UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
ýý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2019
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)
111 Nueces Street, 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
APPS
(Title of Class)
(Trading Symbol)
Securities registered under Section 12(g) of the Exchange Act:
None
(Title of Class)
The Nasdaq Stock Market LLC
(NASDAQ Capital Market)
(Name of Each Exchange on Which Registered)
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 every Interactive Data File required to be submitted 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 such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of a “large
accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Non-Accelerated Filer
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Accelerated Filer
Smaller Reporting Company
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Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. o
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, 2018 was $91,244,134.
As of May 28, 2019, the Company had 81,683,661 shares of its common stock, $0.0001 par value per share, outstanding.
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, 2019
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 ACCOUNTING FEES AND SERVICES
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
ITEM 16.
10-K SUMMARY
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:
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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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products;
risks associated with
indebtedness;
ability to comply with financial covenants in outstanding
indebtedness;
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;
risks associated with adoption of our products among existing customers and adoption of our platform and time to revenue with new customers (including the impact
of possible delays with major partners in the roll out of mobile phones and other devices deploying our products and other factors out of our control);
risks associated with delays in major mobile phone and other device launches, or the failure of such launches to achieve the scale and customer adoption that either we
or the market may expect;
the impact of currency exchange rate fluctuations on our reported GAAP financial
statements;
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);
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 partners and the management of a complex technology platform
given the Company's relatively limited resources;
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 device 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.
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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 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”).
ITEM 1.
BUSINESS
Current Operations
Digital Turbine, through its subsidiaries, innovates at the convergence of media and mobile communications, delivering an end-to-end platform solution for
mobile operators, application developers, device original equipment manufacturers ("OEMs"), and other third parties to enable them to effectively monetize mobile content and
generate higher value user acquisition. Currently Digital Turbine has delivered over 2 billion application preloads on over 260 million devices across thirty plus Operator and
OEM (O&O) partnerships. The Company operates this business as one reportable segment - Advertising.
The Company's Advertising business consists of O&O, an advertiser solution for unique and exclusive carrier and OEM inventory which is comprised of services
including:
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Ignite™ ("Ignite"), a software platform with targeted media delivery and management capabilities, and
Other recurring and lifecycle products, features, and professional services delivered on the Ignite platform.
With global headquarters in Austin, Texas and offices in Durham, North Carolina; San Francisco, California; Singapore; and Tel Aviv, Israel, Digital Turbine’s
solutions are available worldwide.
Information about Discontinued Operations
On April 29, 2018, the Company entered into two distinct disposition agreements with respect to selected assets owned by our subsidiaries.
DT APAC and DT Singapore (together, “Pay Seller”), each wholly owned subsidiaries of the Company, entered into an Asset Purchase Pay Agreement (the “Pay
Agreement”), dated as of April 23, 2018, with Chargewave Ptd Ltd (“Pay Purchaser”) to sell certain assets (the “Pay Assets”) owned by the Pay Seller related to the Company’s
Direct Carrier Billing business. The Pay Purchaser is principally owned and controlled by Jon Mooney, an officer of the Pay Seller. At the closing of the asset sale, Mr. Mooney
was no longer employed by the Company or Pay Seller. As consideration for this asset sale, Digital Turbine is entitled to receive certain license fees, profit sharing and equity
participation rights as outlined in the Company’s Form 8-K filed May 1, 2018 with the Securities and Exchange Commission (the "SEC"). The transaction was completed in July
2018. With the sale of these assets, the Company has determined that it will exit the segment previously referred to as the Content business.
DT Media (the “A&P Seller”), a wholly owned subsidiary of the Company, entered into an Asset Purchase Agreement (the “A&P Agreement”), dated as of April
28, 2018, with Creative Clicks B.V. (the “A&P Purchaser”) to sell business relationships with various advertisers and publishers (the “A&P Assets”) related to the Company’s
Advertising and Publishing ("A&P") business. As consideration for this asset sale, we are entitled to receive a percentage of the gross profit derived from these customer
agreements for a period of three years as outlined in the Company’s Form 8-K filed May 1, 2018 with the SEC. The transaction was completed in June 2018. With the sale of
these assets, the Company has determined that it will exit the segment of its Advertising business previously referred to as the A&P business.
We believe that these dispositions will allow the Company to benefit from a streamlined business model, simplified operating structure, and enhanced
management focus.
As a result of these dispositions, the results of operations from our Content reporting segment and A&P business within the Advertising reporting segment are
reported as “Net loss from discontinued operations, net of taxes” and the related assets and liabilities are classified as “held for disposal" in the consolidated financial statements
in Item 8 of this Annual Report. The Company has recast prior period amounts presented within this Report to provide visibility and comparability. All
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discussion herein, unless otherwise noted, refers to our remaining operating segment after the dispositions, the O&O business. See “Discontinued Operations” in Note 3 to the
consolidated financial statements in Item 8 of this Report.
Information about Segment and Geographic Revenue
As a result of the dispositions, the Company now manages its business in one operating segment, the O&O business, which is presented as one reportable
segment: Advertising. 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 Ignite and other recurring and
lifecycle products, features, and professional services delivered on the Ignite platform.
Ignite is a software platform that enables mobile operators and OEMs to control, manage, and monetize devices through application installation at the time of
activation and over the life of a mobile device. Ignite allows mobile operators to personalize the application activation experience for customers and monetize their home screens
via revenue share agreements such as: Cost-Per-Install (CPI), Cost-Per-Placement (CPP), Cost-Per-Action (CPA) with third party advertisers; or via Per-Device-License Fees
(PDL) agreements which allow operators and OEMs to leverage the Ignite platform, products and features for a structured fee. Setup Wizard and Dynamic Installs are the two
delivery methods available to operators and OEMs on first boot of the device. Additional products and features are available throughout the life-cycle of the device that provide
operators and OEMs 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.
Competition
The distribution of applications, mobile advertising, development, distribution and sale of mobile products and services is a highly competitive business. We
compete for advertising partners on the basis of positioning, brand, quality and price. We compete for wireless carrier and manufacturer placement based on these factors, as
well as historical performance. 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 media distribution comes from the traditional Google application store, existing operator solutions built internally, as
well as companies providing application install products and services as offered by Facebook, Snapchat, IronSource, InMobi, Cheetah Mobile, Baidu, Taptica, and others. These
companies can be both customers for Digital Turbine products, as well as competitors in certain cases. 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
Ignite products, which could be a material source of competition. And finally, although we do not see any competition from larger Enterprise application players such as IBM,
Citrix, Oracle, Salesforce, 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 original equipment manufacturers including device application management
solutions and application-based value added services. 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.
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Product 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, 2019, 2018, 2017 were $10.9 million, $9.7 million, and $9.3 million, respectively.
Contracts with Customers
We have both exclusive and non-exclusive carrier and OEM agreements. Our agreements with advertisers are generally non-exclusive. 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. Most of our sales are made either directly to application developers, advertising agencies
representing application developers or through advertising aggregators.
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.
During the year ended March 31, 2019 one major customer, Oath Inc., a subsidiary of Verizon Communications, represented 28.6% of net revenues. During the
year ended March 31, 2018, two major customers, Oath Inc., a subsidiary of Verizon Communications, and Machine Zone, Inc., represented 23.5% and 16.1% of net revenues,
respectively.
The Company partners with mobile carriers and OEMs to deliver applications on our Ignite platform through the carrier network. During the year ended March 31,
2019 and 2018, Verizon Wireless, a subsidiary of Verizon Communications, a carrier partner, generated 45.9% and 51.5%, respectively, while AT&T Inc., a carrier partner,
including its Cricket subsidiary, generated 38.7% and 34.3%, respectively, of our 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, 2019, the Company, including its subsidiaries, had 161 employees, 158 of whom were full-time and 3 of whom were part-time. We consider our
relationships with our employees to be satisfactory. As of March 31, 2019, 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).
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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 “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.”
In April 2018, the Company entered into two separate agreements to dispose of the Content reporting segment (through the Pay Agreement) and A&P business
within the Advertising reporting segment (through the A&P Agreement). As a result of these dispositions, the results of operations from our Content reporting segment and
A&P business within the Advertising reporting segment are reported as “Net loss from discontinued operations, net of taxes” and the related assets and liabilities are classified
as "held for disposal" in the consolidated financial statements in Item 8 of this Report. The Pay Agreement and A&P Agreement both closed in June 2018.
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 SEC website. The contents of our website are not incorporated into this Annual Report on Form 10-K.
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.
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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.
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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 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;
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maintain and expand our current, and develop new, relationships with compelling advertising partners;
retain or improve our current revenue-sharing arrangements with carriers and OEMs;
continue to develop new high-quality products and services that achieve significant market acceptance;
continue to develop and upgrade our technology;
continue to enhance our information processing systems;
increase the number of end users of our products and services;
execute our business and marketing strategies successfully;
respond to competitive developments; and
attract, integrate, retain and motivate qualified personnel.
We may be unable to accomplish one or more of these objectives, which could cause our business to suffer. In addition, accomplishing many of these efforts
might be very expensive, which could adversely impact our operating results and financial condition.
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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.
In addition to other risk factors discussed in this section, factors that may contribute to the variability of our results include:
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the number of new products and services released by us and our competitors;
the timing of release of new products and services by us and our competitors, particularly those that may represent a significant portion of revenues in a
period;
the popularity of new products and services, and products and services released in prior periods;
changes in prominence of deck placement for our leading products and those of our competitors;
the 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 direct versus indirect advertising sales, which have varying margin profiles;
changes in the mix of CPI, CPP, CPA, and license fee sales, which have varying revenue and margin profiles
the seasonality of our industry;
fluctuations in the size and rate of growth of overall consumer demand for mobile products and services;
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 for product 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.
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If we are unsuccessful in establishing and increasing awareness of our brand and recognition of our products and services or if we incur excessive expenses promoting and
maintaining our brand or our products and services, our potential revenues could be limited, our costs could increase and our operating results and financial condition
could be harmed.
We believe that establishing and maintaining our brand is critical to retaining and expanding our existing relationships with wireless carriers, OEMs, and
advertisers 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, carriers, and OEMs 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, carriers, and OEMs, 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;
changes in network carrier pricing plans that charge device users based on the amount of data consumed;
and
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 or content 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 number 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 these 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.
11
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 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. 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, equipment
manufacturers, and application developers 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.
12
We may be subject to legal liability associated with providing mobile and online services.
We provide a variety of products and services that enable carriers, manufactures, 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 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.
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. If our customer base grows, 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.
13
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 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’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.
14
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 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 application.
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. In addition, the state of California has enacted the California
Consumer Privacy Act of 2018, a privacy and cyber security law, which establishes strict data protection and privacy controls
15
and reporting requirements and increases liabilities for non-compliance. In addition, other jurisdictions, including other states,
have enacted, or may enact, their own privacy and cyber security laws. Any such laws may impact our operations and the
California legislation underscores the increasing risk profile of our business to both cyber events and the emerging, strict,
regulatory framework governing all businesses dealing in personal data. 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 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 (EU) has adopted a comprehensive overhaul of its data protection regime from the current national legislative approach to a single
European Economic Area Privacy Regulation, the General Data Protection Regulation (GDPR), which became effective in 2018. The EU data protection regime extends the
scope of the EU data protection law to all foreign companies processing data of EU residents. It imposes a strict data protection compliance regime with severe penalties of up
to the greater of 4% of worldwide turnover and €20 million and includes new rights such as the “portability” of personal data. Although the GDPR will apply across the EU
without a need for local implementing legislation, as has been the case under the current data protection regime, local data protection authorities (DPAs) will still have the
ability to interpret the GDPR, which has the potential to create inconsistencies on a country-by-country basis. 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.
16
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, or FASB,
the Securities and Exchange Commission (“SEC” or the “Commission”) and various other bodies. 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.
The Company’s success will depend on the continuing and uninterrupted performance of its own internal systems, which the Company will utilize to deliver
applications, 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 applications. Sustained or repeated system failures that interrupt its ability to provide services to clients, including technological failures affecting its ability
to deliver applications quickly and accurately and to process mobile device users’ responses to applications, 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.
17
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 becomes impaired, we may be required to record a significant charge to earnings.
We test goodwill for impairment at least annually or sooner if an indicator of impairment is present. If such goodwill is 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 is determined,
which would negatively affect our results of operations.
Advertising 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 we gain more significant carrier relationships
and conversely these issues can be exacerbated with, as presently, a limited number of such relationships.
18
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.
A significant portion of our revenue is impacted by the level of advertising spend. If 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.
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 which 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 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.
19
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.
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 our products and services and thus to generate much 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 for the foreseeable future. Our failure to maintain our relationships with these carriers, establish relationships with new carriers, 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.
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;
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.
20
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, Snap, 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.
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.
21
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 content 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 content the Company delivers. In most cases, the Company will be paid by advertisers on a CPI basis, when
an install of an advertised application occurs. Different types of advertising content 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.
22
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 current services and to develop
and introduce new services on a timely basis. If the Company’s platform is not attractive to its customers or is not able to compete with alternative 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.
23
The Company’s advertising business depends on its ability to collect and use data to deliver applications, 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 application to a mobile device, it will often be able to collect anonymous information about the interaction of the mobile device
user with the application, such as whether the user opened the 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 applications across the advertising inventory provided to it by developers. For example, the Company may use
the collected information to provide an application to only certain types of mobile devices, or to provide a report to an advertiser client on the number of its applications that
were engaged.
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
applications, or device users may not consent to having information about their device usage provided to the developer. Any limitation on the Company’s ability 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.
The Company’s business depends on its ability to maintain the quality of its advertiser content.
The Company must be able to ensure that applications that are placed on devices are not unlawful or inappropriate. If the Company is unable to ensure that the
quality of its advertiser content does not decline as the number of advertisers it works with continues to grow, then the Company’s reputation and business may suffer.
24
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 advertisers 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 advertisers and other intellectual property. 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, Snap, Yahoo!, Pandora and other ad networks such
as RocketFuel. These companies can be both customers for Digital Turbines products, as well as competitors in certain cases. 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 products.
Some of our competitors’ and our potential competitors’ advantages over us, either globally or in particular geographic markets, include the following:
•
•
•
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 Digital Turbine’s case,
inhibit generation of sales), our margins could decline and we could lose market share (or in Digital Turbine’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 deploying new products and services through wireless carriers and OEMs that end users buy. We must continue to invest significant
resources in licensing efforts, product development, and regional expansion to enhance our offering of new products and services, and we must make decisions about these
matters well in advance of product release in order to implement them in a timely manner. Our success depends, in part, on unpredictable and volatile factors beyond our
control, including end-user preferences, competing products and services, and the availability of other entertainment activities. If our products and services are not responsive to
the requirements of our carriers or the entertainment preferences of end users, 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.
25
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.
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, CPI, CPP, CPA, up-front fees (including licensing), revenue shares, per device license 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 platform, we will need to achieve additional
operational and technical achievements to further develop the product offering. Ignite is 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.
26
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 our product development resources in an attempt
either to preserve our product launch schedule or to keep up with our competition. In either case, our business, operating results and financial condition could be materially
harmed.
The complexity of and incompatibilities among mobile handsets may require us to use additional resources for the development of our products and services.
To reach large numbers of wireless subscribers, application developers, and wireless carriers, 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 continuous investments in product development and maintenance, 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 product development and maintenance 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.
27
Our industry is subject to risks generally associated with advertising content delivery, any of which could significantly harm our operating results.
Our business is subject to risks that are generally associated with the advertising content delivery, 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 products currently are compatible with the Android and iOS operating system. 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 application developers 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 delivery of such offerings. 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 use our products, prevent the completion of a billing transaction, or interfere with access to some aspects of our products. If any of
these systems fail or if there is an interruption in the supply of power, an earthquake, fire, flood or other natural disaster, or an act of war or terrorism, end users might be
unable to access our offerings. For example, from time to time, our carriers have experienced failures with their billing and delivery systems and communication networks,
including gateway failures that reduced the provisioning capacity of their branded e-commerce system. Any failure of, or technical problem with, the carriers’, other third
parties’ or our systems could cause us to lose end users or revenues or incur substantial repair costs and distract management from operating our business. This, in turn, could
harm our business, operating results and financial condition.
Our business depends on the growth and maintenance of wireless communications infrastructure.
Our success will depend on the continued growth and maintenance of wireless communications infrastructure in the United States and internationally. This
includes deployment and maintenance of reliable next-generation digital networks with the speed, data capacity and security necessary to provide reliable wireless
communications services. Wireless communications infrastructure may be unable to support the demands placed on it if the number of subscribers continues to increase, or if
existing or future subscribers increase their bandwidth requirements. Wireless communications have experienced a variety of outages and other delays as a result of
infrastructure and equipment failures, and could face outages and delays in the future. These outages and delays could reduce the level of wireless communications usage as
well as our ability to distribute our products and services successfully. In addition, changes by a wireless carrier to network infrastructure may interfere with downloads and may
cause end users to lose functionality. This could harm our business, operating results and financial condition.
28
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. 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 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, India, South America, and Singapore, 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.
29
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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•
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develop and improve our operational, financial and management
controls;
enhance our reporting systems and
procedures;
recruit, train and retain highly skilled
personnel;
• maintain our quality standards;
and
• maintain branded content owner, wireless carrier and end-user
satisfaction.
Managing our growth will require significant expenditures and allocation of valuable management resources. If we fail to achieve the necessary level of efficiency
in our organization as it grows, our business, operating results and financial condition would be harmed.
The acquisition of other companies, businesses or technologies could result in operating difficulties, dilution and other harmful consequences.
We have made acquisitions and, although we have no present understandings, commitments or agreements to do so, we may pursue further acquisitions, any of
which could be material to our business, operating results and financial condition. Future acquisitions could divert management’s time and focus from operating our business,
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.
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 FASB, the SEC, 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.
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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
•
•
•
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•
•
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•
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
controls;
the servicing of regions by many different
carriers;
imposition of public sector
controls;
political, economic and social instability, including relating to the current European sovereign debt
crisis;
restrictions on the export or import of
technology;
trade and tariff
restrictions;
variations in tariffs, quotas, taxes and other market barriers;
and
difficulties in enforcing intellectual property rights in countries other than the United
States.
In addition, developing user interfaces that are compatible with other languages or cultures can be expensive. As a result, our ongoing international expansion
efforts may be more costly than we expect. Further, expansion into developing countries subjects us to the effects of regional instability, civil unrest and hostilities, and could
adversely affect us by disrupting communications and making travel more difficult. These risks could harm our international expansion efforts, which, in turn, could materially
and adversely affect our business, operating results and financial condition.
31
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 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 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.
32
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.
Our business in countries with a history of corruption and transactions with foreign governments, including with government owned or controlled wireless carriers,
increase the risks associated with our international activities.
As we operate and sell internationally, we are subject to the U.S. Foreign Corrupt Practices Act, or the FCPA, and other laws that prohibit improper payments or
offers of payments to foreign governments and their officials and political parties by the United States and other business entities for the purpose of obtaining or retaining
business. We have operations, deal with carriers, and make sales in countries known to experience corruption, particularly certain emerging countries in Eastern Europe, Latin
America, and Asia. 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.
33
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 and Capital Structure
The Company has secured and unsecured indebtedness, which could limit its financial flexibility.
The Company’s incurrence of up to $5 million in secured indebtedness as of March 31, 2019, which was subsequently increased to $20 million as of May 22,
2019, 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.
Our secured indebtedness contains current ratio and revenue financial covenants. There can be no assurance we will continue to satisfy these covenants. We may
fail to satisfy the current ratio covenant due to increases in liabilities or decreases in current assets, which can occur despite our best efforts. Similarly, the revenue covenant can
fail to be satisfied due to slowdowns in our business or failing to meet projections. See “Management’s Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources-Recent Developments” for a description of these financial covenants. If we fail to satisfy these covenants, the lender may declare a
default, which could lead to acceleration of the debt maturity. Any such default would have a material adverse effect on the Company.
The secured indebtedness also contains a requirement that at all times two thirds of our Notes due 2020 remain subject to subordination agreements. There is no
assurance that this condition will always be satisfied due to potential sales, conversions or other events with respect to the Notes. If we failed to comply with his requirement the
lender may declare a default, which could lead to acceleration and the other adverse consequences noted immediately above.
The collateral pledged to secure our secured debt, consisting of all of our and our subsidiaries’ assets, would be available to the secured creditor in a foreclosure,
in addition to many other remedies. Accordingly, any adverse change in our ability to service our secured debt could result in an event of default, cross default and foreclosure
or forced sale. Depending on the value of the assets, there could be little if any assets available for common stockholders in any foreclosure or forced sale.
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To service our debt and fund our other capital requirements, we will require a significant amount of cash, and our ability to generate cash will depend on many factors
beyond our control.
Our ability to meet our debt service obligations and to fund working capital, capital expenditures and investments in our business, will depend upon our future
performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control. For example, this could include
general and regional economic, financial, competitive, legislative, regulatory and other factors. We cannot ensure that we will generate cash flow from operations, or that future
borrowings will be available, in an amount sufficient to enable us to pay our debt or to fund our other liquidity needs.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to
reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional indebtedness or equity capital or restructure or refinance our
indebtedness. We may not be able to effect any such alternative measures on commercially reasonable terms or at all and, even if successful, those alternative actions may not
allow us to meet our scheduled debt service obligations.
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”). On May 28, 2019, the last reported sale price for our common stock on the
NASDAQ Capital Market was $3.84 per share and the closing price of our common stock has traded in a range from a low of $1.19 per share to a high of $3.77 per share during
fiscal 2019. We must continue to 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.
Recent regulatory actions may adversely affect the trading price and liquidity of the warrants and our common stock.
We expect that many investors in, and potential purchasers of, the warrants will employ, or seek to employ, a convertible arbitrage strategy with respect to the
warrants. Investors would typically implement such a strategy by selling short the common stock underlying the warrants and dynamically adjusting their short position while
continuing to hold the warrants. Investors may also implement this type of strategy by entering into swaps on our common stock in lieu of or in addition to short selling the
common stock. As a result, any specific rules regulating equity swaps or short selling of securities or other governmental action that interferes with the ability of market
participants to effect short sales or equity swaps with respect to our common stock could adversely affect the ability of investors in, or potential purchasers of, the warrants to
conduct the convertible arbitrage strategy with respect to the warrants.
The SEC and other regulatory and self-regulatory authorities have implemented various rules and taken certain actions, and may in the future adopt additional
rules and take other actions, that may impact those engaging in short selling activity involving equity securities (including our common stock). Such rules and actions include
Rule 201 of SEC Regulation SHO, the adoption by the Financial Industry Regulatory Authority, Inc. and the national securities exchanges of a “Limit Up-Limit Down”
program, the imposition of market-wide circuit breakers that halt trading of securities for certain periods following specific market declines, and the implementation of certain
regulatory reforms required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Any governmental or regulatory action that restricts the ability of
investors in, or potential purchasers of, the Notes and warrants to effect short sales of our common stock, borrow our common stock or enter into swaps on our common stock
could adversely affect the trading price and the liquidity of the Notes and warrants.
The exercise price for the warrants may not be adjusted for all dilutive events.
The exercise price for the warrants are subject to separate adjustments for certain events, including, but not limited to, the issuance of shares of our common stock
without consideration or at a price per share less than the applicable conversion rate, subject to certain exceptions, the issuance of stock dividends on our common stock, the
issuance of certain rights, options, or warrants, subdivisions, combinations, distributions of capital stock, evidences of indebtedness, assets or property, cash dividends and
certain issuer tender offers or exchange offers as described in the indenture for the Notes. However, the exercise price, as applicable, will not be adjusted for all possible events,
such as a third-party tender offer or exchange offer, that may adversely affect the market price of our common stock.
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There is no public market for the warrants, which could limit their respective trading price or the investors' ability to sell them.
The warrants are an issuance of securities for which there currently is no respective trading market. As a result, a market may not develop for the warrants and the
investor may not be able to sell its warrants. Any warrants that are traded after their initial issuance may trade at a discount from their initial offering price. Future trading prices
of the warrants will depend on many factors, including prevailing interest rates, the market for similar securities, general economic conditions and our financial condition,
performance and prospects. Accordingly, the investor may be required to bear the financial risk of an investment in the warrants for an indefinite period of time. We do not
intend to apply for listing or quotation of the warrants on any securities exchange or automated quotation system. While the initial purchaser may make a market in the warrants,
they are not required to do so and, consequently, any market making with respect to the warrants may be discontinued at any time without notice. Even if the initial purchaser
makes a market in the warrants, the liquidity of such markets may be limited.
Exercise of the warrants will dilute the ownership interest of existing stockholders, or may otherwise depress the market price of our common stock.
The exercise of some or all of the warrants will dilute the ownership interests of existing stockholders. Any sales in the public market of the shares of our common
stock issuable upon such conversion or such exercise could adversely affect prevailing market prices of our common stock. In addition, the existence of the warrants may
encourage short selling by market participants because the anticipated exercise of the warrants into shares of our common stock could depress the market price of our common
stock.
Holders of warrants will not be entitled to any rights with respect to our common stock, but will be subject to all changes made with respect to our common stock.
Holders of warrants will not be entitled to any rights with respect to our common stock (including, without limitation, voting rights and rights to receive any
dividends or other distributions on our common stock), but holders of warrants will be subject to all changes affecting our common stock. For example, if an amendment is
proposed to our amended and restated certificate of incorporation requiring stockholder approval and the record date for determining the stockholders of record entitled to vote
on the amendment, such holder will not be entitled to vote on the amendment, although such holder will nevertheless be subject to any changes in the powers, preferences or
special rights of our common stock.
Volatility in the market price and trading volume of our common stock could adversely impact the trading price of the warrants.
The stock market in recent years has experienced significant price and volume fluctuations that have often been unrelated to the operating performance of
companies. The market price of our common stock could fluctuate significantly for many reasons, including in response to the risks described in this section or for reasons
unrelated to our operations, such as reports by industry analysts, investor perceptions or negative announcements by our customers, competitors or suppliers regarding their own
performance, as well as industry conditions and general financial, economic and political instability. A decrease in the market price of our common stock would likely adversely
impact the trading price of the warrants. The market price of our common stock could also be affected by possible sales of our common stock by investors who view the
warrants as a more attractive means of equity participation in us and by hedging or arbitrage trading activity that we expect to develop involving our common stock. This trading
activity could, in turn, affect the respective trading prices of the warrants.
