the Company’s debt to North Atlantic is not due until March 6, 2017, if the debt is not retired by May 6, North Atlantic has a
right to receive a warrant for 400,000 shares (0.6% of outstanding as of March 31, 2016) and a board observer right. As the Company is in
discussions to refinance its debt, it sought to defer the issuance of the warrant (and board observer rights) in exchange for the prepayment
premium. Accordingly, pursuant to this amendment, the warrant vesting was modified to May 6, 2016.
Period
Prepayment Premium
From March 6, 2016 to and including April 6, 2016
From April 7, 2016 until the maturity date
$
$
40
80
On May 6, 2016, DT Media and North Atlantic, entered into a Second Amendment to Securities Purchase Agreement, where
DT Media agreed to pay North Atlantic the amount of $140 as a fee in connection with the preparation, negotiation, and execution of this
amendment. Pursuant to this amendment, the warrant vesting date was modified to June 15, 2016 (the “Retirement Date”) and provided
that the vesting date may be further extended by North Atlantic to no later than June 22, 2016, if North Atlantic believes, in its reasonable
discretion, that (i) DT Media is unable to refinance the obligations by the vesting date, (ii) reasonable progress has been made by DT
Media in refinancing the obligations, and (iii) in all likelihood, DT Media will be able to refinance the obligations by June 22, 2016. If
these conditions are not satisfied or the debt is not refinanced by June 15, 2016, then a warrant for 400,000 shares would be issued to North
Atlantic and North Atlantic would receive a board observer. The payment of $140 to North Atlantic was in lieu of any prepayment
premium described above.
On June 13, 2016, DT Media and North Atlantic entered into a Third Amendment to Securities Purchase Agreement, where
DT Media agreed to pay North Atlantic the amount of $60 as consideration to extend the Retirement Date to July 15, 2016.
90
The New Debenture, and the Company’s secured guarantees of such debt, contain covenants, among others, limiting the
Company’s ability to undergo a change of control, incur indebtedness, grant liens, make dividends in cash, and other customary covenants.
At March 31, 2016, DT Media and the Company were compliant with all such covenants.
The Company’s required principal repayments for its outstanding debt as of March 31, 2016, are as follows:
June 30, 2016
March 6, 2017
Total
$
$
12. Related-Party Transactions
Revolving Line of
Credit
Subordinated Debenture
—
8,000
8,000
3,000 $
—
3,000 $
On December 28, 2015, DT Media entered into a license with respect to certain of DTM’s intellectual property assets with
Sift, in exchange for 9.9% of Sift’s newly-issued Preferred Stock and a cash payment of $1,000. Judson Bowman, a Director at the time of
the transaction, is the founder, CEO, and majority shareholder of Sift. Mr Bowman has subsequently stepped down from Digital Turbine's
board effective January 25, 2016. For so long as DT Media holds Preferred Stock in Sift, DT Media shall be entitled to nominate for
election one member of the five-member Board of Sift, which DT Media nominated as director Bill Stone, CEO of Digital Turbine.
The investment in Sift’s Preferred Stock is recorded at cost, equal to its fair value at the date of issuance of $999.
13. Capital Stock Transactions
Preferred Stock
There are 2,000,000 shares of Series A Convertible Preferred Stock, $0.0001 par value per share (“Series A”), authorized and
100,000 shares issued and outstanding, which are currently convertible into 20,000 shares of common stock. 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 April 2015, the Company issued 452,974 unregistered shares of common stock of the Company to a director for the
cashless exercise of 666,667 warrants granted in June 2010. See additional disclosure regarding the issuance of unregistered shares at
"PART II - OTHER INFORMATION", section "Item 2. Unregistered Sales of Equity Securities and Use of Proceeds."
In May 2015, the Company issued 3,333 shares of common stock of the Company for the exercise of options granted to an
employee in October 2013.
In June 2015, the Company issued 333 shares of common stock of the Company for the exercise of options granted to an
employee in October 2013.
In July 2015, the Company issued 40,116 shares of common stock for the exercise of options assumed by the Company as
part of the acquisition of DT Media (Appia, Inc.) during March 2015.
In July 2015, the Company cancelled 10,874 shares of common stock held in escrow related to the finalization and post-
closing adjustment to the acquisition of DT Media (Appia, Inc.) during March 2015.
In July 2015, the Company issued 117,000 shares of common stock for the settlement of a liability. For more details on the
settlement of this liability, see section "Settlement of Potential Claim" detailed in Note 18 to our Consolidated Financial Statements
included in PART II, Item 8 of this Annual Report on Form 10-K.
In September 2015, the Company issued 19,425 shares of common stock for the exercise of options assumed by the Company
as part of the acquisition of DT Media (Appia, Inc.) during March 2015.
91
In October 2015, the Company issued 8,740,000 shares in its public offering on October 2, 2015, netting cash proceeds to the
Company of $12,627.
In October 2015, the Company issued 1,227 shares of common stock for the exercise of options assumed by the Company as
part of the acquisition of DT Media (Appia, Inc.) during March 2015.
In November 2015, the Company issued 2,248 shares of common stock for the exercise of options assumed by the Company
as part of the acquisition of DT Media (Appia, Inc.) during March 2015.
In November 2015, the Company issued 210,728 shares of common stock of the Company to its directors for services. The
shares vest over one year. The fair value of the shares on the date of issuance was $318.
In January 2016, the Company cancelled 23,841 shares of common stock for Judson Bowman, who resigned from his position
as director of the Company to run the Sift organization, where he is the founder, CEO, and majority shareholder.
In February 2016, the Company issued 23,200 shares of common stock of the Company to a director for services. The shares
vest over pro-rata through July 31, 2016. The fair value of the shares on the date of issuance was $25.
Restricted Stock Agreements
From time to time, the Company enters into restricted stock agreements (“RSAs”) with certain employees and consultants.
The RSAs have performance conditions, market conditions, time conditions or a combination thereof. In some cases, 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
terms of the RSA. As reported in our Current Reports on Form 8-K filed with the SEC on February 12, 2014 and June 25, 2014, the
Company adopted a Board Member Equity Ownership Policy that supersedes any post-vesting lock-up in RSAs that are applicable to
people covered by the policy, which includes the Company’s Board of Directors and Chief Executive Officer.
Performance and Market Condition RSAs
On December 28, 2011, the Company issued 3,170,000 restricted shares with vesting criteria based on both performance and
market conditions. On December 28, 2011, one third of the restricted shares vested. On July 3, 2013, the second one third of the restricted
shares vested. During fiscal 2015, the Company vested 594,372 shares and cancelled 8,131 shares of the final one third of the 3,170,000
restricted shares, leaving 454,164 shares unvested. During fiscal 2015, the remaining expense related to these RSAs of $1,967 was
recorded leaving these RSAs fully expensed as of March 31, 2015. During the year ended March 31, 2016, the Company cancelled the
remaining 454,164 shares, as the vesting criteria based on both performance and market conditions were not met.
Service and Time Condition RSAs
On various dates during the years ended March 31, 2016 and March 31, 2015, the Company issued 233,928 and 267,195
restricted shares, respectively, with vesting criteria based on both service and time conditions.
In November 2015, the Company issued 210,728 restricted shares with vesting criteria based on both service and time
conditions. For accounting purposes, the Company determined the grant date fair value to be $1.51 per share which is the closing price of
the Company's stock price on November 4, 2015.
In January 2016, the Company issued 23,200 restricted shares with vesting criteria based on both service and time conditions.
For accounting purposes, the Company determined the grant date fair value to be $1.06 per share which is the closing price of the
Company's stock price on January 26, 2016.
With respect to service and time condition RSAs, during the years ended March 31, 2016 and March 31, 2015, the Company
expensed $867 and $956 related to time condition RSAs, respectively. As of March 31, 2016, 110,046 remain unvested.
Total non-vested restricted stock awards and activities for all vesting conditions for periods ended March 31, 2016 and
March 31, 2015, respectively, were as follows:
92
Unvested restricted stock outstanding as of March 31, 2014
Granted
Vested
Cancelled
Unvested restricted stock outstanding as of March 31, 2015
Granted
Vested
Cancelled
Unvested restricted stock outstanding as of March 31, 2016
Number of
Shares
1,365,010 $
267,195
(981,731)
(8,131)
642,343
233,928
(288,220)
(478,005)
110,046 $
Weighted-
Average Grant
Date Fair Value
3.22
3.60
3.48
3.31
3.04
1.47
2.97
2.82
1.45
All restricted shares, vested and unvested, cancellable and not cancelled, have been included in the outstanding shares as of
March 31, 2016.
