# Digital Turbine, Inc.: Form 10-Q for the period ended Sep 30, 2017

- Company: [Digital Turbine, Inc.](/companies/apps.md) (CIK 317788)
- Form: 10-Q
- Filed: 2017-11-07
- Accepted by EDGAR: Nov 7, 2017, 16:26 ET
- Period: 2017-09-30
- Accession: 0001628280-17-011071
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/317788/000162828017011071/q2fy201810-qdocument.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/317788/000162828017011071/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2017-07-01 to 2017-09-30 | $27.9m | us-gaap:Revenues |
| Revenue | 6 months, 2017-04-01 to 2017-09-30 | $54.0m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2017-07-01 to 2017-09-30 | $20.5m | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months, 2017-04-01 to 2017-09-30 | $40.0m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2017-07-01 to 2017-09-30 | $7.4m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2017-04-01 to 2017-09-30 | $14.0m | us-gaap:GrossProfit |
| Research and development | 3 months, 2017-07-01 to 2017-09-30 | $2.8m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2017-04-01 to 2017-09-30 | $5.6m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2017-07-01 to 2017-09-30 | −$1.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2017-04-01 to 2017-09-30 | −$2.8m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2017-07-01 to 2017-09-30 | −$884.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2017-04-01 to 2017-09-30 | −$853.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-07-01 to 2017-09-30 | −$6.5m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2017-04-01 to 2017-09-30 | −$10.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2017-07-01 to 2017-09-30 | −$0.10 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted EPS | 6 months, 2017-04-01 to 2017-09-30 | −$0.16 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 6 months, 2017-04-01 to 2017-09-30 | −$1.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2017-09-30 | $5.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2017-09-30 | $30.5m | us-gaap:AssetsCurrent |
| Total assets | at 2017-09-30 | $113.8m | us-gaap:Assets |
| Current liabilities | at 2017-09-30 | $39.0m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2017-09-30 | $53.6m | us-gaap:Liabilities |
| Long-term debt | at 2017-09-30 | $6.5m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2017-09-30 | $2.2m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2017-09-30 | $60.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 41,426 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, 2017 as well as those described elsewhere in this report and in our other public filings. The risks included are not exhaustive, and additional factors could adversely affect our business and financial performance. We operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. 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. This report and all subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.

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
- Other professional services directly related to the Ignite platform.
- A&P, a leading worldwide mobile user acquisition network which is comprised of the Syndicated network.

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 Ignite.

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, 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. The Company has launched Ignite with mobile operators and OEMs in North America, Latin America, Europe, Asia Pacific, India, and Israel.

#### A&P Business

The Company's A&P business, formerly Appia Core, is a 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 (unaudited)

*(in thousands, except per share amounts)*

*(in thousands, except per share amounts)*

|  | Three Months Ended September 30, 2017 | 2016 | % of Change | Six Months Ended September 30, 2017 | 2016 | % of Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net revenues | $27,891 | $22,832 | 22.2% | $54,011 | $46,871 | 15.2% |
| License fees and revenue share | 19,885 | 17,797 | 11.7% | 38,766 | 37,021 | 4.7% |
| Other direct cost of revenues | 643 | 1,882 | (65.8)% | 1,266 | 3,762 | (66.3)% |
| Gross profit | 7,363 | 3,153 | 133.5% | 13,979 | 6,088 | 129.6% |
| Total operating expenses | 8,613 | 9,460 | (9.0)% | 16,753 | 18,844 | (11.1)% |
| Loss from operations | (1,250) | (6,307) | (80.2)% | (2,774) | (12,756) | (78.3)% |
| Interest expense, net | (662) | (622) | 6.4% | (1,369) | (1,304) | 5.0% |
| Foreign exchange transaction loss | (73) | (1) | 7,200.0% | (217) | (4) | 5,325.0% |
| Change in fair value of convertible note embedded derivative liability | (3,344) | (430) | 677.7% | (4,652) | (430) | 981.9% |
| Change in fair value of warrant liability | (1,164) | (140) | 731.4% | (1,628) | (140) | 1,062.9% |
| Loss on extinguishment of debt | (882) | (293) | 201.0% | (882) | (293) | 201.0% |
| Other income | 33 | 15 | 120.0% | 36 | 33 | 9.1% |
| Loss from operations before income taxes | (7,342) | (7,778) | (5.6)% | (11,486) | (14,894) | (22.9)% |
| Income tax benefit | (884) | (437) | 102.3% | (853) | (141) | 505.0% |
| Net loss | $(6,458) | $(7,341) | (12.0)% | $(10,633) | $(14,753) | (27.9)% |
| Basic and diluted net loss per common share | $(0.10) | $(0.11) | (9.1)% | $(0.16) | $(0.22) | (27.3)% |
| Weighted-average common shares outstanding, basic and diluted | 66,846 | 66,457 | 0.6% | 66,723 | 66,358 | 0.6% |

