# Digital Turbine, Inc.: Form 10-Q for the period ended Dec 31, 2015

- Company: [Digital Turbine, Inc.](/companies/apps.md) (CIK 317788)
- Form: 10-Q
- Filed: 2016-02-09
- Accepted by EDGAR: Feb 9, 2016, 17:13 ET
- Period: 2015-12-31
- Accession: 0001628280-16-010895
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/317788/000162828016010895/apps10-qx12312015.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/317788/000162828016010895/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2015-12-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2015-10-01 to 2015-12-31 | $24.1m | us-gaap:Revenues |
| Revenue | 9 months, 2015-04-01 to 2015-12-31 | $63.5m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2015-10-01 to 2015-12-31 | $20.3m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2015-04-01 to 2015-12-31 | $57.3m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2015-10-01 to 2015-12-31 | $3.8m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2015-04-01 to 2015-12-31 | $6.2m | us-gaap:GrossProfit |
| Research and development | 3 months, 2015-10-01 to 2015-12-31 | $2.7m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2015-04-01 to 2015-12-31 | $7.9m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2015-10-01 to 2015-12-31 | −$5.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2015-04-01 to 2015-12-31 | −$20.6m | us-gaap:OperatingIncomeLoss |
| Net income | 3 months, 2015-10-01 to 2015-12-31 | −$5.8m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2015-04-01 to 2015-12-31 | −$22.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2015-10-01 to 2015-12-31 | −$0.09 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted EPS | 9 months, 2015-04-01 to 2015-12-31 | −$0.37 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 9 months, 2015-04-01 to 2015-12-31 | −$5.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2015-04-01 to 2015-12-31 | $0 | us-gaap:PaymentsToAcquireProductiveAssets |
| Cash and equivalents | at 2015-12-31 | $13.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2015-12-31 | $31.4m | us-gaap:AssetsCurrent |
| Total assets | at 2015-12-31 | $125.1m | us-gaap:Assets |
| Current liabilities | at 2015-12-31 | $30.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2015-12-31 | $38.3m | us-gaap:Liabilities |
| Long-term debt | at 2015-12-31 | $7.4m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2015-12-31 | $3.1m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2015-12-31 | $86.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 27,788 characters.

The following discussion should be read in conjunction with, and is qualified in its entirety by, the Financial Statements and the Notes thereto included in this Report. This Quarterly Report on Form 10-Q (the “Report”) and the following discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1993, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements involve substantial risks and uncertainties. When used in this Report, the words “anticipate,” “believe,” “estimate,” “expect,” “will,” “seeks,” “should,” “could,” “would,” “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” in our Annual Report on Form 10-K, for the fiscal year ended March 31, 2015. Historical operating results are not necessarily indicative of the trends in operating results for any future period. We do not undertake any obligation to update any forward-looking statements made in this Report. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on known results and trends at the time they are made, to anticipate future results or trends.

Unless the context otherwise indicates, the use of the terms “we,” “our,” “us,” “Digital Turbine,” “DT,” or the “Company” refer to the collective business and operations of Digital Turbine, Inc. through its operating and wholly-owned subsidiaries, Digital Turbine USA, Inc. (“DT USA”), Digital Turbine (EMEA) Ltd. (“DT EMEA”), Digital Turbine Australia 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”).

All numbers are in thousands, except share and per share amounts.

### Company Overview

Digital Turbine, through its subsidiaries, innovates at the convergence of media and mobile communications, delivering end-to-end products and solutions for mobile operators, application advertisers, device OEMs, and other third parties, to enable them to effectively monetize mobile content and generate higher value user acquisition. The Company operates its business in two reportable segments - Advertising and Content.

The Company's Advertising business is comprised of products including:

- DT Ignite™, a mobile device management solution with targeted application distribution capabilities,
- DT IQ™, a customized user experience and application discovery tool,
- DT Media, an advertiser solution for unique and exclusive carrier and OEM inventory, and
- Appia Core, a leading worldwide mobile user acquisition network.