At March 31, 2016 and March 31, 2015, there was $159 and $876, respectively, of unrecognized stock-based compensation
expense, net of estimated forfeitures, related to unvested restricted stock awards expected to be recognized over a weighted-average period
of approximately 0.34 and 0.22 years, respectively.
14. Net Loss per Common Share
Basic net loss per share is calculated by dividing net loss by the weighted-average number of shares of common stock outstanding
during the period, less shares subject to repurchase, and excludes any dilutive effects of employee stock-based awards. Because the
Company had net losses for the twelve months ended March 31, 2016, all potentially dilutive shares of common stock were determined to
be anti-dilutive, and accordingly, were not included in the calculation of diluted net loss per share.
The following table sets forth the computation of net loss per share of common stock (in thousands, except per share
amounts):
Net loss from continuing operations, net of taxes
Weighted-average common shares outstanding, basic and diluted
Basic and diluted net loss per common share
Common stock equivalents excluded from net loss per diluted share because
their effect would have been anti-dilutive
15. Employee Benefit Plans
Years Ended
March 31,
2016
(28,032) $
61,763
2015
(24,647) $
38,967
(0.46) $
(0.63) $
2014
(17,202)
27,478
(0.68)
$
$
1,438,355
1,574,372
1,169,555
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.
93
16. Income Taxes
The provision (benefit) for income taxes by taxing jurisdiction was as follows:
Year Ended
March 31, 2016
Year Ended
March 31, 2015
Current U.S. federal
Current state and local
Current non-U.S.
Total current
Deferred U.S. federal
Deferred state and local
Deferred non-U.S.
Total deferred
Total income tax provision
$
$
— $
—
270
270
—
—
(56)
(56)
214 $
Year Ended
March 31, 2014
—
—
(272)
(272)
—
—
—
—
(272)
— $
25
324
349
—
—
398
398
747 $
A reconciliation of income tax expense using the statutory U.S. income tax rate compared with the actual income tax
provision follows:
Statutory federal income taxes
State income taxes, net of federal benefit
Non-deductible expenses
Rate change
Change in uncertain tax liability
Change in valuation allowance
Return-to-provision adjustments
Income tax provision/(benefit)
Deferred tax assets and liabilities consist of the following:
Year Ended
March 31,
2016
(9,736) $
—
821
(224)
(123)
10,106
(630)
214 $
Year Ended
March 31,
2015
(8,365) $
17
2,171
—
324
6,600
—
747 $
Year Ended
March 31,
2014
(6,017)
(765)
895
—
(136)
5,751
—
(272)
$
$
Deferred income tax assets
Net operating loss carryforward
Stock-based compensation
Credit carryforwards
Other
Gross deferred income tax assets
Valuation allowance
Net deferred income tax assets
Deferred income tax liabilities
Depreciation and amortization
Intangibles and goodwill
Other
Net deferred income tax
assets/(liabilities)
Year Ended
March 31,
2016
Year Ended
March 31,
2015
Year Ended
March 31,
2014
$
$
$
31,840 $
1,965
129
1,469
35,403
(32,026)
25,668 $
1,270
123
1,324
28,385
(21,920)
3,377 $
6,465 $
19,621
15,360
268
425
35,674
(35,154)
520
(754) $
(751) $
(1,947)
(175)
(5,069)
(780)
—
(269)
—
$
501
$
(135)
$
251
As of March 31, 2016, the Company had net operating loss (NOL) carry-forwards for U.S. federal and state tax of
approximately $79,220, Australia federal tax of approximately $5,500, and Israel federal tax of approximately $1,500. The U.S.
94
federal and state NOLs expire between 2028 and 2036, and the Australia and Israel NOLs have an unlimited carryover period. Utilization of
the NOLs in the U.S. are subject to 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 and foreign
limitations. These ownership changes 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 or series of transactions
over a three-year period resulting in an ownership change of more than 50% percentage points of the outstanding stock of a company by
certain stockholders or public groups.
As of March 31, 2016, realization of a large portion of the Company’s gross deferred tax assets was not considered more
likely than not and, accordingly, a valuation allowance of $32,026 has been provided. During the year ended March 31, 2016, the valuation
allowance increased by $10,106.
ASC 740 requires the consideration of a valuation allowance, on a jurisdictional basis, 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. Based on the history of cumulative book and tax losses, a valuation allowance has been recorded for assets that management
believes are not more likely than not realizable.
ASC 740 provides guidance on the minimum threshold that an uncertain income tax position is required to meet before it can
be recognized in the financial statements. ASC 740 contains a two-step approach to recognizing and measuring uncertain income tax
positions. The first step is to evaluate the income tax position for recognition by determining if the weight of available evidence indicates
that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if
any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. If it
is not more likely than not that the benefit will be sustained on its technical merits, no benefit can be recorded. We recognize accrued
interest and penalties related to uncertain income tax positions in income tax expense on our consolidated statement of income.
The Company’s income is subject to taxation in both the U.S. and foreign jurisdictions. Significant judgment is required in
evaluating the Company’s tax positions and determining its provision for income taxes. The Company establishes liabilities for income tax-
related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These liabilities for tax
contingencies are established when the Company believes that a tax position is not more likely than not sustainable. The Company adjusts
these liabilities in light of changing facts and circumstances, such as the outcome of a tax audit or lapse of a statute of limitations. The
provision for income taxes includes the impact of uncertain tax liabilities and changes in liabilities that are considered appropriate.
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended March 31, 2016, 2015,
and 2014 is as follows:
Balance at April 1
Additions for tax position of prior years
Reductions for tax positions of prior years
Balance at March 31
2016
2015
2014
$
$
905 $
—
(122)
783 $
61 $
844
—
905 $
61
—
—
61
Included in the balances at March 31, 2016, 2015 and 2014 are $783, $905, and $61, respectively, of unrecognized tax
benefits, which would affect the annual effective tax rate if recognized. The Company recognized an interest benefit of $1 on uncertain
income tax liabilities in its statement of operations for the year ended March 31, 2016. The Company recognized interest expense and
penalties on uncertain income tax liabilities of $33 and $0 in its statement of operations for the years ended March 31, 2015 and 2014,
respectively. The Company expects the amount of unrecognized tax benefits to decrease by approximately $140 in the next twelve months.
The Company’s U.S. federal, state, and foreign income tax returns generally remain subject to examination for the tax years
ended 2012 through 2016.
95
17. Segment and Geographic Information
In the fourth quarter of fiscal 2015, the Company made certain segment realignments in order to conform to the way the
Company manages segment performance. This realignment was driven primarily by the acquisition of Appia on March 6, 2015. The
Company has recast prior period amounts to provide visibility and comparability. None of these changes impacts the Company’s
previously reported consolidated net revenue, gross margin, operating income, net income, or earnings per share.
The Company manages its business in three operating segments: Operators and OEMs ("O&O"), Advertisers and Publishers,
and Content. The three operating segments have been aggregated into two reportable segments: Advertising and Content. Our chief
operating decision maker does not evaluate operating segments using asset information. The Company has considered guidance in
Accounting Standards Codification (ASC) 280 in reaching its conclusion with respect to aggregating its operating segments into two
reportable segments. Specifically, the Company has evaluated guidance in ASC 280-10-50-11and determined that aggregation is consistent
with the objectives of ASC 280 in that aggregation into two reportable segments allows users of our financial statements to view the
Company’s business through the eyes of management based upon the way management reviews performance and makes
decisions. Additional factors that were considered included: whether or not the operating segments have similar economic characteristics,
the nature of the products/services under each operating segment, the nature of the production/go to market process, the type and
geographic location of our customers, and the distribution of our products/services.
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 segment information on our net revenues and loss from operations for the years ended
March 31, 2016, 2015, and 2014. During fiscal 2016 the company changed its methodology for how corporate operating expenses are
allocated to the Company's Advertising and Content operating segments as the new method of allocation is deemed by management to be a
more accurate representation for how the expenses relate to the operations and development of the Advertising and Content segments.
Corporate operating expenses in fiscal 2015 were previously allocated between the Advertising and Content segments based on employee
headcount. Corporate operating expenses in fiscal 2016 are now being allocated based on the percentage of revenue between Advertising
and Content for the Company as a whole. Prior period fiscal 2015 figures presented have been updated to reflect these changes and are
comparable to the fiscal 2016 figures presented.
