UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-35958
DIGITAL TURBINE, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
22-2267658
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
1300 Guadalupe Street, Suite 302, Austin TX
 
78701
(Address of Principal Executive Offices)
 
(Zip Code)
(512) 387-7717
(Issuer’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ý    No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ý    No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting, or an emerging growth company. See definitions of a “large accelerated filer,” “accelerated filer,”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check One)
Large Accelerated Filer
¨
Accelerated Filer
ý
 
 
 
 
Non-accelerated Filer
¨  (do not check if smaller reporting company)
Smaller Reporting Company
¨
 
 
 
 
Emerging Growth Company
¨

 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).    Yes ¨    No ý
As of October 31, 2017, the Company had 71,663,791 shares of its common stock, $0.0001 par value per share, outstanding.




Digital Turbine, Inc.
FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED September 30, 2017
TABLE OF CONTENTS
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1 (A).
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
 
 
 
 
 




PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Digital Turbine, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except par value and share amounts)
 
 
September 30, 2017
 
March 31, 2017
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash
 
$
5,867

 
$
6,149

Restricted cash
 
331

 
331

Accounts receivable, net of allowances of $832 and $597, respectively
 
23,787

 
16,554

Deposits
 
117

 
121

Prepaid expenses and other current assets
 
444

 
510

Total current assets
 
30,546

 
23,665

Property and equipment, net
 
2,565

 
2,377

Deferred tax assets
 
688

 
352

Intangible assets, net
 
3,393

 
4,565

Goodwill
 
76,621

 
76,621

TOTAL ASSETS
 
$
113,813

 
$
107,580

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Current liabilities
 
 
 
 
Accounts payable
 
$
23,277

 
$
19,868

Accrued license fees and revenue share
 
10,442

 
8,529

Accrued compensation
 
1,876

 
1,073

Short-term debt, net of debt issuance costs of $290 and $0, respectively
 
2,210

 

Other current liabilities
 
1,194

 
1,304

Total current liabilities
 
38,999

 
30,774

Convertible notes, net of debt issuance costs and discounts of $3,491 and $6,315, respectively
 
6,509

 
9,685

Convertible note embedded derivative liability
 
5,116

 
3,218

Warrant liability
 
2,704

 
1,076

Other non-current liabilities
 
241

 
782

Total liabilities
 
53,569

 
45,535

Stockholders' equity
 
 
 
 
Preferred stock
 
 
 
 
Series A convertible preferred stock at $0.0001 par value; 2,000,000 shares authorized, 100,000 issued and outstanding (liquidation preference of $1,000)
 
100

 
100

Common stock
 
 
 
 
$0.0001 par value: 200,000,000 shares authorized; 72,396,491 issued and 71,662,035 outstanding at September 30, 2017; 67,329,262 issued and 66,594,807 outstanding at March 31, 2017
 
10

 
8

Additional paid-in capital
 
308,415

 
299,580

Treasury stock (754,599 shares at September 30 and March 31, 2017)
 
(71
)
 
(71
)
Accumulated other comprehensive loss
 
(326
)
 
(321
)
Accumulated deficit
 
(247,884
)
 
(237,251
)
Total stockholders' equity
 
60,244

 
62,045

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
113,813

 
$
107,580

The accompanying notes are an integral part of these consolidated financial statements.

3



Digital Turbine, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Loss (Unaudited)
(in thousands, except per share amounts)
 
 
Three Months Ended September 30,
Six Months Ended September 30,
 
 
2017
 
2016
2017
 
2016
Net revenues
 
$
27,891

 
$
22,832

$
54,011

 
$
46,871

Cost of revenues
 
 
 
 
 
 
 
License fees and revenue share
 
19,885

 
17,797

38,766

 
37,021

Other direct cost of revenues
 
643

 
1,882

1,266

 
3,762

Total cost of revenues
 
20,528

 
19,679

40,032

 
40,783

Gross profit
 
7,363

 
3,153

13,979

 
6,088

Operating expenses
 
 
 
 
 
 
 
Product development
 
2,837

 
3,117

5,595

 
5,952

Sales and marketing
 
1,688

 
1,528

3,246

 
2,972

General and administrative
 
4,088

 
4,815

7,912

 
9,920

Total operating expenses
 
8,613

 
9,460

16,753

 
18,844

Loss from operations
 
(1,250
)
 
(6,307
)
(2,774
)
 
(12,756
)
Interest and other expense, net
 
 
 
 
 
 
 
Interest expense, net
 
(662
)
 
(622
)
(1,369
)
 
(1,304
)
Foreign exchange transaction loss
 
(73
)
 
(1
)
(217
)
 
(4
)
Change in fair value of convertible note embedded derivative liability
 
(3,344
)
 
(430
)
(4,652
)
 
(430
)
Change in fair value of warrant liability
 
(1,164
)
 
(140
)
(1,628
)
 
(140
)
Loss on extinguishment of debt
 
(882
)
 
(293
)
(882
)
 
(293
)
Other income
 
33

 
15

36

 
33

Total interest and other expense, net
 
(6,092
)
 
(1,471
)
(8,712
)
 
(2,138
)
Loss from operations before income taxes
 
(7,342
)
 
(7,778
)
(11,486
)
 
(14,894
)
Income tax benefit
 
(884
)
 
(437
)
(853
)
 
(141
)
Net loss
 
$
(6,458
)
 
$
(7,341
)
$
(10,633
)
 
$
(14,753
)
Other comprehensive income / (loss)
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
3

 
(80
)
(5
)
 
(53
)
Comprehensive loss
 
$
(6,455
)
 
$
(7,421
)
$
(10,638
)
 
$
(14,806
)
Basic and diluted net loss per common share
 
$
(0.10
)
 
$
(0.11
)
$
(0.16
)
 
$
(0.22
)
Weighted-average common shares outstanding, basic and diluted
 
66,846

 
66,457

66,723

 
66,358

The accompanying notes are an integral part of these consolidated financial statements.

4



Digital Turbine, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
 
Six Months Ended September 30,
 
 
2017
 
2016
Cash flows from operating activities
 
 

 
 

Net loss
 
$
(10,633
)
 
$
(14,753
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
Depreciation and amortization
 
1,808

 
4,199

Change in allowance for doubtful accounts
 
235

 
7

Amortization of debt discount and debt issuance costs
 
680

 
681

Accrued interest
 
(24
)
 
(91
)
Stock-based compensation
 
1,479

 
2,310

Stock based compensation for services rendered
 
150

 
166

Change in fair value of convertible note embedded derivative liability
 
4,652

 
430

Change in fair value of warrant liability
 
1,628

 
140

Loss on extinguishment of debt
 
882

 
293

(Increase) / decrease in assets:
 
 
 
 
Restricted cash transferred from operating cash
 

 
(321
)
Accounts receivable
 
(7,468
)
 
35

Deposits
 
4

 
61

Deferred tax assets
 
(336
)
 
99

Prepaid expenses and other current assets
 
66

 
68

Increase / (decrease) in liabilities:
 
 
 
 
Accounts payable
 
3,409

 
4,771

Accrued license fees and revenue share
 
1,912

 
(1,009
)
Accrued compensation
 
803

 
(280
)
Other current liabilities
 
(86
)
 
(393
)
Other non-current liabilities
 
(541
)
 
20

Net cash used in operating activities
 
(1,380
)
 
(3,567
)

 
 
 
 
Cash flows from investing activities
 
 

 
 

Capital expenditures
 
(823
)
 
(1,115
)
Net cash used in investing activities
 
(823
)
 
(1,115
)

 
 
 
 
Cash flows from financing activities
 
 

 
 

Cash received from issuance of convertible notes
 

 
16,000

Proceeds from short-term borrowings
 
2,500

 

Options exercised
 
19

 
11

Repayment of debt obligations
 
(247
)
 
(11,000
)
Payment of debt issuance costs
 
(346
)
 
(2,091
)
Net cash provided by financing activities
 
1,926

 
2,920


 
 
 
 
Effect of exchange rate changes on cash
 
(5
)
 
(53
)

 
 
 
 
Net change in cash
 
(282
)
 
(1,815
)

 
 
 
 
Cash, beginning of period
 
6,149

 
11,231


 
 
 
 
Cash, end of period
 
$
5,867

 
$
9,416


 


 


Supplemental disclosure of non-cash investing and financing activities:
 


 


Common stock of the Company issued for extinguishment of debt
 
$
7,187

 
$

The accompanying notes are an integral part of these consolidated financial statements.

