# Digital Turbine, Inc.: Form 10-Q for the period ended Jun 30, 2016

- Company: [Digital Turbine, Inc.](/companies/apps.md) (CIK 317788)
- Form: 10-Q
- Filed: 2016-08-09
- Accepted by EDGAR: Aug 9, 2016, 16:54 ET
- Period: 2016-06-30
- Accession: 0001628280-16-018821
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/317788/000162828016018821/q1fy201710-qdocument.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/317788/000162828016018821/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-04-01 to 2016-06-30 | $24.0m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2016-04-01 to 2016-06-30 | $21.1m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2016-04-01 to 2016-06-30 | $2.9m | us-gaap:GrossProfit |
| Research and development | 3 months, 2016-04-01 to 2016-06-30 | $2.8m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2016-04-01 to 2016-06-30 | −$6.4m | us-gaap:OperatingIncomeLoss |
| Net income | 3 months, 2016-04-01 to 2016-06-30 | −$7.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-04-01 to 2016-06-30 | −$0.11 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 3 months, 2016-04-01 to 2016-06-30 | −$1.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2016-06-30 | $9.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-06-30 | $25.7m | us-gaap:AssetsCurrent |
| Total assets | at 2016-06-30 | $116.5m | us-gaap:Assets |
| Current liabilities | at 2016-06-30 | $39.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2016-06-30 | $40.3m | us-gaap:Liabilities |
| Current portion of debt | at 2016-06-30 | $10.5m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2016-06-30 | $76.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 30,647 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, 2016. 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.

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 two businesses:

- O&O, an advertiser solution for unique and exclusive carrier and OEM inventory which is comprised of services including:
- Ignite, a mobile device management platform with targeted application distribution capabilities, and
- Discover, an intelligent application discovery platform.
- A&P, a leading worldwide mobile user acquisition network which is comprised of services including:
- Syndicated network, and
- RTB or programmatic advertising.

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

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

### Advertising

#### O&O Business

The Company's O&O business is an advertiser solution for unique and exclusive carrier and OEM inventory, which is comprised of services including Ignite and Discover.

Ignite is a mobile application management software that enables mobile operators and OEMs to control, manage, and monetize applications installed at the time of activation and over the life of a mobile device. Ignite allows mobile operators to personalize the app activation experience for customers and monetize their home screens via Cost-Per-Install or CPI arrangements, Cost-Per-Placement or CPP arrangements, and/or Cost-Per-Action or CPA arrangements with third-party advertisers. There are several different delivery methods available to operators and OEMs on first boot of the device: Wizard, Silent, Software Development Kit ("SDK"), or Direct through Discover. Optional notification features are available throughout the life cycle of the device, providing operators additional opportunity for advertising revenue streams. The Company has launched Ignite with mobile operators and OEMs in North America, Latin America, Europe, Asia Pacific, India, and Israel.

Discover enables end user application and content discovery, both organic and sponsored, through a variety of user interfaces. The recommendation engine powering Discover and other Digital Turbine products is AppSource, which provides intelligent recommendations to the device end user. Monetization occurs through the display of and/or recommendation of applications via the CPI commercial model. Discover has been deployed with mobile operators in North America and Asia Pacific.

#### A&P Business

The Company's A&P business, formerly Appia Core, is a leading worldwide mobile user acquisition network. Its mobile user acquisition platform is a demand side platform, or DSP. This platform allows mobile advertisers to engage with the right customers for their applications at the right time to gain them as customers. The A&P business, through its syndicated network service, accesses mobile ad inventory through publishers including direct developer relationships, mobile websites, mobile carriers, and mediated relationships. The A&P business also accesses mobile ad inventory by purchasing inventory through exchanges using RTB. The advertising revenue generated by A&P platform is shared with publishers according to contractual rates in the case of direct or mediated relationships. When inventory is accessed using RTB, A&P buys inventory at a rate determined by the marketplace. Since inception, A&P has delivered over 150 million application installs for hundreds of advertisers.

