# Digital Turbine, Inc.: Form 10-Q for the period ended Dec 31, 2022

- Company: [Digital Turbine, Inc.](/companies/apps.md) (CIK 317788)
- Form: 10-Q
- Filed: 2023-02-08
- Accepted by EDGAR: Feb 8, 2023, 16:32 ET
- Period: 2022-12-31
- Accession: 0001628280-23-002788
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/317788/000162828023002788/apps-20221231.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/317788/000162828023002788/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-12-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-10-01 to 2022-12-31 | $162.3m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2022-04-01 to 2022-12-31 | $525.8m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2022-10-01 to 2022-12-31 | $73.4m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2022-04-01 to 2022-12-31 | $237.6m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2022-10-01 to 2022-12-31 | $88.9m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2022-04-01 to 2022-12-31 | $288.2m | us-gaap:GrossProfit |
| Research and development | 3 months, 2022-10-01 to 2022-12-31 | $14.2m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2022-04-01 to 2022-12-31 | $43.1m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2022-10-01 to 2022-12-31 | $9.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2022-04-01 to 2022-12-31 | $55.3m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2022-10-01 to 2022-12-31 | −$1.2m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-04-01 to 2022-12-31 | $8.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-10-01 to 2022-12-31 | $4.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2022-04-01 to 2022-12-31 | $30.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-10-01 to 2022-12-31 | $0.04 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-04-01 to 2022-12-31 | $0.30 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-10-01 to 2022-12-31 | $0.04 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-04-01 to 2022-12-31 | $0.31 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-10-01 to 2022-12-31 | 103,348,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-04-01 to 2022-12-31 | 103,674,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-04-01 to 2022-12-31 | $97.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2022-12-31 | $79.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-12-31 | $342.8m | us-gaap:AssetsCurrent |
| Total assets | at 2022-12-31 | $1.35bn | us-gaap:Assets |
| Current liabilities | at 2022-12-31 | $289.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-12-31 | $745.0m | us-gaap:Liabilities |
| Long-term debt | at 2022-12-31 | $422.3m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2022-12-31 | $0 | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2022-12-31 | $605.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 38,321 characters.

The following discussion should be read in conjunction with, and is qualified in its entirety by, the condensed consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q (the “Report”). 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 1933, as amended (the “Securities Act”), 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, 2022, 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

We are a leading, independent mobile growth platform that levels up the landscape for advertisers, publishers, carriers, and device original equipment manufacturers (“OEMs”). We offer end-to-end products and solutions leveraging proprietary technology to all participants in the mobile application ecosystem, enabling brand discovery and advertising, user acquisition and engagement, and operational efficiency for advertisers. In addition, our products and solutions provide monetization opportunities for OEMs, carriers, and application (“app” or “apps”) publishers and developers.

### Recent Developments

### Credit Agreement

On October 26, 2022, we amended the New Credit Agreement (the “Second Amendment”) to replace the London Interbank Offered Rate (“LIBOR”) with the Term Secured Overnight Financing Rate (“SOFR”). As a result, amounts outstanding under the New Credit Agreement where the applicable rate was LIBOR will accrue interest at an annual rate equal to SOFR plus between 1.50% and 2.25%. The Second Amendment made no other changes in the terms of the New Credit Agreement. As of December 31, 2022, of the total amount outstanding, $239,000 remains subject to LIBOR based interest rates.

As of December 31, 2022, we had $425,134 drawn against the revolving line of credit under the New Credit Agreement. The proceeds from the borrowings were used to finance the purchases of various acquisitions. As of December 31, 2022, the interest rate was 6.12% and the unused line of credit fee was 0.20%, and we were in compliance with the consolidated leverage ratio, interest coverage ratio, and other covenants under the New Credit Agreement.

### Segment Reporting

As of March 31, 2022, we operated through three segments, each of which was a reportable segment. The three segments were On Device Media (“ODM”), In-App Media - AdColony (“IAM-A”), and In-App Media-Fyber (“IAM-F”). Effective April 1, 2022, we made certain changes to our organizational and management structure that resulted in the following: (1) the renaming of the On Device Media segment to On Device Solutions and (2) the integration of IAM-A and IAM-F into a single segment. The integration of IAM-A and IAM-F was completed to drive operating efficiencies and revenue synergies. As a result of the integration of IAM-A and IAM-F, we reassessed our operating and reportable segments in accordance with ASC 280, *Segment Reporting*. Effective April 1, 2022, we report our results of operations through the following two segments, each of which represents an operating and reportable segment, as follows:

- **On Device Solutions (“ODS”) -** We re-named the ODM segment On Device Solutions to better reflect the nature of the segment’s product offerings. This segment generates revenue from the delivery of mobile application media or content to end users. This segment provides focused solutions to all participants in the mobile application ecosystem that want to connect with end users and consumers who hold the device, including mobile carriers and device OEMs that participate in the app economy, app publishers and developers, and brands and advertising agencies. This segment’s product offerings are enabled through relationships with mobile device carriers and OEMs.
- **App Growth Platform (“AGP”) -** This segment consists of the previously reported IAM-A and IAM-F segments. AGP customers are primarily advertisers and publishers and the segment provides platforms that allow mobile app publishers and developers to monetize their monthly active users via display, native, and video advertising. The AGP platforms allow demand side platforms, advertisers, agencies, and publishers to buy and sell digital ad impressions, primarily through programmatic, real-time bidding auctions and, in some cases, through direct-bought/sold advertiser budgets. The segment also provides brand and performance advertising products to advertisers and agencies.

Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision maker (“CODM”) in making decisions regarding resource allocation and assessing performance. We have determined that our Chief Executive Officer is the CODM.

### Impact of Economic Conditions, Geopolitical Developments, and COVID-19

Our results of operations are affected by macroeconomic conditions and geopolitical developments, including but not limited to levels of business and consumer confidence, actions taken by governments to counter inflation, Russia’s invasion of Ukraine, and the COVID-19 pandemic.

Inflation, rising interest rates, supply chain disruptions, and reduced business and consumer confidence have caused and may continue to cause a global slowdown of economic activity, which has caused and may continue to cause a decrease in demand for a broad variety of goods and services, including those provided by our clients.

Like other advertising technology companies, we have seen a slowdown in digital advertising spending, which we believe is driven by the impact of inflation and recession fears and their potential impacts on consumers. These negative macroeconomic trends have resulted, and may continue to result in, a decrease or delay of advertising budgets and spending. While the slowdown in digital advertising spending is varied and depends on the geography, advertising type, operating system, and business vertical, the current economic environment is likely to continue to impact our business, financial condition, and results of operations, the full impact of which remains uncertain at this time.

The extent of the impact of these macroeconomic factors on our operational and financial performance is also dependent on their impact on carriers and OEMs in relation to their sales of smartphones, tablets, and other devices, as well as the impact on application developers and in-app advertisers. If negative macroeconomic factors or geopolitical developments continue to materially impact our partners over a prolonged period, our results of operations and financial condition could also be adversely impacted, the size and duration of which we cannot accurately predict at this time.

We continue to actively monitor these factors and we may take further actions that alter our business operations, as required, or that we determine are in the best interests of our employees, customers, partners, suppliers, and stockholders. In addition to monitoring the developments described above, the Company also considers the impact such factors may have on our accounting estimates and potential impairments of our non-current assets, which primarily consist of goodwill and finite-lived intangible assets.

The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment, including qualitative and quantitative factors such as the identification of reporting units, identification and allocation of assets and liabilities to reporting units, and determinations of fair value. In estimating the fair value of our reporting units when performing our annual impairment test, or when an indicator of impairment is present, we make estimates and significant judgments about the future cash flows of those reporting units and other estimates including appropriate discount rates. Discount rates can fluctuate based on various economic conditions including our capital allocation and interest rates, including the interest rates on U.S. treasury bonds. Changes in judgments on these assumptions and estimates could result in goodwill impairment charges.

Finite-lived intangible assets and property, plant, and equipment are amortized or depreciated over their estimated useful lives on a straight-line basis. We monitor conditions related to these assets to determine whether events and circumstances warrant a revision to the remaining amortization or depreciation period or an impairment. We test these assets for potential impairment whenever we conclude events or changes in circumstances indicate carrying amounts may not be recoverable.

As of December 31, 2022, we considered the developments discussed above, our current operating results, and our estimates of future operating results. We concluded there were no triggering events that indicated it was more likely than not that the fair values of our reporting units were less than their respective carrying values or that our finite-lived intangible assets were impaired. We will continue to closely monitor macroeconomic conditions and their impacts on our business, financial condition, and results of operations.