5



Digital Turbine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2017
(in thousands, except share and per share amounts)
1.    Description of Business
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 original equipment manufacturers ("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:
Operator and OEM ("O&O"), an advertiser solution for unique and exclusive carrier and original equipment manufacturer ("OEM") inventory which is comprised of services including:
Ignite™ ("Ignite"), a mobile device management platform with targeted application distribution capabilities, and
Other professional services directly related to the Ignite platform.
Advertiser and Publisher ("A&P"), a worldwide mobile user acquisition network which is comprised of the Syndicated network service.
The Company's Content business is comprised of services including:
Marketplace™ ("Marketplace"), an application and content store, and
Pay™ ("Pay"), a content management and mobile payment solution.
With global headquarters in Austin, Texas and offices in Durham, North Carolina, San Francisco, California, Singapore, Sydney, and Tel Aviv, Digital Turbine’s solutions are available worldwide.
Unless the context otherwise indicates, the use of the terms “we,” “our,” “us,” “Digital Turbine,” “DT,” or the “Company” refer to the collective business and operations of Digital Turbine, Inc. through its operating and wholly-owned subsidiaries, Digital Turbine USA, Inc. (“DT USA”), Digital Turbine (EMEA) Ltd. (“DT EMEA”), Digital Turbine Australia Pty Ltd (“DT APAC”), Digital Turbine Singapore Pte. Ltd. (“DT Singapore”), Digital Turbine Luxembourg S.a.r.l. (“DT Luxembourg”), Digital Turbine Germany, GmbH (“DT Germany”), and Digital Turbine Media, Inc. (“DT Media” or "DTM"). We refer to all the Company's subsidiaries collectively as "wholly-owned subsidiaries." We refer to Appia, Inc., a company we acquired on March 6, 2015, as “DT Media” or "DTM."
2.    Liquidity
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("US GAAP"), which contemplate continuation of the Company as a going concern.
Our primary sources of liquidity have historically been issuance of common stock, preferred stock, and debt. As of September 30, 2017, we had cash and restricted cash totaling approximately $6,198.

6



On September 28, 2016, the Company closed a private placement of $16,000 aggregate principal amount of 8.75% Convertible Senior Notes due 2020 (the “Notes”), netting cash proceeds to the Company of $14,316, after deducting the initial purchaser's discounts and commissions and the estimated offering expenses payable by Digital Turbine. The net proceeds from the issuance of the Notes were used to repay approximately $11,000 of secured indebtedness, consisting of approximately $3,000 to Silicon Valley Bank ("SVB") and $8,000 to North Atlantic Capital ("NAC"), retiring both such debts in their entirety, and will otherwise be used for general corporate purposes and working capital. The Company previously entered a supplemental indenture and warrant amendment, described in its Current Report on Form 8-K filed May 24, 2017, which provided for a 30 day stock price measurement period to determine whether or not there would be any change to the conversion price or exercise price of the Company’s outstanding convertible notes or related warrants. The measurement period concluded on September 20, 2017, with no change to the existing $1.364 per share conversion or exercise price of our convertible notes or related warrants. During September 2017, noteholders of $6,000 of the Notes elected to convert such Notes. These Notes were extinguished by issuing shares of common stock based on the applicable conversion price, plus additional shares of common stock and cash to satisfy the early conversion payments required by the indenture under which the Notes were issued. At September 30, 2017, aggregate principal amount of $10,000 remained outstanding and is reflected on the balance sheet, net of debt issuance costs and discounts of $3,491, in the amount of $6,509. Refer to Note 7 "Debt" and Note 10 "Capital Stock Transactions" for more details.
On May 23, 2017, the Company entered into a Business Finance Agreement (the "Credit Agreement") with Western Alliance Bank (the "Bank"). The Credit Agreement provides for a $5,000 total facility. The amounts advanced under the Credit Agreement mature in two years and accrue interest at prime plus 1.25% subject to a 4.00% floor, with the prime rate defined as the prime rate published in the Wall Street Journal. The Credit Facility also carries an annual facility fee of $45.5, and an early termination fee of 0.5% if terminated during the first year. The obligations under the Credit Agreement are secured by a perfected first position security interest in all assets of the Company and its subsidiaries, subject to partial (65%) pledges of stock of non-US subsidiaries. In addition to customary covenants, including restrictions on payments (subject to specified exceptions), and restrictions on indebtedness (subject to specified exceptions), the Credit Agreement requires the Company to comply with certain monthly financial covenants. At September 30, 2017, the gross outstanding principle on the Credit Agreement was $2,500 which is presented, net of capitalized debt issuance costs of $290, as net secured short-term line of credit of $2,210. Refer to Note 7 "Debt" for more details.
In addition, the indenture for the Notes, and the related warrant agreement for the warrants issued in connection with the Notes, contain, among other protections, price-based anti-dilution rights. These rights could result in significant dilution to other stockholders in the event we were to complete certain types of financings at valuations below specified levels. At our January 2017 annual stockholders meeting, we received stockholder approval to issue the full amount of shares of our stock that could ultimately be issuable under the indenture for the Notes and the warrant agreement. However, as a result of the modification of our indenture for the Notes and related modification of the warrant agreement in connection with soliciting consent for incurrence of the Credit Agreement, the January 2017 stockholder approval no longer applies and we would need to receive a new stockholder approval in order to issue the full amount of shares of our stock that could ultimately be issuable under the indenture for the Notes and the warrant agreement. We are required to seek such stockholder approval. Until we do so, conversion rights of holders may be limited and, under the indenture, we may be required to satisfy attempted conversions with cash.
Until the Company becomes cash flow positive, the Company anticipates that its primary sources of liquidity will continue be cash on hand and the remaining credit available under the Credit Agreement. In addition, the Company may raise additional capital through future equity or, subject to restrictions contained in the indenture for the Notes and the Credit Agreement, debt financing to provide for greater flexibility to make acquisitions, make new investments in under-capitalized opportunities, or invest in organic opportunities. Additional financing may not be available on acceptable terms or at all. If the Company issues additional equity securities to raise funds, the ownership percentage of its existing stockholders would be reduced. New investors may demand rights, preferences, or privileges senior to those of existing holders of common stock.
In view of the matters described in the preceding paragraphs, recoverability of a major portion of the recorded asset amounts shown in the accompanying consolidated balance sheet is dependent upon continued operations of the Company, which, in turn, is dependent upon the Company’s ability to generate positive cash flows from operations. The financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts, or amounts and classifications of liabilities, that might be necessary should the Company be unable to continue its existence. 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.

7



3.    Summary of Significant Accounting Policies
Interim Consolidated Financial Information
The accompanying consolidated financial statements of Digital Turbine, Inc. should be read in conjunction with the consolidated financial statements and accompanying notes filed with the U.S. Securities and Exchange Commission ("SEC") in Digital Turbine, Inc.'s Annual Report on Form 10-K for the fiscal year ended March 31, 2017, as amended. The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP and pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments of a normal recurring nature considered necessary to fairly state the financial position of Digital Turbine, Inc. and its consolidated subsidiaries at September 30, 2017, the results of its operations and corresponding comprehensive loss, and its cash flows for the six months ended September 30, 2017 and 2016. The consolidated financial statements include the accounts of the Company and our wholly-owned subsidiaries. All material inter-company balances and transactions have been eliminated in consolidation. The results of operations for the interim period are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2018.
The significant accounting policies and recent accounting pronouncements were described in Note 4 of the consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended March 31, 2017. There have been no significant changes in or updates to the accounting policies since March 31, 2017. Only new accounting pronouncements, pertinent to the Company, issued subsequent to the issuance of our Annual Report are described below.
Recently Issued Accounting Pronouncements
In July 2017, the FASB issued ASU 2017-11, Accounting for Certain Financial Instruments with Down Round Features, which addresses the complexity of accounting for certain financial instruments with down round features under current guidance criterion. With this new update, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. This guidance is to be applied retrospectively for instruments outstanding as of the adoption date. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2018. Early application is permitted. The Company will adopt ASU 2017-11 during the quarter ended June 30, 2019, and does not expect the impact of this ASU to have a material impact on its consolidated results of operations, financial condition and cash flows.
In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation, which modifies the scope of share-based payment award modification accounting in an effort to provide clarity and reduce diversity in practice under old guidance. Under this new standard, an entity should apply modification accounting (Topic 718) unless specific criterion related to fair value, vesting conditions, and equity/liability classification are all met. This guidance is to be applied prospectively for awards modified on or after the adoption date. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017. Early application is permitted. The Company will adopt ASU 2017-09 during the quarter ended June 30, 2018, and does not expect the impact of this ASU to have a material impact on its consolidated results of operations, financial condition and cash flows.
In May 2014, the FASB issued ASU 2014-9, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. Additionally, ASU 2014-09 requires enhanced disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In July 2015, the FASB decided to delay the effective date of ASU 2014-09 by one year. The deferral results in the new revenue standard being effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. ASU 2014-09, as amended, is effective using either the full retrospective or modified retrospective transition approach for fiscal years, and for interim periods within those years. In 2016 and 2017, the FASB has issued several accounting standards updates to clarify certain topics within ASU 2014-09. The Company will adopt ASU 2014-09, and its related clarifying ASUs, during the quarter ended June 30, 2018.  Further, the Company is in the initial stages of evaluating the effect of the standard on its consolidated results of operations, financial condition and cash flows, but expects the impact to not be material.
Other authoritative guidance issued by the FASB (including technical corrections to the FASB Accounting Standards Codification), the American Institute of Certified Public Accountants, and the SEC did not, or are not expected to have a material effect on the Company’s consolidated financial statements.