### Content

Pay is an Application Programming Interface ("API") that integrates billing infrastructure between mobile operators and content publishers to facilitate mobile commerce. Increasingly, mobile content publishers want to go directly to consumers to sell their content rather than sell through traditional distributors such as Google Play or the Apple Application Store, which are not as prominent in select countries. Pay allows publishers and carriers to monetize those applications by allowing the content to be billed directly to the consumer via carrier billing. Pay has been launched in Australia, Philippines, India, and Singapore.

Marketplace is a white-label solution for mobile operators and OEMs to offer their own branded content store. Marketplace can be sold as an application storefront that manages the retailing of mobile content including features such as merchandising, product placements, reporting, pricing, promotions, and distribution of digital goods. Marketplace also includes the distribution and licensing of content across multiple content categories including music, applications, wallpapers, videos, and games. Marketplace is deployed with many operators across multiple countries including Australia, Philippines, Singapore, and Indonesia.

### RESULTS OF OPERATIONS

*(in thousands, except per share amounts)*

|  | Three Months Ended June 30, 2016 | June 30, 2015 | % of Change |
| --- | ---: | ---: | ---: |
| Net revenues | $24,039 | $18,686 | 28.6% |
| License fees and revenue share | 19,224 | 14,221 | 35.2% |
| Other direct costs of revenues | 1,880 | 2,191 | (14.2)% |
| Gross profit | 2,935 | 2,274 | 29.1% |
| Total operating expenses | 9,384 | 9,425 | (0.4)% |
| Loss from operations | (6,449) | (7,151) | (9.8)% |
| Interest expense, net | (682) | (491) | 38.9% |
| Foreign exchange transaction gain / (loss) | (3) | 1 | (400.0)% |
| Loss on disposal of fixed assets | — | (23) | (100.0)% |
| Other income | 18 | 17 | 5.9% |
| Loss from operations before income taxes | (7,116) | (7,647) | (6.9)% |
| Income tax provision | 296 | 472 | (37.3)% |
| Net loss | $(7,412) | $(8,119) | (8.7)% |
| Basic and diluted net loss per common share | $(0.11) | $(0.14) | (21.4)% |
| Weighted-average common shares outstanding, basic and diluted | 66,286 | 57,388 | 15.5% |

### Comparison of the Three Months Ended June 30, 2016 and 2015

### Revenues

*(in thousands)*

| Revenues by type: | Three Months Ended June 30, 2016 | 2015 | % of Change |
| --- | ---: | ---: | ---: |
| Content | $11,230 | $7,070 | 58.8% |
| Advertising | 12,809 | 11,616 | 10.3% |
| Total | $24,039 | $18,686 | 28.6% |

During the three months ended June 30, 2016 there was an approximately $5,353 or 28.6% increase in overall revenue, as compared to the three months ended June 30, 2015. During the three months ended June 30, 2016, as compared to the three months ended June 30, 2015, the Company experienced growth in both the Content and Advertising businesses. Organic growth in Advertising was driven by significant growth in O&O revenue, which offset a decline in A&P revenue. O&O revenue growth was driven by increased CPI and CPP revenue from Advertising partners across existing carrier distribution partners as well as expansion with new carrier distribution partners. A&P revenue declined due to decreased budget allocation from Advertising partners. The increase in the Content business was driven primarily by growth in Pay from overall increased demand for the product with customers in Australia, and from an increase in marketing spend by Content providers during the three months ended June 30, 2016 that is not expected to continue at the same level of spend going forward. The increase in the Content business was offset by a decline in Marketplace. For more details on the Company's services included in the Advertising and Content segments, see PART I Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations relate to continuing operations, section titled "Revenue by Service Category."