### RESULTS OF OPERATIONS

### Net revenue

| Net revenue | Three months ended December 31, 2022 | 2021 | % of Change | Nine months ended December 31, 2022 | 2021 | % of Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| On Device Solutions | $96,316 | $133,594 | (27.9)% | $323,419 | $383,426 | (15.7)% |
| App Growth Platform | 67,407 | 89,113 | (24.4)% | 208,029 | 192,764 | 7.9% |
| Elimination | (1,413) | (5,889) | (76.0)% | (5,646) | (12,729) | (55.6)% |
| Total net revenue | $162,310 | $216,818 | (25.1)% | $525,802 | $563,461 | (6.7)% |

### Comparison of the three and nine months ended December 31, 2022 and 2021

Over the three-month comparative periods, net revenue decreased by $54,508 or 25.1%, and over the nine-month comparative periods, net revenue decreased by $37,659 or 6.7%. See the segment discussion below for further details regarding net revenue.

### On Device Solutions

ODS revenue for the three months ended December 31, 2022, decreased by $37,278 or 27.9% compared to the three months ended December 31, 2021. Revenue from content media declined by approximately $23,840 million, primarily due to the ending of a carrier partnership that resulted in lower daily active users (“DAU”) on prepaid devices. In addition, weak demand, due in part to lower new device volume in the United States and overall advertising spending reductions, resulted in a decline in application media revenue of approximately $13,466.

ODS revenue for the nine months ended December 31, 2022, decreased by $60,007 or 15.7% compared to the nine months ended December 31, 2021. Revenue from content media declined by approximately $57,140 for the same reason as noted above for the three months ended December 31, 2022. In addition, application media revenue declined by approximately $2,866 for the nine months ended December 31, 2022. This decrease was primarily due to the same reason as noted for the three months ended December 31, 2022, partially offset by revenue of $13,700 for two contract amendments during the nine months ended December 31, 2022.

### App Growth Platform

AGP revenue for the three months ended December 31, 2022, decreased by $21,706 or 24.4% compared to the three months ended December 31, 2021. The decrease was primarily due to weak demand during the three months ended December 31, 2022, as compared to the prior year comparative period. The fiscal third quarter historically sees an uptick in advertising spending due to the holiday shopping season, which did not occur in the current fiscal year. In addition, we experienced a decline in performance advertising, largely due to broader weakness in the advertising markets.

AGP revenue for the nine months ended December 31, 2022, increased by $15,265 or 7.9% compared to the nine months ended December 31, 2021. The increase was primarily due to the impact of a full nine months of operations resulting from the AdColony Acquisition and Fyber Acquisition. See Note 3, “Acquisitions,” for further information.

### Costs of revenue and operating expenses

| Costs of revenue and operating expenses | Three months ended December 31, 2022 | 2021 | % of Change | Nine months ended December 31, 2022 | 2021 | % of Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| License fees and revenue share | $73,370 | $109,053 | (32.7)% | $237,618 | $284,369 | (16.4)% |
| Other direct costs of revenue | 9,324 | 9,090 | 2.6% | 27,438 | 21,385 | 28.3% |
| Product development | 14,218 | 13,755 | 3.4% | 43,087 | 40,594 | 6.1% |
| Sales and marketing | 16,469 | 15,857 | 3.9% | 48,017 | 47,072 | 2.0% |
| General and administrative | 39,132 | 39,924 | (2.0)% | 114,328 | 105,225 | 8.7% |
| Total costs of revenue and operating expenses | $152,513 | $187,679 | (18.7)% | $470,488 | $498,645 | (5.6)% |

### Comparison of the three and nine months ended December 31, 2022 and 2021

Over the three and nine months ended December 31, 2022, total costs of revenue and operating expenses decreased by $35,166 or 18.7% and $28,157 or 5.6%, respectively, compared to the three and nine months ended December 31, 2021. The decrease in total costs of revenue and operating expenses over the three and nine month comparative periods is primarily due to lower license fees and revenue share, which is the result of lower revenue over the same comparative periods. Costs of revenue and operating expenses included transaction costs of $1,297 and $3,880, respectively, for the three and nine months ended December 31, 2022, compared to $6,167 and $23,671, respectively, for the three and nine months ended December 31, 2021.

### License fees and revenue share

License fees and revenue share are reflective of amounts paid to our carrier and OEM partners, as well as app publishers and developers, and are recorded as a cost of revenue.

License fees and revenue share decreased by $35,683 or 32.7% to $73,370 for the three months ended December 31, 2022, and was 45.2% as a percentage of total net revenue compared to $109,053, or 50.3% of total net revenue, for the three months ended December 31, 2021.