8



Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and accounts receivable. A significant portion of the Company’s cash is held at one major financial institution that the Company's management has assessed to be of high credit quality. The Company has not experienced any losses in such accounts.
The Company mitigates its credit risk with respect to accounts receivable by performing credit evaluations and monitoring advertisers' and carriers' accounts receivable balances. The Company counts all advertisers and carriers within a single corporate structure as one customer, even in cases where multiple brands, branches, or divisions of an organization enter into separate contracts with the Company. As of September 30, 2017, two major Advertising customers and one Content customer represented approximately 15.9% , 10.0% , and 12.3%, respectively, of the Company’s net accounts receivable balance. As of March 31, 2017, two major customers represented 11.2% and 10.7% of the Company's net accounts receivable balance, both within the Advertising business.
With respect to revenue concentration, the Company defines a customer as an advertiser or a carrier that is a distinct source of revenue and is legally bound to pay for the services that the Company delivers on the advertiser’s or carrier's behalf. During the three and six months ended September 30, 2017, Singapore Telecommunications Limited, a Content customer represented 20.0% and 18.6% of net revenues, respectively; AOL Inc., an Advertising customer represented 14.2% and 13.2% of net revenues, respectively; Telstra Corporation Limited, a Content customer represented 12.5% and 12.0% of net revenues, respectively; and Machine Zone, Inc., an Advertising customer represented 10.6% and 10.5% of net revenues, respectively. During the three and six months ended September 30, 2016, Telstra Corporation Limited, a Content customer represented 21.3% and 27.3% of net revenues, respectively, and Jam City Inc., an Advertising customer represented 16.7% and 12.1% of net revenues, respectively.
The Company partners with mobile carriers and OEMS to deliver applications on our Ignite platform through the carrier network. During the three and six months ended September 30, 2017, Verizon Wireless, a carrier partner, generated 30.8% and 31.8% of our net revenues, respectively; while AT&T Inc., a carrier partner, primarily through its Cricket subsidiary, generated 16.7% and 15.4% of our net revenue, respectively. During the three and six months ended September 30, 2016, Verizon Wireless, generated 28.6% and 23.7% of our net revenues, respectively.
The Company may not continue to receive significant revenues from any of these or from other large customers. A reduction or delay in operating activity from any of the Company’s significant customers, or a delay or default in payment by any significant customer could materially harm the Company’s business and prospects. Because of the Company’s significant customer concentration, its net sales and operating income could fluctuate significantly due to changes in political or economic conditions, or the loss, reduction of business, or less favorable terms for any of the Company's significant customers.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make certain estimates that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

9



4.    Accounts Receivable
 
 
September 30, 2017
 
March 31, 2017
 
 
(Unaudited)
 
 
Billed
 
$
15,255

 
$
9,367

Unbilled
 
9,364

 
7,784

Allowance for doubtful accounts
 
(832
)
 
(597
)
Accounts receivable, net
 
$
23,787

 
$
16,554

Billed accounts receivable represent amounts billed to customers that have yet to be collected. Unbilled accounts receivable represent revenue recognized, but billed after period end. All unbilled receivables as of September 30, 2017 and March 31, 2017 are expected to be billed and collected within twelve months.
The Company recorded $148 and $235 of bad debt expense during the three and six months ended September 30, 2017, respectively. The Company recorded $28 and $405 of bad debt expense during the three and six months ended September 30, 2016, respectively.
5.    Property and Equipment
 
 
September 30, 2017
 
March 31, 2017
 
 
(Unaudited)
 
 
Computer-related equipment
 
$
4,965

 
$
4,133

Furniture and fixtures
 
108

 
116

Leasehold improvements
 
143

 
143

Property and equipment, gross
 
5,216

 
4,392

Accumulated depreciation
 
(2,651
)
 
(2,015
)
Property and equipment, net
 
$
2,565

 
$
2,377

Depreciation expense for the three and six months ended September 30, 2017 was $339 and $636, respectively; and $223 and $437 for the three and six months ended September 30, 2016, respectively. Depreciation expense in the three and six months ended September 30, 2017 includes $277 and $542, respectively, related to internal use assets included in General and Administrative Expense and $62 and $94, respectively, related to internally developed software to be sold, leased, or otherwise marketed included in Other Direct Costs of Revenue. Depreciation expense in the prior year comparative periods related exclusively to internal use assets and is included in General and Administrative Expense.
6.    Intangible Assets
The components of intangible assets at September 30, 2017 and March 31, 2017 were as follows:
 
 
As of September 30, 2017
 
 
(Unaudited)
 
 
Cost
 
Accumulated Amortization
 
Net
Software
 
$
11,544

 
$
(9,275
)
 
$
2,269

Trade name / trademark
 
380

 
(380
)
 

Customer list
 
11,300

 
(10,210
)
 
1,090

License agreements
 
355

 
(321
)
 
34

Total
 
$
23,579

 
$
(20,186
)
 
$
3,393


10



 
 
As of March 31, 2017
 
 
Cost
 
Accumulated Amortization
 
Net
Software
 
$
11,544

 
$
(8,191
)
 
$
3,353

Trade name / trademark
 
380

 
(380
)
 

Customer list
 
11,300

 
(10,152
)
 
1,148

License agreements
 
355

 
(291
)
 
64

Total
 
$
23,579

 
$
(19,014
)
 
$
4,565

The Company has included amortization of acquired intangible assets directly attributable to revenue-generating activities in cost of revenues; thus, all intangible amortization is included in cost of revenues.
The Company recorded amortization expense of $582 and $1,172, respectively, during the three and six months ended September 30, 2017, and $1,882 and $3,762, respectively, during the three and six months ended September 30, 2016. The decrease in amortization expense year-over-year was primarily attributable to advertiser and publisher relationships acquired in the Appia Inc transaction being fully amortized and the write-off of certain assets during fiscal year 2017.
Based on the amortizable intangible assets as of September 30, 2017, we estimate amortization expense for the next five years to be as follows:
Year Ending March 31,
 
Amortization Expense
2018
 
$
1,097

2019
 
1,375

2020
 
114

2021
 
114

2022
 
114

Thereafter
 
579

Total
 
$
3,393


11



7.    Debt
 
 
September 30, 2017
 
March 31, 2017
 
 
(Unaudited)
 
 
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

 
$

 
 
September 30, 2017
 
March 31, 2017
 
 
(Unaudited)
 
 
Long-term debt
 
 
 
 
Convertible notes, net of issuance costs and discounts of $3,491 and $6,315, respectively
 