### Gross Margins

*(in thousands)*

| Gross margin by type: | Three Months Ended June 30, 2016 | 2015 | % of Change |
| --- | ---: | ---: | ---: |
| Content gross margin $ | $1,189 | $798 | 49.0% |
| Content gross margin % | 10.6% | 11.3% |  |
| Advertising gross margin $ | $1,746 | $1,476 | 18.3% |
| Advertising gross margin % | 13.6% | 12.7% |  |
| Total gross margin $ | $2,935 | $2,274 | 29.1% |
| Total gross margin % | 12.2% | 12.2% |  |

Total gross margin, inclusive of the impact of other direct cost of revenues (amortization of intangibles) was approximately $2,935 or 12.2% for the three months ended June 30, 2016, versus approximately $2,274 or 12.2% for the three months ended June 30, 2015. The increase in gross margin dollars from $2,274 to $2,935 is primarily attributable to growth in the Advertising business driven by O&O revenue and growth in the Content business driven by Pay revenue. Overall gross margin percentage remained flat as growth in higher gross margin Advertising revenue and lower amortization of intangibles were coupled with an increase in lower gross margin Pay revenue.

Content gross margin, inclusive of the impact of other direct cost of revenues (amortization of intangibles), was approximately $1,189 or 10.6% for the three months ended June 30, 2016, versus approximately $798 or 11.3% for the three months ended June 30, 2015. The increase in Content gross margin dollars was due primarily to the increase in overall demand for the Company's Pay service and the service being launched with new customers in Australia. The decrease in Content gross margin percentage was due primarily to a mix shift from Marketplace to Pay, which carries a lower gross margin. For more details on the Company's services included in the Content segment, see PART I Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations relate to continuing operations, section titled "Revenue by Service Category."

Advertising gross margin, inclusive of the impact of other direct cost of revenues (amortization of intangibles), was approximately $1,746 or 13.6% for the three months ended June 30, 2016, versus approximately $1,476 or 12.7% for the three months ended June 30, 2015. The increase in advertising gross margin dollars and percentage was primarily attributable to growth in O&O revenue. For more details on the Company's services included in the Advertising segment, see PART I Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations relate to continuing operations, section titled "Revenue by Service Category."

### Operating Expenses

*(in thousands)*

|  | Three Months Ended June 30, 2016 | 2015 | % of Change |
| --- | ---: | ---: | ---: |
| Product development | $2,835 | $2,754 | 2.9% |
| Sales and marketing | 1,444 | 1,282 | 12.6% |
| General and administrative | 5,105 | 5,389 | (5.3)% |
| Total operating expenses | $9,384 | $9,425 | (0.4)% |

Product development expenses include the development and maintenance of the Company's product suite, including A&P and O&O, as well as the costs to support Pay and Marketplace through the optimization of content for consumption on a mobile phone. Expenses in this area are primarily a function of personnel.

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

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 June 30, 2016 and 2015 were approximately $9,384 and $9,425, respectively, a decrease of approximately $41 or 0.4%.

Product development expenses for the three months ended June 30, 2016 and 2015 were approximately $2,835 and $2,754, respectively, an increase of approximately $81 or 2.9%. The increase in product development expenses year-over-year was primarily attributable to the Company's investment in the offices in Tel Aviv, Israel and Durham, North Carolina through additional headcount being added in those regions.

Sales and marketing expenses for the three months ended June 30, 2016 and 2015 were approximately $1,444 and $1,282, respectively, an increase of approximately $162 or 12.6%. The increase in sales and marketing expenses year-over-year was primarily attributable to increased commissions associated with the sales team generating more revenue through new and existing advertising relationships.

General and administrative expenses for the three months ended June 30, 2016 and 2015 were approximately $5,105 and $5,389, respectively, a decrease of approximately $284 or 5.3%. The decrease in general and administrative expenses year-over-year includes a decrease in total stock compensation expense of $318 from $1,621 to $1,303, for the three months ended June 30, 2015 and 2016, respectively.