Future sales of our common stock in the public market could lower the market price for our common stock and adversely impact the trading price of the warrants.
In the future, we may sell additional shares of our common stock or securities convertible into our common stock to raise capital. In addition, a substantial
number of shares of our common stock is reserved for issuance upon the exercise of stock options, exercise of warrants, and the vesting of restricted stock units and restricted
stock. We cannot predict the size of future issuances or the effect, if any, that they may have on the market price for our common stock. The issuance and sale of substantial
amounts of common stock, or the perception that such issuances and sales may occur, could adversely affect the trading price of the warrants, and the market price of our
common stock and impair our ability to raise capital through the sale of additional equity securities.
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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.
Our secured and unsecured indebtedness essentially prevents all payments of dividends to our stockholders. Even if such dividends were permitted by the
applicable lenders, 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. Management concluded that our internal controls over financial
reporting were effective as of March 31, 2019; refer to Item 9A of this Annual Report on Form 10-K for more information about management’s assessment of internal controls.
We cannot be certain that measures taken by the Company will continue to ensure that we implement and maintain adequate controls over our financial processes and reporting
in the future. Even if we are able to 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 material weaknesses or significant deficiencies in our
internal controls, 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 civil and administrative sanctions and penalties, including ineligibility for short
form resale registration, action by the SEC, and the inability of registered broker-dealers to make a market in our common stock.
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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 111 Nueces Street, Austin, Texas 78701. Digital Turbine also leases property in Durham, North
Carolina and San Francisco, California through its wholly-owned subsidiary, DT Media; and internationally in Tel Aviv, Israel and Singapore through its wholly-owned
subsidiaries DT EMEA and DT Singapore, respectively.
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
39
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Market Information
Our common stock is traded on the NASDAQ Capital Market under the symbol “APPS.”
Holders
As of May 28, 2019, there were 11,604 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.
Further, any such dividends would be substantially restricted by our secured and unsecured indebtedness.
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, 2019.
Recent Sale of Unregistered Securities
None.
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, 2014 and
March 31, 2019, 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.
40
COMPARISON OF CUMULATIVE TOTAL RETURN
ITEM 6.
SELECTED FINANCIAL DATA
The following Selected Financial Data has been revised to reflect discontinued operations (see “Discontinued Operations” in Note 3 to the consolidated financial
statements in Item 8 of this report).
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, 2019, 2018, and 2017 and the consolidated balance sheet data as of
March 31, 2019 and 2018 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, 2016 and 2015 and the
consolidated balance sheet data as of March 31, 2017, 2016, and 2015 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.
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.
41
Results of Operations
Net revenues
Income / (loss) from operations
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
Working capital (1)
Total assets (2)
Long-term obligations
Total stockholders' equity
Year ended March 31,
2019
2018
2017
2016
2015
(in thousands, except per share amounts)
$
103,569 $
3,445
(4,302 )
74,751 $
(5,809 )
(19,697)
40,207 $
(16,971)
(19,138)
22,251 $
(22,534)
(24,492)
3,371
(16,556)
(16,173)
$
(0.06) $
(0.28) $
(0.29) $
(0.40) $
(0.41)
77,440
70,263
66,511
61,763
38,967
$
$
$
10,894
713
82,861
$
$
8,195
36,358
$
12,720 $
(2,678 )
86,607 $
12,529
27,672 $
6,149 $
1,353
107,580 $
14,761
62,045 $
11,231 $
(4,531 )
121,940 $
815
82,271 $
7,069
(3,924 )
122,571
7,090
91,529
(1) Working capital number excludes assets and liabilities held for disposal on the balance sheet
(2) Total assets include assets classified as held for disposal on the balance sheet as they were still owned by the Company at the balance sheet date.
42
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is qualified in its entirety by, the Financial Statements and the notes thereto included in this
Report. This discussion contains certain forward-looking statements that involve substantial risks and uncertainties, and is subject to, and claims the protection of, the
disclaimer regarding forward-looking contained immediately before Item 1, which disclaimer is incorporated herein by reference. 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.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide investors with an understanding
of our recent performance, financial condition and prospects and should be read in conjunction with the consolidated financial statements contained in Item 8, “Financial
Statements and Supplementary Data” in this annual report on Form 10-K. The following will be discussed and analyzed:
•
•
•
•
•
•
•
•
Company
Overview
Disposition of the Content Reportable Segment and A&P
Business
Discontinued
Operations
Results of
Operations
Liquidity and Capital
Resources
Critical Accounting
Policies
Recently Issued Accounting
Pronouncements
Recent
Developments
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 an end-to-end platform solution for
mobile operators, application developers, device original equipment manufacturers ("OEMs"), and other third parties to enable them to effectively monetize mobile content and
generate higher value user acquisition. Currently Digital Turbine has delivered over 2 billion application preloads on over 260 million devices across thirty plus Operator and
OEM (O&O) partnerships. The Company operates this business as one reportable segment - Advertising.
The Company's Advertising business consists of O&O, an advertiser solution for unique and exclusive carrier and OEM inventory which is comprised of services
including:
◦
◦
Ignite™ ("Ignite"), a software platform with targeted media delivery and management capabilities, and
Other recurring and lifecycle products, features, and professional services delivered on the Ignite platform.
With global headquarters in Austin, Texas and offices in Durham, North Carolina; San Francisco, California; Singapore; and Tel Aviv, Israel, Digital Turbine’s
solutions are available worldwide.
43
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 Ignite and other recurring and
lifecycle products, features, and professional services delivered on the Ignite platform.
Ignite is a software platform that enables mobile operators and OEMs to control, manage, and monetize devices through application installation at the time of
activation and over the life of a mobile device. Ignite allows mobile operators to personalize the application activation experience for customers and monetize their home screens
via revenue share agreements such as: Cost-Per-Install (CPI), Cost-Per-Placement (CPP), Cost-Per-Action (CPA) with third party advertisers; or via Per-Device-License Fees
(PDL) agreements which allow operators and OEMs to leverage the Ignite platform, products and features for a structured fee. Setup Wizard and Dynamic Installs are the two
delivery methods available to operators and OEMs on first boot of the device. Additional products and features are available throughout the life-cycle of the device that provide
operators and OEMs 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.
Disposition of the Content Reportable Segment and A&P Business
On April 29, 2018, the Company entered into two distinct disposition agreements with respect to selected assets owned by our subsidiaries.
DT APAC and DT Singapore (together, “Pay Seller”), each wholly-owned subsidiaries of the Company, entered into an Asset Purchase Pay Agreement (the “Pay
Agreement”), dated April 23, 2018, with Chargewave Ptd Ltd (“Pay Purchaser”) to sell certain assets (the “Pay Assets”) owned by the Pay Seller related to the Company’s
Direct Carrier Billing business. The Pay Purchaser is principally owned and controlled by Jon Mooney, an officer of the Pay Seller. At the closing of the asset sale, Mr. Mooney
was no longer employed by the Company or Pay Seller. As consideration for this asset sale, Digital Turbine is entitled to receive certain license fees, profit-sharing, and equity
participation rights as outlined in the Company’s Form 8-K filed May 1, 2018 with the SEC. The transaction was completed on July 1, 2018 with an effective date of July 1,
2018. With the sale of these assets, the Company has determined that it will exit the reporting segment of the business previously referred to as the Content business.
DT Media, a wholly-owned subsidiary of the Company, entered into an Asset Purchase Agreement (the “A&P Agreement”), dated April 28, 2018, with Creative
Clicks B.V. (the “A&P Purchaser”) to sell business relationships with various advertisers and publishers (the “A&P Assets”) related to the Company’s Advertising and
Publishing business. As consideration for this asset sale, we are entitled to receive a percentage of the gross profit derived from these customer agreements for a period of three
years as outlined in the Company’s Form 8-K filed May 1, 2018 with the SEC. The transaction was completed on June 28, 2018 with an effective date of June 1, 2018. With the
sale of these assets, the Company has determined that it will exit the operating segment of the business previously referred to as the A&P business, which was previously part of
the Advertising segment, the Company's sole continuing reporting segment.
These dispositions will allow the Company to benefit from a streamlined business model, simplified operating structure, and enhanced management focus.
Discontinued Operations
As a result of the dispositions, the results of operations from our Content reporting segment and A&P business within the Advertising reporting segment are
reported as “Net loss from discontinued operations, net of taxes” and the related assets and liabilities are classified as “held for disposal" in the consolidated financial statements
in Item 8 of this report. The Company has recast prior period amounts presented within this report to provide visibility and comparability.
All discussions in this Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations, unless otherwise noted, relate to the
remaining continuing operations in our sole operating segment after the dispositions, the O&O business.
44
RESULTS OF OPERATIONS
Below are our revenues, cost of revenues, and expenses for fiscal 2019, 2018, and 2017. This information should be read in conjunction with our Consolidated
Financial Statements and notes thereto.
Years Ended March 31,
Years Ended March 31,
2019
2018
% of
Change
2018
2017
% of
Change
(in thousands, except per share amounts)
(in thousands, except per share amounts)
Net revenues
$
103,569 $
License fees and revenue share
Other direct cost of revenues
Gross profit
Total operating expenses
Income / (loss) from operations
Interest expense
Foreign exchange transaction gain / (loss)
Change in fair value of convertible note
embedded derivative liability
Change in fair value of warrant liability
Loss on extinguishment of debt
Other income / (expense)
Loss from continuing operations before income
taxes
Income tax (benefit) / provision
Loss from continuing operations, net of taxes
Basic and diluted net loss per common share,
from continuing operations
Weighted-average common shares outstanding,
basic and diluted
$
$
65,981
2,023
35,565
32,120
3,445
(1,120 )
3
(1,008 )
(4,875 )
(431)
153
(3,833 )
469
(4,302 ) $
74,751
47,967
1,729
25,055
30,864
(5,809 )
(2,067 )
(148)
(7,559 )
(3,208 )
(1,785 )
(72)
(20,648)
(951)
(19,697)
38.6 % $
74,751 $
37.6 %
17.0 %
41.9 %
4.1 %
(159.3 )%
(45.8)%
(102.0 )%
(86.7)%
52.0 %
(75.9)%
(312.5 )%
47,967
1,729
25,055
30,864
(5,809 )
(2,067 )
(148)
(7,559 )
(3,208 )
(1,785 )
(72)
40,207
26,374
2,575
11,258
28,229
(16,971)
(2,625 )
(26)
475
147
(293)
11
(81.4)%
(149.3 )%
(78.2)% $
(20,648)
(951)
(19,697) $
(19,282)
(144)
(19,138)
(0.06) $
(0.28)
(78.6)% $
(0.28) $
(0.29)
77,440
70,263
10.2 %
70,263
66,511
45
85.9 %
81.9 %
(32.9)%
122.6 %
9.3 %
(65.8)%
(21.3)%
469.2 %
100.0 %
100.0 %
(100.0 )%
(754.5 )%
7.1 %
560.4 %
2.9 %
(3.4 )%
5.6 %
Net Revenues
Fiscal 2019 Compared to Fiscal 2018
During the year ended March 31, 2019, revenues increased $28,818 or 38.6%, compared to the prior year's period.
The Company's O&O business is an advertiser solution for unique and exclusive carrier and OEM inventory. During the years ended March 31, 2019 and 2018,
the main revenue driver for the O&O business was the Ignite platform. Ignite is an application delivery and 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 device. This increase in Ignite net revenue was attributable to increased
demand for the Ignite service which has led to higher CPI and CPP revenue per available placement. This is driven primarily by increased revenue from advertising partners as
placement across existing commercial partners expands, as well as expanded distribution with new partners and the deployment or expansion of new services and features. We
expect this positive demand trend to continue as the market has responded positively to our expanding features within our platform, and as we onboard and scale new partners.
During the year ended March 31, 2019 one major customer, Oath Inc., a subsidiary of Verizon Communications, represented 28.6% of net revenues. During the
year ended March 31, 2018, two major customers, Oath Inc., a subsidiary of Verizon Communications, and Machine Zone, Inc., represented 23.5% and 16.1% of net revenues,
respectively.
The Company partners with mobile carriers and OEMs to deliver applications on our Ignite platform through the carrier network. During the year ended March 31,
2019 and 2018, Verizon Wireless, a subsidiary of Verizon Communications, a carrier partner, generated 45.9% and 51.5%, respectively, while AT&T Inc., a carrier partner,
including its Cricket subsidiary, generated 38.7% and 34.3%, respectively, of our net revenues.
A reduction or delay in operating activity from these customers or partners, or a delay or default in payment by these customers, or a termination of the Company's
agreements with these customers, could materially harm the Company’s business and prospects. The Company is not aware of any material changes to these relationships, or
material reductions or delays in operating activity with these customers or partners.
Fiscal 2018 Compared to Fiscal 2017
During the year ended March 31, 2018, revenues increased $34,544 or 85.9%, compared to the prior year's period. Growth stemmed from significant growth
attributable to increased demand for the Ignite service which has led to higher CPI and CPP revenue per available placement. This is driven primarily by increased revenue from
advertising partners as placement across existing commercial partners expands, as well as expanded distribution with new partners and the deployment or expansion of new
services and features. We expect this positive demand trend to continue as the market has responded positively to our expanding features within our platform, and as we onboard
and scale new partners.
During the year ended March 31, 2018, two major customers, Oath Inc., a subsidiary of Verizon Communications, and Machine Zone, Inc., represented 23.5%
and 16.1% of net revenues, respectively. During the year ended March 31, 2017, two major customers, Oath Inc. and Jam City Inc., represented 21.9% and 26.1% of net
revenues, respectively.
The Company partners with mobile carriers and OEMs to deliver applications on our Ignite platform through the carrier network. During the year ended March 31,
2018 and 2017, Verizon Wireless, a subsidiary of Verizon Communications, a carrier partner, generated 51.5% and 61.1%, respectively, while AT&T Inc., a carrier partner,
including its Cricket subsidiary, generated 34.3% and 17.6%, respectively, of our net revenues.
46
Gross Margins
Gross margin $
Gross margin %
Years ended March 31,
Years ended March 31,
2019
2018
% of Change
2018
2017
% of Change
$
(in thousands)
$
35,565
25,055
41.9 % $
(in thousands)
$
25,055
11,258
122.6%
34.3 %
33.5 %
33.5 %
28.0 %
Fiscal 2019 Compared to Fiscal 2018
Total gross margin, inclusive of the impact of other direct cost of revenues (amortization of intangibles) was $35,565 or 34.3% for the year ended March 31, 2019
versus $25,055 or 33.5% for the year ended March 31, 2018. The increase in gross margin dollars of $10,510 or 41.9%, is primarily attributable to an increase in Carrier and
Advertiser demand in the O&O business positively impacted by improved yield from a higher mix of non-dynamic install revenue for the year ended March 31, 2019.
Fiscal 2018 Compared to Fiscal 2017
Total gross margin, inclusive of the impact of other direct cost of revenues (amortization of intangibles) was $25,055 or 33.5% for the year ended March 31, 2018,
versus $11,258 or 28.0% for the year ended March 31, 2017. The year ended March 31, 2017 includes the impact of a $757 impairment charge taken for certain intangible assets
related to the IP purchased in the XYO acquisition. The increase in gross margin dollars of $13,797 or 122.6%, is primarily attributable to an increase in Carrier and Advertiser
demand in the O&O business. Overall gross margin percentage increased as growth was coupled with higher gross margin O&O revenue contracts with new and existing
partners, coupled with lower amortization of intangibles.
Operating Expenses
Product development
Sales and marketing
General and administrative
Total operating expenses
Years ended March 31,
Years ended March 31,
2019
2018
% of Change
2018
2017
% of Change
(in thousands)
$
$
10,876 $
8,212
13,032
32,120 $
9,653
6,087
15,124
30,864
12.7 % $
34.9 %
(13.8)%
4.1 % $
(in thousands)
9,653 $
6,087
15,124
30,864 $
9,283
4,180
14,766
28,229
4.0%
45.6 %
2.4%
9.3%
Product development expenses include the development and maintenance of the Company's product suite. 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.
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 2019 Compared to Fiscal 2018
Total operating expenses for the year ended March 31, 2019 and March 31, 2018 were approximately $32,120 and $30,864, respectively, representing a year over
year increase of approximately $1,256 or 4.1%. This change is a result of continued Company wide cost control measures and shows the Company's ability to scale revenue at a
greater rate than operating expense.
47
Product development expenses for the year ended March 31, 2019 and March 31, 2018 were approximately $10,876 and $9,653, respectively, representing a year
over year increase of approximately $1,223 or 12.7%. The increase in costs over the comparative periods is primarily a function of incremental personnel hired during fiscal
year 2019 and hosting expenses associated with development activity.
Sales and marketing expenses for the year ended March 31, 2019 and March 31, 2018 were approximately $8,212 and $6,087, respectively, representing a year
over year increase of approximately $2,125 or 34.9%. The increase in sales and marketing expenses over the comparative periods is primarily attributable to increased travel
expenses related to the Company's continued expansion of its global footprint and 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, 2019 and March 31, 2018 were approximately $13,032 and $15,124, respectively, a decrease of
approximately $(2,092) or (13.8)%. The decrease over the comparative periods is primarily attributable to lower employee related expenses, as well as lower legal, accounting,
and other professional consulting costs.
Fiscal 2018 Compared to Fiscal 2017
Total operating expenses for the year ended March 31, 2018 and March 31, 2017 were $30,864 and $28,229, respectively, an increase of $2,635 or 9.3%.
Product development expenses for the year ended March 31, 2018 and March 31, 2017 were $9,653 and $9,283, respectively, an increase of $370 or 4.0%. The
increase over the comparative periods is primarily attributable to the Company's increased investment in the offices in Tel Aviv, Israel and Durham, North Carolina through
additional headcount being added in those regions, as well as from increased hosting expenses driven by the growth in the business.
Sales and marketing expenses for the year ended March 31, 2018 and March 31, 2017 were $6,087 and $4,180, respectively, an increase of $1,907 or 45.6%. The
increase in sales and marketing expenses over the comparative periods is primarily attributable to increased commissions associated with the sales team generating more revenue
through new and existing partner relationships.
General and administrative expenses for the year ended March 31, 2018 and March 31, 2017 were $15,124 and $14,766, respectively, a decrease of $358 or 2.4%.
The increase over the comparative periods is primarily attributable to accounting and professional consulting expenses, stock option expense related to stock option grants
issued to employees, office related expenses, administrative employee payroll expense, and other payroll related expenses.
Other Income and Expenses
Years ended March 31,
Years ended March 31,
2019
2018
% of Change
2018
2017
% of Change
Interest expense
Foreign exchange transaction gain / (loss)
Change in fair value of convertible note embedded
derivative liability
Change in fair value of warrant liability
Loss on extinguishment of debt
Other income / (expense)
(in thousands)
$
(1,120 ) $
3
(1,008 )
(4,875 )
(431)
153
(2,067 )
(148)
(7,559 )
(3,208 )
(1,785 )
(72)
(in thousands)
(45.8)% $
(102.0 )%
(2,067 ) $
(148)
(2,625 )
(26)
(86.7)%
52.0 %
(75.9)%
(312.5 )%
(7,559 )
(3,208 )
(1,785 )
(72)
475
147
(293)
11
Total interest and other (expense), net
$
(7,278 ) $
(14,839)
(51.0)% $
(14,839) $
(2,311 )
(21.3)%
469.2 %
(100.0 )%
(100.0 )%
100.0 %
(754.5 )%
542.1 %
48
Fiscal 2019 Compared to Fiscal 2018
Total interest and other expense, net, for the year ended March 31, 2019 and March 31, 2018 were $7,278 and $14,839, respectively, a decrease in net expenses of
$7,561 or 51.0%. This change in total interest and other income / (expense), net, was primarily attributable to the change in fair value of convertible note embedded derivative
liability, the change in fair value of warrant liability, loss on extinguishment of debt, and interest expense. The change in fair value of embedded derivative and warrant liabilities
is due to the change in the Company's stock price from $2.01 at March 31, 2018 to $3.50 at March 31, 2019 partially offset by the settling of $5,700 of the underlying debt
instruments which resulted in the loss on extinguishment of $431. The decrease in interest expense is also due to the conversion of all $5,700 of the remaining outstanding Notes
(defined below).
Fiscal 2018 Compared to Fiscal 2017
Total interest and other expense, net, for the year ended March 31, 2017 and March 31, 2016 were $14,839 and $2,311, respectively, an increase in net expenses of
$12,528 or 542.1%. This change in total interest and other income / (expense), net, was primarily attributable to the change in fair value of convertible note embedded derivative
liability, the change in fair value of warrant liability, and loss on extinguishment of debt. The change in fair value of embedded derivative and warrant liabilities is due to the
change in the Company's stock price from $0.94 at March 31, 2017 to $2.01 at March 31, 2018 partially offset by the settlement of $10,300 of the underlying debt instruments
which resulted in the loss on extinguishment of $1,785.
Interest Expense, Net
Interest expense is generated from the $16,000 aggregate principal amount of 8.75% Convertible Notes due 2020 (the “Notes”), issued on September 28, 2016,
and from our business finance agreement (the “Credit Agreement”) with Western Alliance Bank (the “Bank”). The Credit Agreement provides for a $5,000 total facility.
Subsequent to March 31, 2019, the Company entered into an amendment to the Credit Agreement that extends the agreement through May 23, 2021 and provides for up to a
$20,000 total facility, subject to draw limitations derived from current levels of eligible domestic receivables. See Note 20 "Subsequent Events" for more details. Interest income
consists of interest income earned on our cash. This increase in interest expense, net, was primarily attributable to 1) fees related to the obtainment of debt (recorded as debt
issuance costs and expensed as a component of interest expense over the life of the debt); 2) interest expense incurred on the Notes at a stated interest rate of 8.75%, and interest
expense incurred on the Credit Agreement at approximately 5.25% (Wall Street Journal Prime Rate + 1.25%); and 3) amortization of debt discount related to the Notes which
are expensed as a component of interest expense over the life of the debt. Inclusive of the Notes issued on September 28, 2016 and the Credit Agreement entered into on May
23, 2017, the Company recorded $1,120, $2,067, and $2,625 of aggregate interest expense, inclusive of debt discount and debt issuance cost amortization during the years ended
March 31, 2019, 2018, and 2017, respectively.
Loss From Change in Fair Value of Convertible Note Embedded Derivative Liability
The Company accounts for the convertible note embedded derivative liability issued in accordance with US GAAP accounting guidance under ASC 815
applicable to derivative instruments, which requires every derivative instrument within its scope to be recorded on the balance sheet as either an asset or liability measured at its
fair value, with changes in fair value recognized in earnings.
Due to the valuation of the derivative liability being highly sensitive to the trading price of the Company's stock, the increase and decrease in the trading price of
the Company's stock has the impact of increasing the (loss) and gain, respectively. During the year ended March 31, 2019, the Company recorded a loss from change in fair
value of convertible note embedded derivative liability of $1,008 due to the increase of the Company's stock price from $2.01 at March 31, 2018 to $3.50 at March 31, 2019
partially offset by the settling of $5,700 of the underlying debt instruments which resulted in the loss on extinguishment of $431 .
49
During the year ended March 31, 2018, the Company recorded a loss from change in fair value of convertible note embedded derivative liability of $7,559 due to
the decrease in the Company's closing stock price during the period from March 31, 2017 to March 31, 2018 from $0.94 to $2.01. No gain or loss from change in fair value of
convertible note embedded derivative liability was recorded during the years ended March 31, 2016 due to the transaction giving rise to these liabilities closing on September
28, 2016.
During the year ended March 31, 2017, the Company recorded a gain from change in fair value of convertible note embedded derivative liability of $475 due to
the decrease in the Company's closing stock price during the period from September 28, 2016 to March 31, 2017 from $0.99 to $0.94. No gain or loss from change in fair value
of convertible note embedded derivative liability was recorded during the years ended March 31, 2016 due to the transaction giving rise to these liabilities closing on September
28, 2016.
Loss From Change in Fair Value of Warrant Liability
The Company accounts for the warrants issued in connection with the above-noted sale of Notes in accordance with US GAAP accounting guidance under ASC
815 applicable to derivative instruments, which requires every derivative instrument within its scope to be recorded on the balance sheet as either an asset or liability measured
at its fair value, with changes in fair value recognized in earnings. Based on this guidance, the Company determined that these warrants did not meet the criteria for
classification as equity. Accordingly, the Company classified the warrants as long-term liabilities. The warrants are subject to re-measurement at each balance sheet date, with
any change in fair value recognized as a component of other income (expense), net in the statements of operations.
Due to the valuation of the derivative liability being highly sensitive to the trading price of the Company's stock, the increase and decrease in the trading price of
the Company's stock has the impact of increasing the (loss) and gain, respectively. During the year ended March 31, 2019, the Company recorded a loss from change in fair
value of warrant liability of $4,875 due to the increase of the Company's stock price from $2.01 at March 31, 2018 to $3.50 at March 31, 2019, partially offset by the exercise of
484,900 warrants.
During the year ended March 31, 2018, the Company recorded a loss from change in fair value of warrant liability of $3,208 due to the increase in the Company's
closing stock price during the period from March 31, 2017 to March 31, 2018 from $0.94 to $2.01, partially offset by the exercise of 256,600 warrants.
During the year ended March 31, 2017, the Company recorded a gain from change in fair value of warrant liability of $147 due to the decrease in the Company's
closing stock price during the period from September 28, 2016 to March 31, 2017 from $0.99 to $0.94.
Loss on Extinguishment of Debt
During the year ended March 31, 2019, connected with the settlement of a portion of the Notes, the Company recorded a loss on extinguishment of $431 which
represents the difference between the carrying value of the settled debt (including underlying derivative instruments) and the consideration given to settle the debt, in this case
primarily stock.
During the year ended March 31, 2018, connected with the settlement of a portion of the Notes, the Company recorded a loss on extinguishment of $1,785 which
represents the difference between the carrying value of the settled debt (including underlying derivative instruments) and the consideration given to settle the debt, in this case
primarily stock.