$
6,509

 
$
9,685

Total long-term debt
 
$
6,509

 
$
9,685

Convertible Notes
On September 28, 2016, the Company sold to BTIG, LLC (the "Initial Purchaser"), $16,000 aggregate principal amount of 8.75% convertible notes maturing on September 23, 2020, unless converted, repurchased or redeemed in accordance with their terms prior to such date. The $16,000 aggregate principal received from the issuance of the Notes was initially allocated between long-term debt at $11,084, the convertible note embedded derivative liability at $3,693 (see Note 8. "Fair Value Measurements" for more information), and the warrant liability at $1,223 (see Note 8. "Fair Value Measurements" for more information), within the consolidated balance sheet. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the liability. Fair value of the Notes is determined using the residual method of accounting whereby, first, a portion of the proceeds from the issuance of the Notes is allocated to derivatives embedded in the Notes and the warrants issued in connection with the issuance of the Notes, and the proceeds so allocated are accounted for as a convertible note embedded derivative liability and warrant liability, respectively (see Note 8. "Fair Value Measurements for more information), and second, the remainder of the proceeds from the issuance of the Notes is allocated to the convertible notes, resulting in an original issue debt discount amounting to $4,916. As of the close of the issuance of the Notes on September 28, 2016, the Company incurred $1,700 in debt issuance costs directly related to the issuance of the Notes, which in accordance with ASU 2015-03, the Company has recorded these costs as a direct reduction to the face value of the Notes and will amortize this amount over the life of the Notes as a component of interest expense on the consolidated statement of operation and comprehensive loss. During the three months ended December 31, 2016, the Company further incurred $212 in costs directly associated with the issuance of the Notes, for the preparation and filing of the S-1 to register the underlying common stock related to the Notes issued and related Warrants issued along with the Notes, which was required to be done in accordance with the Indenture (as defined below). The convertible notes will remain on the consolidated balance sheet at historical cost, accreted up for the amount of cumulative amortization of the debt discount over the life of the debt. If we or the note holders elect not to settle the debt through conversion, we must settle the Notes at face value. Therefore, the liability component will be accreted up to the face value of the Notes, which will result in additional non-cash interest expense being recognized within the consolidated statements of operations and comprehensive loss through the Notes maturity date.
The Company sold the Notes to the Initial Purchaser at a purchase price of 92.75% of the principal amount. The initial purchaser also received an additional 250,000 warrants on the same terms as the warrants issued with the Notes (as detailed below) and has the right to receive 2.5% of any cash consideration received by the Company in connection with a future exercise of any of the warrants issued with the Notes. The Notes were issued under an Indenture dated September 28, 2016, as amended on January 31, 2017 (the "Indenture"), between Digital Turbine, Inc., US Bank National Association, as trustee, and certain wholly-owned subsidiaries of the Company, specifically Digital Turbine, Inc. as the parent Company, DT USA, DT Media, and DT APAC (collectively referred to as the "Guarantors"). The Notes are senior unsecured obligations of the Company, and bear interest at a rate of 8.75% per year, payable semiannually in arrears on March 15th and September 15th of each year, beginning on March 15, 2017. The Notes are unconditionally guaranteed by the Guarantors as to the payment of principal, premium, if any, and interest on a senior unsecured basis. The Notes were issued with an initial conversion price equal to $1.364 per share of the Company's common stock, subject to proportional adjustment for adjustments to outstanding common stock and anti-dilution provisions in case of dividends or distributions, stock split or combination, or if the Company issues or sells shares of common stock at a price per share less than the conversion price on the trading day immediately preceding such issuance of sale.

12



With respect to any conversion prior to September 23, 2019, in addition to the shares deliverable upon conversion, holders of the Notes will be entitled to receive a payment equal to the remaining scheduled payments of interest that would have been made on the notes being converted from the date of conversion until September 23, 2019 (an “Early Conversion Payment”). We may pay the Early Conversion Payment in cash or, subject to certain equity-related conditions set forth in the Indenture, in shares of our common stock.
The Company will not have the right to issue shares of common stock as payment of the Early Conversion Payment, if the aggregate number of shares issued (and any other transaction aggregated for such purpose) after giving effect to such conversion or payment, as applicable, would exceed 19.99% of the number of shares of the Company’s common stock outstanding as of the Conversion date (or the "Notes Exchange Cap"). The Company will pay cash in lieu of any shares that would otherwise be deliverable in excess of the Notes Exchange Cap.
The Company may redeem the Notes, for cash, in whole or in part, at any time after September 23, 2018, at a redemption price equal to $1 per $1 principal amount of the notes to be redeemed plus accrued and unpaid interest, if any, to, but excluding, the date of redemption, plus an additional payment (payable in cash or stock) equivalent to the amount of, and subject to equivalent terms and conditions applicable for, an Early Conversion Payment had the notes been converted on the date of redemption, if (1) the closing price of our common shares on the NASDAQ Capital Market has exceeded 200% of the conversion price then in effect (but disregarding the effect on such price from certain anti-dilution adjustments) for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending within the five trading days immediately preceding the date on which we provide the redemption notice, (2) for the 15 consecutive trading days following the last trading day on which the closing price of our common shares was equal to or greater than 200% of the conversion price in effect (but disregarding the effect on such price from certain anti-dilution adjustments) on such trading day for the purpose of the foregoing clause, the closing price of our common shares remains equal to or greater than 150% of the conversion price in effect (but disregarding the effect on such price from certain anti-dilution adjustments) on the given trading day and (3) we are in compliance with certain other equity-related conditions as set forth in the Indenture.


13



If we undergo a fundamental change (as described below), holders may require us to purchase the Notes in whole or in part for cash at a price equal to 120% of the principal amount of the Notes to be purchased plus any accrued and unpaid interest, including additional interest, if any, to, but excluding, the repurchase date. Conversions that occur in connection with a fundamental change may entitle the holder to receive an increased number of shares of common stock issuable upon such conversion, depending on the date of such fundamental change and the valuation of the Company’s common stock related thereto. A fundamental change is defined as follows:
a “person” or “group” within the meaning of Section 13(d) of the Exchange Act other than the Company, the Company’s Subsidiaries or the Company’s or the Company’s Subsidiaries’ employee benefit plans files a Schedule TO or any schedule, form or report under the Exchange Act disclosing that such person or group has become the direct or indirect “beneficial owner,” as defined in Rule 13d-3 under the Exchange Act, of the Company’s common equity representing more than 50% of the voting power of all outstanding classes of the Company’s common equity entitled to vote generally in the election of the Company’s directors;
consummation of (A) any share exchange, consolidation or merger involving the Company pursuant to which the Common Stock will be converted into cash, securities or other property or (B) any sale, lease or other transfer in one transaction or a series of transactions of all or substantially all of the consolidated assets of the Company and the Company’s Subsidiaries, taken as a whole, to any person other than one or more of the Company’s Subsidiaries; provided, however, that a share exchange, consolidation or merger transaction described in clause (A) above in which the holders of more than 50% of all shares of Common Stock entitled to vote generally in the election of the Company’s directors immediately prior to such transaction own, directly or indirectly, more than 50% of all shares of Common Stock entitled to vote generally in the election of the directors of the continuing or surviving entity or the parent entity thereof immediately after such transaction in substantially the same proportions (relative to each other) as such ownership immediately prior to such transaction will not, in either case, be a Fundamental Change;
the Company’s shareholders approve any plan or proposal for the liquidation or dissolution of the Company; or
the Common Stock (or other Capital Stock into which the Notes are then convertible pursuant to the terms of this Indenture) ceases to be listed on any of The New York Stock Exchange, The NASDAQ Global Select Market, The NASDAQ Global Market, The NASDAQ Capital Market or The NYSE MKT (or their respective successors) (each, an “ Eligible Market ”).
Subject to limited exceptions, the Indenture prohibits us from incurring additional indebtedness at any time while the Notes remain outstanding.
Each purchaser of the Notes also received warrants to purchase 256.60 shares of the Company's common stock for each $1 in Notes purchased, or up to 4,105,600 warrants in aggregate, in addition to the 250,000 warrants issued to the initial purchaser, as described above. The warrants were issued under a Warrant Agreement (the "Warrant Agreement"), dated as of September 28, 2016, between Digital Turbine, Inc. and US Bank National Association, as the warrant agent.
The warrants are immediately exercisable on the date of issuance at an initial exercise price of $1.364 per share and will expire on September 23, 2020. The exercise price is subject to proportional adjustment for adjustments to outstanding common stock and anti-dilution provisions in case of dividends or distributions, stock split or combination, or if the Company issues or sells shares of common stock at a price per share less than the conversion price on the trading day immediately preceding such issuance of sale. Certain caps on the number of shares that could be issued under the Notes and the Warrants were effectively lifted by our stockholders approving the full issuance of all potentially issuable shares at our January 2017 annual meeting of stockholders.
In the event of a fundamental change, as set forth in the Warrant Agreement, the holders can elect to exercise their warrants or to receive an amount of cash under a Black-Scholes calculation of the value of such warrants.
The Company received net cash proceeds of $14,316, after deducting the initial purchaser's discounts and commissions and the estimated offering expenses payable by Digital Turbine. The net proceeds from the issuance of the Notes were used to repay $11,000 of secured indebtedness, retiring such debt in its entirety, and will otherwise be used for general corporate purposes and working capital.