Year ended March 31, 2016
Net revenues
Loss from operations
Year ended March 31, 2015
Net revenues
Loss from operations
Year ended March 31, 2014
Net revenues
Loss from operations
Content
Advertising
Total
$
$
$
$
$
$
28,765 $
(7,603) $
57,776 $
(18,333) $
22,009 $
(13,300) $
6,243 $
(10,437) $
23,635 $
(11,969) $
769 $
(3,555) $
86,541
(25,936)
28,252
(23,737)
24,404
(15,524)
The following information sets forth geographic information on our net revenues and net property and equipment for the
years ended March 31, 2016, 2015, and 2014. Revenues by geography are based on the billing addresses of our customers. The following
table sets forth revenues and long-lived assets by geographic area. One major carrier customer in our Content business accounted for 26.1%
of our consolidated net revenues during the year ended March 31, 2016, and this major carrier customer and another major carrier customer
in our Content business accounted for 50.6% and 11.1% of our consolidated net revenues during the year ended March 31, 2015. During
the year ended March 31, 2014, the two previously mentioned major customers and a third major customer represented 45.8%, 22.2%, and
10.5% of our consolidated net revenues.
96
Net revenues
United States & Canada
Europe, Middle East, & Africa
Asia Pacific & China
Mexico, Central America, & South America
Consolidated net revenues
Property and equipment, net
United States & Canada
Europe, Middle East, & Africa
Asia Pacific & China
Mexico, Central America, & South America
Consolidated property and equipment, net
$
$
$
$
Year Ended March 31,
2016
2015
2014
28,813 $
15,587
41,661
480
86,541 $
1,376 $
94
314
—
1,784 $
5,976 $
2,202
20,074
—
28,252 $
289 $
32
293
—
614 $
167
4,060
20,107
70
24,404
68
70
327
—
465
18. Commitments and Contingencies
Operating Lease Obligations
The Company leases office facilities and equipment under non-cancelable operating leases expiring in various years through
2026.
Following is a summary of future minimum payments under initial terms of leases as of:
Year ending March 31,
2017 $
2018
2019
2020
2021
Thereafter
Total minimum lease payments
$
941
955
814
577
487
525
4,299
These amounts do not reflect future escalations for real estate taxes and building operating expenses. Rental expense for
continuing operations amounted to $804, $629 and $250, for the years ended March 31, 2016, 2015, and 2014, respectively.
Other Obligations
As of March 31, 2016, the Company was obligated for payments under various employment contracts with initial terms
greater than one year at March 31, 2016. Annual payments relating to these commitments at March 31, 2016 are as follows:
Year ending March 31,
Total minimum payments
2017 $
$
620
620
The Company is not obligated for payments beyond fiscal 2017.
Legal Matters
97
The Company may be involved in various claims, suits, assessments, investigations, and legal proceedings that arise from
time to time in the ordinary course of its business, including those identified below. The Company accrues a liability when it is both
probable that a liability has been incurred, and the amount of the loss can be reasonably estimated. The Company reviews these accruals at
least quarterly, and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel, and other relevant
information. To the extent new information is obtained and the Company's views on the probable outcomes of claims, suits, assessments,
investigations, or legal proceedings change, changes in the Company's accrued liabilities would be recorded in the period in which such
determination is made. For some matters, the amount of liability is not probable or the amount cannot be reasonably estimated, and
therefore, accruals have not been made. The following is a discussion of the Company's significant legal matters and other proceedings.
Coral Tell Ltd. Matter
On May 30, 2013, a class action suit in the amount of NIS 19,200 or $5,300 was filed in the Tel-Aviv Jaffa District Court
against Coral Tell Ltd., an Israeli company that owns and operates a website offering advertisements. Coral Tell Ltd. is currently being
sued in a class action lawsuit regarding phone call overages, and has served a third-party notice against Logia and two additional companies
for our alleged involvement in facilitating the overages. The suit relates to a service offered by the Coral Tell website, enabling advertisers
to display a virtual cellular number in the advertisement instead of their real cellular number. The plaintiff claims that calls were charged
for the connection time between two segments of the call, instead of the second segment alone; that the caller was charged even if the
advertiser did not answer the call (as the charge began upon initiation of the first segment); and that the caller was charged for text
messages sent to the advertiser, although the service did not support delivery of text messages. We have no contractual relationship with
this company. We believe the lawsuit is without merit and a finding of liability on our part remote. After conferring with advisors and
counsel, management believes that the ultimate liability, if any, in aggregate will not be material to the financial position or results or
operations of the Company for any future period.
The Company does not believe there is a probable and estimable claim. Accordingly, the Company has not accrued any
liability.
Settlement of Potential Claim
The Company had a disagreement with an investor of the Company regarding their respective rights and obligations to each
other regarding certain investments. Although no claims have been made as of March 31, 2015, each of the parties recognizes that the
disagreements they have had could, in the future, lead to claims being made and believe it is in their respective best interests to avoid such
claims by entering into an agreement whereby the Company has offered to settle the matter in exchange for a certain number of shares of
common stock of the Company. A settlement was finalized on July 30, 2015, which resulted in the issuance of 117,000 shares. The
Company initially accrued $381 for the settlement of this liability during Q4 fiscal 2015. During Q2 fiscal 2016, the Company settled this
liability by issuing the 117,000 with a fair market value of approximately $283, resulting in a net reduction in expense related to the partial
reversal of the liability during Q2 fiscal 2016 in the amount of $98.
98
19. Supplemental Consolidated Financial Information
Unaudited Quarterly Results
The following tables set forth our quarterly consolidated statements of operations in dollars for each quarter of fiscal 2016 and
2015. We have prepared the quarterly consolidated statements of operations data on a basis consistent with the audited consolidated
financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. In the opinion of management, the financial
information in these tables reflects all adjustments, consisting only of normal recurring adjustments that management considers necessary
for a fair presentation of this data. This information should be read in conjunction with the audited consolidated financial statements and
related notes included in Part II, Item 8 of this Annual Report on Form 10-K. The results of historical periods are not necessarily indicative
of the results for any future period.
99
March 31,
2016
December 31,
2015
September 30,
2015
June 30,
2015
March 31,
2015
December 31,
2014
September 30,
2014
June 30,
2014
(in thousands, except per share amounts)
Three Months Ended
Net revenues
$ 23,032 $
24,089 $
20,734 $ 18,686 $ 10,230 $
7,006 $
5,462 $ 5,554
17,296
18,569
16,099
14,221
8,389
4,609
3,316
3,796
License fees and revenue
share
Other direct cost of
revenues
Gross profit
Total operating expenses
Loss from operations
Interest income/(expense),
net
Foreign exchange
transaction gain/(loss)
Change in fair value of
warrant derivative
liabilities loss
Loss on extinguishment
of debt
Gain/(loss) on settlement
of debt
Gain/(loss) on disposal of
fixed assets
Gain on change in
valuation of long-term
contingent liability
Other income/(expense)
Loss from operations before
income taxes
Income tax provision
Net loss from continuing
operations, net of taxes
Basic and diluted net loss per
common share
Weighted-average common
shares outstanding, basic and
diluted
345
1,801
6,446
(4,645)
344
1,414
6,094
(4,680)
(131)
3
(1)
(6)
—
—
—
—
—
(10)
—
2
5
39
—
—
1
—
2,084
3,652
9,028
(5,376)
1,704
3,816
9,081
(5,265)
4,558
77
8,221
(8,144)
2,191
2,274
9,425
(7,151)
908
933
9,954
(9,021)
413
1,984
7,375
(5,391)
(449)
(471)
(405)
(491)
(111)
(9)
(8)
(13)
1
—
—
—
—
—
—
—
—
—
—
—
(23)
—
—
—
—
(8)
—
(8)
(6)
(20)
—
11
—
17
—
59
—
(25)
—
3
—
9
(5,860)
(32)
(5,760)
3
(8,551)
(229)
(7,647)
472
(9,073)
278
(5,371)
114
(4,774)
427
(4,682)
(72)
(5,828)
(5,763)
(8,322)
(8,119)
(9,351)
(5,485)
(5,201)
(4,610)
$ (0.09) $
(0.09) $
(0.14) $
(0.14) $
(0.22) $
(0.15) $
(0.14) $ (0.12)
66,278
65,979
57,274
57,388
43,219
37,799
37,504 37,424
Quarterly Trends and Seasonality
Our overall operating results fluctuate from quarter to quarter as a result of a variety of factors, some of which are outside our
control. We have experienced rapid growth since the acquisition of Appia, Inc. on March 6, 2015, which has resulted in a substantial
increase in our revenue and a corresponding increase in our operating expenses to support our growth. We are continuously working on
enhancing our technology and our operational abilities. This rapid growth has also led to uneven overall operating results due to changes in
our investment in sales and marketing and research and development from
100
quarter to quarter and increases in employee headcount. Our historical results should not be considered a reliable indicator of our future
results of operations.