License fees and revenue share decreased by $46,751 or 16.4% to $237,618 for the nine months ended December 31, 2022, and was 45.2% as a percentage of total net revenue compared to $284,369, or 50.5% of total net revenue, for the nine months ended December 31, 2021.

The decrease in license fees and revenue share as a percentage of total net revenue for the three months ended December 31, 2022, compared to the prior year comparative period, was primarily due to revenue mix changes. The decrease in license fees and revenue share as a percentage of total net revenue for the nine months ended December 31, 2022, compared to the prior year comparative period, was primarily due to revenue mix changes partially offset by the two contract amendments discussed above.

### Other direct costs of revenue

Other direct costs of revenue are comprised primarily of hosting expenses directly related to the generation of revenue and depreciation expense accounted for under ASC 985-20, *Costs of Software to be Sold, Leased, or Otherwise Marketed.*

Other direct costs of revenue was relatively unchanged, increasing $234 or 2.6% to $9,324 for the three months ended December 31, 2022, and was 5.7% as a percentage of total net revenue compared to $9,090, or 4.2% of total net revenue, for the three months ended December 31, 2021. The increase as a percentage of total net revenue was due to the decrease in total net revenue for the three months ended December 31, 2022.

Other direct costs of revenue increased by $6,053 or 28.3% to $27,438 for the nine months ended December 31, 2022, and was 5.2% as a percentage of total net revenue compared to $21,385, or 3.8% of total net revenue, for the nine months ended December 31, 2021. The increase in other direct costs of revenue for the nine months ended December 31, 2022, compared to the prior year comparative period, was due to higher hosting costs of approximately $4,406 and higher depreciation expense for developed technology assets of approximately $1,647 due in part to the impact of a full nine months of operations resulting from the AdColony Acquisition and Fyber Acquisition. Please see Note 3, “Acquisitions,” for further information. The increase as a percentage of total net revenue compared to the prior year comparative period was due to both higher costs as well as the decrease in total net revenue for the nine months ended December 31, 2022.

### Product development

Product development expenses include the development and maintenance of the Company’s product suite. Expenses in this area are primarily a function of personnel.

Product development expenses increased by $463 or 3.4% to $14,218 for the three months ended December 31, 2022, compared to $13,755 for the three months ended December 31, 2021. Product development expenses included acquisition-related costs of $542 and severance costs of $323 for the three months ended December 31, 2022. Product development expenses included acquisition-related costs of $454 for the three months ended December 31, 2021. Excluding acquisition-related costs and severance costs, product development expenses were relatively unchanged for the three months ended December 31, 2022. Lower employee-related costs, primarily due to reduced incentive compensation, was mostly offset by third-party development costs to support increased development activities.

Product development expenses increased by $2,493 or 6.1% to $43,087 for the nine months ended December 31, 2022, compared to $40,594 for the nine months ended December 31, 2021. Product development expenses included acquisition-related costs of $1,627 and severance costs of $323 for the nine months ended December 31, 2022. Product development expenses included acquisition-related costs of $2,364 for the nine months ended December 31, 2021. Excluding acquisition-related and severance costs, product development expenses increased by $2,930 for the nine months ended December 31, 2022. The increase in product development expenses, after excluding acquisition-related costs and severance costs, was primarily due to higher third-party development costs to support increased development activities of $6,628, partially offset by lower employee-related costs of approximately $3,698, primarily due to the capitalization of employee-related costs for development activities and lower incentive compensation. The increases were due in part to the impact of a full nine months of operations resulting from the AdColony Acquisition and Fyber Acquisition. Please see Note 3, “Acquisitions,” for further information.

Product development expenses, excluding acquisition-related costs and severance costs, increased to 8.2% and 7.8% of total net revenue for the three and nine months ended December 31, 2022, respectively, compared to 6.1% and 6.8% of total net revenue for the three and nine months ended December 31, 2021, respectively. The increase in product development expenses as a percentage of total net revenue was due to higher costs and lower revenues.

### Sales and marketing

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

Sales and marketing expenses increased by $612 or 3.9% to $16,469 for the three months ended December 31, 2022, and was 10.1% as a percentage of total net revenue compared to $15,857, or 7.3% of total net revenue, for the three months ended December 31, 2021. The increase in sales and marketing expenses was primarily due to an increase in travel and sales-related events of approximately $1,388 due to the easing of COVID restrictions and severance costs of approximately $652, primarily for Nordic region employees due to the termination of a reseller partnership in the region. These increases were offset by a decrease of approximately $1,428 for employee-related costs, primarily due to lower headcount and incentive compensation.