38

### Comparison of the three and six months ended September 30, 2017 and 2016

### Revenues

*(in thousands)*

*(in thousands)*

| Revenues by type: | Three Months Ended September 30, 2017 | 2016 | % of Change | Six Months Ended September 30, 2017 | 2016 | % of Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Content | $9,784 | $7,626 | 28.3% | $17,714 | $18,856 | (6.1)% |
| Advertising | 18,107 | 15,206 | 19.1% | 36,297 | 28,015 | 29.6% |
| Total | $27,891 | $22,832 | 22.2% | $54,011 | $46,871 | 15.2% |

During the three and six months ended September 30, 2017 there was an approximately $5,059 and $7,140 or 22.2% and 15.2% increase, in overall revenue, as compared to the three and six months ended September 30, 2016. This is primarily due to growth in Advertising revenue driven by increased O&O revenue from Advertising partners across existing carrier distribution partners as well as expansion with multiple new carrier distribution partners, partially offset by a decline in traditional A&P revenue. A&P revenue declined due to decrease in demand from advertising partners and a decline in publisher distribution partners, reflecting a trend we expect to continue as the market shifts away from non-automated syndicated networks such as our current A&P business towards more programmatic advertising. 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 the continued increase of Pay revenue from other Asia-Pacific markets. The increase in the Pay business was partially offset by a continued 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, section titled "Revenues by Product and Service Category."

Revenues from Singapore Telecommunications Limited, a Content customer; AOL Inc., an Advertising customer; Telstra Corporation Limited, a Content customer; and Machine Zone, Inc., an Advertising customer each represented more than 10% of the Company's total revenue for the three and six months ended September 30, 2017. A reduction or delay in operating activity from these customers, or a delay or default in payment by these customers could materially harm the Company’s business and prospects. The Company expects to maintain the relationship and does not expect to experience material reductions or delays in operating activity with these customers.

The Company partners with mobile carriers and OEMS to deliver applications on our Ignite platform through the carrier network. During the three and six months ended September 30, 2017, Verizon Wireless, a carrier partner, generated 30.8% and 31.8% of our net revenues; while AT&T Inc., a carrier partner, primarily through its Cricket subsidiary, generated 16.7% and 15.4% of our net revenue. During the three and six months ended September 30, 2016, Verizon Wireless, generated 28.6% and 23.7% of our net revenues.

### Gross Margins

*(in thousands)*

*(in thousands)*

| Gross margin by type: | Three Months Ended September 30, 2017 | 2016 | % of Change | Six Months Ended September 30, 2017 | 2016 | % of Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Content gross margin $ | $1,192 | $781 | 52.6% | $1,950 | $1,970 | (1.0)% |
| Content gross margin % | 12.2% | 10.2% |  | 11.0% | 10.4% |  |
| Advertising gross margin $ | $6,171 | $2,372 | 160.2% | $12,029 | $4,118 | 192.1% |
| Advertising gross margin % | 34.1% | 15.6% |  | 33.1% | 14.7% |  |
| Total gross margin $ | $7,363 | $3,153 | 133.5% | $13,979 | $6,088 | 129.6% |
| Total gross margin % | 26.4% | 13.8% |  | 25.9% | 13.0% |  |

Total gross margin, inclusive of the impact of other direct cost of revenues (amortization of intangibles) was approximately $7,363 and $13,979 or 26.4% and 25.9% for the three and six months ended September 30, 2017, versus approximately $3,153 and $6,088 or 13.8% and 13.0% for the three and six months ended September 30, 2016. Overall gross margin increased as growth in higher gross margin Advertising revenue was coupled with lower amortization of intangibles.