Many advertisers spend the largest portion of their advertising budgets during the third quarter, to coincide with the holiday
shopping season. As a result, typically the third quarter of each calendar year historically represents the largest percentage of our revenue
for the year, and the first quarter of each year represents the smallest percentage.
Valuation and Qualifying Accounts
Fiscal Year
Description
Balance at
Beginning of Period
Charged to
Income Statement
Charged to
Allowance
Balance at
End of Period
Trade receivables
2016
2015
2014
Allowance for doubtful accounts
Allowance for doubtful accounts
Allowance for doubtful accounts
$
698 $
—
108
132 $
505
13
366 $
(193) $
121 $
464
698
—
(in thousands)
20. Subsequent Events
Management evaluated subsequent events after the balance sheet date of March 31, 2016 through the date these audited
financial statements were issued and concluded that no other material subsequent events have occurred that would require recognition in
the consolidated financial statements or disclosure in the notes to the consolidated financial statements, other than the following:
Pursuant to the amendment to the Third Amended and Restated Loan and Security Agreement dated June 11, 2015, entered
into by DT Media and SVB on November 30, 2015, the covenant requirement was put in place for the Company to maintain an adjusted
quick ratio of not less than 0.90:1.00 unless (a) there are no advances outstanding under the revolving facility, or (b) if the Company’s cash
and cash equivalents held at SVB or SVB's Affiliates is greater than or equal to $15,000. As of April 30, 2016, given the Company did not
meet the requirements set forth in (a) and (b) noted previously, the Company was required to maintain an adjusted quick ratio of not less
than 0.90:1.00. As of April 30, 2016, the Company's quick ratio was estimated at 0.89 versus the 0.90 minimum level.
On June 10, 2016, prior to the required testing of the above-mentioned covenant, SVB and DT Media entered into a Consent
Agreement, effective as of May 31, 2016, whereby SVB provided its consent to DT Media (for a de minimis fee) to not exercise any rights
or remedies solely in connection with the non-compliance with such covenant for the period ended April 30, 2016, without which consent
DT Media would have been in default of the Loan Agreement. Please see "Risk Factors" included in PART I Item 1A. of this Annual
Report on Form 10-K within section "General Risk - The Company has secured indebtedness, which could limit its financial flexibility",
regarding financial covenant compliance.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
CONTROLS AND PROCEDURES
ITEM 9A.
Evaluation of Disclosure Controls and Procedures
Under the supervision of and with the participation of our management, including our chief executive officer, who is our
principal executive officer, and our chief financial officer, who is our principal financial officer, we conducted an evaluation of the
effectiveness of our disclosure controls and procedures as of March 31, 2016, the end of the period covered by this Annual Report. The
term “disclosure controls and procedures,” as set forth in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended, or the Exchange Act, means controls and other procedures of a company that are designed to provide reasonable assurance that
information required to be disclosed by a company in the reports that it files or submits 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
101
ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated
and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and
procedures as of March 31, 2016 our chief executive officer and chief financial officer concluded that, as of such date, our disclosure
controls and procedures were ineffective due to the material weakness described below. As a result, the disclosure controls and procedures
were ineffective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reporting within the time periods specified in the Securities and Exchange
Commission’s rules and forms and is accumulated and communicated to our management, including the chief executive officer and chief
financial officer, as appropriate to allow timely decisions regarding disclosure.
Changes in Internal Controls Over Financial Reporting
In fiscal 2015 DT Media (formerly known as Appia, Inc.) was not included in the scope of the review of our internal controls.
DT Media was included in the scope of our internal controls review in fiscal year 2016. David Wesch became our Acting Chief
Accounting Officer after the resignation of James Alejandro, our prior Chief Accounting Officer.
See "Completed Actions" subsection below which summarizes additional changes in internal controls over financial reporting.
Other than as described above, 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, 2015 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial
reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Exchange Act Rules 13a-15(f). Our management conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation under the framework in Internal Control - Integrated Framework,
our management concluded that our internal controls over financial reporting were ineffective as of March 31, 2016 because of the material
weakness described below.
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.
Material Weakness
Management identified control deficiencies that in the aggregate represent a material weakness in our internal control over
financial reporting as of March 31, 2016. A material weakness is a deficiency, or a combination of deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial
statements will not be prevented or detected on a timely basis.
We have identified deficiencies in the design and/or operations of our controls associated with the Financial Close and
Reporting process that in the aggregate represent a material weakness including: (i) deficiencies in control design and operating
effectiveness relating to manual processes performed in spreadsheets used for consolidation and stock compensation; (ii) deficiencies in
operating effectiveness of controls over reconciliations of balance sheet accounts and review of journal entries; and (iii) deficiencies in
operating effectiveness of controls over review of financial statements for compliance with GAAP and SEC reporting requirements.
Additionally, we have identified deficiencies in the design and operations of our controls over information technology that represent a
material weakness relating to deficiencies in control design, including lack of formal documentation of controls, and monitoring.
In light of the material weakness in internal control over financial reporting described above, we performed additional
analysis and other post-closing procedures to ensure that our financial statements were prepared in accordance with generally accepted
accounting principles. Despite the material weakness in our internal controls over financial reporting, we
102
believe that the financial statements included in our Form 10-K for the period ended March 31, 2016 fairly present, in all material respects,
our financial condition, results of operations, changes in stockholders’ deficiency and cash flows for the periods presented.
The foregoing has been approved by our management, including our Chief Executive Officer and Chief Financial Officer,
who have been involved with the reassessment and analysis of our internal control over financial reporting.
SingerLewak LLP, an independent registered public accounting firm, has issued an attestation report on our internal control
over financial reporting. This report is included in Part II, Item 8 of this 10K.
Remedial Actions
The material weakness we identified associated with the Financial Close and Reporting process arises primarily from (i) a lack
of a sufficient complement of accounting and financial reporting personnel who were unable to implement formal accounting policies with
an appropriate level of accounting knowledge and experience commensurate with our financial reporting requirements, and (ii) inadequate
accounting systems including information technology systems directly related to financial statement processes and a heavy reliance on
manual processes.
We have taken and completed certain actions, with other planned actions to be taken over the next 12 months to remediate the
material weakness.
Completed Actions
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Hired a Chief Accounting Officer “CAO” on February 27, 2015 (who recently resigned; Mr. David Wesch is now our current Acting
CAO). The CAO hired during fiscal 2015 was with the Company for all of fiscal 2016 and through the year end close process.
Implemented a management representation letter in which key members of management and accounting/finance staff attest to certain
questions related to the financial statements.
Implemented a Company signature authority policy, which outlines requirements and signing authority for executing
contracts.
Implemented expense reporting tool in the
US.
Implemented a process for contract reviews, operating expense actual versus budget reviews, and strengthened policies and
procedures for balance sheet reconciliations and reviews.
Documented key accounting policies, including policies for revenue recognition, goodwill and intangibles, journal entries, accounts
receivable, accounts payable, capital and depreciation, interest and other, and income statement classification.
Drafted position papers for all complex, non-recurring
transactions.
Planned Actions
Expect to hire additional finance and accounting resources across the global
organization.
Evaluate accounting and finance headcount resources globally to ensure that resources are sufficient to meeting the accounting and
finance requirements of the Company.
Continue working to document and remediate weaknesses, and to structure the Company’s accounting/finance department to meet
SOX 404 (b) requirements.
Continue to utilize third party accounting experts to augment Company accounting staff as
necessary.
Finalize the system implementation related to
SAP.
Implement a billing, disbursement and stock option accounting system and integrate with
SAP.
Continue to document internal control procedures for significant accounting areas with an emphasis on implementing additional
documented review and approval procedures and automated controls within the Company’s accounting system
Continue to conduct formal training related to key accounting policies, internal controls, and SEC compliance for all key personal
which have a direct and indirect impact on the transactions underlying the financial statements.
Implement Information Technology documentation and new controls that have an impact on financial
reporting.
103
ITEM 9B.
OTHER INFORMATION
None.
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference to our Proxy Statement or 10K/A for the 2016 Annual
Meeting of Stockholders (or Form 10-K/A).
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to our Proxy Statement for the 2016 Annual Meeting of
Stockholders (or Form 10-K/A).
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to our Proxy Statement for the 2016 Annual Meeting of
Stockholders (or Form 10-K/A).
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to our Proxy Statement for the 2016 Annual Meeting of
Stockholders (or Form 10-K/A).
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to our Proxy Statement for the 2016 Annual Meeting of
Stockholders (or Form 10-K/A).