### Other Income and Expenses

*(in thousands)*

|  | Three Months Ended June 30, 2016 | 2015 | % of Change |
| --- | ---: | ---: | ---: |
| Interest expense, net | $(682) | $(491) | 38.9% |
| Foreign exchange transaction gain / (loss) | (3) | 1 | (400.0)% |
| Loss on disposal of fixed assets | — | (23) | (100.0)% |
| Other income | 18 | 17 | 5.9% |
| Total interest and other expense, net | $(667) | $(496) | 34.5% |

Total interest and other expense, net, for the three months ended June 30, 2016 and 2015 were approximately $667 and $496, respectively, an increase in net expenses of approximately $171 or 34.5%. Interest and other expense, net, includes net interest expense, foreign exchange transaction gain / (loss), loss on disposal of fixed assets, and other ancillary costs incurred by the Company. This increase in total interest and other expense, net, was primarily attributable to net interest expense which includes additional fees incurred related to the amendments entered into by the Company with SVB and North Atlantic, as well as the scheduled increase in Subordinated Debenture interest rate from 10% to 14%, during the three months ended June 30, 2016.

### Revenues by Product and Service Categories

The following table summarizes our net revenues by product and service categories for the three months ended June 30, 2016 and 2015. The amount or percentage of total revenue contributed by class of products and services has been presented for those classes accounting for more than 10% or more of total net revenue in any of the periods presented, with all other amounts individually representing less than 10% of total net revenue included in the Other category.

*(in thousands)*

*(in thousands)*

| Net revenues | 3 Months Ended June 30, 2016 Dollars | % of Net Revenues | 3 Months Ended June 30, 2015 Dollars | % of Net Revenues | % of Change |
| --- | ---: | ---: | ---: | ---: | ---: |
| Pay | 10,721 | 44.6% | 5,674 | 30.4% | 88.9% |
| Ignite | 6,825 | 28.4% | 2,765 | 14.8% | 146.8% |
| Syndicated Network | 5,779 | 24.0% | 8,414 | 45.0% | (31.3)% |
| Other | 714 | 3.0% | 1,833 | 9.8% | (61.0)% |
| Total net revenues | $24,039 | 100.0% | $18,686 | 100.0% | 28.6% |

#### Advertising

The Company's O&O business is an advertiser solution for unique and exclusive carrier and OEM inventory. During the three months ended June 30, 2016, the main revenue drive for the O&O business was the Ignite service. Ignite is a mobile application management software that enables mobile operators and OEMs to control, manage, and monetize applications installed at the time of activation and over the life of a mobile device. During the three months ended June 30, 2016 there was an approximately $4,060 or 146.8% increase in Ignite net revenues, as compared to the three months ended June 30, 2015. This increase in Ignite net revenue was attributable to organic growth in Ignite, driven primarily by increased CPI and CPP revenue from advertising partners across existing commercial deployments of Ignite with carrier partners as well as expanded distribution with new carrier partners.

The Company's A&P business, formerly Appia Core, is a leading worldwide mobile user acquisition network. Its mobile user acquisition platform is a demand side platform, or DSP. This platform allows mobile advertisers to engage with the right customers for their applications at the right time to gain them as customers. The A&P business, through its syndicated network service, accesses mobile ad inventory through publishers including direct developer relationships, mobile websites, mobile carriers and mediated relationships. The advertising revenue generated by A&P platform is shared with publishers according to contractual rates in the case of direct or mediated relationships. During the three months ended June 30, 2016, the decrease in revenue for the A&P business was primarily attributable to the syndicated network service. During the three months ended June 30, 2016 there was an approximately $2,635 or 31.3% decrease in syndicated network net revenues, as compared to the three months ended June 30, 2015. This decrease in syndicated network revenue was due primarily to the decrease in budget allocations from advertising partners.