14



The Company previously entered a supplemental indenture and warrant amendment, described in its Current Report on Form 8-K filed May 24, 2017, which provided for a 30 day stock price measurement period to determine whether or not there would be any change to the conversion price or exercise price of the Company’s outstanding convertible notes or related warrants. The measurement period concluded on September 20, 2017, with no change to the existing $1.364 per share conversion or exercise price of our convertible notes or related warrants.
During September 2017, noteholders of $6,000 of Notes elected to convert such Notes. These Notes were extinguished by issuing shares of common stock, based on the applicable conversion price of $1.364 per share, plus additional shares of common stock and cash to satisfy the early conversion payments required by the indenture under which the Notes were issued. Associated with this conversion, gross debt net of debt discount and capitalized debt issuance costs of $1,579 and $621, respectively, was extinguished for a net debt extinguishment of $3,800. In total, 5,043,018 shares of common stock were issued and $247 in cash was paid to settle these positions. This resulted in an adjustment of approximately $7,187 to additional paid in capital to reflect the shares issued upon conversion. A loss on extinguishment of debt of $882 was recorded as a result of the difference in carrying value of the debt, inclusive of the associated debt discount and capitalized debt issuance costs, compared to the FMV of the consideration given comprising both common stock issued and cash paid. The proportionate amount of the underlying derivative instrument was also extinguished as calculated on the respective conversion dates in September 2017. See Note 8. "Fair Value Measurements for more information.
As of September 30, 2017, the outstanding principal on the Notes was $10,000, the unamortized debt issuance costs and debt discount in aggregate was $3,491, and the net carrying amount of the Notes was $6,509 , which was recorded as long-term debt within the consolidated balance sheet. The Company recorded $327 and $680, respectively, of aggregate debt discount and debt issuance cost amortization during the three and six months ended September 30, 2017, and $339 and $681, respectively, for the three and six months ended September 30, 2016. Inclusive of the Notes issued on September 28, 2016 and the NAC subordinated debenture which was retired in full on September 28, 2016, the Company recorded $335 and $689, respectively, of interest expense during the three and six months ended September 30, 2017 and $282 and $623, respectively, for the three and six months ended September 30, 2016.

15



Senior Secured Credit Facility
On May 23, 2017, the Company entered a Business Finance Agreement (the “Credit Agreement”) with Western Alliance Bank (the “Bank”). The Credit Agreement provides for a $5,000 total facility. Fifty percent of the availability of the total facility was originally subject to EX-IM Bank approval, which this approval has been received.
The amounts advanced under the Credit Agreement mature in two (2) years, and accrue interest at the following rates and bear the following fees:
(1) Wall Street Journal Prime Rate + 1.25% (currently approximately 5.25%), with a floor of 4.0%.
(2) Annual Facility Fee of $45.5.
(3) Early termination fee of 0.5% if terminated during the first year.
The obligations under the Credit Agreement are secured by a perfected first position security interest in all assets of the Company and its subsidiaries, subject to partial (65%) pledges of stock of non-US subsidiaries. The Company’s subsidiaries Digital Turbine USA and Digital Turbine Media are co-borrowers.
In addition to customary covenants, including restrictions on payments (subject to specified exceptions), and restrictions on indebtedness (subject to specified exceptions), the Credit Agreement requires the Company to comply with the following financial covenants, measured on a monthly basis:
(1) Maintain a Current Ratio of at least 0.65, defined as unrestricted cash plus accounts receivable, divided by all current liabilities.
(2) Revenue must exceed 85% of projected quarterly revenue.
As of September 30, 2017, the Company was in compliance with the covenants of the Credit Agreement.
The Credit Agreement requires that at least two-thirds (2/3rds) of the holders of the Notes at all times be subject to subordination agreements with the Bank, which were obtained in connection with the solicitation of consents for the Second Supplemental Indenture described below.
The Credit Agreement contains other customary covenants, representations, indemnities and events of default.
At September 30, 2017, the gross outstanding principle on the Credit Agreement was $2,500 which is presented, net of capitalized debt issuance costs of $290, as net secured short-term line of credit of $2,210.
Second Supplemental Indenture and Warrant Amendment.
The Company obtained the consent of the holders of at least two-thirds (2/3rds) of the Notes, which were held by a small number of institutional investors, in order to obtain a waiver of the covenant in the Indenture regarding incurrence of secured debt. In consideration for such consents, the Company entered into a Second Supplemental Indenture, dated May 23, 2017 (the “Supplemental Indenture”) to the Indenture, and also entered into a First Amendment, dated May 23, 2017 (the “Warrant Amendment”) to the Warrant Agreement , dated September 28, 2016, with US Bank as warrant agent (the “Warrant Agreement”), related to the Warrants that were issued in connection with the Notes in September 2017.
The Supplemental Indenture and Warrant Amendment provided for a 30 day stock price measurement period to determine whether or not there would be any change to the conversion price or exercise price of the Company’s outstanding convertible notes or related warrants. The measurement period concluded on September 20, 2017, with no change to the existing $1.364 per share conversion or exercise price of our convertible notes or related warrants.

16



8.    Fair Value Measurements
The inputs to the valuation techniques used to measure fair value are classified into the following categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The Company’s financial liabilities as of the issuance date of the convertible notes on the initial measurement date of September 28, 2016 are presented below at fair value and were classified within the fair value hierarchy as follows:
 
 
Level 1
 
Level 2
 
Level 3
 
Balance at Inception
Financial Liabilities
 
 
 
 
 
 
 
 
Convertible note embedded derivative liability
 
$

 
$

 
$
3,693

 
$
3,693

Warrant liability
 

 

 
1,223

 
1,223

Total
 
$

 
$

 
$
4,916

 
$
4,916

The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the liability. Considerable judgment is necessary to interpret market data and determine an estimated fair value. The use of different market assumptions or valuation methods may have a material effect on the estimated fair values. Fair value of the Notes is determined using the residual method of accounting whereby, first, a portion of the proceeds from the issuance of the Notes is allocated to derivatives embedded in the Notes and the warrants issued in connection with the issuance of the Notes, and the proceeds so allocated are accounted for as a convertible note embedded derivative liability and warrant liability, respectively, and second, the remainder of the proceeds from the issuance of the Notes is allocated to the convertible notes, resulting in debt discount amounting to $4,916. The convertible notes will remain on the consolidated balance sheet at historical cost, accreted up for the amount of cumulative amortization of the debt discount over the life of the debt. The method of determining the fair value of the convertible note embedded derivative liability and warrant liability are described subsequently in this note. Market risk associated with the convertible note embedded derivative liability and warrant liability relates to the potential reduction in fair value and negative impact to future earnings from an increase in price of the Company's common stock. Please refer to Note 7. "Debt" for more information.
The carrying amounts of certain financial instruments, such as cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities.
As of September 30, 2017 and March 31, 2017, the Company’s financial assets and financial liabilities are presented below at fair value and were classified within the fair value hierarchy as follows:
 
 
Level 1
 
Level 2
 
Level 3
 
Balance as of September 30, 2017
 
 
 
 
 
 
 
 
(Unaudited)
Financial Liabilities
 
 
 
 
 
 
 
 
Convertible note embedded derivative liability
 
$

 
$

 
$
5,116

 
$
5,116

Warrant liability
 

 

 
2,704

 
2,704

Total
 
$

 
$

 
$
7,820

 
$
7,820


17



 
 
Level 1
 
Level 2
 
Level 3
 
Balance as of March 31, 2017
Financial Liabilities
 
 
 