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
We have filed the following documents as part of this Annual Report on Form 10-K:
1. Consolidated Financial Statements:
Our consolidated financial statements are listed in the "Index to Consolidated Financial Statements" under Part II, Item 8 of
this Annual Report on Form 10-K.
104
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statement of Comprehensive Loss
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
60
64
65
65
66
68
70
The supplementary financial information required by this Item 8 is set forth in Note 19 of the Notes to the
Consolidated Financial Statements under the caption "Supplemental Consolidated Financial Information".
2. Financial Statement Schedules
Unaudited Quarterly Results and Valuation and Qualifying Accounts for the three fiscal years ended March 31, 2016, 2015,
and 2014 is included in Note 19 of Notes to Consolidated Financial Statements included in Part II Item 8 "Financial Statements and
Supplementary Data." All other schedules called for by Form 10-K are omitted because they are inapplicable or the required information is
shown in the consolidated financial statements, or notes thereto, included herein.
3. Exhibits
See the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Principal Executive Officer:
Dated: June 14, 2016
Digital Turbine, Inc.
By:
/s/ William Stone
William Stone
Chief Executive Officer
(Principal Executive Officer)
105
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 Deutschman
Robert Deutschman
Chairman of the Board
Title
Date
/s/ Andrew Schleimer
Andrew Schleimer
Chief Financial Officer
(Principal Financial Officer)
/s/ David Wesch
David Wesch
/s/ Mohan Gyani
Mohan Gyani
/s/ Craig Forman
Craig Forman
/s/ Christopher Rogers
Christopher Rogers
/s/ Jeffrey Karish
Jeffrey Karish
/s/ Paul Schaeffer
Paul Schaeffer
Acting Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
106
June 14, 2016
June 14, 2016
June 14, 2016
June 14, 2016
June 14, 2016
June 14, 2016
June 14, 2016
June 14, 2016
Exhibit
No.
Description
2.1
2.2
2.3
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
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., incorporated by reference
to our Current Report on Form 8-K (File No. 000-10039), filed with the Commission on January 2, 2008.
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., incorporated by
reference to our Current Report on Form 8-K (File No. 000-10039), filed with the Commission on February 12, 2008.
Agreement and Plan of Merger, dated November 13, 2014, by and among Mandalay Digital Group, Inc., DTM Merger
Sub, Inc., and Appia, Inc., incorporated by reference to our Amended Current Report on Form 8-K/A (File No. 001-
35958), filed with the Commission on November 18, 2014.
Certificate of Incorporation, incorporated by reference to our Current Report on Form 8-K (File No. 000-10039), filed
with the Commission on November 14, 2007.
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, incorporated by reference to our
Current Report on Form 8-K (File No. 000-10039), filed with the Commission on November 14, 2007.
Certificate of Ownership merging Mandalay Digital Group, Inc. into Neumedia, Inc., dated February 2, 2012,
incorporated by reference to our Annual Report on Form 10-K (File No. 000-10039), filed with the Commission on
June 29, 2012.
Certificate of Amendment of Certificate of Incorporation, dated August 14, 2012, incorporated by reference to
Appendix B of the Registrant’s Definitive Information Statement on Form 14-C (File No. 000-10039), filed with the
Commission on July 10, 2012.
Certificate of Amendment of Certificate of Incorporation, dated March 28, 2013, incorporated by reference to our
Current Report on Form 8-K (File No. 000-10039), filed with the Commission on April 18, 2013.
Certificate of Correction of Certificate of Amendment, dated April 9, 2013, incorporated by reference to our Current
Report on Form 8-K (File No. 000-10039), filed with the Commission on April 18, 2013
Certificate of Amendment of Certificate of Incorporation, as amended, filed with the Secretary of State of the State of
Delaware on January 13, 2015, incorporated by reference to our Current Report on Form 8-K (File No. 000-10039),
filed with the Commission on January 16, 2015.
Bylaws, incorporated by reference to our Current Report on Form 8-K (File No. 000-10039), filed with the
Commission on November 14, 2007.
Certificate of Amendment of the Bylaws of NeuMedia, Inc., dated February 2, 2012, incorporated by reference to our
Current Report on Form 8-K (File No. 000-10039), filed with the Commission on February 7, 2012.
3.10
Certificate of Amendment of the Bylaws dated March 6, 2015 (incorporated by reference to our Current Report on
Form 8-K (File No. 001-10039) filed with the Commission on March 11, 2015).
3.11
Amendment of Bylaws of Digital Turbine, Inc., adopted March 17, 2015, incorporated by reference to our Current
Report on Form 8-K (File No. 000-10039), filed with the Commission on March 20, 2015.
4.1
4.2
4.3
4.3.1
Form of Warrant Relating to Equity Financing Binding Term Sheet, dated as of March 1, 2012, incorporated by
reference to our Annual Report on Form 10-K (File No. 000-10039), filed with the Commission on June 29, 2012.
Form of Warrant Relating to Equity Financing Binding Term Sheets, dated as of March 5, 2012, incorporated by
reference to our Annual Report on Form 10-K (File No. 000-10039), filed with the Commission on June 29, 2012.
Common Stock Purchase Warrant dated March 6, 2015 issued to North Atlantic SBIC IV, L.P., incorporated by
reference to our Current Report on Form 8-K (File No. 001-35958) filed with the Commission on March 11, 2015.
Amendment to Common Stock Purchase Warrant dated as of February 17, 2016 issued to North Atlantic SBIC IV,
L.P.
107
4.3.2
10.1
10.1.1
Second Amendment to Common Stock Purchase Warrant dated as of May 6, 2016 issued North Atlantic SBIC IV,
L.P.
2007 Employee, Director and Consultant Stock Plan, incorporated by reference to our Current Report on Form 8-K
(File No. 000-10039), filed with the Commission on November 14, 2007. †
Form of Non-Qualified Stock Option Agreement, incorporated by reference to our Current Report on Form 8-K (File
No. 000-10039), filed with the Commission on November 14, 2007†
10.1.2
Amendment to 2007 Employee, Director and Consultant Stock Plan, incorporated by reference to our Current Report
on Form 8-K (File No. 000-10039), filed with the Commission on February 12, 2008. †
10.1.3
Second Amendment to 2007 Employee, Director and Consultant Stock Plan., incorporated by reference to our Current
Report on Form 8-K (File No. 000-10039), filed with the Commission on March 28, 2008. †
10.2
Warrant, dated December 23, 2011, made by NeuMedia, Inc. in favor of Adage Capital Management L.P.,
incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-10039 ), filed with the Commission on
February 24, 2012. †
10.3
10.4
Form of Indemnification with Directors and Executive Officers, incorporated by reference to our Current Report on
Form 8-K (File No. 000-10039 ), filed with the Commission on May 10, 2012. †
Amended and Restated 2011 Equity Incentive Plan of Mandalay Digital Group, Inc., incorporated by reference to our
Current Report on Form 8-K (File No. 000-10039), filed with the Commission on May 30, 2012.
10.4.1
Amended and Restated 2011 Equity Incentive Plan Notice of Grant and Restricted Stock Agreement of Mandalay
Digital Group, Inc, incorporated by reference to our Current Report on Form 8-K (File No. 000-10039), filed with the
Commission on May 30, 2012.
10.4.2
Amended and Restated 2011 Equity Incentive Plan Notice of Grant and Stock Option Agreement of Mandalay Digital
Group, Inc., incorporated by reference to our Current Report on Form 8-K (File No. 000-10039), filed with the
Commission on May 30, 2012.
10.5
10.6
10.7
10.8
10.9
10.10
10.10.1
10.10.2
Share Purchase Agreement, dated August 11, 2012, as amended by a first amendment thereto, dated September 13,
2012 among Mandalay Digital Group, Inc., MDG Logia Holdings, Ltd., Logia Group, Ltd., and S.M.B.P. IGLOO
Ltd. ., incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-10039), filed with
the Commission on November 19, 2012.
Share Sale Agreement, dated April 12, 2013, among Digital Turbine Australia Pty Ltd, Digital Turbine, Inc., the
Company, and certain other parties set forth therein, incorporated by reference to our Current Report on Form 8-K
(File No. 000-10039) filed with the Commission on April 17, 2013.
Registration Rights & Lock Up Agreement, dated April 12, 2013 between the Company and various shareholders set
forth therein, incorporated by reference to our Current Report on Form 8-K (File No. 000-10039) filed with the
Commission on April 17, 2013.
Form of Equity Financing Binding Term Sheet dated May 23, 2013 with Windsor Media, Inc., incorporated by
reference to our Current Report on Form 10-Q (File No. 001-35958) filed with the Commission on August 14, 2013.