#### Content

Pay is an API that integrates billing infrastructure between mobile operators and content publishers to facilitate mobile commerce. Increasingly, mobile content publishers want to go directly to consumers to sell their content rather than sell through traditional distributors such as Google Play or the Apple Application Store, which are not as prominent in select countries. Pay allows publishers and carriers to monetize those applications by allowing the content to be billed directly to the consumer via carrier billing. Pay has been launched in Australia, Philippines, India, and Singapore. During the three months ended June 30, 2016 there was an approximately $5,047 or 88.9% increase in Pay net revenues, as compared to the three months ended June 30, 2015. This increase in Pay net revenue was due primarily to the increase in overall demand for the Company's Pay service and the service being launched with new customers in Australia and India, and from an increase in marketing spend by Content providers during the three months ended June 30, 2016 that is not expected to continue at the same level of spend going forward.

### Liquidity and Capital Resources

### Selected Financial Information

*(in thousands)*

|  | June 30, 2016 | March 31, 2016 |
| --- | ---: | ---: |
| Cash and cash equivalents | $9,412 | $11,231 |
| **Short-term debt** |  |  |
| Revolving line of credit, principal | 3,000 | 3,000 |
| Secured debenture, net of discounts of $322 and $440, respectively | 7,678 | 7,560 |
| Debt issuance costs | (202) | (128) |
| Total short-term debt | 10,476 | 10,432 |
| **Working capital** |  |  |
| Current assets | 25,701 | 29,546 |
| Current liabilities | 39,448 | 38,854 |
| Working capital | $(13,747) | $(9,308) |

### Working Capital

Cash and cash equivalents totaled approximately $9,412 and $11,231 at June 30, 2016 and March 31, 2016, respectively, a decrease of approximately $1,819 or 16.2%. Current assets totaled approximately $25,701 and approximately $29,546 at June 30, 2016 and March 31, 2016, respectively, a decrease of approximately $3,845 or 13.0%. As of June 30, 2016 and March 31, 2016, the Company had approximately $15,648 and $17,519, respectively, in accounts receivable, a decrease of $1,871 or 10.7%. As of June 30, 2016 and March 31, 2016 the Company's working capital deficit was $13,747 and $9,308, respectively, an increase of $4,439 or 47.7%, with the increase due primarily to a decrease in cash and cash equivalents and accounts receivable of approximately $1,819 and $1,871, respectively. The working capital deficit as of June 30, 2016 and March 31, 2016 included the impact of the subordinated debenture with North Atlantic becoming classified as a current liability because it is maturing on March 6, 2017 amounting to $7,678 (net of discounts of $332) and $7,560 (net of discounts of $440), respectively. Excluding the classification of the subordinated debenture with North Atlantic in current liabilities at June 30, 2016 and March 31, 2016, the Company's working capital deficit would have been $6,069 and $1,748, respectively.

Our primary sources of liquidity have historically been issuance of common and preferred stock and convertible debt. As of June 30, 2016, we had cash and cash equivalents totaling approximately $9,412. Additionally, the Company currently has a $3,300 revolving credit facility in place with Silicon Valley Bank, which it has historically used to fund working capital requirements, as needed. As of June 30, 2016, the Company had $3,000 outstanding on its revolving credit facility with Silicon Valley Bank, which is included in current liabilities.

On June 28, 2016, our wholly-owned subsidiary DTM, and Silicon Valley Bank, entered into the Third Amendment to the Third Amended and Restated Loan and Security Agreement (the "Amendment"), pursuant to which Silicon Valley Bank agreed to amend and restate the existing Second Amendment to the Third Amended and Restated Loan and Security Agreement to decrease the revolving line of credit available under such facility from $5,000 to $3,300, and to extend the maturity date under the facility from June 30, 2016 to August 14, 2016. Pursuant to the Amendment, the adjusted quick ratio covenant and the application of the streamline trigger (which is not a financial covenant) detailed in the Second Amendment to the Third Amended and Restated Loan and Security Agreement dated June 11, 2015, were removed and replaced with the requirement for the Company to maintain a minimum amount of cash held at SVB to be calculated based on hard outstandings on the revolving line of credit plus $1,000. Amounts outstanding under letters of credit and business credit cards are not included in this calculation. Under the Amendment, the Company is still required to deliver consolidated financial statements in addition to DTM.