During the year ended March 31, 2017, in connection with the settlement of previous debt on September 28, 2016, the Company fully expensed the remainder of
the debt discount and debt issuance costs associated with the debt resulting in a loss on extinguishment of debt of $293.
50
Liquidity and Capital Resources
Working capital(1)
Current assets
Current liabilities
Working capital
Years ended March 31,
2019
2018
(in thousands)
35,097
34,384
$
713 $
31,002
33,680
(2,678 )
(1) Working capital number excludes assets and liabilities held for disposal on the balance sheet
Our primary sources of liquidity have historically been issuance of common and preferred stock and debt. As of March 31, 2019, we had cash, including restricted
cash, totaling approximately $11,059.
On May 23, 2017, the Company entered into a Business Finance Agreement (the "Credit Agreement") with Western Alliance Bank (the "Bank"). The Credit
Agreement provides for a $5,000 total facility. As of March 31, 2019, the Company's drawn amount on the Credit Agreement was $0. The Company has $5,000 remaining
available to draw. Refer to Note 9 "Debt" to our Consolidated Financial Statements included in PART II, Item 8 of this Annual Report on Form 10-K for more details.
Subsequent to March 31, 2019, the Company entered into an amendment to the Credit Agreement that extends the agreement through May 23, 2021 and provides for a $20,000
total facility. Refer to Note 20 "Subsequent Events" to our Consolidated Financial Statements included in PART II, Item 8 of this Annual Report on Form 10-K for more details.
The Company anticipates that its primary sources of liquidity will continue to be cash on hand, cash provided by operations, and the credit available under the Credit
Agreement. In addition, the Company may raise additional capital through future equity or, subject to restrictions contained in the Credit Agreement, debt financing to provide
for greater flexibility to make acquisitions, make new investments in under-capitalized opportunities, or invest in organic 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.
The Company believes that it has sufficient cash and capital resources to operate its business for at least twelve months from the issuance date of this annual report on
Form 10-K.
Cash Flow Summary
Consolidated Statement of Cash Flows Data:
Net cash provided by / (used in) operating activities -
continuing operations
Capital expenditures
Proceeds from sale of cost method investment in Sift
Cash received from issuance of convertible notes
Options and warrants exercised
Repayment of debt obligations
Payment of debt issuance costs
Proceeds from short-term borrowings
Effect of exchange rate changes on cash
Year ended March 31,
Year ended March 31,
2019
2018
% of Change
2018
2017
% of Change
(in thousands)
(in thousands)
4,970
(2,314 )
—
—
734
(1,650 )
—
—
(31)
7,290
(1,992 )
—
—
687
(1,098 )
(346)
2,500
(4)
51
(31.8)%
16.2 %
— %
— %
6.8 %
50.3 %
100.0 %
(100.0 )%
675.0 %
7,290
(1,992 )
—
—
687
(1,098 )
—
2,500
(4)
(11,258)
(1,418 )
999
16,000
11
(11,000)
(2,383 )
—
(119)
(164.8 )%
40.5 %
(100.0 )%
(100.0 )%
6,145.5 %
(90.0)%
(100.0 )%
100.0 %
(96.6)%
Operating Activities
During the year ended March 31, 2019 and March 31, 2018, the Company's net cash provided by operating activities from continuing operations was $4,970 and
$7,290, respectively, a decrease of $2,320 or 31.8%. The decrease in net cash provided by operating activities was primarily attributable to the change in working capital
accounts, excluding current assets and current liabilities held for disposal, over the comparative periods.
During the year ended March 31, 2019, net cash provided by operating activities from continuing operations was $4,970, resulting from a net loss of $4,302 offset
by net non-cash expenses of $12,792, which included depreciation and amortization, stock-based compensation, amortization of debt discounts and issuance costs, change in the
allowance for doubtful accounts, change in the fair value of warrant and embedded derivative liabilities, and loss on the extinguishment of debt of approximately $2,766, $2,531,
$798, $383, $5,883, and $431, respectively. Depreciation and amortization expense decreased $106 during fiscal 2019 compared to fiscal 2018, due primarily to certain
intangible assets being fully amortized in the year ended March 31, 2018. Net cash used in operating activities during fiscal 2019 was negatively impacted by the change in net
working capital accounts as of March 31, 2019 compared to March 31, 2018, with a net increase over the comparative periods in liabilities of $2,212, offset by an increase in
assets of approximately $6,470.
During the year ended March 31, 2018, net cash provided by operating activities from continuing operations was $7,290, resulting from a net loss of $19,697
offset by net non-cash expenses of $19,507, which included depreciation and amortization, stock-based compensation, stock-based compensation related to vesting of restricted
stock for services, amortization of debt discount, change in the allowance for doubtful accounts, change in accrued interest, change in the fair value of warrant and embedded
derivative liabilities, loss on the extinguishment of debt and impairment of intangible assets of approximately $2,660, $2,655, $323, $1,018, $299, $10,767, $1,785, and $0,
respectively. Net cash used in operating activities during fiscal 2018 was positively impacted by the change in net working capital accounts as of March 31, 2018 compared to
March 31, 2017, with a net increase over the comparative periods in liabilities of approximately $15,131, offset by an increase in assets of approximately $7,651.
During the year ended March 31, 2017, net cash provided by operating activities from continuing operations was $11,258, resulting from a net loss of $19,138,
offset by net non-cash expenses of $8,098, which included depreciation and amortization, stock-based compensation, stock-based compensation related to vesting of restricted
stock for services, amortization of debt discount, and a decrease in the allowance for doubtful accounts of approximately $2,606, $3,362, $398, $1,256, $48, respectively. Net
cash used in operating activities during fiscal 2017 was minimally impacted by the change in net working capital accounts as of March 31, 2017 and March 31, 2016.
Investing Activities
During the year ended March 31, 2019, cash used in investing activities was approximately $2,314, which includes capital expenditures of $2,314 comprised
mostly of internally-developed software.
During the year ended March 31, 2018, cash used in investing activities was approximately $1,992, which includes capital expenditures of $1,992 comprised
mostly of internally-developed software.
During the year ended March 31, 2017, cash used in investing activities was approximately $419, which includes capital expenditures of $1,418, offset by
proceeds from sale of cost method investment in Sift of $999.
52
Financing Activities
During the year ended March 31, 2019, cash used in financing activities was approximately $916, which is primarily attributable to the repayment of debt
obligations of approximately $1,650, offset by proceeds received from the exercise of stock options and warrants of approximately $734.
During the year ended March 31, 2018, cash provided by financing activities was approximately $1,743, which is primarily attributable to proceeds from short-
term borrowings of $2,500 and proceeds received from the exercise of stock options of approximately $687, offset by repayment of debt obligations and payment of debt
issuance costs of approximately $1,098 and $346, respectively.
During the year ended March 31, 2017, cash provided in financing activities was approximately $2,628, which is primarily attributable to cash received from
issuance of convertible notes of $16,000 and proceeds received from the exercise of stock options and warrants of $11, offset by repayment of debt obligations and payment of
debt issuance costs of approximately $11,000 and $2,383, respectively.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose
entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do
not have any undisclosed borrowings or debt, and we have not entered into any synthetic leases. We believe, therefore, that we are not materially exposed to any financing,
liquidity, market or credit risk that could arise if we had engaged in such relationships.
Contractual Cash Obligations
The following table summarizes our contractual cash obligations at March 31, 2019:
Contractual cash obligations
Operating leases (a)
Interest and bank fees
Uncertain tax positions (b)
Total contractual cash obligations
Payments Due by Period
Total
Less Than 1 Year
1-3 Years
3 to 5 Years
4,632
23
—
4,655
960
23
—
983
1,750
—
—
1,750
1,600
—
—
1,600
More Than 5
Years
322
—
—
322
(a) Consists of operating leases for our office facilities
(b) We have approximately $943 in additional liabilities associated with uncertain tax positions that are not expected to be liquidated within the next twelve months. We are unable to reliably estimate the
expected payment dates for these additional non-current liabilities.
53
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 GAAP 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 from Contracts with Customers
The Company adopted ASC 606 on April 1, 2018, and ASC 606 is effective from the period beginning April 1, 2016 using the modified retrospective method for all
contracts not completed as of the effective date. For contracts that were modified before the effective date, the Company reflected the aggregate effect of all modifications when
identifying performance obligations and allocating transaction price in accordance with practical expedient ASC 606-10-65-1-(f)-4, which did not have a material effect on the
adjustment to accumulated deficit. The reported results for fiscal year 2017 reflect the application of ASC 606 guidance while the reported results for fiscal year 2016 were
prepared under the guidance of ASC 605, Revenue Recognition (ASC 605), which is also referred to herein as "legacy GAAP" or the "previous guidance". The adoption of ASC
606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the Company's services and will provide financial statement
readers with enhanced disclosures. In accordance with ASC 606, revenue is recognized when a customer obtains control of promised services. The amount of revenue
recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services.
To achieve this core principle, the Company applied the following five steps:
1) Identify the contract with a customer
A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the services to be
transferred and identifies the payment terms related to these services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of
substantially all consideration for services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies
judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case
of a new customer, published credit and financial information pertaining to the customer.
54
2) Identify the performance obligations in the contract
Performance obligations promised in a contract are identified based on the services that will be transferred to the customer that are both capable of being distinct,
whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from the Company, and are
distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. To the extent a contract includes
multiple promised services, the Company must apply judgment to determine whether promised services are capable of being distinct and distinct in the context of the contract.
If these criteria are not met the promised services are accounted for as a combined performance obligation.
3) Determine the transaction price
The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring services to the customer. None of the
Company's contracts contain financing or variable consideration components.
4) Allocate the transaction price to performance obligations in the contract
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple
performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis. The Company determines
standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the
Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the
performance obligations.
5) Recognize revenue when or as the Company satisfies a performance obligation
The Company satisfies performance obligations at a point in time as discussed in further detail under "Disaggregation of Revenue" below. Revenue is recognized at the
time the related performance obligation is satisfied by transferring a promised service to a customer.
Disaggregation of Revenue
All of the Company's performance obligations, and associated revenue, are generally transferred to customers at a point in time.
O&O Services
The Company’s advertising business consists of O&O, an advertiser solution for unique and exclusive carrier and OEM inventory, which is comprised of services
including:
•
•
Ignite, 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 application 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, or Software Development Kit
("SDK"). Optional notification features are available throughout the life-cycle of the device, providing operators additional opportunity for advertising revenue
streams.
Other products and professional services directly related to the Ignite
platform.
55
Carriers and OEMs
The Company generally offers these services under a vendor contract revenue share model or under a customer contract per device license fee model with
carriers and OEMs for a two to four year software as a service ("SaaS") license agreement. These agreements typically include the following services: the access to the
SaaS platform, hosting fees, solution features, and general support and maintenance. The Company has concluded that each promised service is delivered concurrently
with all other promised service over the contract term and, as such, has concluded these promises are a single performance obligation that includes a series of distinct
services that have the same pattern of transfer to the customer. Consideration for the Company’s license arrangements consist of fixed and usage based fees, invoiced
monthly or quarterly. The Company's contracts do not include advance non-refundable fees. Monthly license fees are based on the number of devices on a per device
license fee basis. Monthly hosting and maintenance fees are generally fixed. These monthly fees are subject to a service level agreement ("SLA"), which requires that the
services are available to the customer based on a predefined performance criteria. If the services do not meet these criteria, monthly fees are subject to adjustment or
refund. The Company satisfies its performance obligation by providing access to its SaaS platform over time and processing transactions. For non-usage based fees, the
period of time over which the Company performs its obligations is inherently commensurate with the contract term. The performance obligation is recognized on time
elapsed basis, by month for which the services are provided. For usage-based fees, revenue is recognized in the month in which the Company provides the usage to the
customer.
Third-Party Advertisers
The Company generally offers these services under a customer contract Cost-Per-Install or CPI arrangements, Cost-Per-Placement or CPP arrangements, and/or
Cost-Per-Action or CPA arrangements with third-party advertisers and developers, as well as advertising aggregators, generally in the form of insertion orders that
specify the type of arrangement (as detailed above) at particular set budget amounts/restraints. These advertiser customer contracts are generally short term in nature at
less than one year as the budget amounts are typically spent in full within this time period. These agreements typically include the delivery of applications through
partner networks, defined as carriers or OEMs, to home screens of devices. The Company has concluded that the delivery of the advertisers application is delivered at a
point in time and, as such, has concluded these deliveries are a single performance obligation. The Company invoices fees which are generally variable based on the
arrangement, which would typically include the number of applications delivered at a specified price per application. For applications delivered, revenue is recognized in
the month in which the Company delivers the application to the end consumer.
Professional Services
The Company offers professional services that support the implementation of its Ignite platform for carriers and OEMs, including technology development and
integration services. These contracts generally include delivery and integration of the technology development product and revenue recognized when formal acceptance
is confirmed by the customer. Services are billed in one lump sum. For the majority of these contracts, for which the Company has the right to invoice the customer in an
amount that directly corresponds with the value to the customer of the Company's performance to date, the Company recognizes revenue based on the amount billable to
the customer in accordance with practical expedient ASC 606-10-55-18.
Costs to Obtain and Fulfill a Contract
The Company capitalizes commission expenses paid to internal sales personnel that are incremental to obtaining customer contracts. These costs are deferred in
“prepaid expenses and other current assets,” net of any long-term portion included in “other non-current assets." The judgments made in determining the amount of costs
incurred include whether the commissions are in fact incremental and would not have occurred absent the customer contract. Costs to obtain a contract are amortized as sales
and marketing expense on a straight-line basis over the expected period of benefit. These costs are periodically reviewed for impairment. The Company has evaluated related
activity in prior periods and have determined the costs to obtain a contract to be immaterial and do not require disclosure.
56
The Company capitalizes costs incurred to fulfill its contracts that i) relate directly to the contract, ii) are expected to generate resources that will be used to satisfy the
Company’s performance obligation under the contract and iii) are expected to be recovered through revenue generated under the contract. Contract fulfillment costs are
expensed to cost of revenue as the Company satisfies its performance obligations by transferring the service to the customer. These costs, which are classified in “prepaid
expenses and other current assets,” net of any long term portion included in “other non-current assets,” principally relate to direct costs that enhance resources under the
Company’s demand response contracts that will be used in satisfying future performance obligations. The Company has evaluated related activity in prior periods and have
determined the costs to fulfill a contract to be immaterial and do not require disclosure.
Financial Statement Impact of Adopting ASC 606
The Company adopted ASC 606 using the modified retrospective method. After applying the new guidance to all contracts with customers that were not completed as
of April 1, 2017, the Company has determined no changes in revenues or contract costs for which an adjustment would be required to accumulated deficit as of the adoption
date. As a result of applying the modified retrospective method to adopt the new revenue guidance, the Company determined that the impact of adoption was not material and
that no adjustments would need to be made to accounts to the consolidated balance sheet as of April 1, 2017.
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.
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. At this time, we do not invest significant capital into the research and development phase of new products and
features as the technological feasibility aspect of our platform products has either already been met or is met very quickly.
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. Through fiscal year 2016, the Company
had not incurred significant costs between the establishment of technological feasibility and the release of a product for sale; thus, the Company had expensed all software
development costs as incurred. In fiscal year 2017, the Company began capitalizing costs related the development of software to be sold, leased, or otherwise marketed as we
believe we have met the "tested working model" threshold. Costs will continue to be capitalized until the related software is released. 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 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 will be available for sale; and its historical practice of canceling
products at any stage of the development process.
After products and features are released, all product maintenance cost are expensed.
Presentation
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
57
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, 2019, one major customer, Oath Inc., a subsidiary of Verizon Communications, represented 25.7% of the Company's net accounts
receivable balance. As of March 31, 2018, one major customer, Oath Inc., a subsidiary of Verizon Communications, represented 28.3% of the Company's net accounts
receivable balance.
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, 2019 the Company determined that there was no indicators of impairment of goodwill. In the year ended March 31, 2018 the
Company determined that there was an impairment of goodwill related to the divestiture of its A&P and Content business lines, see Note 8 "Goodwill", no impairment was
recorded against the Company's continuing operations . 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.
Impairment of Long-Lived Assets and Finite Life Intangibles
Long-lived assets, including, intangible assets subject to amortization primarily consist of customer lists, license agreements and software that have been acquired
are amortized using the straight-line method over their useful life ranging from five to eight years and are reviewed for impairment in accordance with FASB ASC 360-10,
Accounting for the Impairment or Disposal of Long-Lived Assets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
58
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.
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.
59
Recent Developments
None.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 consists 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.
60
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 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".
61
62
64
65
66
67
68
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Digital Turbine, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Digital Turbine, Inc. and Subsidiaries (collectively, the “Company”) as of March 31, 2019 and 2018, 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, 2019, and
the related notes to the consolidated financial statements (collectively, the “financial statements”). In our opinion, the financial statements present fairly, in all material respects,
the financial position of the Company as of March 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended March
31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over
financial reporting as of March 31, 2019, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission in 2013, and our report dated June 3, 2019 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial
reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ SingerLewak LLP
We have served as the Company's auditor since 2009.
Los Angeles, California
June 3, 2019
62
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Digital Turbine, Inc. and Subsidiaries
Opinion on the Internal Control Over Financial Reporting
We have audited Digital Turbine, Inc. and Subsidiaries’ (collectively, the “Company”) internal control over financial reporting as of March 31, 2019, based on criteria
established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2019, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), consolidated balance sheets of the
Company as of March 31, 2019 and 2018, 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, 2019 and our report dated June 3, 2019 expressed an unqualified opinion.
Basis for Opinion
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 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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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 (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) 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 (3) 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.
/s/ SingerLewak LLP
Los Angeles, California
June 3, 2019
63
Digital Turbine, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
ASSETS
Current assets
Cash
Restricted cash
Accounts receivable, net of allowances of $895 and $512, respectively
Prepaid expenses and other current assets
Current assets held for disposal
Total current assets
Property and equipment, net
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 debt issuance costs of $0 and $205, respectively
Other current liabilities
Current liabilities held for disposal
Total current liabilities
Convertible notes, net of debt issuance costs and discounts of $0 and $1,827, respectively
Convertible note embedded derivative liability
Warrant liability
Other non-current liabilities
Total liabilities
Stockholders' equity
Preferred stock
March 31, 2019 March 31, 2018
$
$
$
10,894 $
165
22,707
1,331
2,026
37,123
3,430
40
—
42,268
82,861 $
14,912 $
16,205
2,441
—
826
3,924
38,308
—
—
8,013
182
12,720
331
17,050
901
8,753
39,755
2,757
596
1,231
42,268
86,607
19,895
8,232
2,966
1,445
1,142
12,726
46,406
3,873
4,676
3,980
—
46,503
58,935
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)
100
100
Common stock
$0.0001 par value: 200,000,000 shares authorized; 82,354,940 issued and 81,620,484 outstanding at March 31, 2019; 76,843,278
issued and 76,108,822 outstanding at March 31, 2018
Additional paid-in capital
Treasury stock (754,599 shares at March 31, 2019 and March 31, 2018)
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders' equity
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
10
332,793
(71)
(356)
(296,118 )
36,358
82,861 $
$
10
318,066
(71)
(325)
(290,108 )
27,672
86,607
The accompanying notes are an integral part of these consolidated financial statements.
64
Digital Turbine, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except per share amounts)
Years ended March 31,
2019
2018
2017
$
103,569 $
74,751 $
40,207
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
Income / (loss) from operations
Interest and other income / (expense), net
Interest expense
Foreign exchange transaction gain / (loss)
Change in fair value of convertible note embedded derivative liability
Change in fair value of warrant liability
Loss on extinguishment of debt
Other income / (expense)
Total interest and other (expense), net
Loss from continuing operations before income taxes
Income tax (benefit) / provision
Loss from continuing operations, net of taxes
Loss from discontinued operations
Net loss from discontinued operations, net of taxes
Net loss
Other comprehensive loss
Foreign currency translation adjustment
Comprehensive loss
Basic and diluted net loss per common share
Continuing operations
Discontinued operations
Net loss
Weighted-average common shares outstanding, basic and diluted
65,981
2,023
68,004
35,565
10,876
8,212
13,032
32,120
3,445
(1,120 )
3
(1,008 )
(4,875 )
(431 )
153
(7,278 )
(3,833 )
469
(4,302 )
(1,708 )
(1,708 )
(6,010 )
47,967
1,729
49,696
25,055
9,653
6,087
15,124
30,864
(5,809 )
(2,067 )
(148)
(7,559 )
(3,208 )
(1,785 )
(72)
(14,839)
(20,648)
(951)
(19,697)
(33,160)
(33,160)
(52,857)
(31 )
(4)
$
(6,041 ) $
(52,861) $
(0.06 )
(0.02 )
(0.08 )
77,440
(0.28)
(0.47)
(0.75)
70,263
26,374
2,575
28,949
11,258
9,283
4,180
14,766
28,229
(16,971 )
(2,625 )
(26 )
475
147
(293 )
11
(2,311 )
(19,282 )
(144 )
(19,138 )
(5,126 )
(5,126 )
(24,264 )
(119 )
(24,383)
(0.29 )
(0.07 )
(0.36 )
66,511
The accompanying notes are an integral part of these consolidated financial statements.
65
Digital Turbine, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(in thousands, except share amounts)
Common Stock
Shares
Amount
Preferred
Stock
Shares
Amount
Treasury
Stock
Shares
Amount
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income/(Loss)
Accumulated
Deficit
Total
Balance at March 31, 2016
66,284,606
8
100,000
100
754,599
(71) 295,423
(202)
(212,987) $ 82,271
Net loss
Foreign currency translation
Stock-based compensation
Stock-based compensation related to
vesting of restricted stock for services
Options exercised
Shares cancelled
— $ —
— $ —
$ —
331,363
— $ —
$ —
18,383
(39,545) $ —
— $ —
— $ —
— $ —
— $ —
— $ —
— $ —
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,748
408
11
(10)
—
(119)
—
(24,264)
—
—
(24,264)
(119)
3,748
—
—
—
—
—
—
408
11
(10)
Balance at March 31, 2017
66,594,807
8
100,000
100
754,599
(71) 299,580
(321)
(237,251) $ 62,045
Net loss
Foreign currency translation
Warrants issued for services rendered
Stock-based compensation
Compensation related to restricted shares
and warrants issued for services rendered
Options exercised
Exercise of warrants
—
—
—
265,138
100,000
258,281
266,152
—
—
—
—
—
—
—
Stock issued for settlement of liability
8,624,445
Balance at March 31, 2018
76,108,823
$
2
10
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
28
3,138
69
269
350
14,632
—
(4)
—
—
—
—
—
—
(52,857)
—
—
—
(52,857)
(4)
28
3,138
—
—
—
—
69
269
350
14,634
100,000
$ 100
754,599
$
(71) $318,066 $
(325)
$ (290,108) $ 27,672
Net loss
Foreign currency translation
Stock-based compensation
Options exercised
Exercise of warrants
—
—
306,656
424,817
333,924
Stock issued for settlement of liability
4,446,265
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,568
423
1,154
10,582
Balance at March 31, 2019
81,620,485
(71) $332,793 $
$ 100
The accompanying notes are an integral part of these consolidated financial statements.
100,000
754,599
$
$
10
—
(31)
—
—
—
—
(6,010)
—
—
—
—
—
(6,010)
(31)
2,568
423
1,154
10,582
(356)
$ (296,118) $ 36,358
66
Digital Turbine, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities
Net loss from continuing operations, net of taxes
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
Change in allowance for doubtful accounts
Non-cash interest expense
Stock-based compensation
Stock-based compensation for services rendered
Change in fair value of convertible note embedded derivative liability
Change in fair value of warrant liability
Loss on extinguishment of debt
Impairment of intangible assets
(Increase) / decrease in assets:
Accounts receivable
Deferred tax assets
Prepaid expenses and other current assets
Increase / (decrease) in liabilities:
Accounts payable
Accrued license fees and revenue share
Accrued compensation
Other current liabilities
Other non-current liabilities
Net cash provided by / (used in) operating activities - continuing operations
Net cash provided by / (used in) operating activities - discontinued operations
Net cash provided by (used in) operating activities
Cash flows from investing activities
Capital expenditures
Proceeds from sale of cost method investment in Sift
Net cash used in investing activities - continuing operations
Net cash used in investing activities - discontinued operations
Net cash used in investing activities
Cash flows from financing activities
Cash received from issuance of convertible notes
Proceeds from short-term borrowings
Payment of debt issuance costs
Options and warrants exercised
Repayment of debt obligations
Net cash provided by / (used in) financing activities
Effect of exchange rate changes on cash
Net change in cash
Cash and restricted cash, beginning of year
Year ended March 31,
2019
2018
2017
(4,302)
(19,697)
(19,138)
2,766
383
798
2,011
520
1,008
4,875
431
—
(6,040)
556
(430)
(4,983)
7,973
(525)
(253)
182
4,970
(3,701)
1,269
(2,314)
—
(2,314)
—
(2,314)
—
—
—
734
(1,650)
(916)
(31)
(1,992)
13,051
2,660
299
1,018
2,655
323
7,559
3,208
1,785
—
(7,071)
(244)
(336)
8,108
5,221
2,445
52
(695)
7,290
(324)
6,966
(1,992)
—
(1,992)
(142)
(2,134)
—
2,500
(346)
687
(1,098)
1,743
(4)
6,571
6,480
2,606
48
1,256
3,362
398
(475)
(147)
293
757
(3,882)
148
104
4,434
(4)
385
(1,287)
(116)
(11,258)
4,594
(6,664)
(1,418)
999
(419)
(177)
(596)
16,000
—
(2,383)
11
(11,000)
2,628
(119)
(4,751)
11,231
6,480
Cash and restricted cash, end of year
$
11,059
$
13,051
$
Supplemental disclosure of cash flow information
Interest paid
$
383
$
1,071
$
1,406
Supplemental disclosure of non-cash financing activities
Common stock of the Company issued for extinguishment of debt
$
10,582
$
Cashless exercise of warrants to purchase common stock of the Company
$
The accompanying notes are an integral part of these consolidated financial statements.
144
$
14,632
10
$
$
—
—
67
Digital Turbine, Inc. and Subsidiaries
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, application 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 debt. As of March 31, 2019, we had cash, including restricted
cash, totaling approximately $11,059.