 
 
 
 
 
Convertible note embedded derivative liability
 
$

 
$

 
$
3,218

 
$
3,218

Warrant liability
 

 

 
1,076

 
1,076

Total
 
$

 
$

 
$
4,294

 
$
4,294

Convertible Note Embedded Derivative Liability
On September 28, 2016, the Company sold to BTIG, LLC (the "Initial Purchaser"), $16,000 principal amount of 8.75% convertible notes maturing on September 23, 2020 (the “Notes”), unless converted, repurchased, or redeemed in accordance with their terms prior to such date. We evaluated the terms and features of our convertible notes and identified embedded derivatives (conversion options that contain “make-whole interest” provisions, fundamental change provisions, or down round conversion price adjustment provisions; collectively called the "convertible note embedded derivative liability") requiring bifurcation and accounting at fair value because the economic and contractual characteristics of the embedded derivatives met the criteria for bifurcation and separate accounting. ASC 815-10-15-83 (c) states that if terms implicitly or explicitly require or permit net settlement, then it can readily be settled net by means outside the contract, or it provides for delivery of an asset that puts the recipient in a position not substantially different from net settlement. The conversion features related to the convertible notes consists of a “make-whole interest” provision, fundamental change provision, and down round conversion price adjustment provisions, which if the convertible notes were to be converted, would put the convertible note holder in a position not substantially different from net settlement. Given this fact pattern, the conversion features meet the definition of embedded derivatives and require bifurcation and accounting at fair value.
The convertible note embedded derivative liability represent the fair value of the conversion option, fundamental change provision, and "make-whole" provisions, as well as the down round conversion price adjustment or conversion rate adjustment provisions of the convertible notes. There is no current observable market for these types of derivatives and, as such, the Company determined the fair value of the derivative liability using a lattice approach that incorporates a Monte Carlo simulation valuation model. A Monte Carlo simulation valuation model considers the Company's future stock price, stock price volatility, probability of a change of control and the trading information of the Company's common stock into which the notes are or may become convertible. The Company marks the derivative liability to market at the end of each reporting period due to the conversion price not being indexed to the Company's own stock.
Changes in the fair value of the convertible note embedded derivative liability is reflected in our consolidated statements of operations as “Change in fair value of convertible note embedded derivative liability.”
The following table provides a reconciliation of the beginning and ending balances for the convertible note embedded derivative liability measured at fair value using significant unobservable inputs (Level 3):
 
 
Level 3
Balance at March 31, 2017
 
$
3,218

Change in fair value of convertible note embedded derivative liability
 
4,652

     Derecognition on extinguishment or conversion
 
(2,754
)
Balance at September 30, 2017
 
$
5,116

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, offset by the derecognition of $2,754 of derivative liability 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 period ended September 30, 2016 from $0.99 to $1.05.

18



The market-based assumptions and estimates used in valuing the convertible note embedded derivative liability include amounts in the following amounts:
 
September 30, 2017
Stock price volatility
70
%
Probability of change in control
1.75
%
Stock price (per share)
$1.51
Expected term
3.00 years

Risk-free rate (1)
1.61
%
Assumed early conversion/exercise price (per share)
$2.73
(1) The Monte Carlo simulation assumes the continuously compounded equivalent (CCE) interest rate of 1.0%  
based on the average of the 3-year and 5-year U.S. Treasury securities as of the valuation date. 
Changes in valuation assumptions can have a significant impact on the valuation of the convertible note embedded derivative liability. For example, all other things being equal, a decrease/ increase in our stock price, probability of change of control, or stock price volatility decreases/increases the valuation of the liabilities, whereas a decrease/increase in risk-free interest rates increases/decreases the valuation of the liabilities.
Warrant Liability
The Company issued detachable warrants with the convertible notes issued on September 28, 2016. The Company accounts for its warrants issued in accordance with US GAAP accounting guidance under ASC 815 applicable to derivative instruments, which requires every derivative instrument within its scope to be recorded on the balance sheet as either an asset or liability measured at its fair value, with changes in fair value recognized in earnings. Based on this guidance, the Company determined that these warrants did not meet the criteria for classification as equity. Accordingly, the Company classified the warrants as long-term liabilities. The warrants are subject to re-measurement at each balance sheet date, with any change in fair value recognized as a component of other income (expense), net in the statements of operations. We estimated the fair value of these warrants at the respective balance sheet dates using a lattice approach that incorporates a Monte Carlo simulation that considers the Company's future stock price. Option pricing models employ subjective factors to estimate warrant liability; and, therefore, the assumptions used in the model are judgmental.
Changes in the fair value of the warrant liability is primarily related to the change in price of the underlying common stock of the Company and is reflected in our consolidated statements of operations as “Change in fair value of warrant liability.”
The following table provides a reconciliation of the beginning and ending balances for the warrant liability measured at fair value using significant unobservable inputs (Level 3):
 
 
Level 3
Balance at March 31, 2017
 
$
1,076

Change in fair value of warrant liability
 
1,628

Balance at September 30, 2017
 
$
2,704

Due to the valuation of the derivative liability being highly sensitive to the trading price of the Company's stock, the increase and decrease in the trading price of the Company's stock has the impact of increasing the (loss) and gain, respectively. Due to the Company's closing stock price increasing during the three and six months ended September 30, 2017, from $1.03 to $1.51 and $0.94 to $1.51, respectively, this had the impact during the three and six months ended September 30, 2017 of recording a loss from change in fair value of convertible note embedded derivative liability of $1,164 and $1,628, respectively.

19



The market-based assumptions and estimates used in valuing the warrant liability include amounts in the following amounts:
 
September 30, 2017
Stock price volatility
70
%
Probability of change in control
1.75
%
Stock price (per share)
$1.51
Expected term
3.00 years

Risk-free rate (1)
1.61
%
Assumed early conversion/exercise price (per share)
$2.73
(1) The Monte Carlo simulation assumes the continuously compounded equivalent (CCE) interest rate of 1.0%  
based on the average of the 3-year and 5-year U.S. Treasury securities as of the valuation date. 
Changes in valuation assumptions can have a significant impact on the valuation of the warrant liability. For example, all other things being equal, a decrease/increase in our stock price, probability of change of control, or stock price volatility decreases/increases the valuation of the liabilities, whereas a decrease/increase in risk-free interest rates increases/decreases the valuation of the liabilities.
9.    Description of Stock Plans
Employee Stock Plan
The Company is currently issuing stock awards under the Amended and Restated Digital Turbine, Inc. 2011 Equity Incentive Plan (the “2011 Plan”), which was approved and adopted by our stockholders by written consent on May 23, 2012. No future grants will be made under the previous plan, the 2007 Employee, Director and Consultant Stock Plan (the “2007 Plan”). The 2011 Plan and 2007 Plan are collectively referred to as "Digital Turbine's Incentive Plans." In the year ended March 31, 2015, in connection with the acquisition of Appia, the Company assumed the Appia, Inc. 2008 Stock Incentive Plan (the “Appia Plan”). Digital Turbine’s Incentive Plans and the Appia Plan are all collectively referred to as the “Stock Plans.”
The 2011 Plan provides for grants of stock-based incentive awards to our and our subsidiaries’ officers, employees, non-employee directors, and consultants. Awards issued under the 2011 Plan can include stock options, stock appreciation rights (“SARs”), restricted stock, and restricted stock units (sometimes referred to individually or collectively as “Awards”). Stock options may be either “incentive stock options” (“ISOs”), as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), or non-qualified stock options (“NQSOs”).
The 2011 Plan reserves 20,000,000 shares for issuance, of which 9,285,919 and 9,665,123 remained available for future grants as of September 30, 2017 and March 31, 2017, respectively. The change over the comparative period represents stock option grants, stock option forfeitures/cancellations, and restricted shares of common stock of 872,000, 757,934, and 265,138, respectively.
Stock Option Agreements
Stock options granted under Digital Turbine's Stock Plans typically vest over a three-to-four year period. These options, which are granted with option exercise prices equal to the fair market value of the Company’s common stock on the date of grant, generally expire up to ten years from the date of grant. In the year ended March 31, 2015, in connection with the Appia acquisition, the Company exchanged stock options previously granted under the Appia Plan for options to purchase shares of the Company’s common stock under the 2011 Plan. These assumed Appia options typically vest over a period of four years and generally expire within ten years from the date of grant. Compensation expense for all stock options is recognized on a straight-line basis over the requisite service period.