Sales and marketing expenses were relatively unchanged, increasing by $945 or 2.0% to $48,017 for the nine months ended December 31, 2022, and was 9.1% as a percentage of total net revenue compared to $47,072, or 8.4% of total net revenue, for the nine months ended December 31, 2021. The increase in sales and marketing expenses was primarily due to an increase in travel and sales-related events of approximately $2,468 due to the easing of COVID restrictions and severance costs of approximately $652, primarily for Nordic region employees due to the termination of a reseller partnership in the region. These increases were offset by a decrease of approximately $2,175, primarily for employee-related costs due to lower headcount and incentive compensation.

### General and administrative

General and administrative expenses represent management, finance, and support personnel costs in both the parent and subsidiary companies, which include professional services and consulting costs, in addition to other costs such as rent, stock-based compensation, and depreciation and amortization expense.

General and administrative expenses decreased by $792 or 2.0% to $39,132 for the three months ended December 31, 2022, compared to $39,924 for the three months ended December 31, 2021. The three months ended December 31, 2022, included acquisition-related costs and severance costs of $700 and $135, respectively. The three months ended December 31, 2021 included acquisition-related costs of $5,676. Excluding acquisition-related costs and severance costs, general and administrative expenses increased $4,048.

The increase in general and administrative expenses after excluding acquisition-related costs and severance costs was primarily due to: (1) higher depreciation expense of approximately $2,549 for developed technology assets and amortization of acquired intangible assets, (2) an increase in professional fees, primarily for legal, tax, and auditing services, and software costs of approximately $837, and (3) an increase of approximately $661 for employee related costs due to higher wages and stock-based compensation, partially offset by lower incentive compensation.

General and administrative expenses increased by $9,103 or 8.7% to $114,328 for the nine months ended December 31, 2022, compared to $105,225 for the nine months ended December 31, 2021. The nine months ended December 31, 2022, included acquisition-related costs and severance costs of $2,091 and $135, respectively. The nine months ended December 31, 2021, included acquisition-related costs $20,866. Excluding acquisition-related costs and severance costs, general and administrative expenses increased $27,744.

The increase in general and administrative expenses after excluding acquisition-related costs and severance costs was primarily due to: (1) higher depreciation expense of approximately $17,870 for developed technology assets and amortization of acquired intangible assets, (2) an increase of approximately $4,435 for employee-related costs due to higher wages and stock-based compensation costs, partially offset by lower incentive compensation, (3) an increase in bad debt expense of approximately $2,149, and (4) an increase in other categories, primarily professional services, software, and facilities of $3,289. The increases were due in part to the impact of a full nine months of operations resulting from the AdColony Acquisition and Fyber Acquisition. Please see Note 3, “Acquisitions,” for further information.

### Interest and other income / (expense), net

| Interest and other income / (expense), net | Three months ended December 31, 2022 | 2021 | % of Change | Nine months ended December 31, 2022 | 2021 | % of Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Change in fair value of contingent consideration | $— | $(18,200) | 100.0% | $— | $(40,287) | 100.0% |
| Interest expense, net | (6,913) | (2,195) | 214.9% | (16,224) | (5,307) | 205.7% |
| Foreign exchange transaction gain / (loss) | 17 | 2,122 | (99.2)% | (595) | 1,603 | (137.1)% |
| Other income / (expense), net | 8 | (86) | 109.3% | 392 | (598) | 165.6% |
| Total interest and other income / (expense), net | $(6,888) | $(18,359) | (62.5)% | $(16,427) | $(44,589) | (63.2)% |

### Comparison of the three and nine months ended December 31, 2022 and 2021

### Change in fair value of contingent consideration

For the three and nine months ended December 31, 2021, the Company recorded charges for changes in fair value of contingent consideration in connection with the AdColony Acquisition and Fyber Acquisition of $18,200 and $40,287, respectively. There were no such charges recorded for the three and nine months ended December 31, 2022.

### Interest expense, net

For the three and nine months ended December 31, 2022, interest expense, net, increased by $4,718 or 214.9% and $10,917 or 205.7%, respectively, compared to the three and nine months ended December 31, 2021, primarily due to an increase in interest rates of 371 basis points and 228 basis points, respectively, and higher average outstanding borrowings of $129,167 and $229,952, respectively, over the comparative periods.