The Company expects to use net cash on hand for organic business opportunities, product development, general corporate purposes, working capital, and capital expenditures, and for repayment of debt. The Company believes that it has sufficient cash, cash equivalents, and capital resources to operate its business for the next twelve months.

The Company may raise additional capital through future debt or equity financing to provide for greater flexibility to make acquisitions, make new investments in under-capitalized opportunities, or invest in organic opportunities, including Real-Time Bidding (RTB), integration of Content/Pay into advertising infrastructure, or new product development. 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.

As of June 30, 2016, our total contractual cash obligations were as follows:

| Contractual cash obligations | Total | Payments Due by Period Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Principal payments on short-term debt | 11,000 | 11,000 | — | — | — |
| Operating leases (a) | 4,043 | 948 | 1,676 | 969 | 450 |
| Employment agreements and other obligations (b) | 1,024 | 566 | 458 | — | — |
| Interest | 764 | 764 | — | — | — |
| Uncertain tax positions (c) | — | — | — | — | — |
| Total contractual cash obligations | 16,831 | 13,278 | 2,134 | 969 | 450 |

(a) Consists of operating leases for our office facilities.

(b) Consists of various employment agreements and severance agreements.

(c) We have approximately $835 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.

### Cash Flow Summary

*(in thousands)*

| Consolidated statement of cash flows data: | Three Months Ended June 30, 2016 | 2015 | % of Change |
| --- | ---: | ---: | ---: |
| Net cash used in operating activities | (1,096) | (336) | 226.2% |
| Capital expenditures | (472) | (341) | 38.4% |
| Repayment of debt obligations | — | (150) | (100.0)% |
| Cash paid for debt issuance costs | (280) | — | 100.0% |
| Options exercised | 2 | 10 | (80.0)% |
| Effect of exchange rate changes on cash and cash equivalents | 27 | (72) | (137.5)% |

### Operating Activities

During the three months ended June 30, 2016 and 2015, the Company's net cash used in operating activities was $1,096 and $336, respectively, an increase of $760 or 226.2%. The increase in net cash used in operating activities was primarily attributable to the change in working capital accounts over the comparative periods.

During the three months ended June 30, 2016, net cash used in operating activities was $1,096, resulting from a net loss of $7,412 offset by net non-cash expenses of $3,631, which included depreciation and amortization, stock-based compensation, stock-based compensation related to vesting of restricted stock for services, amortization of debt discount, amortization of debt issuance costs, a reduction in the allowance for doubtful accounts, and an increase in accrued interest of approximately $2,094, $1,223, $80, $118, $224, $109, and $1, respectively. Net cash used in operating activities during the three months ended June 30, 2016 was impacted by the change in net working capital accounts as of June 30, 2016 compared to March 31, 2016, with a net increase in current liabilities of approximately $550 (inclusive only of accounts payable, accrued license fees and revenue share, accrued compensation, and other liabilities and other items) and a net decrease in current assets of approximately $2,135 (inclusive only of accounts receivable, deposits, and prepaid expenses and other current assets) over the comparative periods. The net increase in working capital account liabilities was driven primarily by the increase in accrued license fees and revenue share of $419, mostly due to the timing of payments. The net decrease in working capital account assets was driven primarily by a focus on accounts receivable collections.