20



Stock Option Activity
The following table summarizes stock option activity for the Stock Plans for the periods or as of the dates indicated:
 
 
Number of
Shares
 
Weighted Average
Exercise Price (per share)
 
Weighted Average
Remaining Contractual
Life (in years)
 
Aggregate Intrinsic
Value (in thousands)
Options Outstanding, March 31, 2017
 
9,735,778

 
$
2.56

 
7.95
 
$
801

Granted
 
872,000

 
1.06

 
 
 
 
Forfeited / Cancelled
 
(757,934
)
 
2.19

 
 
 
 
Exercised
 
(24,211
)
 
0.71

 
 
 
 
Options Outstanding, September 30, 2017
 
9,825,633

 
2.46

 
7.71
 
3,320

Vested and expected to vest (net of estimated forfeitures) at September 30, 2017 (a)
 
8,753,144

 
2.64

 
7.53
 
2,727

Exercisable, September 30, 2017
 
4,162,328

 
$
4.23

 
6.10
 
$
536

(a) For options vested and expected to vest, options exercisable, and options outstanding, the aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between Digital Turbine's closing stock price on September 30, 2017 and the exercise price multiplied by the number of in-the-money options) that would have been received by the option holders, had the holders exercised their options on September 30, 2017. The intrinsic value changes based on changes in the price of the Company's common stock.
Information about options outstanding and exercisable at September 30, 2017 is as follows:
 
 
Options Outstanding
 
Options Exercisable
Exercise Price
 
Number of Shares
 
Weighted-Average Exercise Price
 
Weighted-Average Remaining Life (Years)
 
Number of Shares
 
Weighted-Average Exercise Price
$0.00 - 0.50
 
7,652

 
$
0.24

 
2.48
 
7,652

 
$
0.24

$0.51 - 1.00
 
3,359,407

 
$
0.73

 
9.04
 
438,141

 
$
0.69

$1.01 - 1.50
 
2,892,564

 
$
1.28

 
8.70
 
635,671

 
$
1.24

$1.51 - 2.00
 
206,333

 
$
1.51

 
7.88
 
114,973

 
$
1.51

$2.01 - 2.50
 
253,779

 
$
2.43

 
3.33
 
220,445

 
$
2.42

$2.51 - 3.00
 
891,532

 
$
2.62

 
6.73
 
773,778

 
$
2.63

$3.51 - 4.00
 
840,300

 
$
3.96

 
7.02
 
732,385

 
$
3.96

$4.01 - 4.50
 
844,066

 
$
4.14

 
5.82
 
721,369

 
$
4.14

$4.51 - 5.00
 
60,000

 
$
4.65

 
5.49
 
60,000

 
$
4.65

$5.01 and over
 
470,000

 
$
16.32

 
1.26
 
457,914

 
$
16.60

 
 
9,825,633

 
 
 
 
 
4,162,328

 
 
Other information pertaining to stock options for the Stock Plans for the six months ended September 30, 2017 and 2016, as stated in the table below, is as follows:
 
 
September 30,
 
 
2017
 
2016
Total fair value of options vested
 
$
1,461

 
$
2,452

Total intrinsic value of options exercised (a)
 
$
9

 
$
8

(a) The total intrinsic value of options exercised represents the total pre-tax intrinsic value (the difference between the stock price at exercise and the exercise price multiplied by the number of options exercised) that was received by the option holders who exercised their options during the six months ended September 30, 2017 and 2016.

21



During the six months ended September 30, 2017 and 2016, the Company granted options to purchase 872,000 and 1,037,000 shares of its common stock, respectively, to employees with weighted-average grant-date fair values of $1.06 and $0.82, respectively.
At September 30, 2017 and 2016, there was $3,254 and $6,731 of total unrecognized stock-based compensation expense, respectively, net of estimated forfeitures, related to unvested stock options expected to be recognized over a weighted-average period of 2.02 and 2.31 years, respectively.
Valuation of Awards
For stock options granted under Digital Turbine’s Stock Plans, the Company typically uses the Black-Scholes option pricing model to estimate the fair value of stock options at grant date. The Black-Scholes option pricing model incorporates various assumptions, including volatility, expected term, risk-free interest rates, and dividend yields. The assumptions utilized in this model for options granted during the three and six months ended September 30, 2017 are presented below.

 
September 30, 2017
Risk-free interest rate
 
 1.8% to 2.3%
Expected life of the options
 
 5.69 to 9.93 years
Expected volatility
 
73%
Expected dividend yield
 
—%
Expected forfeitures
 
20%
Expected volatility is based on a blend of implied and historical volatility of the Company's common stock over the most recent period commensurate with the estimated expected term of the Company’s stock options. The Company uses this blend of implied and historical volatility, as well as other economic data, because management believes such volatility is more representative of prospective trends. The expected term of an award is based on historical experience and on the terms and conditions of the stock awards granted to employees.
Total stock compensation expense for the Company’s Stock Plans for the three and six months ended September 30, 2017 and 2016, which includes both stock options and restricted stock, was $765 and $1,629, respectively, and $1,173 and $2,476, respectively. Please refer to Note 10. "Capital Stock Transactions" regarding restricted stock.
10.    Capital Stock Transactions
Preferred Stock
There are 2,000,000 shares of Series A Convertible Preferred Stock, $0.0001 par value per share (“Series A”), authorized and 100,000 shares issued and outstanding, which are currently convertible into 20,000 shares of common stock. The Series A holders are entitled to: (1) vote on an equal per share basis as common stock, (2) dividends paid to the common stock holders on an if-converted basis and (3) a liquidation preference equal to the greater of $10 per share of Series A (subject to adjustment) or such amount that would have been paid to the common stock holders on an if-converted basis.
Common Stock and Warrants
In September 2017, in connection with the redemption of $6,000 of the Notes, the Company issued 5,043,018 shares to the holders of those Notes in exchange for the extinguishment of the Notes. Refer to Note 7 "Debt" and Note 8 "Fair Value Measurements" for more details.

22



The following table provides activity for warrants issued and outstanding during the six months ended September 30, 2017:
 
 
Number of Warrants Outstanding
 
Weighted-Average Exercise Price
Outstanding as of March 31, 2017
 
5,003,813

 
1.62

Issued
 

 

Exercised
 

 

Expired
 
(71,428
)
 
3.50

Outstanding as of September 30, 2017
 
4,932,385

 
1.59

Restricted Stock Agreements
From time to time, the Company enters into restricted stock agreements (“RSAs”) with certain employees, directors, and consultants. The RSAs have performance conditions, market conditions, time conditions, or a combination thereof. In some cases, once the stock vests, the individual is restricted from selling the shares of stock for a certain defined period, from three months to two years, depending on the terms of the RSA. As reported in our Current Reports on Form 8-K filed with the SEC on February 12, 2014 and June 25, 2014, the Company adopted a Board Member Equity Ownership Policy that supersedes any post-vesting lock-up in RSAs that are applicable to people covered by the policy, which includes the Company’s Board of Directors and Chief Executive Officer.
Service and Time Condition RSAs
Awards of restricted stock are grants of restricted stock that are issued at no cost to the recipient. The cost of these awards is determined using the fair market value of the Company’s common stock on the date of the grant. Compensation expense for restricted stock awards with a service condition is recognized on a straight-line basis over the requisite service period.
In August 2017, the Company issued 265,138 restricted shares to its directors for services. The shares vest over one year. The fair value of the shares on the date of issuance was $289.
With respect to time condition RSAs, the Company expensed $74 and $150 during the three and six months ended September 30, 2017, and $86 and $166 during three and six months ended September 30, 2016, respectively.
The following is a summary of restricted stock awards and activities for all vesting conditions for the six months ended September 30, 2017:
 
 
Number of Shares
 
Weighted-Average Grant Date Fair Value
Unvested restricted stock outstanding as of March 31, 2017
 
139,318

 
1.10

Granted
 
265,138

 
1.09

Vested
 
(139,318
)
 
1.10

Cancelled
 

 

Unvested restricted stock outstanding as of September 30, 2017
 
265,138

 
1.09

All restricted shares, vested and unvested, cancellable and not cancelled, have been included in the outstanding shares as of September 30, 2017.
At September 30, 2017, there was $241 of unrecognized stock-based compensation expense, net of estimated forfeitures, related to non-vested restricted stock awards expected to be recognized over a weighted-average period of approximately 0.83 years.