### Liquidity and Capital Resources

Our primary sources of liquidity are our cash and cash equivalents, cash from operations, and borrowings under our New Credit Agreement. As of December 31, 2022, we had unrestricted cash of approximately $79,307 and $174,866 available to draw under the New Credit Agreement with BoA. The maturity date of the New Credit Agreement is April 29, 2026, and the outstanding balance of $425,134 is classified as long-term debt, net of debt issuance costs of $2,824, on our condensed consolidated balance sheet as of December 31, 2022. We generated $97,514 in cash flows from operating activities for the nine months ended December 31, 2022.

Our ability to meet our debt service obligations and to fund working capital, capital expenditures, and investments in our business will depend upon our future performance, which will be subject to availability of borrowing capacity under our credit facility and our ability to access the capital markets as well as financial, business, and other factors affecting our operations, many of which are beyond our control. For example, these factors include general and regional economic, financial, competitive, legislative, regulatory, and other factors such as health epidemics including COVID-19, economic and macro-economic factors like labor shortages, supply chain disruptions, and inflation, and geopolitical developments, including the conflict in Ukraine. We cannot guarantee that we will generate sufficient cash flow from operations, or that future borrowings or the capital markets will be available, in an amount sufficient to enable us to pay our debt or to fund our other liquidity needs. We could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional indebtedness or equity capital, or restructure or refinance our indebtedness. We may not be able to affect any such alternative measures on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations.

We believe we will generate sufficient cash flow from operations and has the liquidity and capital resources to meet our business requirements for at least twelve months from the filing date of this Quarterly Report on Form 10-Q.

### Hosting Agreements

We enter into hosting agreements with service providers and in some cases, those agreements include minimum commitments that require us to purchase a minimum amount of service over a specified time period (“the minimum commitment period”). The minimum commitment period is generally one-year in duration and the hosting agreements include multiple minimum commitment periods. Our minimum purchase commitments under these hosting agreements total approximately $181,603 over the next 4 years.

### Outstanding Secured Indebtedness

Our outstanding secured indebtedness under the New Credit Agreement is $425,134 as of December 31, 2022. See “Recent Developments - Credit Agreement” for additional information on the New Credit Agreement. Our ability to borrow additional amounts under the New Credit Agreement could have significant negative consequences, including:

- increasing our vulnerability to general adverse economic and industry conditions;
- limiting our ability to obtain additional financing;
- violating a financial covenant, potentially resulting in the indebtedness to be paid back immediately and thus negatively impacting our liquidity;
- requiring additional financial covenant measurement consents or default waivers without enhanced financial performance in the short term;
- requiring the use of a substantial portion of any cash flow from operations to service indebtedness, thereby reducing the amount of cash flow available for other purposes, including capital expenditures;
- limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which it competes, including by virtue of the requirement that we remain in compliance with certain negative operating covenants included in the credit arrangements under which we will be obligated as well as meeting certain reporting requirements; and
- placing us at a possible competitive disadvantage to less leveraged competitors that are larger and may have better access to capital resources.

Our credit facility also contains a maximum consolidated secured net leverage ratio and minimum consolidated interest coverage ratio. There can be no assurance we will continue to satisfy these ratio covenants. If we fail to satisfy these covenants, the lender may declare a default, which could lead to acceleration of the debt maturity. Any such default would have a material adverse effect on us.

The collateral pledged to secure our secured debt, consisting of substantially all of our and our U.S. subsidiaries’ assets, would be available to the secured creditor in a foreclosure, in addition to many other remedies. Accordingly, any adverse change in our ability to service our secured debt could result in an event of default, cross default, and foreclosure or forced sale. Depending on the value of the assets, there could be little, if any, assets available for common stockholders in any foreclosure or forced sale.