During the three months ended June 30, 2015, net cash used in operating activities was $336, resulting from a net loss of $8,119 offset by net non-cash expenses of $3,958, which included depreciation and amortization, stock-based compensation, stock-based compensation related to vesting of restricted stock for services, amortization of debt discount, a reduction in the allowance for doubtful accounts, loss on disposal of fixed assets, and an increase in accrued interest of approximately $2,241, $1,294, $327, $117, $131, $23, and $87, respectively. Net cash used in operating activities during the three months ended June 30, 2015 was impacted by the change in net working capital accounts as of June 30, 2015 compared to March 31, 2015, with a net increase in current liabilities of approximately $4,114 (inclusive only of accounts payable, accrued license fees and revenue share, accrued compensation, and other liabilities and other items), offset by a net increase in current assets of approximately $289 (inclusive only of accounts receivable, deposits, and prepaid expenses and other current assets) over the comparative periods. The net increase in working capital account liabilities was driven primarily by driven by working capital and liquidity management, with a focus on utilizing the full and extended payment terms on our liabilities.

### Investing Activities

For the three months ended June 30, 2016 and 2015, cash used in investing activities was approximately $472 and $341, respectively, which is comprised of capital expenditures related to internally developed software.

### Financing Activities

For the three months ended June 30, 2016 and 2015, cash used in financing activities was approximately $278 (inclusive of payment for debt issuance costs of $280, offset by options exercised of $2) and $140 (inclusive of repayment of debt obligations of $150, offset by stock options exercised of $10), 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, 2,154 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.

### Interest Rate Fluctuation Risk

The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. Our cash and cash equivalents consist of cash and deposits which are not insensitive to interest rate changes.

Our borrowings under our credit facility are subject to variable interest rates and thus expose us to interest rate fluctuations depending on the extent to which we utilize the credit facility. If market interest rates materially increase, our results of operations could be adversely affected. Our borrowings under our credit facility are subject to variable interest rates and thus expose us to interest rate fluctuations depending on the extent to which we utilize the credit facility. If market interest rates materially increase, our results of operations could be adversely affected. A hypothetical increase in market interest rates of 100 basis points would result in an increase in our interest expense of $0.01 million per year for every $1 million of outstanding debt under the credit facility.

### Foreign Currency Exchange Risk

We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar, primarily the Australian dollar. While a portion of our sales are denominated in 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, 5,777 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, 2016, management concluded that our internal controls over financial reporting were not effective as of March 31, 2016, 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, 2016.

### 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 June 30, 2016. 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

The material weakness we identified associated with the Financial Close and Reporting process arises primarily from (i) a lack of a sufficient complement of accounting and financial reporting personnel who were unable to implement formal accounting policies with an appropriate level of accounting knowledge and experience commensurate with our financial reporting requirements, and (ii) inadequate accounting systems including information technology systems directly related to financial statement processes and a heavy reliance on manual processes.

We have taken and completed certain actions, with other planned actions to be taken during fiscal 2017 to remediate the material weakness.

#### Completed Actions

- Hired a Chief Accounting Officer “CAO” on February 27, 2015 (who resigned during our first quarter of fiscal 2017; Mr. David Wesch is now our current Acting CAO).

#### Planned Actions

- Expect to hire additional finance and accounting resources across the global organization.
- Evaluate accounting and finance headcount resources globally to ensure that resources are sufficient to meeting the accounting and finance requirements of the Company.
- Continue working to document and remediate weaknesses, and to structure the Company’s accounting/finance department to meet SOX 404 (b) requirements.
- Continue to utilize third party accounting experts to augment Company accounting staff as necessary.
- Finalize the system implementation related to SAP.
- Implement a billing, disbursement and stock option accounting system and integrate with SAP.
- Continue to document internal control procedures for significant accounting areas with an emphasis on implementing additional documented review and approval procedures and automated controls within the Company’s accounting system
- Continue to conduct formal training related to key accounting policies, internal controls, and SEC compliance for all key personal which have a direct and indirect impact on the transactions underlying the financial statements.
- Implement Information Technology documentation and new controls that have an impact on financial reporting.

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 June 30, 2016 that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Filed Aug 9, 2016.
Source: SEC EDGAR, the filing index for accession 0001628280-16-018821. Last ingested by Listed: Nov 5, 2026, 12:38 ET. No prices; not investment advice.