On May 23, 2017, the Company entered into a Business Finance Agreement (the "Credit Agreement") with Western Alliance Bank (the "Bank"). The Credit
Agreement provides for a $5,000 total facility. As of March 31, 2019, the Company's drawn amount on the Credit Agreement was $0. The Company has $5,000 remaining
available to draw. Refer to Note 9 "Debt" for more details. Subsequent to March 31, 2019, the Company entered into an amendment to the Credit Agreement that extends the
agreement through May 23, 2021 and provides for up to a $20,000 total facility, subject to draw limitations derived from current levels of eligible domestic receivables. See
Note 20 "Subsequent Events" for more details.
The Company anticipates that its primary sources of liquidity will continue to be cash on hand, cash provided by operations, and the credit available under the Credit
Agreement. In addition, the Company may raise additional capital through future equity or, subject to restrictions contained in the Credit Agreement, debt financing to provide
for greater flexibility to make acquisitions, make new investments in under-capitalized opportunities, or invest in organic 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.
During the evaluation by management of the Company’s financial position, factors such as working capital, current market capitalization, enterprise value, and the
fiscal year 2020 operating plan of the Company were considered when determining the ability of the Company to continue as a going concern. 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. Based on the year over year revenue and gross margin increases, coupled with the Company’s
management of operating expenses and access to debt, management has determined that when considering all relevant quantitative and qualitative factors that the Company has
sufficient cash and capital resources to continue to operate its business for at least twelve months from the issuance date of this annual report on Form 10-K.
In view of the matters described in the preceding paragraphs, the consolidated 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.
68
3. Discontinued Operations
On April 29, 2018, the Company entered into two distinct disposition agreements with respect to selected assets owned by our subsidiaries.
DT APAC and DT Singapore (together, “Pay Seller”), each wholly owned subsidiaries of the Company, entered into an Asset Purchase Pay Agreement (the “Pay
Agreement”), dated as of April 23, 2018, with Chargewave Ptd Ltd (“Pay Purchaser”) to sell certain assets (the “Pay Assets”) owned by the Pay Seller related to the Company’s
Direct Carrier Billing business. The Pay Purchaser is principally owned and controlled by Jon Mooney, an officer of the Pay Seller. At the closing of the asset sale, Mr. Mooney
was no longer employed by the Company or Pay Seller. As consideration for this asset sale, Digital Turbine is entitled to receive certain license fees, profit-sharing, and equity
participation rights as outlined in the Company’s Form 8-K filed on May 1, 2018 with the SEC. The transaction was completed on July 1, 2018 with an effective date of July 1,
2018. With the sale of these assets, the Company has determined that it will exit the segment of the business previously referred to as the Content business.
In accordance with the Pay Agreement, the Company assigned and transferred a material contract to the Pay Purchaser. Subsequent to the closing of the
transaction associated with the Pay Agreement, the Company received notification from the Pay Purchaser that the partner to the material contract had terminated the contract
with the Pay Purchaser. Due to the material contract being terminated, the Company has determined that the estimated earn out from the Pay Purchaser to be $0. As all the
assets being transferred had been fully impaired prior to the closing of the transaction, the gain/loss on sale related to the Pay Agreement transaction is currently estimated at $0.
Furthermore, the Company retained certain receivables and payables for content delivered for the benefit of the partner to the material contract, where these certain receivables
and payables were all recognized prior to the closing of the Pay Agreement. These amounts are presented below as assets and liabilities held for disposal. As of March 31, 2019,
the Company has determined there to be uncertainty surrounding the collectability of the receivables due to ongoing discussions with the business partner. If at a later date it is
determined that the amounts recorded are not collectible due to disputes surrounding the content delivered, the related payables would also be withheld. At this time, the
Company has requested and received confirmation from the business partner for mediation but does not have enough information to reasonably estimate which receivables and
payables, if any, may be uncollectable. The total net exposure to the Company if all of the remaining receivables and payables are determined to be uncollectable is
approximately $194. These assets and liabilities remain on our books as a component of discontinued operations as of March 31, 2019.
DT Media, a wholly-owned subsidiary of the Company, entered into an Asset Purchase Agreement (the “A&P Agreement”), dated as of April 28, 2018, with Creative
Clicks B.V. (the “A&P Purchaser”) to sell business relationships with various advertisers and publishers (the “A&P Assets”) related to the Company’s Advertising and
Publishing business. As consideration for this asset sale, we are entitled to receive a percentage of the gross profit derived from these customer agreements, for a period of three
years, as outlined in the Company’s Form 8-K filed on May 1, 2018 with the SEC. The transaction was completed on June 28, 2018 with an effective date of June 1, 2018. With
the sale of these assets, the Company has determined that it will exit the operating segment of the business previously referred to as the A&P business, which was previously
part of Advertising, the Company's sole continuing reporting unit. No gain or loss on sale was recognized related to this divestiture. All transferred assets and liabilities, with the
exception of goodwill, were fully amortized prior to entering into the sales agreement. As the consideration given by the purchaser was already materially determined at March
31, 2018, goodwill was impaired to the estimated future cash flows of the divested business, which was effectively the purchase price. With the consummation of the sale, the
remaining goodwill asset was netted against the purchase price receivable for a net impact of $0 on the Consolidated Statement of Operations for the year ended March 31, 2019.
These dispositions will allow the Company to benefit from a streamlined business model, simplified operating structure, and enhanced management focus.
69
The following table summarizes the financial results of our discontinued operations for all periods presented herein:
Condensed Statements of Operations and Comprehensive Loss
For Discontinued Operations
(in thousands, except per share amounts)
Year ended March 31,
2019
2018
2017
Net revenues
Total cost of revenues
Gross profit
Product development
Sales and marketing
General and administrative
Income / (loss) from operations
Loss on impairment of goodwill
Interest and other income / (expense), net
Income / (loss) from discontinued operations before income taxes
Income tax provision
Net income / (loss) from discontinued operations, net of taxes
Foreign currency translation adjustment
Comprehensive income / (loss)
3,970
1,788
2,182
732
350
2,671
(1,571 )
—
(137)
(1,708 )
—
(1,708 )
—
(1,708 )
48,877
42,950
5,927
2,194
1,444
1,835
454
(34,045)
431
(33,160)
—
(33,160)
—
(33,160)
Basic and diluted net loss per common share
$
Weighted-average common shares outstanding, basic
(0.02) $
77,440
(0.47) $
70,263
51,346
49,241
2,105
2,752
2,357
2,045
(5,049 )
—
(77)
(5,126 )
—
(5,126 )
—
(5,126 )
(0.08)
66,511
Notes on the impairment of goodwill for discontinued operations
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. Qualitative factors considered in this assessment
include industry and market considerations, overall financial performance, and other relevant events and factors affecting the reporting unit. In connection with the planned sale
of the Content reporting unit and the A&P business within the Advertising reporting segment, we performed a full analysis of the carrying value of the associated goodwill.
Since the impairment assessment concluded, based on the future cash flows of the businesses, that it is more likely than not that the fair value is less than its carrying value, we
performed the first step of the goodwill impairment test, which compares the fair value of the reporting unit to its carrying value. The carrying value of the net assets assigned to
the afore mentioned reporting units exceeded the fair value of the reporting units, therefore the associated goodwill was impaired. The impairment recorded above represents the
results of this assessment.
Based on the results of the annual impairment tests performed during the fourth quarter of fiscal 2018, the Company recorded an impairment of approximately
$34,045 at March 31, 2018 which is detailed in the table above. Based on the results of the annual impairment tests performed during the fourth quarter of fiscal 2019, no
impairment to goodwill was recorded related to the businesses divested during the fiscal year.
70
Details on assets and liabilities classified as held for disposal in the accompanying consolidated balance sheets are presented in the following table:
Assets held for disposal
Accounts receivable, net of allowances of $1,589 and $578, respectively
Property and equipment, net
Goodwill
Prepaid expenses and other current assets
Current assets held for disposal
Total assets held for disposal
Liabilities held for disposal
Accounts payable
Accrued license fees and revenue share
Accrued compensation
Other current liabilities
Current liabilities held for disposal
Total liabilities held for disposal
Year ended March 31,
2019
2018
1,883
143
—
—
2,026
2,026
3,158
537
226
3
3,924
3,924
8,013
377
309
54
8,753
8,753
8,789
3,059
529
349
12,726
12,726
Assets and liabilities held for disposal as of March 31, 2019 are classified as current since we expect the dispositions to be completed within one year.
71
The following table provides reconciling cash flow information for our discontinued operations:
Cash flows from operating activities
Net income / (loss) from discontinued operations, net of taxes
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
Change in allowance for doubtful accounts
Stock-based compensation
Impairment of intangible assets
Impairment of goodwill
(Increase) / decrease in assets:
Accounts receivable
Goodwill
Deposits
Prepaid expenses and other current assets
Increase / (decrease) in liabilities:
Accounts payable
Accrued license fees and revenue share
Accrued compensation
Other current liabilities
Other non-current liabilities
Cash used in operating activities
Cash flows from investing activities
Capital expenditures
Cash used in investing activities
Year ended March 31,
2019
2018
2017
(1,708 )
(33,160)
(5,126 )
279
1,011
37
—
5,119
309
—
54
(5,631 )
(2,522 )
(303)
(346)
—
(3,701 )
1,037
194
189
1,065
34,045
(1,928 )
—
—
8
708
(2,459 )
(24)
25
(24)
(324)
5,564
85
386
—
—
4,715
—
69
(8)
134
(1,089 )
(665)
444
85
4,594
—
—
(142)
(142)
(177)
(177)
Cash used in discontinued operations
(3,701 )
(466)
4,417
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.
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.
72
Revenue from Contracts with Customers
The Company adopted ASC 606 on April 1, 2018, and ASC 606 is effective from the period beginning April 1, 2016 using the modified retrospective method for all
contracts not completed as of the effective date. For contracts that were modified before the effective date, the Company reflected the aggregate effect of all modifications when
identifying performance obligations and allocating transaction price in accordance with practical expedient ASC 606-10-65-1-(f)-4, which did not have a material effect on the
adjustment to accumulated deficit. The reported results for fiscal year 2017 reflect the application of ASC 606 guidance while the reported results for fiscal year 2016 were
prepared under the guidance of ASC 605, Revenue Recognition (ASC 605), which is also referred to herein as "legacy GAAP" or the "previous guidance". The adoption of ASC
606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the Company's services and will provide financial statement
readers with enhanced disclosures. In accordance with ASC 606, revenue is recognized when a customer obtains control of promised services. The amount of revenue
recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services.
To achieve this core principle, the Company applied the following five steps:
1) Identify the contract with a customer
A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the services to be
transferred and identifies the payment terms related to these services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of
substantially all consideration for services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies
judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case
of a new customer, published credit and financial information pertaining to the customer.
2) Identify the performance obligations in the contract
Performance obligations promised in a contract are identified based on the services that will be transferred to the customer that are both capable of being distinct,
whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from the Company, and are
distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. To the extent a contract includes
multiple promised services, the Company must apply judgment to determine whether promised services are capable of being distinct and distinct in the context of the contract.
If these criteria are not met the promised services are accounted for as a combined performance obligation.
3) Determine the transaction price
The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring services to the customer. None of the
Company's contracts contain financing or variable consideration components.
4) Allocate the transaction price to performance obligations in the contract
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple
performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis. The Company determines
standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the
Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the
performance obligations.
5) Recognize revenue when or as the Company satisfies a performance obligation
The Company satisfies performance obligations at a point in time as discussed in further detail under "Disaggregation of Revenue" below. Revenue is recognized at the
time the related performance obligation is satisfied by transferring a promised service to a customer.
73
Disaggregation of Revenue
All of the Company's performance obligations, and associated revenue, are generally transferred to customers at a point in time.
O&O Services
The Company’s advertising business consists of O&O, an advertiser solution for unique and exclusive carrier and OEM inventory, which is comprised of services
including:
•
•
Ignite, 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 application 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, or Software Development Kit
("SDK"). Optional notification features are available throughout the life-cycle of the device, providing operators additional opportunity for advertising revenue
streams.
Other products and professional services directly related to the Ignite
platform.
Carriers and OEMs
The Company generally offers these services under a vendor contract revenue share model or under a customer contract per device license fee model with
carriers and OEMs for a two to four year software as a service ("SaaS") license agreement. These agreements typically include the following services: the access to the
SaaS platform, hosting fees, solution features, and general support and maintenance. The Company has concluded that each promised service is delivered concurrently
with all other promised service over the contract term and, as such, has concluded these promises are a single performance obligation that includes a series of distinct
services that have the same pattern of transfer to the customer. Consideration for the Company’s license arrangements consist of fixed and usage based fees, invoiced
monthly or quarterly. The Company's contracts do not include advance non-refundable fees. Monthly license fees are based on the number of devices on a per device
license fee basis. Monthly hosting and maintenance fees are generally fixed. These monthly fees are subject to a service level agreement ("SLA"), which requires that the
services are available to the customer based on a predefined performance criteria. If the services do not meet these criteria, monthly fees are subject to adjustment or
refund. The Company satisfies its performance obligation by providing access to its SaaS platform over time and processing transactions. For non-usage based fees, the
period of time over which the Company performs its obligations is inherently commensurate with the contract term. The performance obligation is recognized on time
elapsed basis, by month for which the services are provided. For usage-based fees, revenue is recognized in the month in which the Company provides the usage to the
customer.
Third-Party Advertisers
The Company generally offers these services under a customer contract Cost-Per-Install or CPI arrangements, Cost-Per-Placement or CPP arrangements, and/or
Cost-Per-Action or CPA arrangements with third-party advertisers and developers, as well as advertising aggregators, generally in the form of insertion orders that
specify the type of arrangement (as detailed above) at particular set budget amounts/restraints. These advertiser customer contracts are generally short term in nature at
less than one year as the budget amounts are typically spent in full within this time period. These agreements typically include the delivery of applications through
partner networks, defined as carriers or OEMs, to home screens of devices. The Company has concluded that the delivery of the advertisers application is delivered at a
point in time and, as such, has concluded these deliveries are a single performance obligation. The Company invoices fees which are generally variable based on the
arrangement, which would typically include the number of applications delivered at a specified price per application. For applications delivered, revenue is recognized in
the month in which the Company delivers the application to the end consumer.
74
Professional Services
The Company offers professional services that support the implementation of its Ignite platform for carriers and OEMs, including technology development and
integration services. These contracts generally include delivery and integration of the technology development product and revenue recognized when formal acceptance
is confirmed by the customer. Services are billed in one lump sum. For the majority of these contracts, for which the Company has the right to invoice the customer in an
amount that directly corresponds with the value to the customer of the Company's performance to date, the Company recognizes revenue based on the amount billable to
the customer in accordance with practical expedient ASC 606-10-55-18.
Costs to Obtain and Fulfill a Contract
The Company capitalizes commission expenses paid to internal sales personnel that are incremental to obtaining customer contracts. These costs are deferred in
“prepaid expenses and other current assets,” net of any long-term portion included in “other non-current assets." The judgments made in determining the amount of costs
incurred include whether the commissions are in fact incremental and would not have occurred absent the customer contract. Costs to obtain a contract are amortized as sales
and marketing expense on a straight-line basis over the expected period of benefit. These costs are periodically reviewed for impairment. The Company has evaluated related
activity in prior periods and have determined the costs to obtain a contract to be immaterial and do not require disclosure.
The Company capitalizes costs incurred to fulfill its contracts that i) relate directly to the contract, ii) are expected to generate resources that will be used to satisfy the
Company’s performance obligation under the contract and iii) are expected to be recovered through revenue generated under the contract. Contract fulfillment costs are
expensed to cost of revenue as the Company satisfies its performance obligations by transferring the service to the customer. These costs, which are classified in “prepaid
expenses and other current assets,” net of any long term portion included in “other non-current assets,” principally relate to direct costs that enhance resources under the
Company’s demand response contracts that will be used in satisfying future performance obligations. The Company has evaluated related activity in prior periods and have
determined the costs to fulfill a contract to be immaterial and do not require disclosure.
Financial Statement Impact of Adopting ASC 606
The Company adopted ASC 606 using the modified retrospective method. After applying the new guidance to all contracts with customers that were not completed as
of April 1, 2017, the Company has determined no changes in revenues or contract costs for which an adjustment would be required to accumulated deficit as of the adoption
date. As a result of applying the modified retrospective method to adopt the new revenue guidance, the Company determined that the impact of adoption was not material and
that no adjustments would need to be made to accounts to the consolidated balance sheet as of April 1, 2017.
Comprehensive Loss
Comprehensive loss consists of two components, net loss and other comprehensive loss. Other comprehensive loss 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.
Restricted Cash
Cash accounts that are restricted as to withdrawal or usage are presented as restricted cash. As of March 31, 2019 and March 31, 2018, the Company
had $165 and $331, respectively, of restricted cash held by a bank in a collateral account as collateral to cover the Company's corporate credit cards as well as a letter of credit
issued to guarantee a facility lease in the prior period.
75
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.
Deposits
As of March 31, 2019, the Company had deposits of $132 comprised of facility and equipment lease deposits, as compared to $151 as of March 31, 2018.
Fair Value of Financial Instruments
The Company measures certain financial assets and liabilities at fair value based on the exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Where available, fair value is
based on or derived from observable market prices or other observable inputs. Where observable prices or inputs are not available, valuation techniques are applied. These
valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and
the instruments’ complexity.
The carrying amounts of certain financial instruments, such as cash equivalents, short term investments, accounts receivable, accounts payable and accrued
liabilities, approximate fair value due to their relatively short maturities. The fair value of the Notes issued on September 28, 2016 is determined using the residual method of
accounting whereby, first, a portion of the proceeds from the issuance of the Notes is allocated to derivatives embedded in the Notes and the warrants issued in connection with
the issuance of the Notes, and the proceeds so allocated are accounted for as a convertible note embedded derivative liability and warrant liability, respectively, and second, the
remainder of the proceeds from the issuance of the Notes is allocated to the convertible notes, resulting in debt discount. The convertible notes are carried on the consolidated
balance sheet on a historical cost basis, net of discounts and debt issuance costs.
The Company estimates the fair value of the convertible note embedded derivative liability and warrant liability using a lattice approach that incorporates a Monte
Carlo simulation valuation model that considers the Company's future stock price, stock price volatility, probability of a change of control, and the trading information of the
Company's common stock into which the Notes are or may become convertible.
Changes in the inputs into these valuation models have a significant impact on the estimated fair value of the convertible note embedded derivative liability and
warrant liability. For example, a decrease (increase) in the stock price results in a decrease (increase) in the estimated fair value of the liabilities. The change in the fair value of
the convertible note embedded derivative liability and warrant liability are primarily related to the change in price of the Company's underlying common stock and are reflected
in the consolidated statements of operations and comprehensive loss as "Change in fair value of convertible note embedded derivative liability” and "Change in fair value of
warrant liability." Refer to Note 10 "Fair Value Measurements" for more details.
76
Convertible Note Embedded Derivative Liability
Embedded derivatives that are required to be bifurcated from the underlying debt instrument (i.e. host) are accounted for and valued as a separate financial
instrument. We evaluated the terms and features of the Notes issued on September 28, 2016 and identified embedded derivatives (i.e. conversion options that contain “make-
whole interest” provisions, fundamental change provisions, or down round conversion price adjustment provisions) requiring bifurcation and accounting at fair value due to the
economic and contractual characteristics of the embedded derivatives meeting the criteria for bifurcation and separate accounting. ASC 815-10-15-83 (c) states that if terms
implicitly or explicitly require or permit net settlement, then it can readily be settled net by means outside the contract, or it provides for delivery of an asset that puts the
recipient in a position not substantially different from net settlement. The conversion features related to the Notes consists of a “make-whole interest” provision, fundamental
change provision, and down round conversion price adjustment provisions, which if the Notes were to be converted, would put the convertible note holder in a position not
substantially different from net settlement. Given this fact pattern, the conversion features meet the definition of embedded derivatives and require bifurcation and accounting at
fair value.
See Note 10, "Fair Value Measurements," of this report for a description of our embedded derivatives related to the Notes and information on the valuation model
used to calculate the fair value of the embedded derivatives, otherwise called the convertible note embedded derivative liability. Changes in the inputs into the valuation model
may have a significant impact on the estimated fair value of the convertible note embedded derivative liability. For example, a decrease (increase) in the stock price results in a
decrease (increase) in the estimated fair value of the liability. Change in the fair value of the liability is primarily attributable to the change in price of the underlying common
stock of the Company and is reflected in our consolidated statements of operations as “Change in fair value of convertible note embedded derivative liability.”
Warrant Liability
The Company issued detachable warrants with the Notes issued on September 28, 2016. The Company accounts for its warrants issued in accordance with US
GAAP accounting guidance under ASC 815 applicable to derivative instruments, which requires every derivative instrument within its scope to be recorded on the balance sheet
as either an asset or liability measured at its fair value, with changes in fair value recognized in earnings. Based on this guidance, the Company determined that these warrants
did not meet the criteria for classification as equity. Accordingly, the Company classified the warrants as long-term liabilities. The warrants are subject to re-measurement at
each balance sheet date, with any change in fair value recognized as a component of other income (expense), net in the consolidated statements of operations. We estimated the
fair value of these warrants at the respective balance sheet dates using a lattice approach that incorporates a Monte Carlo simulation that considers the Company's future stock
price. Option pricing models employ subjective factors to estimate warrant liability; and, therefore, the assumptions used in the model are judgmental.
See Note 10, "Fair Value Measurements," of this report for a description of our warrant liability and information on the valuation model used to calculate the fair
value of the warrant liability. Changes in the inputs into the valuation model may have a significant impact on the estimated fair value of the warrant liability. For example, a
decrease (increase) in the stock price results in a decrease (increase) in the estimated fair value of the liability. The change in the fair value of the liability is primarily related to
the change in price of the underlying common stock of the Company and is reflected in our consolidated statements of operations as “Change in fair value of warrant liability.”
Debt Issuance Costs
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; as such, the Company adopted this guidance in the quarter ended June 30, 2016. The Company has determined that adopting
ASU 2015-03 did not have a significant impact on its consolidated results of operations, financial condition, and cash flows. Refer to Note 9 "Debt" for more details.
77
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.
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. At this time, we do not invest significant capital into the research and development phase of new products and
features as the technological feasibility aspect of our platform products has either already been met or is met very quickly.
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. Through fiscal year 2016, the Company
had not incurred significant costs between the establishment of technological feasibility and the release of a product for sale; thus, the Company had expensed all software
development costs as incurred. In fiscal year 2017, the Company began capitalizing costs related the development of software to be sold, leased, or otherwise marketed as we
believe we have met the "tested working model" threshold. Costs will continue to be capitalized until the related software is released. 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 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 will be available for sale; and its historical practice of canceling
products at any stage of the development process.
After products and features are released, all product maintenance cost are expensed.
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 2019, 2018, and 2017 the Company capitalized software development costs in the amount of $1,544, $1,641, and $1,387.
Product Development Costs
The Company charges non-capitalizable costs related to design, development, deployment, and maintenance of products to product development expense as
incurred. The types of costs included in product development expenses include salaries, contractor fees and allocated facilities costs.
Advertising Expenses
The Company expenses the costs of advertising as incurred. Advertising expense was $135, $83, and $263 in the years ended March 31, 2019, 2018, and 2017,
respectively.
Fair Value of Financial Instruments
As of March 31, 2019 and 2018, the carrying value of cash, 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.
78
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 $31, $4, and $119 in the years ended
March 31, 2019, 2018, and 2017 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, 2019, one major customer represented 25.7% of the Company's net accounts receivable balance. As of March 31, 2018, one major
customer represented 28.3% 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 years ended March 31,
2019, one major customer represented 28.6% of our consolidated net revenue. During the year ended March 31, 2018 two major customers represented 23.5% and 16.1% of our
consolidated net revenues. During the year ended March 31, 2017, two major customers represented 26.1% and 21.9% of our consolidated net revenues, respectively.
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 to 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 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.
79
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, 2019.
In the fiscal year ended March 31, 2018, the Company did not record any impairment related to continuing operations. The Company did record an impairment
related to planned dispositions which is detailed in Note 3 "Discontinued Operations."
In the fiscal year ended March 31, 2017, the Company determined that there was an impairment of intangible assets of $757 related to the XYO developed
technology being fully impaired. The impairment is detailed in Note 7 "Intangible Assets".
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.
80
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.
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
In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update 2018-15, which aligns the requirements for capitalizing
implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain
internal-use software (and hosting arrangements that include an internal use software license). This guidance is effective for annual reporting periods, and interim periods
within those annual periods, beginning after December 15, 2019. Early adoption is permitted upon its issuance. The amendments in this update will be applied prospectively.
The Company is currently determining an adoption date but does not expect the impact of the future adoption of this standard to have a material impact on its consolidated
results of operations, financial condition and cash flows.
81
In August 2018, the FASB issued Accounting Standard Update 2018-13: Fair Value Measurement (Topic 820). The amendments in this update modify the
disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, as a result of the FASB’s final deliberations of the financial reporting concepts
pursuant to the March 4, 2014 issued FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements, as they relate to
fair value measurement disclosures. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15,
2019. Early adoption is permitted upon its issuance. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable
inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent
interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective
date. The Company will adopt ASU 2018-13 during the quarter ended June 30, 2019, and is currently assessing the impact of the future adoption of this standard on its
consolidated results of operations, financial condition and cash flows.
In June 2018, the FASB issued Accounting Standard Update 2018-07: Compensation—Stock Compensation - Improvements to Non-employee Share-Based
Payment Accounting. This update aligns the accounting for share-based payment awards issued to employees and non-employees. The existing employee guidance will apply to
nonemployee share-based transactions with some exceptions. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing model for
non-employee awards. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2018. Early
adoption is permitted upon its issuance. The amendments in this update should be applied prospectively. The Company will adopt ASU 2018-07 during the quarter ended June
30, 2019, and is currently assessing the impact of the future adoption of this standard on its consolidated results of operations, financial condition and cash flows.