The Company's Content business is comprised of products including:

- DT Marketplace™, an application and content store, and
- DT Pay™, a content management and mobile payment solution.

Digital Turbine's global headquarters are located in Austin, Texas, with other United States offices in Durham, North Carolina and San Francisco, California. International offices include Berlin, Singapore, Sydney, and Tel Aviv.

### Advertising

DT Ignite is a mobile application management software that is pre-installed on devices to enable mobile operators and OEMs to control, manage, and monetize the applications that are installed on mobile devices. DT Ignite allows mobile operators to customize the out-of-the-box experience for customers and monetize their home screens via Cost-Per-Install ("CPI") arrangements, Cost-Per-Placement ("CPP") arrangements, and Cost-Per-Action ("CPA") arrangements with third-party application developers. Applications can be installed silently or with notification, on first boot or later in the life-cycle of the device, allowing mobile operators and OEMs to participate in an advertising revenue stream. The Company has launched DT Ignite with mobile operators and OEMs in North America, Europe, Asia Pacific, India, and Israel.

DT IQ enables application discovery, both organic and sponsored, in a variety of user interfaces. The core of the product suite is the DT IQ engine, which provides application recommendations to the device end-user blended with sponsored ads. The recommendations are presented either in a widget, via the IQ client application on Android, via the IQ AppWall, or integrated into partner applications via the IQ Application Programming Interface ("API"). IQ monetizes through blending in sponsored application recommendations via the same commercial models as DT Ignite. DT IQ has been deployed with mobile operators across North America and Asia Pacific.

DT Media is an advertiser solution for unique and exclusive carrier and OEM on-device home screen inventory.

Appia Core is a leading worldwide mobile user acquisition network. Its mobile user acquisition platform is a demand side platform, or DSP. This platform allows mobile advertisers to engage with the right customers for their applications at the right time to gain them as customers. Appia Core accesses mobile ad inventory through publishers, including direct developer relationships, mobile websites, mobile carriers, and mediated relationships; as well as purchasing inventory through exchanges using real-time bidding. The advertising revenue generated by Appia Core’s platform is shared with publishers according to contractual rates in the case of direct or mediated relationships. When inventory is accessed using real-time bidding, Appia Core buys inventory at a rate determined by the marketplace. Since inception, Appia Core has delivered over 130 million application installs for hundreds of advertisers.

### Content

DT Pay is currently one of the Company’s primary revenue generating products. DT Pay is an API that integrates billing infrastructure between mobile operators and content publishers to facilitate mobile commerce. Increasingly, mobile content publishers want to go directly to consumers to sell their content rather than sell through traditional distributors such as Google Play or the Apple Application Store. DT Pay allows publishers and carriers to monetize those applications by allowing the content to be billed directly to the consumer via carrier billing. DT Pay has been launched in Australia, Singapore, and the Philippines.

DT Marketplace can be sold as an application storefront that manages the retailing of mobile content, including features such as merchandising, product placements, reporting, pricing, promotions, and distribution of digital goods. DT Marketplace also includes the distribution and licensing of content across multiple content categories including music, applications, wallpapers, eBooks, and games. DT Marketplace is deployed with many operators, across multiple countries, including Australia and the Philippines.

### RESULTS OF OPERATIONS

All financial results of operations during the three and nine months ended December 31, 2014 do not include Appia financial results as the Appia acquisition did not close until March 6, 2015.