### Cash Flow Summary

*(in thousands)*

| Consolidated statements of cash flows data: | Nine months ended December 31, 2022 | 2021 | % of Change |
| --- | ---: | ---: | ---: |
| **Net cash provided by operating activities** | **$97,514** | **$43,462** | **124.4%** |
| Equity investments | (4,000) | — | (100.0)% |
| Business acquisitions, net of cash acquired | (2,708) | (148,192) | 98.2% |
| Capital expenditures | (18,598) | (15,692) | (18.5)% |
| **Net cash used in investing activities** | **$(25,306)** | **$(163,884)** | **84.6%** |
| Proceeds from borrowings | 18,000 | 369,913 | (95.1)% |
| Payment of debt issuance costs | (94) | (4,044) | 97.7% |
| Payment of deferred business acquisition consideration | — | (98,175) | 100.0% |
| Options and warrants exercised | 1,095 | 2,814 | (61.1)% |
| Payment of withholding taxes for net share settlement of equity awards | (6,202) | (7,587) | (18.3)% |
| Repayment of debt obligations | (129,500) | (52,623) | (146.1)% |
| **Net cash provided by / (used in) financing activities** | **$(116,701)** | **$210,298** | **155.5%** |

### Operating Activities

Our cash flows from operating activities are primarily driven by revenues generated from advertising activity, offset by the cash costs of operations, and are significantly influenced by the timing of and fluctuations in receipts from buyers and related payments to sellers. Our future cash flows will be diminished if we cannot increase our revenue levels and manage costs appropriately. Cash provided by operating activities was $97,514 for the nine months ended December 31, 2022, compared to $43,462 for the nine months ended December 31, 2021. The increase of $54,052 was due to the following:

- $58,961 increase due to changes in operating assets and liabilities, primarily due to lower net working capital for the nine months ended December 31, 2022;
- $15,295 increase in net income; and
- $20,204 decrease due to lower non-cash charges during the nine months ended December 31, 2022, including the impact of the change in fair value of contingent consideration during the nine months ended December 31, 2021. This impact was partially offset by accelerated amortization of trade name intangible assets amidst rebranding and a larger employee base receiving stock-based compensation for the nine months ended December 31, 2022.

### Investing Activities

Our primary investing activities have consisted of acquisitions of businesses, purchases of property and equipment, and capital expenditures in support of creating and enhancing our technology infrastructure. For the nine months ended December 31, 2022, net cash used in investing activities decreased by $138,578 to approximately $25,306. Current period cash used in investing activities was comprised of capital expenditures related mostly to internally-developed software of $18,598, an equity investment of $4,000 in one of the largest independent Android app stores, and cash expenditures for business acquisitions, net of cash acquired, of $2,708 related to our acquisition of In App Video Services UK LTD. For the nine months ended December 31, 2021, net cash used in investing activities was approximately $163,884, comprised of cash expenditures for business acquisitions, net of cash acquired, of $148,192 related to our acquisitions of AdColony and Fyber and capital expenditures related mostly to internally-developed software of $15,692. The $2,906 increase in capital expenditures was due to incremental investments in product development efforts and is also reflective of a larger product portfolio due to the acquisitions of AdColony and Fyber.

### Financing Activities

Our financing activities consisted of borrowings and repayment of amounts borrowed under our New Credit Agreement and transactions related to our equity plans. For the nine months ended December 31, 2022, net cash used in financing activities was approximately $116,701, which was comprised of the repayment of debt obligations of $129,500 and payment of withholding taxes for net share settlement of equity awards of $6,202, partially offset by proceeds from borrowings of $18,000 and stock option exercises of $1,095. For the nine months ended December 31, 2021, net cash provided by financing activities was approximately $210,298, which was comprised of proceeds from borrowings of $369,913 and stock option exercises of $2,814, partially offset by the payment of deferred business acquisition consideration of $98,175, repayment of debt obligations of $52,623, payment of withholding taxes for net share settlement of equity awards of $7,587, and payment of debt issuance costs of $4,044.

### Critical Accounting Policies and Estimates

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 management’s selection and application of accounting policies, 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 policies and estimates, please see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies,” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2022, and Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” of this Quarterly Report on Form 10-Q for our fiscal third quarter ended December 31, 2022.

## Market risk

As filed, 2,367 characters.

The Company has operations both within the United States and internationally and is exposed to market risks in the ordinary course of business - primarily interest rate and foreign currency exchange risks.

### Interest Rate Fluctuation Risk

The primary objective of the Company’s investment activities is to preserve principal while maximizing income without significantly increasing risk. The Company’s cash and cash equivalents consist of cash and deposits, which are sensitive to interest rate changes.

The Company’s borrowings under its credit facility are subject to variable interest rates and thus expose the Company to interest rate fluctuations, depending on the extent to which the Company utilizes its credit facility. If market interest rates materially increase, the Company’s results of operations could be adversely affected. A hypothetical increase in market interest rates of 100 basis points would result in an increase in interest expense of $10 per year for every $1,000 of outstanding debt under the credit facility. The Company has not used any derivative financial instruments to manage its interest rate risk exposure.