Support Agreement, dated November 13, 2014, between Mandalay Digital Group, Inc. and its Stockholders,
incorporated by reference Registrant’s Amended Current Report on Form 8-K/A (File No. 001-35958), filed with the
Commission on November 18, 2014.
Securities Purchase Agreement by and among Appia, Inc., Digital Turbine, Inc., and North Atlantic SBIC IV, L.P.,
dated March 6, 2015, incorporated by reference to our Current Report on Form 8-K (File No. 001-35958) filed with
the Commission on March 11, 2015.
Amendment to Securities Purchase Agreement by and among Digital Turbine Media, Inc. (f/k/a
Appia, Inc.),, Digital Turbine, Inc., and North Atlantic SBIC IV, L.P., dated as of February 17, 2016.
Second Amendment to Securities Purchase Agreement by and among Digital Turbine Media, Inc. (f/k/a
Appia, Inc.),, Digital Turbine, Inc., and North Atlantic SBIC IV, L.P., dated as of May 7, 2016.
10.11
Unconditional Secured Guaranty and Pledge Agreement entered into by Digital Turbine, Inc. in favor of North
Atlantic SBIC IV, L.P. as of March 6, 2015, incorporated by reference to our Current Report on Form 8-K (File No.
001-35958) filed with the Commission on March 11, 2015.
10.12
Unconditional Secured Guaranty and Pledge Agreement entered into by Digital Turbine, Inc. in favor of Silicon
Valley Bank as of March 6, 2015, incorporated by reference to our Current Report on Form 8-K (File No. 001-35958)
filed with the Commission on March 11, 2015.
108
10.13
10.14
10.15
10.16
API Service Agreement dated July 5, 2011 with Vodafone Hutchison Australia Pty Limited incorporated by reference
to Amendment No. 2 to our Registration Statement on Form S-4/A (File No. 333-200695) filed with the Commission
on January 27, 2015.
IT & Content Services Agreement dated October 11, 2011 with Telstra Corporation Limited incorporated by reference
to Amendment No. 2 to our Registration Statement on Form S-4/A (File No. 333-200695) filed with the Commission
on January 27, 2015.
Employment Agreement, effective July 8, 2014, between the Company and Andrew Schleimer, incorporated by
reference to our Current Report on Form 8-K (File No. 000-10039 ), filed with the Commission on July 9, 2014. †
Employment Agreement, effective September 9, 2014, between the Company and Bill Stone, incorporated by
reference to our Current Report on Form 8-K (File No. 001-35958), filed with the Commission on September 15,
2014. †
10.16.1
Amendment, effective May 26, 2016, to Employment Agreement between the Company and William Stone,
incorporated by reference to our Current Report on Form 8-K (File No. 000-10039 ), filed with the Commission on
June 1, 2016. †
10.17
10.18
10.19
10.20
10.21
Employment Agreement, effective February 10, 2015, between the Company and James Alejandro, incorporated by
reference to our Current Report on Form 8-K (File No. 000-10039), filed with the Commission on February 11, 2015.
†
Separation Agreement between Mandalay Digital Group, Inc. and Peter A. Adderton, dated January 15, 2015,
incorporated by reference to our Current Report on Form 8-K (File No. 000-10039), filed with the Commission on
January 16, 2015.
Board Equity Ownership Policy, as amended, incorporated by reference to our Current Report on Form 8-K (File No.
001-35958) filed with the Commission on June 25, 2014. †
Corporate office lease agreement commencing on October 1, 2015, and ending on December 31, 2022 between
Thomas C. Calhoon (Landlord) and Digital Turbine, Inc. (Tenant). Incorporated by reference to our Annual Report on
Form 10-K (File No. 001-35958), filed with the Commission on June 15, 2015.
Third Amended and Restated Loan and Security Agreement effective June 11, 2015 between Digital Turbine Media
and Silicon Valley Bank. Incorporated by reference to our Annual Report on Form 10-K (File No. 001-35958), filed
with the Commission on June 15, 2015.
10.21.1
First Amendment dated November 30, 2015 to Third Amended and Restated Loan and Security Agreement with
Silicon Valley Bank, incorporated by reference to our Current Report on Form 8-K (File No. 000-10039 ), filed with
the Commission on December 4, 2015.
10.22
10.23
10.24
10.25
10.26
10.27
Intellectual Property License Agreement dated as of December 28, 2015 between Digital Turbine Media, Inc. and Sift
Media, Inc., incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-10039 ), filed with the
Commission on February 9, 2016.
Publisher Agreement dated as of December 28, 2015 between Digital Turbine Media, Inc. and Sift Media, Inc.,
incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-10039 ), filed with the Commission on
February 9, 2016.
Sift Media, Inc. Series Seed Convertible Preferred Stock Purchase Agreement dated as of December 28, 2015,
incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-10039 ), filed with the Commission on
February 9, 2016.
Employment Agreement between Sift Media, Inc. and Judson S. Bowman dated as of December 28, 2015,
incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-10039 ), filed with the Commission on
February 9, 2016.
Restricted Stock Agreement between Sift Media, Inc. and Judson S. Bowman dated as of December 28, 2015,
incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-10039 ), filed with the Commission on
February 9, 2016.
2008 Equity Incentive Plan for Appia, Inc., incorporated by reference to our Registration Statement on Form S-8 (File
No. 333-202863), filed with the Commission on March 19,2015.
21.1
23.1
List of Subsidiaries. *
Consent of Independent Registered Public Accounting Firm. *
109
31.1
31.2
32.1
32.2
101
101
101
101
101
101
*
**
†
Certification of William Stone, Principal Executive Officer. *
Certification of Andrew Schleimer, Principal Financial Officer. *
Certification of William Stone, Principal Executive Officer pursuant to U.S.C. Section 1350. **
Certification of Andrew Schleimer, Principal Financial Officer pursuant to U.S.C. Section 1350. **
INS XBRL Instance Document. *
SCH XBRL Schema Document. *
CAL XBRL Taxonomy Extension Calculation Linkbase Document. *
DEF XBRL Taxonomy Extension Definition Linkbase Document. *
LAB XBRL Taxonomy Extension Label Linkbase Document. *
PRE XBRL Taxonomy Extension Presentation Linkbase Document. *
Filed
herewith
The certifications attached as Exhibit 32.1 and 32.2 that accompany this Annual Report on Form 10-K are not deemed filed with the
Securities and Exchange Commission and are not to be incorporated by reference into any filing of Digital Turbine Inc under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of
this Form 10-K, irrespective of any general incorporation language contained in such filing.
Management contract or compensatory plan or
arrangement
110
AMENDMENT TO COMMON STOCK PURCHASE WARRANT
This Amendment to Common Stock Purchase Warrant (this “ Amendment”), dated as of February 17, 2016, is
being entered into by and between Digital Turbine USA, Inc. (f/k/a Digital Turbine, Inc.), a Delaware corporation (the
“Company”), and North Atlantic SBIC IV, L.P., a Delaware limited partnership (the “ Registered Holder”).
Capitalized terms used in this Amendment without definition have the respective definitions ascribed to them in the
Warrant (as defined below).
WHEREAS, the Company, Digital Turbine Media, Inc. (f/k/a Appia, Inc.) and the Registered Holder have
executed and delivered that certain Securities Purchase Agreement (the “Purchase Agreement”), dated as of March 6,
2015; and
WHEREAS, pursuant t o the Purchase Agreement, the Company and t h e Registered Holder have agreed to
amend that certain Common Stock Purchase Warrant (the “Existing Warrant”), dated as of March 6, 2015, issued by
the Company and delivered to the Registered Holder, in the manner provided in this Amendment (the Existing Warrant,
as so amended, the “Warrant”).
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
Section 1. AMENDMENT TO WARRANT. The Existing Warrant is amended by replacing the reference to “twelve (12)”
in Section 1 thereof to “fourteen (14)”.
Section 2. MISCELLANEOUS.
(A) Generally. Sections 15 and 16 of the Existing Warrant will apply to this
Amendment as if the same were reproduced in this Amendment, mutatis mutandis.
(B) Affirmation of Warrant. The parties hereby affirm all provisions of the Existing
Warrant as amended by this Amendment.
[Remainder of Page Intentionally Left Blank; Signature Page Follows ]
The parties hereto have executed this Amendment as of the date first written above.
DIGITAL TURBINE USA, INC.
By:
Name: Andrew Schleimer
Title: CFO, Digital Turbine, Inc.
NORTH ATLANTIC SBIC IV, L.P.