*(in thousands, except per share amounts)*

*(in thousands, except per share amounts)*

|  | Three Months Ended December 31, 2015 | December 31, 2014 | % of Change | Nine Months Ended December 31, 2015 | December 31, 2014 | % of Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | $24,089 | $7,006 | 243.8% | 63,509 | 18,023 | 252.4% |
| License fees and revenue share | 18,569 | 4,609 | 302.9% | 48,889 | 11,720 | 317.1% |
| Other direct cost of revenues (amortization of intangibles) | $1,704 | $414 | 311.6% | 8,453 | 1,103 | 666.4% |
| Gross profit | 3,816 | 1,983 | 92.4% | 6,167 | 5,200 | 18.6% |
| SG&A | $9,081 | $7,374 | 23.1% | 26,727 | 19,914 | 34.2% |
| Operating loss | (5,265) | (5,391) | (2.3)% | (20,560) | (14,714) | 39.7% |
| Interest income/(expense), net | $(471) | $5 | (9,520.0)% | (1,367) | (122) | 1,020.5% |
| Foreign exchange transaction gain/(loss) | (8) | 41 | (119.5)% | (20) | 31 | (164.5)% |
| Gain/(loss) on disposal of fixed assets | $(8) | $— | (100.0)% | (31) | 2 | (1,650.0)% |
| Gain/(loss) on settlement of debt | $— | $1 | (100.0)% | — | (9) | (100.0)% |
| Other income | $(8) | $(25) | (68.0)% | 20 | (13) | 253.8% |
| Loss before income taxes | $(5,760) | $(5,369) | 7.3% | (21,958) | (14,825) | 48.1% |
| Income tax provision/(benefit) | $3 | $115 | (97.4)% | 246 | 469 | (47.5)% |
| Net loss, net of taxes | $(5,763) | $(5,484) | 5.1% | (22,204) | (15,294) | 45.2% |
| Basic and diluted net loss per common share: | (0.09) | (0.14) | (39.8)% | (0.37) | (0.41) | (9.4)% |
| Weighted average common shares outstanding, basic and diluted | 65,979 | 37,799 | 74.6% | 60,201 | 37,576 | 60.2% |

### Comparison of the Three and Nine Months Ended December 31, 2015 and 2014

### Revenues

*(in thousands)*

*(in thousands)*

| Revenues by type: | Three Months Ended December 31, 2015 | 2014 | % of Change | Nine Months Ended December 31, 2015 | 2014 | % of Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Content | $6,641 | $5,139 | 29.2% | $20,782 | $15,474 | 34.3% |
| Advertising | 17,448 | 1,867 | 834.5% | 42,727 | 2,549 | 1,576.2% |
| Total | $24,089 | $7,006 | 243.8% | $63,509 | $18,023 | 252.4% |

During the three and nine months ended December 31, 2015, revenues increased approximately $17,083 or 243.8% and $45,486 or 252.4%, respectively, as compared to the three and nine months ended December 31, 2014, respectively. During the three and nine months ended December 31, 2015, we experienced growth in both the Content and Advertising businesses, with the Advertising growth stemming from both organic growth in DT Ignite and one quarter and three quarters, respectively, of Appia Core revenue. Additionally, the Advertising revenue for the three months ended December 31, 2015 included a one-time adjustment which reduced revenue by approximately $500. This adjustment consisted of a $700 credit, which reduced revenue, with a large advertising partner, and also included a positive impact of approximately $200 related to a change in estimate for sales allowance. The increase in the Content business was driven primarily from growth in DT Pay, with overall increased demand for the product, the service being launched with new customers in Australia, as well as new Content services provided in new markets in Southeast Asia.

This growth was offset by a decline in DT Marketplace as our contract in Israel was terminated during the period ended June 30, 2015. Additionally, the growth was further offset by continued decline in the foreign exchange rate of the Australian dollar to the United States dollar. Organic growth in Advertising was driven primarily by CPI and CPP revenue from new Advertising partners', and amounts earned from carrier partners related to software customization and integration. Inorganic growth in Advertising was driven by the inclusion of one quarter and three quarters, respectively, of Appia Core over the three and nine months ended December 31, 2015 compared to the same periods during 2014.