### Foreign Currency Exchange Risk

Foreign currency exchange risk is the risk that the Company’s results of operations and/or financial condition could be affected by changes in exchange rates. The Company has transactions denominated in currencies other than the U.S. dollar, principally the euro, Turkish lira, and British pound, that expose the Company’s operations to risk from the effects of exchange rate movements. Such movements may impact future revenues, expenses, and cash flows. In certain of the Company’s foreign operations, the Company transacts primarily in the U.S. dollar, including for net revenue, license fees and revenue share, and employee-related compensation costs, which reduces the Company’s exposure to foreign currency exchange risk. In addition, gains / (losses) related to translating certain cash balances, trade accounts receivable and payable balances, and intercompany balances also impact net income. As the Company’s foreign operations expand, results may be impacted further by fluctuations in the exchange rates of the currencies in which the Company’s does business. The Company has not used any derivative financial instruments to manage its foreign currency exchange risk exposure.

## Controls and procedures

As filed, 5,231 characters.

This Report includes the certifications of the Company’s Chief Executive Officer and Chief Financial Officer, as required by Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). See Exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Q. This Item 4 includes information concerning the controls and control evaluations referred to in those certifications.

### 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 controls and other procedures designed to ensure information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer, who is the principal executive officer, and the Company’s Chief Financial Officer, who is the principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

As previously disclosed in Item 9A, Disclosure Controls and Procedures, of the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2022, management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of March 31, 2022. Based on this evaluation, management concluded as of such date, the Company’s disclosure controls and procedures were not effective due to the existence of the material weakness in its internal control over financial reporting therein described.

Management concluded the Company’s internal control for business combinations did not include a control adequately designed to ensure acquiree accounting policies, as they relate to presentation and classification, were conformed to those of the Company and GAAP.

With the participation of the Company’s Chief Executive Officer and Chief Financial Officer, management evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2022. Based on this evaluation and as a result of the identification of the material weakness described above, management concluded the Company’s disclosure controls and procedures were not effective as of December 31, 2022.

### Remediation Plans for Material Weakness in Internal Control over Financial Reporting

Prior to the identification of the material weakness, management, with oversight from the Company’s Audit Committee, completed a review of the recently acquired business’ product lines with the consultation of a large, third-party accounting firm as part of the financial close and reporting process. This included a review, at the acquired businesses, of representative customer contracts and agreements, supply/publisher agreements, and each product line’s business model and operations with key operations personnel. Further, management took several other actions to strengthen the Company’s control environment, including hiring a new Chief Accounting Officer and creating and hiring for other key positions including a Senior Manager of Internal Audit/ICFR and Director of Global Tax.

The Company is continuing to make progress in implementing improvements to its policies and procedures by:

- Strengthening the Company’s procedures for reviewing the accounting policies of material acquired companies, including their accounting for revenue, through initial reviews during the due diligence period and ensuring alignment of accounting policies prior to the first post-acquisition interim reporting date;
- Standardizing customer and publisher contract review processes to ensure consistent accounting and reporting of revenue transactions; and
- Formalizing the approval process for making changes to the global chart of accounts and accounting systems to ensure the accurate classification of financial statement amounts, including changes resulting from material acquisitions.

Management believes these additional steps will be effective in remediating the material weakness described above and may take additional measures to address the material weakness or modify the remediation plan described above, if deemed necessary. Management continues to make progress implementing the remediation steps discussed above and will continue to test the enhanced control environment in the Company’s fiscal fourth quarter. If the results of remaining controls testing progress as planned, management expects sufficient evidence will be available to conclude the material weakness described above no longer exists as of March 31, 2023.

### Changes in Internal Control Over Financial Reporting

Other than the revenue recognition review process and ongoing remediation steps described above, there were no changes in the Company’s internal control over financial reporting during the three months ended December 31, 2022, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 260 characters.

The Company is not aware of any material changes to the risk factors set forth under Part I, Item 1A, “Risk Factors,” in its Annual Report on Form 10-K for the fiscal year ended March 31, 2022, filed with the Securities and Exchange Commission on June 6, 2022.

Filed Feb 8, 2023.
Source: SEC EDGAR, the filing index for accession 0001628280-23-002788. Last ingested by Listed: Nov 5, 2026, 12:38 ET. No prices; not investment advice.