Advertising gross margin, inclusive of the impact of other direct cost of revenues (amortization of intangibles), was approximately $6,171 and $12,029 or 34.1% and 33.1% for the three and six months ended September 30, 2017, versus approximately $2,372 and $4,118 or 15.6% and 14.7% for the three and six months ended September 30, 2016. The increase in Advertising gross margin dollars and percentage is primarily attributable to an increase in Advertiser demand in the O&O business, which carries a higher gross margin than the A&P business. 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, section titled "Revenues by Product and Service Category."

Content gross margin, inclusive of the impact of other direct cost of revenues (amortization of intangibles), was approximately $1,192 and $1,950 or 12.2% and 11.0% for the three and six months ended September 30, 2017, versus approximately $781 and $1,970 or 10.2% and 10.4% for the three and six months ended September 30, 2016. The decrease in Content gross margin dollars was driven primarily by a continued decline in Marketplace. The increase in Content gross margin percentage was due primarily to an increase in activity over comparative periods with a Pay Partner that carries a slightly higher margin than other partners. 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, section titled "Revenues by Product and Service Category."

### Operating Expenses

*(in thousands)*

*(in thousands)*

|  | Three Months Ended September 30, 2017 | 2016 | % of Change | Six Months Ended September 30, 2017 | 2016 | % of Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Product development | $2,837 | $3,117 | (9.0)% | $5,595 | $5,952 | (6.0)% |
| Sales and marketing | 1,688 | 1,528 | 10.5% | 3,246 | 2,972 | 9.2% |
| General and administrative | 4,088 | 4,815 | (15.1)% | 7,912 | 9,920 | (20.2)% |
| Total operating expenses | $8,613 | $9,460 | (9.0)% | $16,753 | $18,844 | (11.1)% |

Total operating expenses for the three and six months ended September 30, 2017, and 2016 were approximately $8,613 and $16,753; and $9,460 and $18,844, respectively, a decrease of approximately $847 and $2,091 or 9.0% and 11.1% over comparative periods.

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. Product development expenses for the three and six months ended September 30, 2017 and 2016 were approximately $2,837 and $5,595; and $3,117 and $5,952, respectively, a decrease of approximately $280 and $357 or 9.0% and 6.0% over the comparative periods. The decrease in costs over comparative periods is due primarily to continued refinement of support systems and personnel needs over comparative periods.

Sales and marketing expenses represent the costs of sales and marketing personnel, advertising and marketing campaigns, and campaign management. Sales and marketing expenses for the three and six months ended September 30, 2017, and 2016 were approximately $1,688 and $3,246; and $1,528 and $2,972, respectively, an increase of approximately $160 and$274 or 10.5% and 9.2% over the comparative periods. The increase in sales and marketing expenses over the comparative periods was primarily attributable to increased commissions associated with the sales team generating more revenue through new and existing advertising relationships.

General and administrative expenses represent management, finance, and support personnel costs in both the parent and subsidiary companies, which include professional and consulting costs, in addition to other costs such as rent, stock-based compensation, and depreciation expense. General and administrative expenses for the three and six months ended September 30, 2017, and 2016 were approximately $4,088 and $7,912; and $4,815 and $9,920, respectively, a decrease of approximately $727 and $2,008 or 15.1% and 20.2% over the comparative periods. The decrease in general and administrative expenses over the comparative periods is primarily attributable to lower accounting and professional consulting expenses; and reduced stock option expense over the comparative periods due to stock option grants issued over the comparative periods being issued at lower fair values, which has the impact of lower expense being recorded.

### Interest and Other Income / (Expense)

*(in thousands)*

*(in thousands)*

|  | Three Months Ended September 30, 2017 | 2016 | % of Change | Six Months Ended September 30, 2017 | 2016 | % of Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest expense, net | $(662) | $(622) | 6.4% | $(1,369) | $(1,304) | 5.0% |
| Foreign exchange transaction loss | (73) | (1) | 7,200.0% | (217) | (4) | 5,325.0% |
| Change in fair value of convertible note embedded derivative liability | (3,344) | (430) | 677.7% | (4,652) | (430) | 981.9% |
| Change in fair value of warrant liability | (1,164) | (140) | 731.4% | (1,628) | (140) | 1,062.9% |
| Loss on extinguishment of debt | (882) | (293) | 201.0% | (882) | (293) | 201.0% |
| Other income | 33 | 15 | (120.0)% | 36 | 33 | (9.1)% |
| Total interest and other expense, net | $(6,092) | $(1,471) | 314.1% | $(8,712) | $(2,138) | 307.5% |