### Gross Margins

*(in thousands)*

*(in thousands)*

| Gross margin by type | Three Months Ended December 31, 2015 | 2014 | % of Change | Nine Months Ended December 31, 2015 | 2014 | % of Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Content gross margin $ | $998 | $1,014 | (1.6)% | $141 | $3,731 | (96.2)% |
| Content gross margin % | 15.0% | 19.7% |  | 0.7% | 24.1% |  |
| Advertising gross margin $ | $2,818 | $969 | 190.8% | $6,026 | $1,469 | 310.2% |
| Advertising gross margin % | 16.2% | 51.9% |  | 14.1% | 57.6% |  |
| Total gross margin $ | $3,816 | $1,983 | 92.4% | $6,167 | $5,200 | 18.6% |
| Total gross margin % | 15.8% | 28.3% |  | 9.7% | 28.9% |  |

Gross margin, inclusive of the impact of other direct cost of revenues (amortization of intangibles), was approximately $3,816 or 15.8% for the three months ended December 31, 2015, versus approximately $1,983 or 28.3% for the three months ended December 31, 2014. The increase from $1,983 to $3,816 is primarily attributable to the inclusion of a full quarter of Appia Core operations. This was partially offset by increased amortization expense associated with the Appia acquisition. Overall gross margin percentage has declined as the Appia Core business has a lower gross margin as compared to DT Media.

Gross margin dollars, inclusive of the impact of other direct cost of revenues (amortization of intangibles), increased $967 or 18.6%, from $5,200 to $6,167 during the nine months ended December 31, 2014 and 2015, respectively. This increase includes the impacts of an approximate $2,400 accelerated amortization expense related to customer relationship intangible assets associated with customer terminations related to our DT EMEA Content business. Excluding the effects of the approximately $2,400 amortization, total gross margin would have been $8,567 or 13.5% during the nine months ended December 31, 2015, which is an increase of approximately $3,367 or 64.8% from the nine months ended December 31, 2014. This increase is due primarily to gross margin dollars attributable to the inclusion of three quarters of Appia Core operations during the nine months ended December 31, 2015.

Content gross margin, inclusive of the impact of other direct cost of revenues (amortization of intangibles), was approximately $998 or 15.0% for the three months ended December 31, 2015, versus approximately $1,014 or 19.7% for the three months ended December 31, 2014. This decrease in Content gross margin dollars and percentages of $17 and (1.6)%, respectively, was due primarily to a mix shift from DT Marketplace to DT Pay, which carries a lower gross margin.

Content gross margin, inclusive of the impact of other direct cost of revenues (amortization of intangibles), decreased $3,590 or (96.2)%, from $3,731 to $141 during the nine months ended December 31, 2014 and 2015, respectively. Excluding the effects of the $2,400 amortization expense, gross margin would have been $2,541 or 12.2% during the nine months ended December 31, 2015, which is a decrease of approximately $1,190 or 31.9% from the nine months ended December 31, 2014. Similar to the three months comparison, this decrease in Content gross margin dollars and percentages was due primarily to a mix shift from DT Marketplace to DT Pay, which carries a lower gross margin.

Advertising gross margins dollars increased primarily due to the inclusion of one quarter and three quarters of Appia Core operations for the three and nine months ended December 31, 2015, respectively, compared to the same comparative periods during 2014. Also driving the increase in gross margin for the three months ended December 31, 2015 was a net positive impact of $181 related to a one time sales credit adjustment to a large advertising partner and also a change in estimate related to sales allowance. Overall gross margin percentage has declined as the Appia Core business has a lower gross margin as compared to DT Media. Additionally, in the three months ended December 31, 2015, gross margin was adversely impacted by high carrier partner concentration and the achievement during the quarter of an incentive threshold yielding a less favorable revenue share to the Company.