In February 2016, the FASB issued Account Standard Update 2016-02: Leases (Topic 842). This update changes lessee accounting to reflect the financial liability
and right-of-use assets that are inherent to leasing an asset on the balance sheet. We will apply the modified retrospective approach such that we will account for leases that
commenced before the effective date of ASU No. 2016-02 in accordance with previous GAAP unless the lease is modified, except we will recognize right-of-use assets and a
lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under
previous GAAP. We will adopt ASU No. 2016-02 during the quarter ended June 30, 2019. The adoption of ASU No. 2016-02 will result in the recognition of incremental right-
of-use assets and related lease liabilities on the Consolidated Balance Sheet as of June 30, 2019 and will not have a material impact on our consolidated results of operations,
financial condition, and cash flows.
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.
Accounting Pronouncements Adopted During the Period
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), 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 ASU replaces most existing revenue recognition guidance in U.S. GAAP.
Additionally, ASU 2014-09 requires enhanced disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In July
2015, the FASB decided to delay the effective date of ASU 2014-09 by one year. The deferral resulted in the new revenue standard being effective for the Company for fiscal
years, and interim periods within those years, beginning April 1, 2018. ASU 2014-09, as amended, is effective using either the full retrospective or modified retrospective
transition approach, and the Company has elected to use the modified retrospective approach. FASB has issued several accounting standards updates to clarify certain topics
within ASU 2014-09. The Company has adopted ASU 2014-09, and its related clarifying amendments (collectively known as ASC 606), effective on April 1, 2018. Please see
section included above within Note 4 titled "Revenue from Contracts with Customers" for the required disclosures related to the impact of adopting this standard and a
discussion of the Company's updated policies related to revenue recognition and accounting for costs to obtain and fulfill a customer contract.
82
5. Accounts Receivable
Billed
Unbilled
Allowance for doubtful accounts
Accounts receivable, net
March 31, 2019
March 31, 2018
$
$
11,833 $
11,769
(895)
22,707 $
9,172
8,390
(512)
17,050
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, 2019 are expected to be billed and collected within twelve months.
The Company recorded $300, $530, and $294 of bad debt expense during the years ended March 31, 2019, 2018, and 2017 respectively.
6. Property and Equipment
Computer-related equipment
Furniture and fixtures
Leasehold improvements
Accumulated depreciation
Property and equipment, net
March 31, 2019
March 31, 2018
$
7,077 $
223
558
7,858
(4,428 )
$
3,430 $
5,464
115
166
5,745
(2,988 )
2,757
Depreciation expense for the years ended March 31, 2019, 2018, and 2017 was $1,535, $1,244, and $875, respectively.
During the years ended March 31, 2019, 2018, and 2017, depreciation expense includes $839, $931, $867 respectively, related to internal use assets included in
General and Administrative Expense and $696, $313, and $8 respectively, related to internally developed software to be sold, leased, or otherwise marketed included in Other
Direct Costs of Revenue.
7. 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. During the
fiscal year ended March 31, 2019, 2018, and 2017, we determined that there were no indicators of impairment related to the Company's continuing operations.
83
The components of intangible assets as at March 31, 2019 and 2018 were as follows:
Software
Total
Software
Total
As of March 31, 2019
Accumulated
Amortization
5,826 $
5,826 $
(5,826 ) $
(5,826 ) $
As of March 31, 2018
Accumulated
Amortization
—
—
Net
Net
5,826 $
5,826 $
(4,595 ) $
(4,595 ) $
1,231
1,231
Cost
Cost
$
$
$
$
The Company has included amortization of acquired intangible assets directly attributable to revenue-generating activities in cost of revenues.
During the years ended March 31, 2019, 2018, and 2017, the Company recorded amortization expense in the amount of $1,231, $1,416, and $1,731, respectively.
Based on the amortizable intangible assets as of March 31, 2019, the Company anticipates no further amortization expense beyond fiscal 2019.
Below is a summary of intangible assets:
Balance as of March 31, 2016
Amortization of intangibles
Intangible asset write-off
Balance as of March 31, 2017
Amortization of intangibles
Balance as of March 31, 2018
Amortization of intangibles
Balance as of March 31, 2019
Intangible Assets
12,490
(7,087 )
(2,756 )
2,647
(1,416 )
1,231
(1,231 )
—
$
$
8. Goodwill
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, 2016
Adjustments
Goodwill as of March 31, 2017
Adjustments
Goodwill as of March 31, 2018
Adjustments
Goodwill as of March 31, 2019
O&O
Total
42,268 $
—
42,268
—
42,268
—
42,268 $
42,268
—
42,268
—
42,268
—
42,268
$
$
Fair value is defined under ASC 820, Fair Value Measurements and Disclosures as “the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date.” The Company considered the income and market approaches to derive an opinion of value.
Under the income approach, the Company utilized the discounted cash flow method, and under the market approach, consideration was given to the guideline public company
method, the merger and acquisition method, and the market capitalization method.
84
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, 2019 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 analysis performed for fiscal 2019 all continuing operations, which is comprised entirely of the O&O reporting unit, have an estimated fair value in
excess of the carrying value of the associated goodwill. The estimated fair value exceeded the carrying value by greater than 10%.
In the years ended March 31, 2019 and 2018, the Company determined there was no impairment to goodwill.
9. Debt
Short-term debt
Short-term debt, net of debt issuance costs of $0 and $205, respectively
Long-term debt
Convertible notes, net of debt issuance costs and discounts of $0 and $1,827, respectively
85
March 31, 2019 March 31, 2018
$
— $
1,445
March 31, 2019 March 31, 2018
$
— $
3,873
Convertible Notes
On September 28, 2016, the Company sold to the Initial Purchaser, $16,000 aggregate principal amount of 8.75% convertible notes maturing on September 23, 2020,
unless converted, repurchased or redeemed in accordance with their terms prior to such date. The $16,000 aggregate principal received from the issuance of the Notes was
initially allocated between long-term debt at $11,084, the convertible note embedded derivative liability at $3,693 (see Note 10 "Fair Value Measurements" for more
information), and the warrant liability at $1,223 (see Note 10 "Fair Value Measurements" for more information), within the consolidated balance sheet. The Company’s
assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the
liability. Fair value of the Notes is determined using the residual method of accounting whereby, first, a portion of the proceeds from the issuance of the Notes is allocated to
derivatives embedded in the Notes and the warrants issued in connection with the issuance of the Notes, and the proceeds so allocated are accounted for as a convertible note
embedded derivative liability and warrant liability, respectively (see Note 10 "Fair Value Measurements for more information), and second, the remainder of the proceeds from
the issuance of the Notes is allocated to the convertible notes, resulting in an original issue debt discount amounting to $4,916. As of the close of the issuance of the Notes on
September 28, 2016, the Company incurred $1,700 in debt issuance costs directly related to the issuance of the Notes, which in accordance with ASU 2015-03, the Company
has recorded these costs as a direct reduction to the face value of the Notes and will amortize this amount over the life of the Notes as a component of interest expense on the
consolidated statement of operation and comprehensive loss. During the remainder of fiscal 2017, the Company further incurred $234 in costs directly associated with the
issuance of the Notes, for the preparation and filing of the registration statement on Form S-1 to register the underlying common stock related to the Notes issued and related
Warrants issued along with the Notes, which was required to be done in accordance with the Indenture (as defined below). The convertible notes will remain on the consolidated
balance sheet at historical cost, accreted up for the amount of cumulative amortization of the debt discount over the life of the debt. If we or the note holders elect not to settle
the debt through conversion, we must settle the Notes at face value at $16,000. Therefore, the liability component will be accreted up to the face value of the Notes, which will
result in additional non-cash interest expense being recognized within the consolidated statements of operations and comprehensive loss through the Notes maturity date.
During the year ended March 31, 2018, holders of $10,300 of Notes elected to convert such Notes. These Notes were extinguished by issuing shares of common stock,
based on the applicable conversion price of $1.364 per share, plus additional shares of common stock and cash to satisfy the early conversion payments required by the
Indenture. Associated with this conversion, gross debt net of debt discount and capitalized debt issuance costs of $3,610 was extinguished for a net debt extinguishment of
$6,690. In total, 8,624,445 shares of common stock were issued and $247 in cash was paid to settle these positions. This resulted in an adjustment of approximately $14,238 to
additional paid-in capital to reflect the shares issued upon conversion. A loss on extinguishment of debt of $1,785 was recorded as a result of the difference in carrying value of
the debt, inclusive of the associated debt discount and capitalized debt issuance costs, compared to the fair market value of the consideration given comprising both common
stock issued and cash paid. The proportionate amount of the underlying derivative instrument was also extinguished as calculated on the respective conversion dates. See Note
10 "Fair Value Measurements" for more information.
As of March 31, 2018, the outstanding principal on the Notes was $5,700, the unamortized debt issuance costs and debt discount in aggregate was $1,827, and the net
carrying amount of the Notes was $3,873, which was recorded as long-term debt within the consolidated balance sheet.
During the year ended March 31, 2019, holders of the remaining $5,700 of Notes elected to convert such Notes. These Notes were extinguished by issuing shares of
common stock, based on the applicable conversion price of $1.364 per share, plus additional shares of common stock and cash to satisfy the early conversion payments required
by the Indenture. Associated with this conversion, gross debt net of debt discount and capitalized debt issuance costs of $1,360 was extinguished for a net debt extinguishment
of $4,340. In total, 4,446,265 shares of common stock were issued to settle these positions. This resulted in an adjustment of approximately $10,582 to additional paid-in capital
to reflect the shares issued upon conversion. A loss on extinguishment of debt of $431 was recorded as a result of the difference in carrying value of the debt, inclusive of the
associated debt discount and capitalized debt issuance costs, compared to the fair market value of the consideration given comprising both common stock issued and cash paid.
The proportionate amount of the underlying derivative instrument was also extinguished as calculated on the respective conversion dates. See Note 10 "Fair Value
Measurements" for more information.
As of March 31, 2019, all of the Notes have been extinguished, the underlying indenture relieved, and all derivative liabilities related to the Notes settled.
86
The Company recorded $798, $1,018 and $1,256 of aggregate debt discount and debt issuance cost amortization during the years ended March 31, 2019, 2018, and 2017,
respectively.
The Company sold the Notes to the Initial Purchaser at a purchase price of 92.75% of the principal amount. The initial purchaser also received an additional 250,000
warrants on the same terms as the warrants issued with the Notes (as detailed below) and has the right to receive 2.5% of any cash consideration received by the Company in
connection with a future exercise of any of the warrants issued with the Notes. The Notes were issued under an Indenture dated September 28, 2016, as amended on January 31,
2017 (the "Indenture"), between Digital Turbine, Inc., US Bank National Association, as trustee, and certain wholly-owned subsidiaries of the Company, specifically Digital
Turbine, Inc. as the parent Company, DT USA, DT Media, and DT APAC (collectively referred to as the "Guarantors"). The Notes are senior unsecured obligations of the
Company, and bear interest at a rate of 8.75% per year, payable semiannually in arrears on March 15th and September 15th of each year, beginning on March 15, 2017. The
Notes are unconditionally guaranteed by the Guarantors as to the payment of principal, premium, if any, and interest on a senior unsecured basis. The Notes were issued with an
initial conversion price equal to $1.364 per share of the Company's common stock, subject to proportional adjustment for adjustments to outstanding common stock and anti-
dilution provisions in case of dividends or distributions, stock split or combination, or if the Company issues or sells shares of common stock at a price per share less than the
conversion price on the trading day immediately preceding such issuance of sale. The conversion price is subject to change related to the modification to the Indenture made in
connection with the solicitation of consents to incur the Bridge Bank credit facility.
With respect to any conversion prior to September 23, 2019, in addition to the shares deliverable upon conversion, holders of the Notes were entitled to receive a
payment equal to the remaining scheduled payments of interest that would have been made on the notes being converted from the date of conversion until September 23, 2019
(an “Early Conversion Payment”) payable in cash or shares of our common stock.
Each purchaser of the Notes also received warrants to purchase 256.60 shares of the Company's common stock for each $1 in Notes purchased, or up to 4,105,600
warrants in aggregate, in addition to the 250,000 warrants issued to the initial purchaser, as described above. The warrants were issued under a Warrant Agreement (the
"Warrant Agreement"), dated as of September 28, 2016, between Digital Turbine, Inc. and US Bank National Association, as the warrant agent. In connection with soliciting
consents for the Bridge Bank credit facility, we also agreed to modify the exercise price of the warrants.
The warrants are immediately exercisable on the date of issuance at an initial exercise price of $1.364 per share and will expire on September 23, 2020. The exercise
price is subject to proportional adjustment for adjustments to outstanding common stock and anti-dilution provisions in case of dividends or distributions, stock split or
combination, or if the Company issues or sells shares of common stock at a price per share less than the conversion price on the trading day immediately preceding such
issuance of sale. Certain caps on the number of shares that could be issued under the Notes and the Warrants were effectively lifted by our stockholders approving the full
issuance of all potentially issuable shares at our January 2017 annual meeting of stockholders. However, as a result of the modification of our indenture for the Notes and
related modification of the warrant agreement in connection with soliciting consent for incurrence of our May 2017 Bridge Bank credit facility, the January 2017 stockholder
approval no longer applies and we would need to receive a new stockholder approval in order to issue the full amount of shares of our stock that could ultimately be issuable
under the indenture for the Notes and the warrant agreement. We are required to seek such stockholder approval.
During the year ended March 31, 2018, 256,600 of the warrants were exercised. During the year ended March 31, 2019, 484,900 of the warrants were exercised. The
outstanding warrants related to the Warrant Agreement at March 31, 2019 were 3,614,100, valued at $8,013.
In the event of a fundamental change, as set forth in the Warrant Agreement, the holders can elect to exercise their warrants or to receive an amount of cash under a
Black-Scholes calculation of the value of such warrants.
The Company received net cash proceeds of $14,316, after deducting the Initial Purchaser's discounts and commissions and the estimated offering expenses payable by
Digital Turbine. The net proceeds from the issuance of the Notes were used to repay $11,000 of secured indebtedness and was otherwise used for general corporate purposes and
working capital. All of these Notes have been settled in their entirety.
87
Senior Secured Credit Facility
On May 23, 2017, the Company entered a Business Finance Agreement (the “Credit Agreement”) with Western Alliance Bank (the “Bank”). The Credit Agreement provides for
a $5,000 total facility.
The amounts advanced under the Credit Agreement mature in two (2) years, and accrue interest at the following rates and bear the following fees:
(1) Wall Street Journal Prime Rate + 1.25% (currently approximately 5.25%), with a floor of 4.0%.
(2) Annual Facility Fee of $45.5.
(3) Early termination fee of 0.5% if terminated during the first year.
The obligations under the Credit Agreement are secured by a perfected first position security interest in all assets of the Company and its subsidiaries, subject to partial
(65%) pledges of stock of non-US subsidiaries. The Company’s subsidiaries Digital Turbine USA and Digital Turbine Media are co-borrowers.
In addition to customary covenants, including restrictions on payments (subject to specified exceptions), and restrictions on indebtedness (subject to specified
exceptions), the Credit Agreement requires the Company to comply with the following financial covenants, measured on a monthly basis:
(1) Maintain a Current Ratio of at least 0.65, defined as unrestricted cash plus accounts receivable, divided by all current liabilities.
(2) Revenue must exceed 85% of projected quarterly revenue.
Subsequent to March 31, 2019, there was an amendment to the covenants of the Credit Agreement. The Company was in compliance with the covenants of the Credit
Agreement, as amended, as of March 31, 2019
The Credit Agreement required that at least two-thirds (2/3rds) of the holders of the Notes at all times be subject to subordination agreements with the Bank. The
Company obtained the consent of the holders of at least two-thirds (2/3rds) of the Notes, which were held by a small number of institutional investors. In consideration for such
consents, the Company entered into a Second Supplemental Indenture, dated May 23, 2017 (the “Supplemental Indenture”) to the Indenture, and also entered into a First
Amendment, dated May 23, 2017 (the “Warrant Amendment”) to the Warrant Agreement. The Supplemental Indenture and Warrant Amendment provided for a 30 day stock
price measurement period to determine whether or not there would be any change to the conversion price or exercise price of the Company’s outstanding convertible notes or
related warrants. The measurement period concluded on September 20, 2017, with no change to the existing $1.364 per share conversion or exercise price of our convertible
notes or related warrants.
The Credit Agreement contains other customary covenants, representations, indemnities and events of default.
At March 31, 2019, there was no outstanding principal on the Credit Agreement and the Company had $5,000 available to draw. Subsequent to March 31, 2019, the
Company entered into an amendment to the Credit Agreement that extends the agreement through May 23, 2021 and provides for up to a $20,000 total facility, subject to draw
limitations derived from current levels of eligible domestic receivables. See Note 20 "Subsequent Events" for more details.
Interest Expense
Inclusive of the Notes issued on September 28, 2016 and the Credit Agreement entered into on May 23, 2017, the Company recorded $322, $1,049, and $1,369 of interest
expense during the years ended March 31, 2019, 2018, and 2017 respectively.
Additionally, aggregate debt discount and debt issuance cost amortization related to the Notes, detailed in the paragraph above, is reflected on the Consolidated
Statement of Operations as interest expense. Inclusive of this amortization of$798 recorded during the year ended March 31, 2019, $1,018 recorded during the year ended
March 31, 2018, and $1,256 recorded during March 31, 2017, the Company recorded $1,120, $2,067, and $2,625 of total interest expense for the years ended March 31, 2019,
2018, and 2017 respectively.
88
10. 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’s financial liabilities as of the issuance date of the convertible notes on the initial measurement date of September 28, 2016 are presented below at
fair value and were classified within the fair value hierarchy as follows:
Financial Liabilities
Convertible note embedded derivative liability
Warrant liability
Total
Level 1
Level 2
Level 3
Balance as of September 28,
2016
$
$
— $
—
— $
— $
—
3,693 $
1,223
— $
4,916 $
3,693
1,223
4,916
The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and
consider factors specific to the liability. Fair value of the Notes is determined using the residual method of accounting whereby, first, a portion of the proceeds from the issuance
of the Notes is allocated to derivatives embedded in the Notes and the warrants issued in connection with the issuance of the Notes, and the proceeds so allocated are accounted
for as a convertible note embedded derivative liability and warrant liability, respectively, and second, the remainder of the proceeds from the issuance of the Notes is allocated
to the convertible notes, resulting in an original debt discount amounting to $4,916. The convertible notes will remain on the consolidated balance sheet at historical cost,
accreted up for the amount of cumulative amortization of the debt discount over the life of the debt. The method of determining the fair value of the convertible note embedded
derivative liability and warrant liability are described subsequently in this note. Market risk associated with the convertible note embedded derivative liability and warrant
liability relates to the potential reduction in fair value and negative impact to future earnings from an increase in price of the Company's common stock. Please refer to Note 9
"Debt" for more information.
The carrying amounts of certain financial instruments, such as cash, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to
their relatively short maturities.
As of March 31, 2019, and 2018 the Company’s financial assets and financial liabilities are presented below at fair value and were classified within the fair value
hierarchy as follows (in thousands):
89
Financial Liabilities
Convertible note embedded derivative liability
Warrant liability
Total
Financial Liabilities
Convertible note embedded derivative liability
Warrant liability
Total
Convertible Note Embedded Derivative Liability
Level 1
Level 2
Level 3
Balance as of March 31,
2019
— $
—
— $
— $
—
— $
— $
8,013
8,013 $
—
8,013
8,013
Level 1
Level 2
Level 3
Balance as of March 31,
2018
— $
—
— $
— $
—
— $
4,676 $
3,980
8,656 $
4,676
3,980
8,656
$
$
$
$
On September 28, 2016, the Company sold to an investment bank (the "Initial Purchaser"), $16,000 principal amount of 8.75% convertible notes maturing on
September 23, 2020 (the “Notes”), unless converted, repurchased, or redeemed in accordance with their terms prior to such date. We evaluated the terms and features of our
convertible notes and identified embedded derivatives (conversion options that contain “make-whole interest” provisions, fundamental change provisions, or down round
conversion price adjustment provisions; collectively called the "convertible note embedded derivative liability") requiring bifurcation and accounting at fair value because the
economic and contractual characteristics of the embedded derivatives met the criteria for bifurcation and separate accounting. ASC 815-10-15-83 (c) states that if terms
implicitly or explicitly require or permit net settlement, then it can readily be settled net by means outside the contract, or it provides for delivery of an asset that puts the
recipient in a position not substantially different from net settlement. The conversion features related to the convertible notes consists of a “make-whole interest” provision,
fundamental change provision, and down round conversion price adjustment provisions, which if the convertible notes were to be converted, would put the convertible note
holder in a position not substantially different from net settlement. Given this fact pattern, the conversion features meet the definition of embedded derivatives and require
bifurcation and accounting at fair value.
During fiscal 2018, holders of $10,300 of the Notes elected to convert such Notes. During fiscal 2019, holders of $5,700 of the Notes elected to convert such notes,
thereby converting all of our outstanding notes and leaving an aggregate principal amount of $0 of Notes outstanding, net of debt issuance costs and discounts of $0 and $0,
respectively, as of March 31, 2019. Refer to Note 9 "Debt - Convertible Notes" and Note 12 "Capital Stock Transactions" for more details.
The convertible note embedded derivative liability represents the fair value of the conversion option, fundamental change provision, and "make-whole" provisions, as
well as the down round conversion price adjustment or conversion rate adjustment provisions of the convertible notes. There is no current observable market for these types of
derivatives and, as such, the Company determined the fair value of the derivative liability using a lattice approach that incorporates a Monte Carlo simulation valuation model.
A Monte Carlo simulation valuation model considers the Company's future stock price, stock price volatility, probability of a change of control and the trading information of
the Company's common stock into which the notes are or may become convertible. The Company marks the derivative liability to market at the end of each reporting period due
to the conversion price not being indexed to the Company's own stock.
Changes in the fair value of the convertible note embedded derivative liability is reflected in our consolidated statements of operations as “Change in fair value of
convertible note embedded derivative liability.”
The following table provides a reconciliation of the beginning and ending balances for the convertible note embedded derivative liability measured at fair value using
significant unobservable inputs (Level 3):
90
Balance at March 31, 2018
Change in fair value of convertible note embedded derivative liability
De-recognition on extinguishment or conversion
Balance at March 31, 2019
$
$
Level 3
4,676
1,008
(5,684 )
—
Due to the valuation of the derivative liability being highly sensitive to the trading price of the Company's stock, the increase and decrease in the trading price of the
Company's stock has the impact of increasing the (loss) and gain, respectively.
Due to the Company's closing stock price increasing from March 31, 2018 to March 31, 2019 from $2.01 to $3.50, the Company recorded a loss of $1,008 during the
year ended March 31, 2019.
Due to the Company's closing stock price increasing from March 31, 2017 to March 31, 2018 from $0.94 to $2.01, the Company recorded a loss of $7,559 during the
year ended March 31, 2018.
The market-based assumptions and estimates used in valuing the convertible note embedded derivative liability include amounts in the following amounts:
Stock price volatility
Probability of change in control
Stock price (per share)
Expected term
Risk-free rate (1)
Assumed early conversion/exercise price (per share)
March 31, 2019
60 %
1.75 %
$3.50
1.50 years
2.31 %
$2.73
(1) The Monte Carlo simulation assumes the continuously compounded equivalent (CCE) interest rate of 2.31% based on the average of the 1-year and 2-year U.S. Treasury securities as of the valuation date.
Changes in valuation assumptions can have a significant impact on the valuation of the convertible note embedded derivative liability. For example, all other things
being equal, a decrease/ increase in our stock price, probability of change of control, or stock price volatility decreases/increases the valuation of the liabilities, whereas a
decrease/increase in risk-free interest rates increases/decreases the valuation of the liabilities.
Warrant Liability
The Company issued detachable warrants with the convertible notes issued on September 28, 2016. The Company accounts for its warrants issued in accordance with
US GAAP accounting guidance under ASC 815 applicable to derivative instruments, which requires every derivative instrument within its scope to be recorded on the balance
sheet as either an asset or liability measured at its fair value, with changes in fair value recognized in earnings. Based on this guidance, the Company determined that these
warrants did not meet the criteria for classification as equity. Accordingly, the Company classified the warrants as long-term liabilities. The warrants are subject to re-
measurement at each balance sheet date, with any change in fair value recognized as a component of other income (expense), net in the statements of operations. We estimated
the fair value of these warrants at the respective balance sheet dates using a lattice approach that incorporates a Monte Carlo simulation that considers the Company's future
stock price. Option pricing models employ subjective factors to estimate warrant liability; and, therefore, the assumptions used in the model are judgmental.
Changes in the fair value of the warrant liability is primarily related to the change in price of the underlying common stock of the Company and is reflected in our
consolidated statements of operations as “Change in fair value of warrant liability.”
91
The following table provides a reconciliation of the beginning and ending balances for the warrant liability measured at fair value using significant unobservable inputs
(Level 3):
Balance at March 31, 2018
Change in fair value of warrant liability
De-recognition on extinguishment or conversion
Balance at March 31, 2019
$
$
Level 3
3,980
4,875
(842 )
8,013
Due to the valuation of the derivative liability being highly sensitive to the trading price of the Company's stock, the increase and decrease in the trading price of the
Company's stock has the impact of increasing the (loss) and gain, respectively.
Due to the Company's closing stock price increasing from March 31, 2018 to March 31, 2019 from $2.01 to $3.50, the Company recorded a loss of $4,875 during the
year ended March 31, 2019.
Due to the Company's closing stock price increasing from March 31, 2017 to March 31, 2018 from $0.94 to $2.01, the Company recorded a loss of $3,208 during the
year ended March 31, 2018.
The market-based assumptions and estimates used in valuing the warrant liability include amounts in the following amounts:
Stock price volatility
Probability of change in control
Stock price (per share)
Expected term
Risk-free rate (1)
Assumed early conversion/exercise price (per share)
March 31, 2019
60 %
1.75 %
$3.50
1.50 years
2.31 %
$2.73
(1) The Monte Carlo simulation assumes the continuously compounded equivalent (CCE) interest rate of 2.31% based on the average of the 1-year and 2-year U.S. Treasury securities as of the valuation date.
Changes in valuation assumptions can have a significant impact on the valuation of the warrant liability. For example, all other things being equal, a decrease/increase
in our stock price, probability of change of control, or stock price volatility decreases/increases the valuation of the liabilities, whereas a decrease/increase in risk-free interest
rates increases/decreases the valuation of the liabilities.