Total interest and other expense, net, for the three and six months ended September 30, 2017, and 2016 were approximately $6,092 and $8,712; and $1,471 and $2,138, respectively, an increase in net expenses of approximately $4,621 and $6,574 or 314.1% and 307.5% over the comparative periods. The increase is primarily attributable to the change in fair value of convertible note embedded derivative liability, and the change in fair value of warrant liability. Interest and other income / (expense), net, includes net interest expense, foreign exchange transaction loss, change in fair value of convertible note embedded derivative liability, change in fair value of warrant liability, and other ancillary income / (expense) earned or incurred by the Company.

#### Interest Expense, Net

Interest expense is generated from the Notes and the Western Alliance Bank Credit Agreement in the current comparative period; and from our debt under the Term Loan Agreement with SVB and the Secured Debenture with NAC, both of which the Company entered into during March 2015 and retired in their entirety on September 28, 2016 in connection with the issuance of the Notes (see further details at Note 7 "Debt") during the prior period. Interest income consists of interest income earned on our cash and cash equivalents. This increase in total interest and other expense, net, was primarily attributable to net interest expense. Inclusive of the Notes issued on September 28, 2016 and the Western Alliance Bank Credit Agreement, the Company recorded $327 and $680 of aggregate debt discount and debt issuance cost amortization and $335 and $689 of interest expense, respectively, during the three and six months ended September 30, 2017. Inclusive of the NAC subordinated debenture which was retired in full on September 28, 2016, the Company recorded $339 and $681 of aggregate debt discount and debt issuance cost amortization and $282 and $623 of interest expense, respectively, during the three and six months ended September 30, 2016.

#### Foreign Exchange Transaction Loss

Foreign exchange transaction gain/(loss) for the three and six months ended September 30, 2017, and 2016 consists of foreign exchange gains and losses, based on fluctuations of the Company’s foreign denominated currencies.

#### 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 three months ended September 30, 2017, the Company recorded a loss from change in fair value of convertible note embedded derivative liability of $3,344 due to the increase in the Company's closing stock price during the current quarter from $1.03 to $1.51, offset by the extinguishment of $6,000 of Notes, and the underlying derivative instruments, during the current quarter. During the six months ended September 30, 2017, the Company recorded a loss from change in fair value of convertible note embedded derivative liability of $4,652 due to the increase in the Company's closing stock price during the current fiscal year from $0.94 to $1.51, partially offset by a derecognition of derivative liability of $2,754 on the extinguishment of $6,000 of Notes, and the underlying derivative instruments, during the current quarter. During the three and six months ended September 30, 2016, the Company recorded a loss from change in fair value of convertible note embedded derivative liability of $430 due to the increase in the Company's closing stock price from inception to the year ended March 31, 2017 from $0.99 to $1.05.

#### 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 to the Initial Purchaser 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 three and six months ended September 30, 2017, the Company recorded a loss from change in fair value of warrant liability of $1,164 and $1,628, respectively, due to the increase in the Company's closing stock price during the comparative period from $1.03 to $1.51, and $0.94 to $1.51, respectively. During the three and six months ended September 30, 2016, the Company recorded a loss from change in fair value of warrant liability of $140 due to the increase in the Company's closing stock price from inception to the year ended March 31, 2017 from $0.99 to $1.05.

### Revenues by Product and Service Categories

The following table summarizes our net revenues by product and service categories for the three and six months ended September 30, 2017 and 2016. 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)*