### Operating Expenses

*(in thousands)*

*(in thousands)*

|  | Three Months Ended December 31, 2015 | 2014 | % of Change | Nine Months Ended December 31, 2015 | 2014 | % of Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Product development expenses | $2,738 | $1,718 | 59.4% | $7,898 | $5,832 | 35.4% |
| Sales and marketing expenses | 1,676 | 485 | 245.6% | 4,426 | 1,989 | 122.5% |
| General and administrative expenses | 4,667 | 5,171 | (9.7)% | 14,403 | 12,093 | 19.1% |
| Total Operating Expenses | $9,081 | $7,374 | 23.1% | $26,727 | $19,914 | 34.2% |

Product development expenses include campaign management, the development and maintenance of the DT product suite, including Appia Core, as well as the costs to support DT Pay and DT Marketplace through the optimization of content for consumption on a mobile phone. Expenses in this area are primarily a function of personnel.

Sales and marketing expenses represent the costs of sales and marketing personnel, and advertising and marketing campaigns.

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.

Total operating expenses for the three months ended December 31, 2015 and 2014 were approximately $9,081 and $7,374, respectively, an increase of approximately $1,707 or 23.1%. The increase in expenses primarily related to the inclusion of one full quarter of Appia's operating expenses during the three months ended December 31, 2015 compared to the comparative period during 2014. The additional Appia operating expenses are related to product and marketing headcount directly related to the Appia Core and DT Media business. Additionally, the Company's investment in offices in Germany and Singapore contributed to the increase in product development expenses through additional headcount being added in those regions. The decline in general and administrative expenses is a result of the inclusion of costs related to M&A activity for Appia and XYO during the three months ended December 31, 2014.

Total operating expenses for the nine months ended December 31, 2015 and 2014 were approximately $26,727 and $19,914, respectively, an increase of approximately $6,813 or 34.2%. The increase in expenses primarily related to the inclusion of a full three quarters of Appia's operating expenses during the nine months ended December 31, 2015 compared to the comparative period during 2014. Additionally, the Company's investment in offices in Germany and Singapore contributed to the increase in product development expenses through additional headcount being added in those regions.

### Other Income and Expenses

*(in thousands)*

*(in thousands)*

|  | Three Months Ended December 31, 2015 | 2014 | % of Change | Nine Months Ended December 31, 2015 | 2014 | % of Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest and other (expense) | $(471) | $5 | (9,520.0)% | $(1,367) | $(122) | (1,020.5)% |
| Foreign exchange transaction gain/(loss), net | (8) | 41 | (119.5)% | (20) | 31 | (164.5)% |
| Gain/(loss) on disposal of fixed assets | (8) | — | 100.0% | (31) | 2 | (1,650.0)% |
| Gain/(loss) on settlement of debt | — | 1 | (100.0)% | — | (9) | 100.0% |
| Other income/(expense) | (8) | (25) | 68.0% | 20 | (13) | 253.8% |
| Total operating expenses | $(495) | $22 | (2,350.0)% | $(1,398) | $(111) | (1,159.5)% |

Interest and other expense includes interest expense, gain/(loss) on disposal of fixed assets, gain/(loss) on settlement of debt, and other ancillary costs incurred by the Company. These expenses were significantly higher in the three and nine months ended December 31, 2015, primarily due to interest expense incurred on the increased credit facility balance in place during the current periods, reflecting the debt associated with the Appia acquisition, as compared to the prior periods.

### Liquidity and Capital Resources

### Selected Financial Information

*(in thousands)*

|  | Period Ended December 31, 2015 | March 31, 2015 |
| --- | ---: | ---: |
| Cash and cash equivalents | $13,679 | $7,069 |
| Restricted cash | — | 200 |
| **Current Portion of Long-Term Debt** |  |  |
| Term loan, principal | $150 | $600 |
| Revolving line of credit, principal | 3,000 | 3,000 |
| Total Current Portion of Long-Term Debt | 3,150 | 3,600 |
| **Long-Term Debt** |  |  |
| Subordinated secured debenture, net of debt discount of $555 and $910, respectively | $7,445 | $7,090 |
| Total Debt | 10,595 | 10,690 |
| **Working capital:** |  |  |
| Current assets | 31,374 | 20,192 |
| Current liabilities | 30,889 | 23,952 |
| Working Capital | $485 | $(3,760) |