92
11. 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, 2015, 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 8,685,457 and 9,135,513 remained available for future grants as of March 31, 2019 and 2018,
respectively. The change over the comparative period represents stock option grants, stock option forfeitures/cancellations, and restricted shares of common stock
of 1,463,925, 1,553,082, and 539,213, respectively.
Stock Option Agreements
Stock options granted under the Company’s Stock 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.
Stock Option Activity
The following table summarizes stock option activity for the Stock Plans during the years ended March 31, 2019 and 2018:
Options Outstanding, March 31, 2017
9,735,778 $
2.56
7.95 $
801
Number of
Shares
Weighted Average
Exercise Price
(per share)
Weighted Average
Remaining Contractual
Life (in years)
Aggregate Intrinsic
Value
(in thousands)
Granted
Forfeited / Canceled
Exercised
Options Outstanding, March 31, 2018
Granted
Forfeited / Canceled
Exercised
Options Outstanding, March 31, 2019
Vested and expected to vest (net of estimated forfeitures) at March
31, 2019 (a)
Exercisable, March 31, 2019
1,963,378
(1,698,906)
(258,281 )
9,741,969
1,463,925
(1,552,192)
(524,817 )
9,128,885 $
8,147,149 $
5,800,564 $
1.53
4.40
1.04
2.08
1.69
3.72
0.94
1.80
1.86
2.06
7.82
6,286
7.31 $
7.18 $
6.75 $
16,347
14,224
9,237
(a)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, 2019 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, 2019. The intrinsic value changes based on changes in the price of Digital Turbine's common stock.
93
Information about options outstanding and exercisable at March 31, 2019 is as follows:
Options Outstanding
Options Exercisable
Number of Shares
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
6,204 $
2,401,184
2,507,881
1,376,044
688,072
769,000
717,500
553,000
60,000
50,000
9,128,885
0.24
0.73
1.28
1.65
2.20
2.61
3.96
4.14
4.65
5.89
Other information pertaining to stock options for the Stock Plans is as follows:
0.99
7.58
7.36
8.88
9.06
5.31
5.54
5.60
3.99
5.45
6,204 $
1,334,293
1,665,100
465,512
179,955
769,000
717,500
553,000
60,000
50,000
5,800,564
0.24
0.73
1.27
1.62
2.17
2.61
3.96
4.14
4.65
5.89
Total fair value of options vested
Total intrinsic value of options exercised (a)
Year ended March 31,
2019
2018
2017
$
$
1,977 $
603 $
3,335 $
202 $
3,519
10
(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.
During the years ended March 31, 2019, 2018, and 2017, the Company granted options to purchase 1,463,925, 1,963,378, and 4,271,523 shares of its common
stock, respectively, to employees with weighted-average grant-date fair value of $1.02, $0.94, and $0.82, respectively.
At March 31, 2019, 2018, and 2017, there was $2,639, $2,353, and $5,038 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 1.9 years, 2.2 years, and 2.2 years, respectively.
Valuation of Awards
For stock options granted under Digital Turbine’s Incentive Plans, the Company 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 assumptions utilized in this model during fiscal 2019, 2018, and 2017 are presented below.
Risk-free interest rate
Expected life of the options
Expected volatility
Expected dividend yield
Expected forfeitures
Year ended March 31,
2018
2017
1.77% to 2.73%
5.65 to 9.84 years
66% to 73%
—%
28% to 29%
1.34% to 2.38%
5.69 to 9.84 years
73% to 130%
—%
10% to 35%
2019
2.38% to 2.96%
5.52 to 9.19 years
66%
—%
29%
94
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, restricted stock, and warrants issued is included in the
following statements of operations components. See Note 12 "Capital Stock Transactions" regarding restricted stock.
Product development
Sales and marketing
General and administrative
Total
12. Capital Stock Transactions
Preferred Stock
Year ended March 31,
2019
2018
2017
$
$
— $
—
2,531
2,531 $
— $
—
2,978
2,978 $
—
—
3,760
3,760
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
For the years ended March 31, 2019 and 2018, the Company issued 524,817 and 258,281 shares, respectively, of common stock for the exercise of employee options.
For the years ended March 31, 2019 and 2018, the Company issued 0 and 100,000 shares, respectively, of common stock for the exercise of options granted for
services rendered.
For the years ended March 31, 2019 and 2018, the Company issued 4,446,265 and 8,624,445 shares, respectively, of common stock to the holders of those Notes in
exchange for the extinguishment of the Notes. Refer to Note 9 "Debt" and Note 10 "Fair Value Measurements" for more details.
In September 2016, in connection with the issuance of the Notes, the Company issued 250,000 and 4,105,600 warrants to the initial purchaser and holders of the
Notes, respectively. The warrants are immediately exercisable on the date of issuance at an initial exercise price of $1.364 per share and will expire on September 23, 2020. The
exercise price is subject to proportional adjustment for adjustments to outstanding common stock and anti-dilution provisions in case of dividends or distributions, stock split or
combination, or if the Company issues or sells shares of common stock at a price per share less than the conversion price on the trading day immediately preceding such
issuance of sale. Refer to Note 10 "Fair Value Measurements" for more details.
For the years ended March 31, 2019 and 2018, the Company issued 333,924 and 256,600 shares, respectively, of common stock to the holders of these warrants upon
exercise.
Additionally, during the year ended March 31, 2018, the Company issued 9,552 shares of common stock in exchange for the cashless exercise of 30,000 previously
issued warrants for services rendered. No shares of common stock were issued in exchange for the exercise of warrants issued for services rendered during the year ended
March 31, 2019.
With respect to warrants for services rendered, the Company expensed $0 during the year ended March 31, 2019, and recorded $28 warrant expense during the
year ended March 31, 2018.
95
The following table provides activity for warrants issued and outstanding during the year ended March 31, 2019:
Number of Warrants Outstanding
Weighted-Average Exercise Price
Outstanding as of March 31, 2018
Issued
Exercised
Canceled/Expired
Outstanding as of March 31, 2019
Restricted Stock Agreements
4,536,857 $
—
(484,900 )
(412,857 )
3,639,100 $
1.56
—
1.36
3.43
1.37
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.
During the years ended March 31, 2019 and 2018, the Company issued 306,655 and 265,138 restricted shares, respectively, to its directors for services. The shares
vest over 1 year.
With respect to RSAs, during the years ended March 31, 2019, 2018, and 2017, the Company expensed $520, $323, and $398 related to time condition RSAs,
respectively. As of March 31, 2019, 153,328 shares remain unvested.
During the year ended March 31, 2019, the Company entered into restricted stock units (RSU) agreements with certain officers of the Company to issue 232,558
shares of common stock upon vesting. As of March 31, 2019, no RSUs related to these agreements were vested. Therefore, no shares of common stock were issued in
connection with these RSU agreements.
The following is a summary of restricted stock awards and activities for all vesting conditions for the years ended March 31, 2019 and 2018, respectively:
Unvested restricted stock outstanding as of March 31, 2017
Granted
Vested
Cancelled
Unvested restricted stock outstanding as of March 31, 2018
Granted
Vested
Cancelled
Unvested restricted stock outstanding as of March 31, 2019
Number of Shares
Weighted-Average
Grant Date Fair Value
139,318 $
265,138
(271,887 )
—
132,569
306,655
(285,896 )
—
153,328 $
1.10
1.09
1.10
—
1.09
1.39
1.24
—
1.39
All restricted shares, vested and unvested, cancellable and not cancelled, have been included in the outstanding shares as of March 31, 2019.
At March 31, 2019 and March 31, 2018, there was $144 and $97, 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 0.33 years, respectively.
96
13. 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 in periods where the Company has net losses. Because the Company had net losses for the year
ended March 31, 2019, 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):
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
Years Ended March 31,
2019
2018
2017
$
$
(4,302 ) $
77,440
(0.06) $
(19,697) $
70,263
(0.28) $
(19,138)
66,511
(0.29)
3,312
2,572
826
14. Employee Benefit Plans
The Company has a qualified contributory retirement plan under section 401(k) of the IRC covering eligible full-time employees. Employees may voluntarily
contribute eligible compensation up to the annual IRS limit. During the years ended March 31, 2019 and 2018, the Company made matching contributions of $226 and $172,
respectively. During the year ended March 31, 2017, the Company made no matching contributions.
15. Related-Party Transactions
On April 29, 2018, Digital Turbine Asia Pacific Pty, Ltd. and Digital Turbine Singapore Pte Ltd. (together, “Pay Seller”), each wholly-owned subsidiaries of the
Company, entered into an Asset Purchase Agreement (the “Pay Agreement”), dated as of April 23, 2018, with Chargewave Ptd Ltd (“Pay Purchaser”) to sell certain assets (the
“Pay Assets”) owned by the Pay Seller related to the Company’s Direct Carrier Billing business. The Pay Purchaser is principally-owned and controlled by Jon Mooney, an
officer of the Pay Seller. At the closing of the asset sale, Mr. Mooney was no longer employed by the Company or Pay Seller.
16. Income Taxes
The provision (benefit) for income taxes by taxing jurisdiction was as follows:
Current state and local
Current non-U.S.
Total current
Deferred non-U.S.
Total deferred
Total income tax provision
Year ended March 31,
2019
2018
2017
— $
(63)
(63)
532
532
469 $
— $
(116)
(116)
(835)
(835)
(951) $
17
(24)
(7)
(137)
(137)
(144)
$
$
97
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)
Year ended March 31,
2019
2018
2017
$
$
(1,163 ) $
—
2,074
—
(5)
(2,422 )
1,985
469 $
(5,750 ) $
—
1,355
14,830
(103)
(10,528)
(755)
(951) $
(8,545 )
15
(350)
(88)
158
8,896
(230)
(144)
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax
Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) requiring
companies to pay a one-time deemed repatriation transition tax (the “Transition Tax”) on certain earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income
taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5)
eliminating the corporate alternative minimum tax (“AMT”) and changing how AMT credits can be realized; (6) capital expensing; (7) eliminating the deduction on U.S.
manufacturing activities; and (8) creating new limitations on deductible interest expense and executive compensation.
The Securities Exchange Commission staff issued Staff Accounting Bulletin (“SAB”) 118 which provides guidance on accounting for the tax effects of the Tax
Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC
740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the
extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional
estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the
basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
In connection with our initial analysis of the impact of the Tax Act, we determined that the tax law changes have no effect on the Company’s tax provision in the
period ending March 31, 2018 due to the valuation allowance against the U.S. deferred tax assets. The Company remeasured its U.S. deferred tax assets and liabilities as of
March 31, 2018 using the reduced statutory rate of 21%, resulting in a reduction of the U.S. deferred tax assets of $14,830, and adjusted the valuation allowance against the U.S.
deferred taxes for a net zero impact on the tax provision. Additionally, the Company does not estimate having a liability for the Transition Tax as a result of deficits in earnings
and profits of its non-U.S. subsidiaries. The Accounting for the Tax Act was completed in the year ended March 31, 2019 consistent with our initial accounting in the prior year.
98
Deferred tax assets and liabilities consist of the following:
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
Convertible Debt
Other
Net deferred income tax assets / (liabilities)
Year ended March 31,
2019
2018
2017
$
$
$
$
23,471 $
3,996
—
1,228
28,695
(27,972)
723 $
(678) $
—
—
(5)
40 $
25,848 $
3,095
—
2,732
31,675
(30,394)
1,281 $
(680) $
—
—
(5)
596 $
38,012
3,806
98
1,502
43,418
(40,922)
2,496
(1,523 )
(75)
(228)
(318)
352
As of March 31, 2019, the Company had net operating loss (NOL) carry-forwards for U.S. federal and state tax of approximately $86,896, Australia federal tax of
approximately $6,043, and Israel federal tax of approximately $2,461. The U.S. federal and state NOLs expire between 2028 and 2037, 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, 2019, 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 $27,972 has been provided. During the year ended March 31, 2019, the valuation allowance decreased by $2,422. The reduction primarily relates to a
true-ups of state NOL deferred tax assets of $2,410 resulting in no net impact on income tax expense or benefit.
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.
99
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, 2019, 2018, and 2017 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
2019
2018
2017
$
$
838 $
—
(50)
788 $
941 $
59
(162)
838 $
783
158
—
941
Included in the balances at March 31, 2019, 2018, and 2017 are $788, $838, and $941, respectively, of unrecognized tax benefits, which would affect the annual
effective tax rate if recognized. The Company recognized $45 and $26 of expense for interest and penalties on uncertain income tax liabilities in its statement of operations for
the years ended March 31, 2019 and 2018, respectively. The Company recognized an interest benefit on uncertain income tax liabilities of $52 in its statement of operations for
the year ended and March 31, 2017, respectively. The Company does not expect the amount of unrecognized tax benefits to change significantly 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 2014 through 2019.
17. Segment and Geographic Information
The Company manages its business in one operating segment: O&O. This one operating segment is the only operating segment in our one reportable segment:
Advertising. 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 segment into one reportable segment. Specifically, the Company has evaluated
guidance in ASC 280-10-50-11 and determined that aggregation is consistent with the objectives of ASC 280 in that aggregation into one reportable segment 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 an operating segment has 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 table sets forth geographic information on our net revenues and net property and equipment for the years ended March 31, 2019, 2018, and 2017.
Net revenues by geography are based on the billing addresses of our customers.
100
Net revenues
United States and Canada
Europe, Middle East, and Africa
Asia Pacific and China
Mexico, Central America, and South America
Consolidated net revenues
Property and equipment, net
United States and Canada
Europe, Middle East, and Africa
Asia Pacific and China
Mexico, Central America, and South America
Consolidated property and equipment, net
18. Commitments and Contingencies
Operating Lease Obligations
Year ended March 31,
2019
2018
2017
$
$
$
$
$
72,898
18,606
9,324
2,741
103,569 $
3,405 $
15
10
—
3,430 $
40,743
$
5,691
23,608
4,709
74,751
$
2,701 $
41
15
—
2,757 $
25,952
3,494
9,269
1,492
40,207
1,916
73
17
—
2,006
The Company leases office facilities under non-cancellable operating leases expiring in various years through 2024.
Following is a summary of future minimum payments under initial terms of leases as of:
Year ending March 31,
2020 $
2021
2022
2023
2024
960
867
884
901
698
322
Thereafter
Total Minimum Lease Payments
$
4,632
These amounts do not reflect future escalations for real estate taxes and building operating expenses. Rental expense for continuing operations amounted to
$1,065, $857, and $669, for the years ended March 31, 2019, 2018, and 2017, respectively.
Legal Matters
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.
101
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 2019 and 2018. 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 this 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.
March 31, 2019
December 31,
2018
September 30, 2018
June 30,
2018
March 31,
2018
December 31,
2017
September 30, 2017
June 30,
2017
Three Months Ended
Net revenues
$
27,192
$
30,411
$
23,854
$
22,112
$
20,961
$
22,732
$
15,905
$
15,153
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
convertible note embedded
derivative liability
Change in fair value of
convertible note embedded
derivative liability
Loss on extinguishment of debt
Other income / (expense)
Income / (loss) from operations
before income taxes
Income tax provision
Net loss from operations, net of taxes
Basic and diluted net income / (loss)
per common share from continuing
operations
Weighted-average common shares
outstanding, basic and diluted
Weighted-average common shares
outstanding, diluted
15,768
470
10,954
9,020
1,934
(472)
(4)
19,195
538
10,678
8,222
2,456
(194)
(2)
15,802
15,216
508
7,544
7,229
315
(135)
507
6,389
7,649
(1,260)
(319)
13,623
453
6,885
8,224
(1,339)
(252)
14,887
437
7,408
8,895
(1,487)
(446)
9,865
430
5,610
7,076
(1,466)
(662)
9,592
409
5,152
6,669
(1,517)
(707)
1
8
(87 )
49
(47 )
(63 )
(2,104)
(1,476)
952
1,620
(1,249)
(1,658)
(3,344)
(1,308)
(5,720)
(406)
322
(6,450)
312
(6,762)
(1,651)
(10 )
(43 )
(920)
216
(1,136)
926
(15 )
1
2,045
(23 )
2,068
1,570
—
(127)
1,492
(36 )
1,528
(682)
(619)
2
(4,226)
(14 )
(4,212)
(898)
(285)
(154)
(4,879)
(84 )
(4,795)
(1,164)
(882)
78
(7,487)
(884)
(6,603)
(464)
—
3
(4,056)
31
(4,087)
$
(0.09 )
$
(0.01 )
$
0.03
$
0.02
$
(0.06 )
$
(0.07 )
$
(0.10 )
$
(0.06 )
79,404
79,404
77,645
77,645
77,193
77,645
75,160
78,780
77,645
75,160
72,148
75,442
66,846
66,599
66,846
66,599
102
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 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
2019
2018
2017
Allowance for doubtful accounts
Allowance for doubtful accounts
Allowance for doubtful accounts
$
512 $
228
203
(in thousands)
300 $
530
294
$
(83)
246
269
895
512
228
20. Subsequent Events
On May 22, 2019, the Company amended its existing Business Finance Agreement (the "Credit Agreement") with Western Alliance Bank (the "Bank") originally
entered into on May 23, 2017. The Credit Agreement, as amended, provides for up to a $20,000 total facility, subject to draw limitations derived from current levels of eligible
domestic receivables. The amounts advanced under the Credit Agreement, as amended, mature in two years, or May 22, 2021, and accrue interest at prime plus 0.50% subject to
a 6.00% floor, with the prime rate defined as the greater of prime rate published in the Wall Street Journal or 5.50%. The Credit Agreement, as amended, also carries an annual
facility fee of 0.20% of our available credit limit, and an unused line fee of 0.10% per annum. The obligations under the Credit Agreement are secured by a perfected first
position security interest in all assets of the Company and its subsidiaries. The Company’s subsidiaries Digital Turbine USA and Digital Turbine Media are additional co-
borrowers.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
103
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, 2019, 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 ensure 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 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, 2019 our chief executive officer and chief financial officer
concluded that, as of such date, our disclosure controls and procedures were effective. As a result, the disclosure controls and procedures were effective to ensure that
information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported
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 required disclosure.
Changes in Internal Controls Over Financial Reporting
There were no changes in our internal controls over financial reporting or in other factors identified in connection with the evaluation required by Exchange Act
Rules 13a-15(d) or 15d-15(d) that occurred during the fiscal period covered by this Report that have materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.
Management's Annual Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control
is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America. Management regularly monitors its internal control over financial reporting, and actions are taken to
correct deficiencies as they are identified.
Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, the Company conducted
an evaluation of the effectiveness of internal control over financial reporting. This assessment was based on the framework in Internal Control – Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on this evaluation under the framework in Internal Control – Integrated Framework,
management concluded that the Company maintained effective internal control over financial reporting as of March 31, 2019, as such term is defined in Exchange Act Rule 13a-
15(f).
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Further, because of changes in conditions,
internal control effectiveness may vary over time. The Company's independent registered public accounting firm, SingerLewak LLP, has audited the Company's internal control
over financial reporting as of March 31, 2019, as stated in their report included herein. SingerLewak LLP also audited the Company's consolidated financial statements as of and
for the year ended March 31, 2019.
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 Form 10-K.
104
ITEM 9B.
OTHER INFORMATION
On June 2, 2019, our Board of Directors and compensation committee approved compensation for our chief executive and chief financial officers for the fiscal
year ended March 31, 2019. Our chief executive officer, William Stone, and our chief financial officer, Barrett Garrison, each received a cash bonus as required by his
respective, previously filed, employment agreement, pro-rated for substantial achievement of the target revenue and target adjusted EBITDA goals previously established by the
compensation committee for such fiscal year, plus the 20% discretionary bonus for achievement of the factors described in the applicable employment agreement. In addition, as
part of the long term incentive plan provided for in their respective employment agreements, Messrs. Stone and Garrison were granted equity awards for the three year period
ending March 31, 2022, consisting of time vesting restricted stock units for 125,000 and 81,250 shares, respectively, of the Company’s common stock and performance vesting
restricted stock units for target numbers of 125,000 and 81,250 shares, respectively, of the Company’s common stock. The time vesting units vest over three years, with one-
third vesting on the anniversary of the grant date and the balance monthly thereafter. The vesting of the performance vesting units is based upon achievement of three-year
revenue and adjusted EBITDA targets determined by the Board, with the potential for between zero to twice the target number of shares based on the degree of attainment of the
applicable goals. Based on overall performance and a market compensation approach, the Board of Directors and compensation committee also increased annual base salary for
Mr. Stone by 10% and for Mr. Garrison by $10,000, and granted them, respectively, 150,000 and 75,000 stock options with three year vesting.
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference to our Proxy Statement for the 2019 Annual Meeting of Stockholders.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to our Proxy Statement for the 2019 Annual Meeting of Stockholders.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
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 8,685,457 remain available for issuance as of March 31,
2019.
Equity Compensation Plan Information
The following table sets forth information concerning our Amended and Restated 2011 Equity Incentive Plan as of March 31, 2019.
105
Plan Category
Equity compensation plan approved by security holders
Amended and Restated 2011 Equity Incentive Plan
Total
Number of securities to be
issued upon exercise of
outstanding options,
warrants, and rights (a)
Weighted average
exercise price of
outstanding options,
warrants, and rights
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
9,128,885 $
9,128,885
1.80
1.80
8,685,457
8,685,457
Other information required by this item is incorporated by reference to our Proxy Statement for the 2019 Annual Meeting of Stockholders.
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 2019 Annual Meeting of Stockholders.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated by reference to our Proxy Statement for the 2019 Annual Meeting of Stockholders.
106
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.
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
62
64
65
65
66
67
68
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, 2019, 2018, and 2017 is included in Note 19 of
Notes to Consolidated Financial Statements included in Part II Item 8 "Supplemental Consolidated Financial Information" 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 located below following Item 16 of this Annual Report on Form 10-K.
107
ITEM 16.
10-K SUMMARY
None.
Exhibit
No.
Description
2.1
2.2
2.3
3.1
3.2
3.3
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.
Pay Asset Purchase Agreement, dated as of April 23, 2018, incorporated by reference to our Current Report on Form 8-K (File No. 001-35958), filed with the
Commission on May 1, 2018^
A&P Asset Purchase Agreement, dated as of April 28, 2018, incorporated by reference to our Current Report on Form 8-K (File No. 001-35958), filed with
the Commission on May 1, 2018^
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.
3.4
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.
3.5
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.
3.6
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
3.7
3.8
3.9
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
4.1.1
4.1.2
4.2
Indenture for 8.75% Convertible Notes, due 2020, dated as of September 28, 2016, between the Company, certain guarantors and U.S. Bank National
Association as trustee, incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K (File No. 001-35958), filed with the Commission on
September 29, 2016.
First Supplemental Indenture for 8.75% Convertible Notes, due 2020, dated as of January 12, 2017, between the Company, certain guarantors and U.S. Bank
National Association as trustee, incorporated by reference to Exhibit 4.4 of our Registration Statement on Form S-1/A (File No. 333-214321), filed with the
Commission on January 23, 2017.
Second Supplemental Indenture for 8.75% Convertible Notes, due 2020, dated as of May 23, 2017, between the Company, certain guarantors and U.S. Bank
National Association as trustee, incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K (File No. 001-35958), filed with the Commission
on May 24, 2017.
Warrant Agreement, dated as of September 28, 2016, between the Company and U.S. Bank National Association as warrant agent, incorporated by reference
to Exhibit 4.2 of our Current Report on Form 8-K (File No. 001-35958), filed with the Commission on September 29, 2016.
108
4.2.1
4.3
4.4
4.5
10.1
First Amendment to Warrant Agreement, dated as of May 23, 2017, between the Company and U.S. Bank National Association as warrant agent,
incorporated by reference to Exhibit 4.2 of our Current Report on Form 8-K (File No. 001-35958), filed with the Commission on May 24, 2017.
Registration Rights Agreement, dated as of September 28, 2016, by the Company and certain guarantors entities, incorporated by reference to Exhibit 4.3 of
our Current Report on Form 8-K (File No. 001-35958), filed with the Commission on September 29, 2016.
Form of Common Stock Certificate, incorporated by reference to Exhibit 4.8 to the Company’s Registration Statement on Form S-1/A (File No. 333-214321)
filed with the Commission on December 23, 2016
Description of our Capital Stock *
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. †
10.2
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.
10.2.1
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.
10.2.2
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.
10.3
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. †
10.3.1
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. †
10.3.2
Second Amendment, dated March 16, 2018, 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 March 21, 2018.†
10.4
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. †
10.5
10.6
10.7
10.7.1
10.8
10.8.1
10.8.2
10.8.3
10.8.4
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.
Initial Purchaser Agreement, dated as of September 28, 2016, between the Company and BTIG, LLC, incorporated by reference to Exhibit 10.1 of our
Current Report on Form 8-K (File No. 001-35958), filed with the Commission on September 29, 2016.
Software as a Service Agreement between Cellco Partnership d/b/a Verizon Wireless and the Company, incorporated by reference to Exhibit 10.28 to our
Registration Statement on Form S-1/A (File No. 333-214321), filed January 6, 2017††
Software as a Service Renewal Agreement between Cellco Partnership d/b/a Verizon Wireless and the Company, dated as of August 14, 2018, incorporated
by reference to Exhibit 10.24 to our Current Report on Form 10-Q (File No. 001-35958), filed with the Commission on November 5, 2018.††
Business Financing Agreement, dated May 23, 2017, between the Company, Digital Turbine USA, Inc., Digital Turbine Media, Inc. and Western Alliance
Bank, incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K (File No. 001-35958), filed with the Commission on May 24, 2017.