*(in thousands)*

*(in thousands)*

| Net revenues | Three Months Ended September 30, 2017 Dollars | % of Net Revenues | Three Months Ended September 30, 2016 Dollars | % of Net Revenues | % of Change Dollars | Six Months Ended September 30, 2017 % of Net Revenues | Dollars | Six Months Ended September 30, 2016 % of Net Revenues |  | % of Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Ignite | 15,846 | 56.8% | 9,301 | 40.7% | 70.4% | 30,905 | 57.2% | 16,126 | 34.4% | 91.6% |
| Other O&O | 58 | 0.2% | 574 | 2.5% | (89.9)% | 151 | 0.3% | 709 | 1.5% | (78.7)% |
| Total O&O | 15,904 | 57.0% | 9,875 | 43.3% | 61.1% | 31,056 | 57.5% | 16,835 | 35.9% | 84.5% |
| Syndicated Network | 2,203 | 7.9% | 5,221 | 22.9% | (57.8)% | 5,241 | 9.7% | 11,000 | 23.5% | (52.4)% |
| Other A&P | — | —% | 111 | 0.5% | (100.0)% | — | —% | 180 | 0.4% | (100.0)% |
| Total A&P | 2,203 | 7.9% | 5,332 | 23.4% | (58.7)% | 5,241 | 9.7% | 11,180 | 23.9% | (53.1)% |
| Total Advertising | 18,107 | 64.9% | 15,207 | 66.6% | 19.1% | 36,297 | 67.2% | 28,015 | 59.8% | 29.6% |
| Pay | 9,537 | 34.2% | 7,191 | 31.5% | 32.6% | 17,232 | 31.9% | 17,912 | 38.2% | (3.8)% |
| Other Content | 247 | 0.9% | 434 | 1.9% | (43.1)% | 482 | 0.9% | 944 | 2.0% | (48.9)% |
| Total Content | 9,784 | 35.1% | 7,625 | 33.4% | 28.3% | 17,714 | 32.8% | 18,856 | 40.2% | (6.1)% |
| Total net revenues | 27,891 | 100.0% | 22,832 | 100.0% | 22.2% | 54,011 | 100.0% | 46,871 | 100.0% | 15.2% |

#### Advertising

The Company's O&O business is an advertiser solution for unique and exclusive carrier and OEM inventory. During the three and six months ended September 30, 2017, the main revenue driver for the O&O business was the Ignite platform. 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 current periods there was an approximately $6,545 and $14,779 or 70.4% and 91.6% increase in Ignite net revenues as compared to the three and six months ended September 30, 2016. This increase in Ignite net revenue was attributable to increased demand for the Ignite service, 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 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 and six months ended September 30, 2017, there was an approximately $3,018 and $5,759 or 57.8% and 52.4% decrease in Syndicated network net revenues as compared to the three and six months ended September 30, 2016. This decrease in Syndicated network revenue was attributable primarily to the decrease in demand from advertising partners, reflecting a trend we expect to continue as the market shifts away from non-automated networks such as our current A&P business towards more programmatic advertising.

#### 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 and six months ended September 30, 2017 there was an approximately $2,346 and $(680) or 32.6% increase and (3.8)% decline in Pay net revenues as compared to the three and six months ended September 30, 2016, respectively.

The increase in the Content business over the comparative periods for the three months ended September 30, 2017 and 2016 was attributable primarily to a increase in activity with a large partner as compared to the same period in prior year. The decrease over the year to date period strems from revisions to the opt-in policies at our largest Pay partner in Australia which drove decreased marketing spend by Content providers, as well as a continued decline in Marketplace revenues. The decline in Marketplace revenues reflects a trend we expect to continue as the end user market has shifted away from carrier specific content stores in favor of a growing number of other application delivery options.

### Liquidity and Capital Resources

### Selected Liquidity Information

*(unaudited)*

*(in thousands)*

|  | September 30, 2017 | March 31, 2017 |
| --- | ---: | ---: |
| Cash | $5,867 | $6,149 |
| **Short-term debt** |  |  |
| Secured line of credit, net of debt issuance costs of $290 and $0, respectively | 2,210 | — |
| Total short-term debt | $2,210 | $— |
| **Long-term debt** |  |  |
| Convertible notes, net of debt issuance costs and discounts of $3,491 and $6,315, respectively | 6,509 | 9,685 |
| Total long-term debt | $6,509 | $9,685 |
| **Total debt** | $8,719 | $9,685 |
| **Working capital** |  |  |
| Current assets | $30,546 | $23,665 |
| Current liabilities | 38,999 | 30,774 |
| Working capital | $(8,453) | $(7,109) |