### Working Capital

Cash and cash equivalents and restricted cash totaled approximately $13,679 and approximately $7,269 at December 31, 2015 and March 31, 2015, respectively. Current assets totaled approximately $31,374 and approximately $20,192 at December 31, 2015 and March 31, 2015, respectively. As of December 31, 2015 and March 31, 2015, we had approximately $16,743 and $12,174, respectively, in accounts receivable. Our working capital as of December 31, 2015 and working capital deficit as of March 31, 2015 was $485 and $(3,760), respectively, with the proceeds received from the completed public offering and the net cash received from our investment in Sift of $875, comprised of $1,000 in cash received by the Company netted against $125 in fees incurred directly associated with the Sift transaction, as well as the increase in working capital primarily due to working capital and liquidity management, with a focus on accounts receivable collections and utilizing the full and extended payment terms on our accounts payable.

Our primary sources of liquidity have historically been issuances of common and preferred stock and convertible debt. The Company completed a public offering on October 2, 2015, netting cash proceeds to the Company of $12,627. The Company expects to use the net proceeds from the offering for organic business opportunities, product development, general corporate purposes, working capital, and capital expenditures. The Company believes that it has, after the public offering, sufficient cash, cash equivalents, and capital resources to operate its business at least through December 31, 2016. As of December 31, 2015, we had cash and cash equivalents totaling approximately $13,679, which includes the cash gross proceeds of $1,000 received from the Sift Media, Inc. transaction. Additionally, the Company currently has a $5,000 revolving credit facility in place with Silicon Valley Bank, which it uses to fund working capital requirements, as needed. As of December 31, 2015, the Company also had $150 outstanding on its term loan and $3,000 outstanding on its revolving credit facility with Silicon Valley Bank, both of which are included in current liabilities.

On June 11, 2015, our wholly-owned subsidiary DTM, and Silicon Valley Bank, entered into a Third Amended and Restated Loan and Security Agreement, pursuant to which Silicon Valley Bank agreed to increase the revolving line of credit available under such facility from $3,500 to $5,000, to extend the maturity date under the facility to June 30, 2016, and to make certain other changes to the terms of the existing agreement.

On November 30, 2015, our wholly-owned subsidiary DTM, and Silicon Valley Bank, entered into an amendment (the “Amendment”) to the Third Amended and Restated Loan and Security Agreement dated June 11, 2015. Pursuant to the Amendment, the adjusted EBITDA financial covenant was removed and replaced with the requirement to maintain an adjusted quick ratio of not less than 0.90:1.00 unless (a) there are no advances outstanding under the revolving facility, or (b) if the Company’s cash and cash equivalents held at the Bank or Bank’s Affiliates is greater than or equal to $15,000. Furthermore, the Streamline Period, which is not a financial covenant but applies to application of receivables, was amended so that it is achieved if the Borrower’s trailing three-month period revenue is not less than 85% of projections for the three months ending August 31, 2015 through November 30, 2015, 75% of projections for the three months ending December 31, 2015 and thereafter, with the projected revenue for such three month period as set forth in the Borrower’s operating budget provided to the Bank. The Amendment also added the requirement for the Company to deliver consolidated financial statements in addition to the Borrower.