Amendment No. 1 to the Business Financing Agreement between the Company, Digital Turbine USA, Inc., Digital Turbine Media, Inc., and Western Alliance
Bank, dated as of , 2018. *
Amendment No. 2 to the Business Financing Agreement between the Company, Digital Turbine USA, Inc., Digital Turbine Media, Inc., and Western Alliance
Bank, dated as of July 26, 2018. *
Amendment No. 3 to the Business Financing Agreement between the Company, Digital Turbine USA, Inc., Digital Turbine Media, Inc., and Western Alliance
Bank, dated as of , 2019. *
Amendment No. 4 to the Business Financing Agreement between the Company, Digital Turbine USA, Inc., Digital Turbine Media, Inc., and Western Alliance
Bank, dated as of May 22, 2019. *
109
10.9
10.9.1
10.10
10.10.1
10.12
Employment Agreement between the Company and Barrett Garrison, dated September 12, 2016, incorporated by reference to Exhibit 10.1 to our Current
Report on Form 8-K (File No. 001-35958), filed with the Commission on August 31, 2016.†
Amendment, effective September 7, 2018, to Employment Agreement between the Company and Barrett Garrison, incorporated by reference to our current
report on Form 8-K (File No. 001-35958), filed with the Commission on September 10, 2018.†
License and Software Agreement between AT&T Mobility LLC and the Company, dated as of November 2, 2015, incorporated by reference to Exhibit 10.25
of our Current Report on Form 10-Q (File No, 001-35958), filed with the Commission on November 5, 2018.††
Amendment No. 1 to the License and Software Agreement between AT&T Mobility and the Company, dated as of October 17, 2018, incorporated by
reference to Exhibit 10.25.1 of our Current Report on Form 10-Q (File No, 001-35958), filed with the Commission on November 5, 2018.
Amendment No. 1 to the Supplement No. 1 to the License and Software Agreement between AT&T Mobility and the Company, dated as of October 17,
2018, incorporated by reference to Exhibit 10.25.2 of our Current Report on Form 10-Q (File No, 001-35958), filed with the Commission on February 5,
2019.††
21.1
List of Subsidiaries, incorporated by reference to our Annual Report on Form 10-K (File No. 001-35958), filed with the Commission on June 14, 2018.
23.1
Consent of Independent Registered Public Accounting Firm. *
31.1
Certification of William Stone, Principal Executive Officer. *
31.2
Certification of Barrett Garrison, Principal Financial Officer. *
32.1
Certification of William Stone, Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. **
32.2
Certification of Barrett Garrison, Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. **
101
101
101
101
101
101
*
**
†
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
†† Confidential treatment requested and received as to certain portions
^
Non-material schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company undertakes to furnish supplemental copies of any of
the omitted schedules and exhibits upon request by the U.S. Securities and Exchange Commission.
110
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,
SIGNATURES
thereunto duly authorized.
Principal Executive Officer:
Dated: June 3, 2019
Digital Turbine, Inc.
By:
/s/ William Stone
William Stone
Chief Executive Officer
(Principal Executive Officer)
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.
/s/ Robert Deutschman
Robert Deutschman
/s/ William Stone
William Stone
/s/ Barrett Garrison
Barrett Garrison
/s/ David Wesch
David Wesch
/s/ Mohan Gyani
Mohan Gyani
/s/ Christopher Rogers
Christopher Rogers
/s/ Jeffrey Karish
Jeffrey Karish
/s/ Paul Schaeffer
Paul Schaeffer
/s/ Roy Chestnutt
Roy Chestnutt
Signatures
Title
Chairman of the Board
Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
111
Date
June 3, 2019
June 3, 2019
June 3, 2019
June 3, 2019
June 3, 2019
June 3, 2019
June 3, 2019
June 3, 2019
June 3, 2019
Exhibit 4.5
The following is a description of our common stock and preferred stock. For the complete terms of our common stock and preferred stock, please refer to our certificate
of incorporation, as amended, and our bylaws, as amended, which have been previously filed with the SEC, and are incorporated by reference. The terms of these securities
may also be affected by the General Corporation Law of the State of Delaware. The summary below is qualified in its entirety by reference to our certificate of incorporation
and our bylaws, as either may be amended from time to time after the date this description has been filed.
DESCRIPTION OF OUR CAPITAL STOCK
Authorized Capitalization
We have 202,000,000 shares of capital stock authorized under our certificate of incorporation, consisting of 200,000,000 shares of common stock, par value $0.0001
per share, and 2,000,000 shares of preferred stock, of which 100,000 have been designated as Series A Convertible Preferred Stock, par value $0.0001 per share, or Series A
Preferred Stock. Our authorized shares of common stock and preferred stock are available for issuance without further action by our stockholders, unless such action is required
by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded. If the approval of our stockholders is not so
required, our board of directors may determine not to seek stockholder approval.
Common Stock
Holders of our common stock are entitled to such dividends as may be declared by our board of directors out of funds legally available for such purpose, subject to any
preferential dividend rights of any then outstanding preferred stock. The shares of common stock are neither redeemable nor convertible. Holders of common stock are not
entitled to preemptive or subscription rights to purchase any of our securities under our charter documents.
Each holder of our common stock is entitled to one vote for each such share outstanding in the holder’s name. No holder of common stock is entitled to cumulate votes
in voting for directors.
In the event of our liquidation, dissolution or winding up, the holders of our common stock are entitled to receive pro rata our assets that are legally available for
distribution, after payments of all debts and other liabilities and subject to the prior rights of any holders of preferred stock then outstanding. All of the outstanding shares of our
common stock are, and the shares of common stock issued upon the conversion of any securities convertible into our common stock will be, fully paid and non-assessable.
Our common stock is listed on The NASDAQ Stock Market under the symbol “APPS.” American Stock Transfer is the transfer agent and registrar for our common
stock. Its address is 6201 15th Avenue Brooklyn, NY 11219, and its telephone number is (800) 937-5449.
Preferred Stock
Our certificate of incorporation permits us to issue up to 2,000,000 shares of preferred stock in one or more series and with rights and preferences that may be fixed or
designated by our board of directors without any further action by our stockholders.
Exhibit 4.5
Subject to the limitations prescribed in our certificate of incorporation and under Delaware law, our certificate of incorporation authorizes the board of directors, from
time to time by resolution and without further stockholder action, to provide for the issuance of shares of preferred stock, in one or more series, and to fix the designation,
powers, preferences and other rights of the shares and to fix the qualifications, limitations and restrictions thereof. Although our board of directors has no present intention to
issue any additional preferred stock, the issuance of preferred stock could adversely affect the rights of holders of our common stock, including with respect to voting, dividends
and liquidation, by issuing shares of preferred stock with certain voting, conversion and/or redemption rights. Such issuance of preferred stock may have the effect of delaying,
deferring or preventing a change of control.
Preferred stock could thus be issued quickly with terms calculated to delay or prevent a change in control of our company or to make removal of management more difficult.
Additionally, the issuance of preferred stock may decrease the market price of our common stock. The number of authorized shares of preferred stock may be increased or
decreased, but not decreased below the number of shares then outstanding plus the number of such shares reserved for issuance upon the exercise of outstanding options, rights
or warrants or upon the conversion of any other outstanding securities issued by us that are convertible into or exercisable into preferred stock, by the affirmative vote of the
holders of a majority of our common stock without a vote of the holders of preferred stock, or any series of preferred stock, unless a vote of any such holder is required
pursuant to the terms of such series of preferred stock.
Series A Convertible Preferred Stock
We currently have 100,000 shares of our Series A Preferred Stock designated, and as of December 31, 2018, we had 100,000 shares of our Series A Preferred Stock
outstanding. While shares of our Series A Preferred Stock are outstanding, holders of the Series A Preferred Stock are entitled to receive any dividends if and when declared by
the Company’s board of directors on the Company’s common stock on an as-converted basis.
The Series A Preferred Stock is convertible at any time at the option of the holder into shares of our common stock based on dividing the original purchase price plus
the amount of any accumulated but unpaid dividends, by the conversion price then in effect (as may be adjusted).
The Series A Preferred Stock is entitled to vote together with the common stock as a single class (on an as-converted to common stock basis) on any matters submitted
to the holders of the Company’s common stock, together with any other voting rights provided to the Series A Preferred under law or the General Corporation Law of the State
of Delaware.
The Series A Preferred Stock is entitled to receive, prior and in preference to our common stock or any other class designated as junior to the Series A Preferred Stock,
upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, or in the event of its insolvency, an amount per share equal to the greater of
(i) $10.00 per share of Series A Preferred Stock (subject to certain adjustments) or (ii) such amount per share as would have been payable had the Series A Preferred Stock
been converted into our common stock immediately prior to such liquidation, dissolution or winding up. Each holder of Series A Preferred Stock also has the right to a cash-out
election in the event of certain transactions, including a consolidation or merger of the Company (excluding a transaction involving a reincorporation or a merger with a wholly-
owned subsidiary), a sale of all or substantially all of the assets of the Company, the issuance by the Company in a single or integrated transaction shares of common stock (or
securities convertible into common stock) representing a majority of the shares of common stock outstanding immediately following such issuance, or any other form of
acquisition where the Company is the target and a change of control occurs such that the acquirer has the power to elect a majority of the Company’s board of directors.
Exhibit 4.5
Anti-Takeover Effects of Certain Provisions of Delaware Law
The following is a summary of certain provisions of Delaware law. This summary does not purport to be complete and is qualified in its entirety by reference to the
corporate law of Delaware and our certificate of incorporation and bylaws.
Effect of Delaware Anti-Takeover Statute. We may be subject to Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, Section 203
prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder
became an interested stockholder, unless:
•
•
•
prior to that date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder
becoming an interested stockholder;
upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of
the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares of voting
stock outstanding (but not the voting stock owned by the interested stockholder) those shares owned by persons who are directors and officers and by
excluding employee stock plans in which employee participants do not have the right to determine whether shares held subject to the plan will be tendered in
a tender or exchange offer; or
on or subsequent to that date, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting
of stockholders, and not by written consent, by the affirmative vote of at least 66⅔% of the outstanding voting stock that is not owned by the interested
stockholder.
Section 203 defines “business combination” to include the following:
•
•
•
•
•
any merger or consolidation involving the corporation and the interested stockholder;
any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested
stockholder;
subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested
stockholder;
any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or
the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the
corporation.
In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation,
or who beneficially owns 15% or more of the outstanding voting stock of the corporation at any time within a three-year period immediately prior to the date of determining
whether such person is an interested stockholder, and any entity or person affiliated with or controlling or controlled by any of these entities or persons.
AMENDMENT NUMBER ONE TO BUSINESS FINANCING AGREEMENT AND WAIVER OF
. DEFAULTS
This AMENDMENT NUMBER ONE TO BUSINESS FINANCING AGREEMENT AND WAIVER
OF DEFAULTS (this "Amendment"), dated as of July 19, 2017, is entered into by and between WESTERN ALLIANCE BANK, an Arizona corporation
("Lender"), on the one hand, and DIGITAL TURBINE, INC., a Delaware corporation ("f!!!m"), DIGITAL TURBINE USA, INC., a Delaware corporation ("USA"),
and DIGITAL TURBINE MEDIA, INC., a Delaware corporation ("Media") (Parent, USA, and Media are sometimes collectively referred to herein as
"Borrowers" and each individually as a "Borrower"), on the other hand, with reference to the following facts:
A.
B.
Borrowers and Lender previously entered into that certain Business Financing Agreement, dated as of May 23, 2017 (the "Agreement").
Borrowers are in default of the provisions of the Agreement set forth on Schedule
A
attached hereto, as at the dates indicated in such Schedule (the "Existing Defaults").
C.
Borrowers have requested that Lender (1) waive the Existing Defaults, and (2) increase the aggregate monthly accounts receivable
adjustment limit to $100,000, which Lender is willing to do, subject to the terms and conditions of this Amendment.
NOW, THEREFORE, in consideration of the foregoing, the parties hereto hereby agree as
follows:
1. Defined Terms. All initially capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Agreement.
2. Amendment to Section 1.6. Section 1.6 of the Agreement is hereby amended in its entirety as follows:
1.6 Adjustments. In the event any Adjustment or dispute is asserted by any Account Debtor, Borrowers shall promptly advise Lender and shall,
subject to the Lender's approval, resolve such disputes and advise Lender of any Adjustments; provided that in no case will the
aggregate Adjustments made in any calendar month exceed $100,000 unless Borrowers have obtained the prior written consent of
Lender which, in its Permitted Discretion, shall not be unreasonably withheld or delayed. So long as any Obligations are outstanding,
Lender shall have the right, at any time, to take possession of any rejected, returned, or recovered personal property. If such possession
is not taken by Lender, Borrowers are to resell it for Lender's account at Borrowers' expense with the proceeds made payable to Lender.
While any Borrower retains possession of any returned goods, such Borrower shall segregate said goods and mark them as property of
Lender.
3. Amendment to Section 4.10. Section 4.10(b) of the Agreement is hereby amended in its entirety as follows:
(b) as soon as practicable but in any event not later than August 16, 2017, a Collateral Access Agreement in favor of Lender executed,
respectively, by the owners of the properties located at (x) 1300 Guadalupe Street, Suite 302, Austin, TX 78701, and (y) 406
Blackwell Street, Suite 500, Durham, NC 27701
4. New Section 4.15. A new Section 4.15 is hereby added to the Agreement immediately following Section 4.14 thereof, as follows:
4.15 Not permit any direct Foreign Subsidiary of any Borrower (including without limitation PocketGear Deutschland Gmbh) to conduct any
business unless Borrowers have first delivered to Lender the original certificates evidencing 65% o f the issued and outstanding
Ownership Interests of such direct Foreign Subsidiary entitled to vote (within the meaning of Treas. Reg. Section 1.956-2(c)(2) and 100%
of the issued and outstanding Ownership Interests not entitled to vote (within the meaning of Treas. Reg. Section 1.956-2(c)(2)), and
undated stock powers with respect thereto, duly executed in blank.
5. Waiver of Existing Defaults. Upon the terms and subject to the conditions set forth in this Amendment, Lender hereby waives the Existing Defaults.
This waiver of the Existing Defaults shall be effective only in this specific instance and for the specific purpose for which it is given and shall not entitle
Borrowers to any other or further waiver in any similar or other circumstances.
6. Conditions Precedent to Effectiveness of Amendment. The effectiveness of this Amendment is subject to and contingent upon the fulfillment of each
and every one of the following conditions to the satisfaction of Lender.
(a)
Lender shall have received this Amendment, duly executed by Borrowers;
(b) After giving effect to this Amendment, no Event of Default or Default shall have occurred and be continuing; and
(c) After giving effect to this Amendment all of the representations and warranties set forth herein and in the Agreement shall be true,
complete and accurate in all respects as of the date hereof (except for representations and warranties which are expressly stated to be true and correct as of
the date of the Agreement).
7. Representations and Warranties. In order to induce Lender to enter into this Amendment, each Borrower hereby represents and warrants to Lender
that:
continuing;
(a)
After giving effect to this Amendment, no Event of Default or Default is
(b) After giving effect to this Amendment, all of the representations and warranties set forth in the Agreement and in the Agreement are true,
complete and accurate in all respects (except for representations and warranties which are expressly stated to be true and correct as of the date of the
Agreement); and
(c) This Amendment has been duly executed and delivered by Borrowers, and the Agreement continues to constitute the legal, valid and
binding agreements and obligations of Borrowers, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency,
and similar laws and equitable principles affecting the enforcement of creditors' rights generally.
8. Counterparts: Telefacsimile Execution. This Amendment may be executed in any number of counterparts and by different parties on separate
counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one
and the same Amendment. Delivery of an executed counterpart of this Amendment by telefacsimile shall be equally as effective as delivery of a manually
executed counterpart of this Amendment. Any party delivering an executed counterpart of this Amendment by telefacsimile also shall
2
deliver a manually executed counterpart of this Amendment but the failure to deliver a manually executed counterpart shall not affect the validity, enforceability, and binding
effect of this Amendment.
9. Integration. The Agreement as amended by this Amendment constitutes the entire agreement and understanding between the parties hereto with respect to
the subject matter hereof and thereof, and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof and thereof.
10. No Other Waiver. Except as provided in Section 5 above, the execution of this Amendment and the acceptance of all other agreements and instruments
related hereto shall not be deemed to be a waiver of any Default or Event of Default, whether or not known to Lender and whether or not existing on the date of this
Amendment.
11.
Release.
(a) Each Borrower hereby absolutely and unconditionally releases and forever discharges Lender, and any and all participants, parent corporations,
subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former directors, officers, agents
and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description, whether arising in law or equity or upon
contract or tort or under any state or federal law or otherwise, which such Borrower has had, now has or has made claim to have against any such person for or by reason of
any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Amendment, whether such claims, demands and
causes of action are matured or unmatured or known or unknown. Each Borrower certifies that it has read the following provisions of California Civil Code Section 1542:
A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the
release, which if known by him or her must have materially affected his or her settlement with the debtor.
(b) Each Borrower understands and acknowledges that the significance and consequence of this waiver of California Civil Code Section 1542 is that even
if it should eventually suffer additional damages arising out of the facts referred to above, it not be able to make any claim for those damages. Furthermore, each Borrower
acknowledges that it intends these consequences even as to claims for damages that may exist as of the date of this release but which it does not know exist, and which, if
known, would materially affect its decision to execute this Agreement, regardless of whether its lack of knowledge is the result of ignorance, oversight, error, negligence, or
any other cause.
12. Reaffirmation of the Agreement. The Agreement as amended hereby and all other agreements, instruments and documents executed in connection
therewith remain in full force and effect.
[remainder of page intentionally left blank]
3
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Amendment as of the date first hereinabove written.
DIGITAL TURBINE, INC.,
a Delaware corporation
DIGITAL TURBINE USA, INC.,
a Delaware corporation
DIGITAL TURBINE MEDIA, INC.,
a Delaware corporation
[Signatures continue on the following page]
WESTERN ALLIANCE BANK,
an Arizona corporation
Section / Covenant
Section 1.6 - Adjustments
Section 4.10(b)(i) - Post closing deliveries
Section 4.10(b)(ii)- Post closing deliveries
Amendment Number One to Credit Agreement and Waiver of Defaults Existing Defaults
Schedule A to
Required
Actual
in no case will the aggregate Adjustments
made in any calendar month exceed $50,000
unless Borrowers have obtained the prior
written consent of Lender
On or before June 23, 2017, Borrowers shall
provide to Lender a Collateral Access
Agreement in favor of Lender executed,
respectively, by the owners of the properties
located at (x) 1300 Guadalupe Street, Suite
302, Austin, TX 78701, and (y) 406 Blackwell
Street, Suite 500, Durham, NC 27701
On or before June 23, 2017, Borrowers shall
provide to Lender the original certificates
evidencing 65% of the issued and outstanding
Ownership Interests of each direct Foreign
Subsidiary of USA and Media entitled to vote,
and undated stock powers with respect thereto,
duly executed in blank.
aggregate Adjustments during the month of
June 2017 were
$77,000 without Lender's prior written consent
Borrowers have failed to provide the required
Collateral Access Agreements as of the date of
this Amendment
Borrowers failed to provide to Lender the
original certificates to comply with Section
4.10(b)(ii) of the Agreement with respect to the
German Subsidiary of Media, PocketGear
Deutschland Gmbh.
AMENDMENT NUMBER TWO TO BUSINESS FINANCING AGREEMENT AND WAIVER OF DEFAULT
This AMENDMENT NUMBER TWO TO BUSINESS FINANCING AGREEMENT AND WAIVER OF DEFAULT (this “ Amendment”), dated as of July 26,
2018, is entered into by and between WESTERN ALLIANCE BANK, an Arizona corporation (“ Lender”), on the one hand, and DIGITAL TURBINE, INC., a
Delaware corporation (“Parent”), DIGITAL TURBINE USA, INC., a Delaware corporation (“ USA”), and DIGITAL TURBINE MEDIA, INC., a Delaware corporation
(“Media”) (Parent, USA, and Media are sometimes collectively referred to herein as “ Borrowers” and each individually as a “ Borrower”), on the other hand,
with reference to the following facts:
A. Borrowers and Lender previously entered into that certain Business Financing Agreement, dated as of May 23, 2017, as amended by that certain
Amendment Number One to Business Financing Agreement and Waiver of Defaults, dated as of July 19, 2017 (as so amended, the “Agreement”).
B. Borrowers are in default of the provision of the Agreement set forth on Schedule A attached hereto, as at the date indicated in such Schedule (the
“Existing Default”).
C. Borrowers have requested that Lender (1) waive the Existing Default, and (2) increase the Domestic Credit Limit to $5,000,000, (3) eliminate the
Exim Credit Limit, and (4) make certain other changes to the Agreement, which Lender is willing to do, subject to the terms and conditions of this Amendment.
NOW, THEREFORE, in consideration of the foregoing, the parties hereto hereby agree as follows:
1.
Defined Terms. All initially capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Agreement.
2. Amendment to Section 1.1. Section 1.1 of the Agreement is hereby amended in its entirety as follows:
1.1
Advances. Subject to the terms and conditions of this Agreement, from the date on which this Agreement becomes effective until the
Maturity Date, Lender will make Advances to Borrowers not exceeding the Credit Limit or the Borrowing Base, whichever is less;
provided that in no event shall Lender be obligated to make any Advance that results in an Overadvance or while any Overadvance is
outstanding. Amounts borrowed under this Section may be repaid and reborrowed during the term of this Agreement. It shall be a
condition to each Advance that (a) an Advance Request substantially in the form provided by Lender has been received by Lender, (b)
all of the representations and warranties set forth in Section 3 are true and correct on and as of the date of such Advance, except for
any representation and warranty that is qualified by materiality, which such representation and warranty shall be true and correct in all
respects on and as of the date of such Advance, and except to the extent that such representations and warranties specifically refer to
an earlier date, in which case they shall be true and correct in all material respects as of such earlier date, except for any
representation and warranty that is qualified by materiality, which such representation and warranty shall be true and correct in all
respects as of such earlier date, (c) no Default has occurred and is continuing, or would result from such Advance, and (d) the Current
Ratio shall be equal to or greater than 0.65 to 1.0, measured as of the end of the month, for the most recent 3 months.
Amendment Number Two to Business Financing Agreement and Waiver of Default
3. Amendments to Section 2.2(d) and (e) . Sections 2.2(d) and (e) of the Agreement are hereby amended in their entirety as follows:
(d)
(e)
Reserved.
Reserved.
4. Amendments to Section 4.8(i) and (j). Sections 4.8(i) and (j) of the Agreement are hereby amended in their entirety as follows:
(i)
(j)
Within 10 days after the 15th day and end of each calendar month, a roll forward domestic borrowing base certificate, in
substantially the form attached hereto as Exhibit B, setting forth Domestic Eligible Receivables and Receivable Amounts
thereof as of the last day of the preceding reporting period.
Within 10 days after the 15th day and the end of each calendar month, a detailed aging of each Borrower's receivables by
invoice date and due date, together with payable aging by invoice date and due date, inventory analysis, sales or billing journal,
cash receipts report, and such other matters as Lender may request.
5. Amendments to Section 12.1.
(a) The following definitions set forth in Section 12.1 are hereby amended in their entirety as follows:
“Advance Rate” means up to 80% of Domestic Eligible Receivables, or such lesser percentage as Lender may from time to time establish in its
Permitted Discretion upon notice to Borrowers.
“Borrowing Base” means at any time the Domestic Borrowing Base.
“Credit Limit” means the Domestic Credit Limit, which is intended to be the maximum amount of Advances at any time outstanding.
“Domestic Credit Limit” means $5,000,000, which is intended to be the maximum amount of Advances at any time outstanding with respect to
Domestic Eligible Receivables.
“Eligible Receivable” means a Domestic Eligible Receivable.
“Finance Charge Percentage” means a rate per year equal to the Prime Rate plus 1.25 percentage points with respect to Advances made
under the Domestic Line of Credit, plus an additional 5.00 percentage points during any period that an Event of Default has occurred and is
continuing.
Amendment Number Two to Business Financing Agreement and Waiver of Default
“Overadvance” means a Domestic Overadvance.
(b) The following definitions set forth in Section 12.1 are hereby deleted:
“EXIM Application Fee”
“EXIM Bank”
“EXIM Bank Expenses”
“EXIM Borrowing Base”
“EXIM Credit Limit”
“EXIM Documents”
“EXIM Eligible Receivables”
“EXIM Facility Fee”
“EXIM Guarantee”
“EXIM Line of Credit”
“EXIM Overadvance”
6. Deletion of Exhibit C. Exhibit C attached to the Agreement is hereby deleted.
7. Waiver of Existing Default . Upon the terms and subject to the conditions set forth in this Amendment, Lender hereby waives the Existing Default.
This waiver of the Existing Default shall be effective only in this specific instance and for the specific purpose for which it is given, and shall not entitle Borrowers
to any other or further waiver in any similar or other circumstances.
8. Conditions Precedent to Effectiveness of Amendment . The effectiveness of this Amendment is subject to and contingent upon the fulfillment of
each and every one of the following conditions to the satisfaction of Lender:
(a) Lender shall have received this Amendment, duly executed by Borrowers;
to Lender, dated as of a recent date;
(b) Lender shall have received Resolutions to Borrow from each Borrower on Lender’s form and otherwise in form and substance satisfactory
(c) After giving effect to this Amendment, no Event of Default or Default shall have occurred and be continuing; and
(d) After giving effect to this Amendment, all of the representations and warranties set forth herein and in the Agreement shall be true,
complete and accurate in all respects as of the date hereof (except for representations and warranties which are expressly stated to be true and correct as of the
date of the Agreement).
9. Representations and Warranties. In order to induce Lender to enter into this Amendment, each Borrower hereby represents and warrants to
Lender that:
(a) After giving effect to this Amendment, no Event of Default or Default is continuing;
(b) After giving effect to this Amendment, all of the representations and warranties set forth in the Agreement and in the Agreement are true,
complete and accurate in all respects (except for representations and warranties which are expressly stated to be true and correct as of the date of the
Agreement); and
(c) This Amendment has been duly executed and delivered by Borrowers, and the Agreement continues to constitute the legal, valid and
binding agreements and obligations of Borrowers, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency,
and similar laws and equitable principles affecting the enforcement of creditors’ rights generally.
Amendment Number Two to Business Financing Agreement and Waiver of Default
10. Counterparts; Electronic Execution. This Amendment may be executed in any number of counterparts and by different parties on separate
counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and
the same Amendment. Delivery of an executed counterpart of this Amendment electronically shall be equally as effective as delivery of a manually executed
counterpart of this Amendment. Any party delivering an executed counterpart of this Amendment electronically also shall deliver a manually executed
counterpart of this Amendment but the failure to deliver a manually executed counterpart shall not affect the validity, enforceability, and binding effect of this
Amendment.