44

### Working Capital

Cash totaled approximately $5,867 and $6,149 at September 30, 2017 and March 31, 2017, respectively, a decrease of approximately $282 or 4.6%. Current assets totaled $30,546 and $23,665 at September 30, 2017 and March 31, 2017, respectively, an increase of approximately $6,881 or 29.1%. As of September 30, 2017 and March 31, 2017, the Company had approximately $23,787 and $16,554, respectively, in accounts receivable, an increase of $7,233 or 43.7%. As of September 30, 2017 and March 31, 2017 the Company's working capital deficit was $8,453 and $7,109, respectively, an increase in working capital deficit of $1,344 or 18.9%. The working capital deficit as of September 30, 2017 included the impact of the Western Alliance Bank Credit Agreement being classified as a current liability of $2,210 (net of aggregate debt issuance costs and debt discount of $290), as compared to $0 as of March 31, 2017 due to the payoff of the subordinated debenture with NAC on September 28, 2016. Excluding the impact of the classification of the Western Alliance Bank Credit Agreement (net of aggregate debt issuance costs of $290) in current liabilities at September 30, 2017, the Company's working capital deficit would have been $6,243 as of September 30, 2017, compared to a working capital deficit of $7,109 as of March 31, 2017, a decrease in the working capital deficit of $866.

Our primary sources of liquidity have historically been issuance of common and preferred stock, and debt. The Company may raise additional capital through future equity raises or, subject to restrictions surrounding our current indenture and credit agreement, debt financing to provide for greater flexibility for the Company to complete acquisitions, fund 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 the next twelve months from the issuance date of this quarterly report on Form 10-Q. See Note 2 - Liquidity for more discussion.

As of September 30, 2017, our total contractual cash obligations were as follows:

*(in thousands)*

| Contractual cash obligations | Total | Payments Due by Period Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Convertible notes (a) | $10,000 | $— | $10,000 | $— | $— |
| Operating leases (b) | 5,203 | 937 | 1,747 | 1,535 | 984 |
| Employment agreements and other obligations (c) | 525 | 525 | — | — | — |
| Interest and Bank Fees | 3,373 | 1,138 | 1,797 | 438 | — |
| Uncertain tax positions (d) | — | — | — | — | — |
| Total contractual cash obligations | $19,101 | $2,600 | $13,544 | $1,973 | $984 |

(a) convertible notes maturing on September 23, 2020 (the “Notes”), unless converted, repurchased or redeemed in accordance with their terms prior to such date.

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

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

(d) We have approximately $1,083 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: | Six Months Ended September 30, 2017 | 2016 | % of Change |
| --- | ---: | ---: | ---: |
| Net cash used in operating activities | $(1,380) | $(3,567) | (61.3)% |
| Capital expenditures | (823) | (1,115) | (26.2)% |
| Proceeds from short-term borrowings | 2,500 | — | 100.0% |
| Payment of debt issuance costs | (346) | (2,091) | (83.5)% |
| Options exercised | 19 | 11 | 72.7% |
| Repayment of debt obligations | (247) | (11,000) | (97.8)% |
| Effect of exchange rate changes on cash | (5) | (53) | (90.6)% |

45

### Operating Activities

During the six months ended September 30, 2017 and 2016, the Company's net cash used in operating activities was $1,380 and $3,567, respectively, a decrease of $2,187 or 61.3%. The decrease in net cash used in operating activities was primarily attributable to the change in working capital accounts over the comparative periods.

During the six months ended September 30, 2017, net cash used in operating activities was $1,380, resulting from a net loss of $10,633 offset by net non-cash expenses of $11,490, which included depreciation and amortization expense, change in the allowance for doubtful accounts, amortization of debt discount and debt issuance costs, accrued interest, stock option expense, stock-based compensation related to vesting of restricted stock for services, change in fair value of convertible note embedded derivative liability, change in fair value of warrant liability, and loss on extinguishment of debt of approximately $1,808, $235, $680, $(24), $1,479, $150, $4,652, $1,628, and $882, respectively. Net cash used in operating activities during the six months ended September 30, 2017 was also impacted by the change in net working capital accounts as of September 30, 2017 compared to March 31, 2017, with a net increase in current liabilities of approximately $5,497 (inclusive of accounts payable, accrued license fees and revenue share, accrued compensation, and other liabilities), offset by a net increase in current assets of approximately $7,734 (inclusive 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 accounts payable and accrued license fees and revenue share of $5,321, mostly due to the timing of payments to our carrier partners. The net increase in working capital assets was driven primarily by the increase in accounts receivable of $7,468, mostly due to the timing of payments from our advertising and content customers.