### Cash Flow Summary

*(in thousands)*

| Consolidated Statement of Cash Flows Data: | Nine Months Ended December 31, 2015 | 2014 | % of Change |
| --- | ---: | ---: | ---: |
| Cash used in operating activities | $(5,491) | $(8,705) | 36.9% |
| Purchase and disposal of property and equipment, net | (976) | 67 | (1,556.7)% |
| Cash used in acquisition of assets | — | (2,125) | (100.0)% |
| Net cash from investment in Sift | 875 | — | 100.0% |
| Settlement of contingent liability | — | (49) | (100.0)% |
| Stock issued for cash in stock offering, net | 12,627 | — | 100.0% |
| Options exercised | 51 | — | 100.0% |
| Warrants exercised | — | 375 | (100.0)% |
| Repayment of debt obligations | (450) | — | 100.0% |
| Effect of exchange rate changes on cash and cash equivalents | (26) | 16 | (262.5)% |

### Operating Activities

For the nine months ended December 31, 2015, cash used in operating activities was $5,491. The difference between our net loss of $22,204 and net cash used in operating activities is comprised primarily of an increase in accounts receivable, deposits, and deferred financing costs of approximately $4,838, an increase in accounts payable of $5,602, an increase in accrued license fees and revenue share of $3,336, and a decrease in restricted cash transferred to operating cash, prepaid expenses and other current assets, accrued compensation, accrued interest, and other liabilities and other items of $200, $40, $837, $14, and $701, respectively. These changes are related to the loss for the period, but exclude: depreciation and amortization and amortization of debt discount of approximately $8,606 and $355, respectively, stock-based compensation, stock issued for settlement of liability, and stock-based compensation related to vesting of restricted stock for services of approximately $3,804, $283, and $723, respectively, and the effect of a reduction in the allowance for doubtful accounts and an adjustment to increase goodwill for purchase price of Appia of $26 and $126, respectively.

### Investing Activities

For the nine months ended December 31, 2015, cash used in investing activities was approximately $101, which comprises capital expenditures made on internally developed software of $976, offset by net cash received from our investment in Sift of $875, which includes $1,000 in cash received by the Company, net of $125 in fees incurred directly associated with the Sift transaction.

### Financing Activities

For the nine months ended December 31, 2015, cash used in financing activities was approximately $12,228, which is primarily due to stock issued for cash (net) in stock offering of $12,627 and proceeds received from the exercise of stock option of approximately $51, offset by repayment of principal on the credit facility and loss on exchange rate changes on cash and cash equivalents of approximately $450 and $26, 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.

## Market risk

As filed, 1,063 characters.

We have operations both within the United States and internationally, and we are exposed to market risks in the ordinary course of our business, primarily interest rate and foreign currency exchange risks.

### 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 foreign currencies and then translated into U.S. dollars, the vast majority of our media costs are billed in U.S. dollars, causing both our revenue and, disproportionately, our operating loss and net loss to be impacted by fluctuations in exchange rates. In addition, gains/(losses) related to translating certain cash balances, trade accounts receivable balances, and inter-company 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.

## Controls and procedures

As filed, 7,831 characters.

This Report includes the certifications of our Chief Executive Officer and Chief Financial Officer, as required by Rule 13a-14 of the Securities Exchange Act of 1934 (the “Exchange Act”). See Exhibits 31.1 and 31.2. Item 4 includes information concerning the controls and control evaluations referred to in those certifications.

### Background

As previously disclosed under “Part II - Item 9A - Controls and Procedures” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2015, management concluded that our internal controls over financial reporting were not effective as of March 31, 2015, because of certain deficiencies that constituted material weaknesses in our internal controls over financial reporting. Material weaknesses could result in material misstatements of substantially all of our financial statement accounts, which would result in a material misstatement of our annual or interim consolidated financial statements that would not be prevented or detected on a timely basis.

Our management has been actively engaged in the implementation of remediation efforts to address the material weaknesses, as well as other identified areas of risk. For a complete description of management’s remediation plan, see “Part II - Item 9A - Controls and Procedures” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2015.

### Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.

In connection with the preparation of this Report, Digital Turbine's management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation and the identification of certain material weaknesses in internal controls over financial reporting, which we view as an integral part of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of December 31, 2015. Nevertheless, based on a number of factors, including the performance of additional procedures by management designed to ensure the reliability of our financial reporting, we believe that the consolidated financial statements in this Report fairly present, in all material respects, our financial position, results of operations, and cash flows as of the dates, and for the periods, presented, in conformity with GAAP.