11. Integration. The Agreement as amended by this Amendment constitutes the entire agreement and understanding between the parties hereto with
respect to the subject matter hereof and thereof, and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter
hereof and thereof.
12. No Other Waiver. Except as provided in Section []above, the execution of this Amendment and the acceptance of all other agreements and
instruments related hereto shall not be deemed to be a waiver of any Default or Event of Default, whether or not known to Lender and whether or not existing on
the date of this Amendment.
13. Release.
(a) Each Borrower hereby absolutely and unconditionally releases and forever discharges Lender, and any and all participants, parent
corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former
directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description,
whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which such Borrower has had, now has or has made
claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and
including the date of this Amendment, whether such claims, demands and causes of action are matured or unmatured or known or unknown. Each Borrower
certifies that it has read the following provisions of California Civil Code Section 1542:
A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of
executing the release, which if known by him or her must have materially affected his or her settlement with the debtor.
(b) Each Borrower understands and acknowledges that the significance and consequence of this waiver of California Civil Code Section 1542
is that even if it should eventually suffer additional damages arising out of the facts referred to above, it will not be able to make any claim for those damages.
Furthermore, each Borrower acknowledges that it intends these consequences even as to claims for damages that may exist as of the date of this release but
which it does not know exist, and which, if known, would materially affect its decision to execute this Agreement, regardless of whether its lack of knowledge is
the result of ignorance, oversight, error, negligence, or any other cause.
14. Reaffirmation of the Agreement. The Agreement as amended hereby and all other agreements, instruments and documents executed in
connection therewith remain in full force and effect.
[remainder of page intentionally left blank]
Amendment Number Two to Business Financing Agreement and Waiver of Default
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Amendment as of the date first hereinabove written.
DIGITAL TURBINE, INC.,
a Delaware corporation
By:
Name:
Title:
DIGITAL TURBINE USA, INC. ,
a Delaware corporation
By:
Name:
Title:
DIGITAL TURBINE MEDIA, INC.,
a Delaware corporation
By:
Name:
Title:
[Signatures continue on the following page]
Amendment Number Two to Business Financing Agreement and Waiver of Default
WESTERN ALLIANCE BANK ,
an Arizona corporation
By:
Name:
Title:
Schedule A
to
Amendment Number Two to Credit Agreement and Waiver of Default
Existing Default
Section / Covenant
Required
Section 4.14 – Accounts Payable
Borrower shall not permit Borrowers’ trade
accounts payable that are 60 days or more past
invoice due date to exceed (measured as of the
last day of each calendar month) $4,400,000 in
aggregate for the month ending June 30, 2018
Actual
Exceeded.
Amendment Number Two to Business Financing Agreement and Waiver of Default
AMENDMENT NUMBER THREE TO BUSINESS FINANCING AGREEMENT AND WAIVER OF DEFAULTS
This AMENDMENT NUMBER THREE TO BUSINESS FINANCING AGREEMENT AND WAIVER
OF DEFAULTS (this “ Amendment”), dated as of January 2, 2019, is entered into by and between WESTERN ALLIANCE BANK, an Arizona corporation
(“Lender”), on the one hand, and DIGITAL TURBINE, INC., a Delaware corporation (“ Parent”), DIGITAL TURBINE USA, INC., a Delaware corporation (“ USA”),
and DIGITAL TURBINE MEDIA, INC., a Delaware corporation (“Media”) (Parent, USA, and Media are sometimes collectively referred to herein as “ Borrowers”
and each individually as a “Borrower”), on the other hand, with reference to the following facts:
A.
Borrowers and Lender previously entered into that certain Business Financing Agreement, dated as of May 23, 2017, as amended by that
certain Amendment Number One to Business Financing Agreement and Waiver of Defaults, dated as of July 19, 2017, and as amended by that certain
Amendment Number Two to Business Financing Agreement and Waiver of Default, dated as of August 3, 2018 (as so amended, the “Agreement”).
B.
Borrowers are in default of the provisions of the Agreement set forth on Schedule
A
attached hereto, as at the date indicated in such Schedule (the “ Existing Defaults”).
C.
Borrowers have requested that Lender waive the Existing Defaults, which Lender is willing to do, subject to the terms and conditions of this
Amendment.
NOW, THEREFORE, in consideration of the foregoing, the parties hereto hereby agree as
follows:
1. Defined Terms. All initially capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Agreement.
2. Amendment to Section 4.8(j). Section 4.8 of the Agreement is hereby amended in its entirety as follows:
(j) (i) Except as otherwise provided i n the paragraph following Section 4.8(k), within 10 days after the 15th day of each calendar
month, a detailed aging of each Borrower's receivables by invoice date and due date, together with payable aging by invoice
date and due date, inventory analysis, sales or billing journal, cash receipts report, and such other matters as Lender may
request; (ii) within 10 days after the end of each calendar month, a detailed aging of each Borrower's receivables by invoice
date and due date, together with an inventory analysis, sales or billing journal, cash receipts report, and such other matters as
Lender may request; and (iii) within 10 days after the end of each calendar month, a payable aging by invoice date and due
date as of the 3rd Business Day after the end of such month, commencing with January 3, 2019.
3. Amendment to Section 4.14. Section 4.14 of the Agreement is hereby amended in its entirety as follows:
4.14 Not permit Borrowers’ trade accounts payable that are 60 days or more past invoice due date to exceed $3,800,000 in aggregate,
measured as of the last day of November 2018, and thereafter as of the 3r d Business Day of each calendar month, commencing
January 3, 2019.
4.
Replacement Exhibit A. Exhibit A attached to the Agreement is hereby replaced
with
Exhibit A attached to this Amendment.
5. Waiver of Existing Defaults . Upon the terms and subject to the conditions set forth in this Amendment, Lender hereby waives the Existing
Defaults. This waiver of the Existing Defaults shall be effective only in this specific instance and for the specific purpose for which it is given, and shall not
entitle Borrowers to any other or further waiver in any similar or other circumstances.
6. Conditions Precedent to Effectiveness of Amendment . The effectiveness of this Amendment is subject to and contingent upon the fulfillment of
each and every one of the following conditions to the satisfaction of Lender:
(a)
Lender shall have received this Amendment, duly executed by Borrowers;
(b) After giving effect to this Amendment, no Event of Default or Default shall have occurred and be continuing;
all expenses incurred in connection with the preparation of this Amendment; and
(c) Lender shall have received a fully earned and nonrefundable waiver and amendment fee in the amount of $1,500, and reimbursement of
(d) After giving effect to this Amendment, all of the representations and warranties set forth herein and in the Agreement shall be true,
complete and accurate in all respects as of the date hereof (except for representations and warranties which are expressly stated to be true and correct as of
the date of the Agreement).
7. Representations and Warranties. In order to induce Lender to enter into this Amendment, each Borrower hereby represents and warrants to
Lender that:
continuing;
(a)
After giving effect to this Amendment, no Event of Default or Default
is
(b) After giving effect to this Amendment, all of the representations and warranties set forth in the Agreement and in the Agreement are true,
complete and accurate in all respects (except for representations and warranties which are expressly stated to be true and correct as of the date of the
Agreement); and
(c) This Amendment has been duly executed and delivered by Borrowers, and the Agreement continues to constitute the legal, valid and
binding agreements and obligations of Borrowers, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency,
and similar laws and equitable principles affecting the enforcement of creditors’ rights generally.
8. Counterparts; Electronic Execution. This Amendment may be executed in any number of counterparts and by different parties on separate
counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one
and the same Amendment. Delivery of an executed counterpart of this Amendment electronically shall be equally as effective as delivery of a manually
executed counterpart of this Amendment. Any party delivering an executed counterpart of this Amendment electronically also shall deliver a manually executed
counterpart of this Amendment but the failure to deliver a manually executed counterpart shall not affect the validity, enforceability, and binding effect of this
Amendment.
9. Integration. The Agreement as amended by this Amendment constitutes the entire agreement and understanding between the parties hereto with
respect to the subject matter hereof and
thereof, and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof and thereof.
10. No Other Waiver. Except as provided in Section 5 above, the execution of this Amendment and the acceptance of all other agreements and
instruments related hereto shall not be deemed to be a waiver of any Default or Event of Default, whether or not known to Lender and whether or not existing
on the date of this Amendment.
11.
Release.
(a) Each Borrower hereby absolutely and unconditionally releases and forever discharges Lender, and any and all participants, parent
corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former
directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description,
whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which such Borrower has had, now has or has made
claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and
including the date of this Amendment, whether such claims, demands and causes of action are matured or unmatured or known or unknown. Each Borrower
certifies that it has read the following provisions of California Civil Code Section 1542:
A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of
executing the release, which if known by him or her must have materially affected his or her settlement with the debtor.
(b) Each Borrower understands and acknowledges that the significance and consequence of this waiver of California Civil Code Section 1542
is that even if it should eventually suffer additional damages arising out of the facts referred to above, it will not be able to make any claim for those damages.
Furthermore, each Borrower acknowledges that it intends these consequences even as to claims for damages that may exist as of the date of this release but
which it does not know exist, and which, if known, would materially affect its decision to execute this Agreement, regardless of whether its lack of knowledge is
the result of ignorance, oversight, error, negligence, or any other cause.
12. Reaffirmation of the Agreement. The Agreement as amended hereby and all other agreements, instruments and documents executed in
connection therewith remain in full force and effect.
[remainder of page intentionally left blank]
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Amendment as of the date first hereinabove written.
DIGITAL TURBINE, INC.,
a Delaware corporation
By: Name: Title:
DIGITAL TURBINE USA, INC. ,
a Delaware corporation
By: Name: Title:
DIGITAL TURBINE MEDIA, INC.,
a Delaware corporation
By: Name: Title:
[Signatures continue on the following page]
WESTERN ALLIANCE BANK ,
an Arizona corporation
By: Name:
Amendment Number Three to Credit Agreement and Waiver of Defaults Existing Defaults
Section / Covenant
Required
Actual
Title:
Schedule A to
Section 4.14 – Accounts Payable
Borrower shall not permit Borrowers’ trade
accounts payable that are 60 days or more past
invoice due date to exceed (measured as of the
last day of each calendar month)
$4,400,000 in aggregate for the month ended
September 30, 2018
Borrower shall not permit Borrowers’ trade
accounts payable that are 60 days or more past
invoice due date to exceed (measured as of the
last day of each calendar month)
$3,800,000 in aggregate for the month ended
October 31, 2018
$5,085,000 in aggregate for the month ended
September 30, 2018
$5,236,000 in aggregate for the month ended
October 31, 2018
Amendment Number Three to Credit Agreement and Waiver of Defaults Form of Compliance Certificate
Exhibit A to
AMENDMENT NUMBER FOUR TO BUSINESS FINANCING AGREEMENT
AND WAIVER OF DEFAULT
This AMENDMENT NUMBER FOUR TO BUSINESS FINANCING AGREEMENT AND WAIVER OF DEFAULT (this “ Amendment”), dated as of May
22, 2019, is entered into by and between WESTERN ALLIANCE BANK, an Arizona corporation (“ Lender”), on the one hand, and DIGITAL TURBINE, INC., a
Delaware corporation (“Parent”), DIGITAL TURBINE USA, INC., a Delaware corporation (“ USA”), and DIGITAL TURBINE MEDIA, INC., a Delaware corporation
(“Media”) (Parent, USA, and Media are sometimes collectively referred to herein as “ Borrowers” and each individually as a “ Borrower”), on the other hand,
with reference to the following facts:
A. Borrowers and Lender previously entered into that certain Business Financing Agreement, dated as of May 23, 2017, as amended by that certain
Amendment Number One to Business Financing Agreement and Waiver of Defaults, dated as of July 19, 2017, that certain Amendment Number Two to
Business Financing Agreement and Waiver of Default, dated as of August 3, 2018, and that certain Amendment Number Three to Business Financing
Agreement and Waiver of Defaults, dated as of January 2, 2019 (as so amended, the “Agreement”).
B. Borrowers are in default of the provision of the Agreement set forth on Schedule A attached hereto, as at the date indicated in such Schedule (the
“Existing Default”).
C. Borrowers have requested that Lender (1) waive the Existing Default, and (2) make certain other changes to the Agreement, which Lender is
willing to do, subject to the terms and conditions of this Amendment.
NOW, THEREFORE, in consideration of the foregoing, the parties hereto hereby agree as follows:
1.
Defined Terms. All initially capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Agreement.
2. Amendment to Section 1.1. Clause (d) of Section 1.1 of the Agreement is hereby amended in its entirety as follows:
(d) Borrowers demonstrate compliance with (i) the covenants set forth in Section 4.12(a) and 4.14 for the most recent 3 month ends,
and (ii) the covenant set forth in Section 4.12(b) for the most recent fiscal quarter end.
3. Amendments to Section 2.2(a) and (b) . Sections 2.2(a) and (b) of the Agreement are hereby amended in their entirety as follows:
(a)
Termination Fee. In the event the Line of Credit under this Agreement is terminated by Borrowers prior to May 23, 2020,
Borrowers shall pay the Termination Fee to Lender; provided that if this Agreement, following Borrowers' request and the
consent of Lender (which consent shall not be unreasonably withheld), is transferred to an operating division of Lender other
than the Capital Finance Group, the transfer will not be deemed a termination resulting in the payment of the Termination Fee;
provided that Borrowers agree, at the time of transfer, to the payment of comparable fees in an amount not less than that set
forth in this Agreement, and provided further that such transfer is not as a result of an Event of Default.
Amendment Number Four to Business Financing Agreement and Waiver of Default
(b)
Unused Line Fee. The accrued and unpaid Unused Line Fee shall be due and payable within 10 calendar days after each
Month End during the term hereof.
4. Amendment to Section 4.8(a). Section 4.8(a) of the Agreement is hereby amended in its entirety as follows:
(a)
Within 180 days of the fiscal year end, the annual financial statements of Parent, certified and dated by an authorized financial
officer. These financial statements must be audited (with an opinion satisfactory to the Lender) by Parent’s current (as of the
date hereof) Certified Public Accountants or another Certified Public Accountant acceptable to Lender. The statements shall be
prepared on a consolidated and consolidating basis in accordance with GAAP.
5. Amendments to Sections 4.8(i) and (j). Sections 4.8(i) and (j) of the Agreement are hereby amended in their entirety as follows:
(i)
(j)
Within 15 days after the end of each calendar month, a roll forward domestic borrowing base certificate, in substantially the
form attached hereto as Exhibit B, setting forth Domestic Eligible Receivables and Receivable Amounts thereof as of the last
day of the preceding reporting period.
(i) within 15 days after the end of each calendar month, a detailed aging of each Borrower's receivables by invoice date and
due date, together with payable aging by invoice date and due date, inventory analysis, sales or billing journal, cash receipts
report, and such other matters as Lender may request; and (ii) within 15 days after the end of each calendar month, a payable
aging by invoice date and due date as of the 3rd Business Day after the end of such month.
6. Amendment to Section 4.8. The paragraph immediately following Section 4.8(k) of the Agreement is hereby deleted.
7. Amendments to Section 4.12. Sections 4.12(a) and (b) of the Agreement are hereby amended in their entirety as follows:
(a)
Quick Ratio not at any time less than the ratio indicated in the table below opposite the applicable period in which the test date
occurs, measured as of the end of each month during which any Advances were outstanding:
Amendment Number Four to Business Financing Agreement and Waiver of Default
Period
Quick Ratio
May 31, 2019 – August 31, 2019
0.75 to 1.00
September 1, 2019 – February 28, 2020
0.80 to 1.00
March 1, 2020 – August 31, 2020
0.85 to 1.00
September 1, 2020 and thereafter
0.90 to 1.00
(b)
trailing 6 months EBDAS not less than $1.00, tested as of each fiscal quarter end during which any Advances were
outstanding.
8. Amendment to Section 4.14. Section 4.14 of the Agreement is hereby amended in its entirety as follows:
4.14
Not permit Borrowers’ trade accounts payable that are 60 days or more past invoice due date to exceed 20% of Borrowers’ total
accounts payable in aggregate, measured as of the 3rd Business Day of each calendar month during which any Advances were
outstanding.
9. Amendments to Section 12.1.
(a) The following defined terms set forth in Section 12.1 of the Agreement are hereby amended in their entirety as follows:
“Domestic Credit Limit” means $20,000,000, which is intended to be the maximum amount of Advances at any time outstanding with respect to
Domestic Eligible Receivables.
“Domestic Facility Fee” means a fee equal to 0.20% of the Domestic Credit Limit due upon the date of this Agreement and each anniversary
thereof so long as any Advances are outstanding or available hereunder.
“Finance Charge Percentage” means a rate per year equal to the Prime Rate plus 0.50 percentage points with respect to Advances made
under the Domestic Line of Credit, plus an additional 5.00 percentage points during any period that an Event of Default has occurred and is
continuing.
“Maturity Date” means May 23, 2021 or such earlier date as Lender shall have declared the Obligations immediately due and payable pursuant
to Section 7.2.
“Prime Rate” means the greater of 5.50% per year or the Prime Rate published in the Money Rates section of the Western Edition of The Wall
Street Journal, or such other rate of interest publicly announced from time to time by Lender as its Prime Rate. Lender may price loans to its
customers at, above, or below the Prime Rate. Any change in the Prime Rate shall take effect at the opening of business on the day specified in
the public announcement of a change in the Prime Rate.
Amendment Number Four to Business Financing Agreement and Waiver of Default
(b) Clause (i) of the definition of “Domestic Eligible Receivable” set forth in Section 12.1 of the Agreement is hereby amended in its entirety as
follows:
(i)
the Account Debtor on the Receivable is not any of the following: (1) an employee, Affiliate, parent or subsidiary of any Borrower, or an
entity which has common officers or directors with any Borrower; (2) the U.S. government or any agency or department of the U.S.
government unless the applicable Borrower complies with the procedures in the Federal Assignment of Claims Act of 1940 (41 U.S.C.
§15) with respect to the Receivable, and the underlying contract expressly provides that neither the U.S. government nor any agency or
department thereof shall have the right of set-off against such Borrower; (3) any person or entity located in a foreign country unless (A)
such person or entity is a well-qualified, multi-national Fortune 1000 entity, that is approved by Lender on a case-by-case basis in its
sole discretion; or (B) the Receivable is supported by an irrevocable letter of credit issued by a bank acceptable to Lender, and if
requested by Lender, the original of such letter of credit and/or any usance drafts drawn under such letter of credit and accepted by the
issuing or confirming bank have been delivered to Lender; or (4) an Account Debtor as to which 35% or more of the aggregate dollar
amount of all outstanding Receivables owing from such Account Debtor have not been paid within 90 days from invoice date (or within
120 days as approved by Lender on a case-by-case basis in its sole discretion).
(c) The following new defined terms are hereby added to Section 12.1 of the Agreement in alphabetical order:
“EBDAS” means earnings before depreciation, amortization, stock compensation, non-cash warrant and derivative liability expense, and any
other onetime non-recurring expenses Lender deems appropriate.
“Quick Ratio” means unrestricted balance sheet cash, plus trade accounts receivable net of any reserve for uncollectable accounts and
excluding any receivables from affiliates whether trade or otherwise, divided by all liabilities denoted as current according to GAAP, and including
any Advances whether or not denoted as a current liability. The current liabilities will exclude deferred revenue (if any), but will include all
accrued license fees and revenue share obligations.
“Unused Line Fee” means, with respect to each month, commencing with the month ending May 31, 2019, a fee in an amount equal to the
product of (a) 0.10% per annum times (b) the difference of (i) the lesser of the Domestic Credit Limit or the Borrowing Base, minus (ii) the sum of
the average outstanding Advances during such month (including deemed Advances with respect to the International Sublimit and the total
amount of the Cash Management Sublimit). The Unused Line Fee shall be calculated on the basis of a year of 360 days for the actual days
elapsed.
(d) The following defined terms set forth in Section 12.1 of the Agreement are hereby deleted:
“Borrower Agreement”
“Current Ratio”
10. Replacement Exhibit A. Exhibit A attached to the Agreement is hereby replaced with Exhibit A attached to this Amendment.
Amendment Number Four to Business Financing Agreement and Waiver of Default
11. Waiver of Existing Default . Upon the terms and subject to the conditions set forth in this Amendment, Lender hereby waives the Existing
Default. This waiver of the Existing Default shall be effective only in this specific instance and for the specific purpose for which it is given, and shall not entitle
Borrowers to any other or further waiver in any similar or other circumstances.
12. Conditions Precedent to Effectiveness of Amendment . The effectiveness of this Amendment is subject to and contingent upon the fulfillment of
each and every one of the following conditions to the satisfaction of Lender:
(a) Lender shall have received this Amendment, duly executed by Borrowers;
(b) Lender shall have received payment in full of the Domestic Facility Fee and the Due Diligence Fee due on May 23, 2019;
(c) After giving effect to this Amendment, no Event of Default or Default shall have occurred and be continuing; and
(d) After giving effect to this Amendment, all of the representations and warranties set forth herein and in the Agreement shall be true,
complete and accurate in all respects as of the date hereof (except for representations and warranties which are expressly stated to be true and correct as of the
date of the Agreement).
13. Representations and Warranties. In order to induce Lender to enter into this Amendment, each Borrower hereby represents and warrants to
Lender that:
(a) After giving effect to this Amendment, no Event of Default or Default is continuing;
(b) After giving effect to this Amendment, all of the representations and warranties set forth in the Agreement and in the Agreement are true,
complete and accurate in all respects (except for representations and warranties which are expressly stated to be true and correct as of the date of the
Agreement); and
(c) This Amendment has been duly executed and delivered by Borrowers, and the Agreement continues to constitute the legal, valid and
binding agreements and obligations of Borrowers, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency,
and similar laws and equitable principles affecting the enforcement of creditors’ rights generally.
14. Counterparts; Electronic Execution. This Amendment may be executed in any number of counterparts and by different parties on separate
counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and
the same Amendment. Delivery of an executed counterpart of this Amendment electronically shall be equally as effective as delivery of a manually executed
counterpart of this Amendment. Any party delivering an executed counterpart of this Amendment electronically also shall deliver a manually executed
counterpart of this Amendment but the failure to deliver a manually executed counterpart shall not affect the validity, enforceability, and binding effect of this
Amendment.
15. Integration. The Agreement as amended by this Amendment constitutes the entire agreement and understanding between the parties hereto with
respect to the subject matter hereof and thereof, and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter
hereof and thereof.
16. No Other Waiver. Except as provided in Section 11 above, the execution of this Amendment and the acceptance of all other agreements and
instruments related hereto shall not be deemed to be a
Amendment Number Four to Business Financing Agreement and Waiver of Default
waiver of any Default or Event of Default, whether or not known to Lender and whether or not existing on the date of this Amendment.
17. Release.
(a) Each Borrower hereby absolutely and unconditionally releases and forever discharges Lender, and any and all participants, parent
corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former
directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description,
whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which such Borrower has had, now has or has made
claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and
including the date of this Amendment, whether such claims, demands and causes of action are matured or unmatured or known or unknown. Each Borrower
certifies that it has read the following provisions of California Civil Code Section 1542:
A general release does not extend to claims that the creditor or releasing party does not know or suspect to exist in his or her favor at the
time of executing the release and that, if known by him or her, would have materially affected his or her settlement with the debtor or
released party.
(b) Each Borrower understands and acknowledges that the significance and consequence of this waiver of California Civil Code Section 1542
is that even if it should eventually suffer additional damages arising out of the facts referred to above, it will not be able to make any claim for those damages.
Furthermore, each Borrower acknowledges that it intends these consequences even as to claims for damages that may exist as of the date of this release but
which it does not know exist, and which, if known, would materially affect its decision to execute this Agreement, regardless of whether its lack of knowledge is
the result of ignorance, oversight, error, negligence, or any other cause.
18. Reaffirmation of the Agreement. The Agreement as amended hereby and all other agreements, instruments and documents executed in
connection therewith remain in full force and effect.
[remainder of page intentionally left blank]
Amendment Number Four to Business Financing Agreement and Waiver of Default
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Amendment as of the date first hereinabove written.
DIGITAL TURBINE, INC.,
a Delaware corporation
By:
Name:
Title:
DIGITAL TURBINE USA, INC. ,
a Delaware corporation
By:
Name:
Title:
DIGITAL TURBINE MEDIA, INC.,
a Delaware corporation
By:
Name:
Title:
[Signatures continue on the following page]
Amendment Number Four to Business Financing Agreement and Waiver of Default
WESTERN ALLIANCE BANK ,
an Arizona corporation
By:
Name:
Title:
Amendment Number Four to Business Financing Agreement and Waiver of Default
Schedule A
to
Amendment Number Four to Credit Agreement and Waiver of Default
Existing Default
Section / Covenant
Required
Actual
Section 4.12(b) – performance to plan
Quarterly consolidated revenue of Parent,
measured as of the end of each fiscal quarter
during which any Advances were outstanding, to
not negatively deviate by more than 15% from the
projections approved by Parent's board of directors
and delivered to Lender pursuant to Section 4.8(e)
hereof.
$27,000,000 vs projection of $34,000,000 for the
fiscal quarter ending March 31, 2019
Amendment Number Four to Business Financing Agreement and Waiver of Default
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statement (Nos. 333-193022 and 333-202863) on Form S-8 of Digital Turbine, Inc. (the “Company”) of our
reports dated June 3, 2019, relating to the consolidated financial statements, and the effectiveness of internal control over financial reporting of the Company and its
Subsidiaries, appearing in this Annual Report on Form 10-K of the Company for the year ended March 31, 2019.
Exhibit 23.1
/s/ SingerLewak LLP
Los Angeles, California
June 3, 2019
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Exhibit 31.1
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 3, 2019
By:
/s/William Stone
William Stone
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Exhibit 31.2
I, Barrett Garrison, 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 3, 2019
By:
/s/ Barrett Garrison
Barrett Garrison
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, 2019 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 3, 2019
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, 2019 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 3, 2019
By:
/s/ Barrett Garrison
Barrett Garrison
Chief Financial Officer
(Principal Financial Officer)