By:
North Atlantic Investors SBIC IV, LLC
General Partner
By:
Name: David M. Coit
Title: Managing Director
[Signature Page to Amendment to Common Stock Purchase Warrant]
SECOND AMENDMENT TO COMMON STOCK PURCHASE WARRANT
This Second Amendment to Common Stock Purchase Warrant (this “ Amendment”), dated as of May 6, 2016,
is being entered into by and between Digital Turbine USA, Inc. (f/k/a Digital Turbine, Inc.), a Delaware corporation
(the “Company”), and North Atlantic SBIC IV, L.P., a Delaware limited partnership (the “ Registered Holder”).
Capitalized terms used in this Amendment without definition have the respective definitions ascribed to them in the
Warrant (as defined below).
WHEREAS, the Company, Digital Turbine Media, Inc. (f/k/a Appia, Inc.) and the Registered Holder have
executed and delivered that certain Securities Purchase Agreement (the “Purchase Agreement”), dated as of March 6,
2015;
WHEREAS, the Company has issued its Common Stock Purchase Warrant to Registered Holder on March 6,
2015 (the “Original Warrant”); the Original Warrant was amended by the Amendment to Common Stock Purchase
Warrant, dated February 7, 2016 (as the same may from time to time be further amended, modified, supplemented or
restated, the “Warrant”); and
WHEREAS, pursuant to the Purchase Agreement and Section 14 of the Warrant, the Company and the
Registered Holder have agreed to further amend the Warrant as set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
Section 1. AMENDMENT TO WARRANT. Section 1 of the Warrant is hereby amended by deleting the words “the date
with (sic) is fourteen (14) months from the date hereof (“Vesting Date”)” and replacing them with the following: “June
15, 2016 (the “Vesting Date”), provided that the Vesting Date may be extended by Registered Holder to no later than
June 22, 2016, if Registered Holder believes, in its reasonable discretion, that (i) the Company is unable to refinance
the Obligations by the Vesting Date, (ii) reasonable progress has been made by the Company in refinancing the
Obligations, and (iii) in all likelihood, the Company will be able to refinance the Obligations by June 22, 2016.
Section 2. MISCELLANEOUS.
(A) Generally. Sections 15 and 16 of the Warrant will apply to this Amendment as if the same were reproduced
in this Amendment, mutatis mutandis.
( B ) Affirmation of Warrant. The parties hereby affirm all provisions of the Warrant as amended by this
Amendment.
[Remainder of Page Intentionally Left Blank; Signature Page Follows ]
The parties hereto have executed this Amendment as of the date first written above.
DIGITAL TURBINE USA, INC.
By:
Name: Andrew Schleimer
Title: CFO
NORTH ATLANTIC SBIC IV, L.P.
North Atlantic Investors SBIC IV, LLC
General Partner
By:
By:
Name:
Title:
[Signature Page to Second Amendment to Common Stock Purchase Warrant]
The parties hereto have
Amendment as of the date first written above.
executed
this
DIGITAL TURBINE USA, INC.
By:
Name:
Title:
NORTH ATLANTIC SBIC IV, L.P.
By:
North Atlantic Investors SBIC IV, LLC
General Partner
By:
Name: David M. Coit
Title: Managing Director
[Signature Page to Second Amendment to Common
Stock Purchase Warrant]
AMENDMENT TO SECURITIES PURCHASE AGREEMENT
This Amendment to Securities Purchase Agreement (this “ Amendment”), dated as of February 17, 2016, is
being entered into by and among (i) Digital Turbine Media, Inc. (f/k/a Appia, Inc.), a Delaware corporation (“ DT
Media”), (ii) Digital Turbine USA, Inc. (f/k/a Digital Turbine, Inc.), a Delaware corporation (“ DT USA” and together
with DT Media, the “Companies” with each a “ Company”), and (iii) North Atlantic SBIC IV, L.P. , a Delaware
limited partnership (the “Purchaser” and collectively with the Companies, the “ Parties” with each a “ Party”).
Capitalized terms used herein without definition shall have the meanings assigned to such terms in the Purchase
Agreement (as defined below).
RECITALS
WHEREAS, the Parties have entered into that certain Securities Purchase Agreement, dated as of March
6, 2015 (as the same may from time to time be amended, modified, supplemented, or restated, the “Purchase
Agreement”); and
WHEREAS, in accordance with Section 11.1 of the Purchase Agreement, the Parties have agreed to
amend the Purchase Agreement pursuant to this Amendment, as set forth herein.
AGREEMENT
In consideration of the mutual covenants and promises contained herein and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, each Party agrees to amend the Purchase
Agreement as follows:
1 . Prepayment Premium. Section 2.8(c) is hereby amended by inserting the following sentence to the end
thereof:
“In the event that the New Debenture is prepaid in whole pursuant to clause (a) above, Appia shall pay to the
Purchaser a prepayment premium (the “Prepayment Premium”) in the amount set forth in the applicable table below
opposite the time period in which such prepayment occurs:
Period
From March 6, 2016 to and including
April 6, 2016
From April 7, 2016 until the Maturity
Date
Prepayment Premium
$40,000.00
$80,000.00
2. Board Observer. The first sentence of Section 2.10 is hereby amended by replacing “twelve (12)” appearing
therein with “fourteen (14).”
3. Headings. The headings of the Sections herein are inserted for convenience of reference only and are not
intended to be a part of or affect the meaning or interpretation of this Amendment.
1
4 . Severability. Any provision of this Amendment which i s prohibited or unenforceable in any jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
5. Governing Law. This Amendment shall be governed by, and construed in accordance with, the laws of the
State of New York, as such laws are applied to contracts entered into and performed in such State, without reference to
principles of conflicts of laws.
6. Counterparts; Electronic Signatures. This Amendment may be executed in counterparts, each of which shall
be deemed to be an original, but all of which together shall constitute one and the same instrument. The parties agree
that this Amendment shall be legally binding upon the electronic transmission, including by facsimile or email, by each
party of a signed signature page to this Amendment to the other party.
7. Full Force and Effect; No Obligation for Other Amendments . Each of the parties hereto confirms that this
Amendment is intended to be a part of, and will serve as a valid, written amendment to, the Purchase Agreement.
Except as otherwise set forth in this Amendment, this Amendment shall not by implication or otherwise alter, modify,
amend, or in any way affect any of the terms, conditions, obligations, covenants, or agreements contained in the
Purchase Agreement, which are hereby ratified and affirmed in all respects and shall continue in full force and effect,
and this Amendment will not operate as an extension or waiver by the parties to the Purchase Agreement of any other
condition, covenant, obligation, right, power or privilege under the Purchase Agreement. This Amendment relates only
to the specific matters covered herein, and shall not be considered to create a course of dealing or to otherwise obligate
any party to the Purchase Agreement to execute similar amendments or grant any waivers under the same or similar
circumstances in the future.
[Signature Page Follows]
2
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed on their
respective behalf, by their respective officers thereunto duly authorized all as of the day and year first above written.
DT MEDIA:
DIGITAL TURBINE MEDIA, INC.
By:
Name: Andrew Schleimer
Title: CFO, Digital Turbine, Inc.
DT USA:
DIGITAL TURBINE USA, INC.
By:
Name: Andrew Schleimer
Title: CFO, Digital Turbine, Inc.
PURCHASER:
NORTH ATLANTIC SBIC IV, L.P.
By:
North Atlantic Investors SBIC IV, LLC
General Partner
By:
Name: David M. Coit
Title: Managing Director
[Signature Page to Amendment to Securities Purchase Agreement]
3
SECOND AMENDMENT TO SECURITIES PURCHASE AGREEMENT
This Second Amendment to Securities Purchase Agreement (this “Amendment”), dated as of May 6, 2016, is
being entered into by and among (i) Digital Turbine Media, Inc. (f/k/a Appia, Inc.), a Delaware corporation ( “DT
Media”), (ii) Digital Turbine USA, Inc. (f/k/a Digital Turbine, Inc.), a Delaware corporation ( “DT USA” and together
with DT Media, the “Companies” with each, a “Company”), and (iii) North Atlantic SBIC IV, L.P. , a Delaware
limited partnership (the “Purchaser” and collectively with the Companies, the “Parties” with each, a “Party”).
Capitalized terms used herein without definition shall have the meanings assigned to such terms in the Purchase
Agreement (as defined below).
RECITALS
WHEREAS, the Parties have entered into that certain Securities Purchase Agreement, dated as of March 6,
2015, as amended by the Amendment to Securities Purchase Agreement, dated February 17, 2016 (as the same may
from time to time be further amended, modified, supplemented or restated, the “Purchase Agreement”); and
WHEREAS, in accordance with Section 11.1 of the Purchase Agreement, the Parties have agreed to further
amend the Purchase Agreement pursuant to this Amendment, as set forth herein.