During the six months ended September 30, 2016, net cash used in operating activities was $3,567, resulting from a net loss of $14,753 offset by net non-cash expenses of $8,135, which included depreciation and amortization, stock option expense, stock-based compensation related to vesting of restricted stock for services, amortization of debt discount, amortization of debt issuance costs, an increase in the allowance for doubtful accounts, change in fair value of convertible note embedded derivative liability, change in fair value of warrant liability, loss on extinguishment of debt, and a decrease in accrued interest of approximately $4,199, $2,310, $166, $237, $444, $7, $430, $140, $293, and $91, respectively. Net cash used in operating activities during the six months ended September 30, 2016 was impacted by the change in net working capital accounts as of September 30, 2016 compared to March 31, 2016, with a net increase in current liabilities of approximately $3,089 (inclusive only of accounts payable, accrued license fees and revenue share, accrued compensation, and other liabilities), offset by a net increase in current assets of approximately $58 (inclusive only of restricted cash, 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 accounts payable of $4,771, mostly due to the timing of payments to our carrier partners. Net cash used in operating activities was further impacted by an increase in other non-current liabilities of $20, related entirely to changes in non-current uncertain tax liabilities over the comparative periods.

### Investing Activities

For the six months ended September 30, 2017 and 2016, cash used in investing activities was approximately $823 and $1,115, respectively, which is comprised of capital expenditures related mostly to internally developed software.

### Financing Activities

For the six months ended September 30, 2017, cash provided by financing activities was approximately $1,926, inclusive of $2,500 in proceeds from our Credit Agreement, and $19 in proceeds from the exercise of stock options. Offsetting the cash provided by financing activities was the settlement of debt through the issuance of stock for a net cash impact of $247. For the six months ended September 30, 2016, cash used in financing activities was approximately $2,920, primarily due to proceeds from the issuance of debt of $16,000 and proceeds from the exercise of stock options of $11, offset by the repayment of debt of $11,000 and $2,091 in debt issuance costs payments.

### 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.

### Critical Accounting Policies and Judgments

Management’s discussion and analysis of our financial condition and results of operations is based on our unaudited financial statements. The preparation of these financial statements is based on the selection of accounting policies and the application of significant accounting estimates, some of which require management to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and notes. For more information regarding our critical accounting estimates and policies, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Judgments” of our Annual Report on Form 10-K for the year ended March 31, 2017, as amended

## Market risk

As filed, 1,348 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.

### 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, 6,562 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, 2017, management concluded that our internal controls over financial reporting were not effective as of March 31, 2017, 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, 2017, as amended.

### 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 of 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 September 30, 2017. 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 US 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, hindering the Company's ability 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.

The lack of staff resources and financial expertise arose as a result of employee turnover and our inability to timely fill accounting and financial-related positions. During the second half of fiscal 2017 we had filled all open accounting and financial-related positions with qualified replacements and continue to more fully develop the technical expertise of our existing staff and newly hired staff.

In addition, we had implemented a consolidated accounting ERP system across the entire organization and stock option accounting software during the third and fourth quarter of fiscal 2017, respectively, which has significantly enhanced our capabilities and efficiencies across many accounting disciplines, particularly as it relates to consolidation of financial information, foreign currency translation, and share-based compensation.

Many of the remedial actions we have taken are recent, and other planned remedial actions are in process of being implemented as detailed below. Because many of the remedial actions taken are very recent, management will not be able to conclude that the material weakness has been eliminated until the controls have been successfully operated and tested. We, along with our Audit Committee, will continue to monitor and evaluate the effectiveness of these remedial actions and make further changes as deemed appropriate. Management, with the oversight of our Audit Committee, has devoted considerable effort to remediate the material weakness identified above, with the planned actions detailed below to be completed during fiscal 2018 to remediate the material weakness.

#### Planned Actions

- Completing the development and execution of the plan to fully implement and effectively operate the key controls identified through the completion of the documentation of internal control procedures over all significant accounting areas and information technology that have an impact on financial reporting.
- Implementing a cyclical process for evaluating and testing the control environment to help ensure any future key control failures will be identified on a timely basis, and allow for the possibility of immediate detection and remediation.
- Conducting formal training related to key accounting policies, internal controls, and SEC compliance for all key personnel who have an impact on the transactions underlying the financial statements.

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 Controls Over Financial Reporting

There were no changes in our internal controls over financial reporting during the three months ended September 30, 2017 that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Filed Nov 7, 2017.
Source: SEC EDGAR, the filing index for accession 0001628280-17-011071. Last ingested by Listed: Nov 5, 2026, 12:38 ET. No prices; not investment advice.