### Management’s Plan for Remediation

Beginning in the third quarter of fiscal year 2015 and continuing through the date of this Report, we began the implementation of measures designed to remediate the identified material weaknesses, including the following:

1\. Hired a Chief Accounting Officer (CAO) on February 27, 2015.

2\. Implemented a limited version of SAP, the Company’s accounting ERP system, with further enhancements as referred to in number 9 below.

3\. Implemented a management representation letter in which key members of management and the accounting/finance staff attest to certain questions related to the financial statements.

4\. Implemented a company-wide signature authority matrix, which outlines requirements and signing authority for executing contracts.

5\. Expect accounting group to be fully staffed in Asia Pacific prior to November 31, 2015. The Asia Pacific accounting team was fully staffed as of November 2015, however the Company is in the processes of evaluating whether additional accounting resources may be needed at this location.

6\. Consolidated all accounting-related decisions under the direction of the CAO.

7\. Continue working with a third party to document and remediate weaknesses, and to structure the Company’s accounting/finance department to meet SOX 404 (b) requirements.

8\. Continue to utilize third-party accounting experts to augment Company accounting staff, as necessary.

9\. Finalize the system implementation related to SAP, including a more automated consolidation system and additional functionality to reduce current manual processes. The Company is in the process of implementing additional functionality, which we expect to be available in June 2016. The Company is in the final stages of reviewing the design documentation with development expected to occur soon afterwards, with an ultimate ‘go-live’ goal of June 2016. This date is subject to delay given the inherent nature of systems implementations.

10\. Implement billing, disbursement, and stock option accounting systems and integrate with SAP. The Company implemented Concur T&E in the United States in early Q3 FY2016. The Company expects to roll out Concur T&E to the rest of the Company by September 2016.

11\. Document key accounting policies and internal control procedures for significant accounting areas, with an emphasis on implementing additional documented review and approval procedures and automated controls within the Company’s accounting system. As of Q3FY16, the Company continues to implement and refine key accounting policies, processes, and controls.

12\. Evaluate accounting and finance headcount resources globally to ensure that resources are sufficient to meet the accounting and finance requirements of the Company. As part of this evaluation the Audit Committee has approved three incremental resources, which the Company is in the process of staffing. One incremental resource has been hired in Austin, Texas, another incremental resource has been hired in Raleigh, North Carolina, and one individual has been hired in the Asia Pacific region as of December 31, 2015. As also referred to in item 5 above, the Company is in the processes of evaluating whether additional accounting resources may be needed, in addition those already hired.

13\. Develop formal training related to key accounting policies, internal controls, and SEC compliance, and deliver training to key personnel who have a direct and indirect impact on the transactions underlying the financial statements. As of Q3FY16, the Company has delivered and will continue to deliver training to key personnel related to the areas of revenue recognition, internal controls/SOX compliance, and liability/expense recognition. The Company will continue to re-inforce these topics and others over the next year.

14\. Implement information technology documentation and new controls that have an impact on financial reporting. In Q4FY16 the Company will be initiating training and internal controls/SOX awareness/training with respect to internal controls over information technology. This training and implementation of information technology controls is expected to continue over the next year.

The remediation plan, once fully implemented and determined to be operating effectively, is expected to result in the remediation of the identified material weaknesses in internal controls over financial reporting.

### Changes in Internal Control Over Financial Reporting

Other than as discussed in Management's Plan for Remediation above, there was no change in our internal controls over financial reporting during the quarter ended December 31, 2015 that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Filed Feb 9, 2016.
Source: SEC EDGAR, the filing index for accession 0001628280-16-010895. Last ingested by Listed: Nov 5, 2026, 12:38 ET. No prices; not investment advice.