AGREEMENT
In consideration of the mutual covenants and promises contained herein and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, each Party agrees to amend the Purchase
Agreement as follows:
1. Amendment to Purchase Agreement. The third sentence of Section 2.8(c) is hereby deleted in its entirety and
replaced with the following: “On May 6, 2016, Digital Turbine Media, Inc. (f/k/a Appia, Inc.) shall pay t o Purchaser
the amount of One Hundred Forty Thousand Dollars ($140,000) as a restructuring fee.”
2. Effective Date; Conditions Precedent. This Amendment will become effective upon (a) its execution by the
Parties, (b) evidence, as reasonably requested by Purchaser, of the due execution and delivery of this Amendment by
the Companies and the power and authority of the Companies to enter into this Amendment, and (c) receipt by
Purchaser, in immediately available funds, of (i) One Hundred Forty Thousand Dollars ($140,000) as a restructuring
fee, and (ii) an amount equal to all other reasonable fees and expenses (including attorneys’ fees and expenses) incurred
by Purchaser in connection with the preparation, negotiation and execution of this Amendment.
3. Headings. The headings of the Sections herein are inserted for convenience of reference only and are not
intended to be a part of or affect the meaning or interpretation of this Amendment.
1
4 . Severability. Any provision o f this Amendment which i s prohibited or unenforceable in any jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition o r unenforceability i n any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
5. Governing Law. This Amendment shall be governed by, and construed in accordance with, the laws of the
State of New York, as such laws are applied to contracts entered into and performed in such State, without reference to
principles of conflicts of laws.
6. Counterparts; Electronic Signatures. This Amendment may be executed in counterparts, each of which shall
be deemed to be an original, but all of which together shall constitute one and the same instrument. The Parties agree
that this Amendment shall be legally binding upon the electronic transmission, including by facsimile or email, by each
Party of a signed signature page to this Amendment to the other Parties.
7. Full Force and Effect; No Obligation for Other Amendments . Each of the Parties hereto confirms that this
Amendment is intended to be a part of, and will serve as a valid, written amendment to, the Purchase Agreement.
Except as otherwise set forth in this Amendment, this Amendment shall not, by implication or otherwise, alter, modify,
amend or in any way affect any of the terms, conditions, obligations, covenants or agreements contained in the Purchase
Agreement, the Unconditional Secured Guaranty and Pledge Agreement, dated March 6, 2015, from DT USA to
Purchaser, or any other instrument, document or agreement executed in connection therewith or referred to therein
(collectively, the “ Documents”), which are hereby ratified and affirmed in all respects and shall continue in full force
and effect, and this Amendment will not operate as an extension or waiver by the parties to the Documents of any other
condition, covenant, obligation, right, power or privilege under the Documents. This Amendment relates only to the
specific matters covered herein, and shall not be considered to create a course of dealing or to otherwise obligate any
party to the Documents to execute similar amendments or grant any waivers under the same or similar circumstances in
the future.
[Signature Page Follows]
2
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed on their
respective behalf, by their respective officers thereunto duly authorized all as of the day and year first above written.
DT MEDIA:
DIGITAL TURBINE MEDIA, INC.
By:
Name: Andrew Schleimer
Title: CFO, Digital Turbine, Inc.
DT USA:
DIGITAL TURBINE USA, INC.
By:
Name: Andrew Schleimer
Title: CFO, Digital Turbine, Inc.
PURCHASER:
NORTH ATLANTIC SBIC IV, L.P.
By:
North Atlantic Investors SBIC IV, LLC
General Partner
By:
Name: David M. Coit
Title: Managing Director
[Signature Page to Second Amendment to Securities Purchase Agreement]
3
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed on their
respective behalf, by their respective officers thereunto duly authorized all as of the day and year first above written.
DT MEDIA:
DIGITAL TURBINE MEDIA, INC.
By:
Name:
Title:
DT USA:
DIGITAL TURBINE USA, INC.
By:
Name:
Title:
PURCHASER:
NORTH ATLANTIC SBIC IV, L.P.
By:
North Atlantic Investors SBIC IV, LLC
General Partner
By:
Name: David M. Coit
Title: Managing Director
[Signature Page to Second Amendment to Securities Purchase Agreement]
4
Chief Executive Offices or
Principal Places of Business
Jurisdiction of
Organization
FEIN
Exhibit 21.1
Company
Organizational
Numbers
Entity
Digital Turbine, Inc.
Digital Turbine USA, Inc.
1300 Guadalupe Street
Suite 302
Austin, TX 78701 - USA
1300 Guadalupe Street
Suite 302
Austin, TX 78701 - USA
Digital Turbine (EMEA) Ltd.
3 Hasadnaot St.
Herzliya Pituach – 46140, Israel
Logia Content Development and
Management Ltd
3 Hasadnaot St.
Herzliya Pituach – 46140, Israel
Volas Entertainment Ltd.
Mailbit Logia (2008) Ltd.
Digital Turbine Germany GmbH
Digital Turbine Luxembourg S.a.r.l.
DTM Merger Sub, Inc.
Digital Turbine Media, Inc.
PocketGear Deutschland GmbH
Digital Turbine Group Pty Ltd
Digital Turbine Holdings Pty Ltd
Digital Turbine Asia Pacific Pty Ltd
Digital Turbine Technology (IP) Pty Ltd
Digital Turbine IP Pty Ltd
Digital Turbine Singapore Pte Ltd
3 Hasadnaot St.
Herzliya Pituach – 46140, Israel
3 Hasadnaot St.
Herzliya Pituach – 46140, Israel
Westendstr. 28
60325 Frankfurt am Main, Germany
121 Avenue De La Faiencerie
L-1511 Luxembourg
1300 Guadalupe Street
Suite 302
Austin, TX 78701 - USA
406 Blackwell Street
Suite 500
Durham, NC 27701 - USA
SchleiBheimer Str. 439,80935
Munchen, Germany
283 Young St
WATERLOO – NSW 2017 Australia
Level 2, 221 Miller Street,
North Sydney – NSW 2060 Australia
Level 2, 221 Miller Street,
North Sydney – NSW 2060 Australia
Level 2, 221 Miller Street,
North Sydney – NSW 2060 Australia
Level 2, 221 Miller Street,
North Sydney – NSW 2060 Australia
128 Tanjong Pagar Road, Singapore
088535
USA
USA
Israel
Israel
Israel
Israel
22-2267658
45-3982329
514802875
513540245
513881607
514121953
Germany
HRB 100847
Luxembourg
Section B, 173 016
USA
USA
26-2346340
Germany
DE165412455
Australia
Australia
Australia
Australia
Australia
ACN 163 117 253
TAX 847599909
TAX 791741061
TAX 949745512
TAX 949301761
Singapore
201407526R
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
We consent to the incorporation by reference in Registration Statements (Nos. 333-193022 and 333-202863) on Form
S-8 and Registration Statements (Nos. 333-190943 and 333-202862) on Form S-3 of Digital Turbine, Inc. (the
“Company”) of our reports dated June 14, 2016, relating to our audits of the consolidated financial statements and
internal control over financial reporting of the Company and its subsidiaries, which appear in this Annual Report on
Form 10-K of the Company for the year ended March 31, 2016.
Our report dated June 14, 2016, on the effectiveness of internal control over financial reporting as of March 31, 2016,
expressed an opinion that the Company and its subsidiaries had not maintained effective internal control over financial
reporting as of March 31, 2016, based on criteria established in Internal Control — Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
/s/ SingerLewak LLP
Los Angeles, California
June 14, 2016
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, William Stone, certify that:
1. I have reviewed this Annual Report on Form 10-K of Digital Turbine, 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 14, 2016
By:
/s/William Stone
William Stone
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Andrew Schleimer, certify that:
1. I have reviewed this Annual Report on Form 10-K of Digital Turbine, 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 14, 2016
By:
/s/Andrew Schleimer
Andrew Schleimer
Chief Financial Officer
(Principal Financial Officer)
Certification of Principal Executive Officer
Pursuant to U.S.C. Section 1350
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States
Code), the undersigned officer of Digital Turbine, 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, 2015 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 14, 2016
By:
/s/William Stone
William Stone
Chief Executive Officer
(Principal 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 Digital Turbine, 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, 2015 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 14, 2016
By:
/s/Andrew Schleimer
Andrew Schleimer
Chief Financial Officer
(Principal Financial Officer)