23



11.    Net Loss Per Share
Basic net loss per share is calculated by dividing net loss by the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase, and excludes any dilutive effects of employee stock-based awards in periods where the Company has net losses. Because the Company had net losses for the three and six months ended September 30, 2017 and 2016, all potentially dilutive shares of common stock were determined to be anti-dilutive, and accordingly, were not included in the calculation of diluted net loss per share.
The following table sets forth the computation of net loss per share of common stock (in thousands, except per share amounts):
 
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Net loss
 
$
(6,458
)
 
$
(7,341
)
 
$
(10,633
)
 
$
(14,753
)
Weighted-average common shares outstanding, basic and diluted
 
66,846

 
66,457

 
66,723

 
66,358

Basic and diluted net loss per common share
 
$
(0.10
)
 
$
(0.11
)
 
$
(0.16
)
 
$
(0.22
)
Common stock equivalents excluded from net loss per diluted share because their effect would have been anti-dilutive
 
1,428

 
156

 
1,238

 
81

12.    Income Taxes
Our provision for income taxes as a percentage of pre-tax earnings (“effective tax rate”) is based on a current estimate of the annual effective income tax rate, adjusted to reflect the impact of discrete items. In accordance with ASC 740, jurisdictions forecasting losses that are not benefited due to valuation allowances are not included in our forecasted effective tax rate.
During the three and six months ended September 30, 2017, a tax benefit of $884 and $853, respectively, resulted in an effective tax rate of 12.0% and 7.4%, respectively. Differences in the tax provision and the statutory rate are primarily due to changes in the valuation allowance. The tax benefit reported in the current quarter is largely due to changes resulting from the finalization of the transfer pricing study.
During the three and six months ended September 30, 2016, a tax benefit of $437 and $141, respectively, resulted in an effective tax rate of 5.6% and 1.0%, respectively. Differences in the tax provision and statutory rate are primarily due to changes in the valuation allowance.
13.    Commitments and Contingencies
Legal Matters
The Company may be involved in various claims, suits, assessments, investigations, and legal proceedings that arise from time to time in the ordinary course of its business, including those identified below, and we do not believe that these proceedings and claims would reasonably be expected to have a material adverse effect on our financial position, results of operations or cash flows. The Company accrues a liability when it is both probable that a liability has been incurred, and the amount of the loss can be reasonably estimated. The Company reviews these accruals at least quarterly, and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel, and other relevant information. To the extent new information is obtained and the Company's views on the probable outcomes of claims, suits, assessments, investigations, or legal proceedings change, changes in the Company's accrued liabilities would be recorded in the period in which such determination is made. For some matters, the amount of liability is not probable or the amount cannot be reasonably estimated, and therefore, accruals have not been made. In those cases, we assess whether there is at least a reasonable possibility that a loss, or additional losses, may have been incurred. If there is a reasonable possibility that a loss or additional loss may have been incurred for such proceedings, we disclose the estimate of the amount of loss or possible range of loss, or disclose that an estimate of loss cannot be made, as applicable.
No significant legal matters or other proceedings exist at this time. Accordingly the Company has accrued no liability.

24



14.    Segment and Geographic Information
The Company manages its business in three operating segments: O&O, A&P, and Content. The three operating segments have been aggregated into two reportable segments: Advertising and Content. Our chief operating decision maker does not evaluate operating segments using asset information. The Company has considered guidance in Accounting Standards Codification (ASC) 280 in reaching its conclusion with respect to aggregating its operating segments into two reportable segments. Specifically, the Company has evaluated guidance in ASC 280-10-50-11 and determined that aggregation is consistent with the objectives of ASC 280 in that aggregation into two reportable segments allows users of our financial statements to view the Company’s business through the eyes of management based upon the way management reviews performance and makes decisions. Additional factors that were considered included: whether or not the operating segments have similar economic characteristics, the nature of the products/services under each operating segment, the nature of the production/go-to-market process, the type and geographic location of our customers, and the distribution of our products/services.
The following table sets forth segment information on our net revenues and loss from operations for the three and six months ended September 30, 2017 and 2016.
 
 
Three Months Ended September 30, 2017
 
Three Months Ended September 30, 2016
 
 
Content
 
Advertising
 
Total
 
Content
 
Advertising
 
Total
Net revenues
 
$
9,784

 
$
18,107

 
$
27,891

 
$
7,626

 
$
15,206

 
$
22,832

Loss from operations
 
(1,006
)
 
(244
)
 
(1,250
)
 
(1,346
)
 
(4,961
)
 
(6,307
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended September 30, 2017
 
Six Months Ended September 30, 2016
 
 
Content
 
Advertising
 
Total
 
Content
 
Advertising
 
Total
Net revenues
 
$
17,714

 
$
36,297

 
$
54,011

 
$
18,856

 
$
28,015

 
$
46,871

Loss from operations
 
(2,108
)
 
(666
)
 
(2,774
)
 
(2,751
)
 
(10,005
)
 
(12,756
)
 
 
 
 
 
 
 
 
 
 
 
 
 
The following table sets forth geographic information on our net revenues for the three and six months ended September 30, 2017 and 2016. Net revenues by geography are based on the billing addresses of our customers.
 
 
Three Months Ended September 30,
 
 
2017
 
2016
Net revenues
 
 
 
 
     United States and Canada
 
$
8,292

 
$
8,811

     Europe, Middle East, and Africa
 
2,351

 
4,047

     Asia Pacific and China
 
16,193

 
9,558

     Mexico, Central America, and South America
 
1,055

 
416

Consolidated net revenues
 
$
27,891

 
$
22,832

 
 
 
 
 
 
 
Six Months Ended September 30,
 
 
2017
 
2016
Net revenues
 
 
 
 
     United States and Canada
 
$
15,485

 
$
15,480

     Europe, Middle East, and Africa
 
4,885

 
7,805

     Asia Pacific and China
 
30,948

 
22,954

     Mexico, Central America, and South America
 
2,693

 
632

Consolidated net revenues
 
$
54,011

 
$
46,871

 
 
 
 
 


25



15.    Guarantor and Non-Guarantor Financial Statements
On September 28, 2016, the Company sold to the Initial Purchaser, $16,000 principal amount of 8.75% convertible notes maturing on September 23, 2020, unless converted, repurchased or redeemed in accordance with their terms prior to such date. The Notes were issued under the Indenture, between Digital Turbine, Inc., US Bank National Association, as trustee, and certain wholly-owned subsidiaries of the Company, specifically Digital Turbine, Inc. as the parent Company, DT USA, DT Media, and DT APAC. Given the Notes are unconditionally guaranteed as to the payment of principal, premium, if any, and interest on a senior unsecured basis by four of the wholly-owned subsidiaries of the Company, the Company is required by SEC Reg S-X 210.3-10 to include, in a footnote, condensed consolidating financial information for the same periods with a separate column for:
The parent company;
The subsidiary guarantors on a combined basis;
Any other subsidiaries of the parent company on a combined basis;
Consolidating adjustments; and
The total consolidated amounts.
The following consolidated financial information and condensed consolidated financial information include:
(1) Condensed consolidated balance sheets as of September 30, 2017 and March 31, 2017; consolidated statements of operations for the three and six months ended September 30, 2017 and 2016; and condensed consolidated statements of cash flows for the six months ended September 30, 2017 and 2016 of (a) Digital Turbine, Inc. as the parent, (b) the guarantor subsidiaries, (c) the non-guarantor subsidiaries, and (d) Digital Turbine, Inc. on a consolidated basis; and
(2) Elimination entries necessary to consolidate Digital Turbine, Inc., as the parent, with its guarantor and non-guarantor subsidiaries.
Digital Turbine, Inc. owns 100% of all of the guarantor subsidiaries, and as a result, in accordance with Rule 3-10(d) of Regulation S-X promulgated by the SEC, no separate financial statements are required for these subsidiaries as of and for the three and six months ended September 30, 2017 or 2016.

26



Condensed Consolidated Balance Sheet
as of September 30, 2017 (Unaudited)
(in thousands, except par value and share amounts)
 
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidated Total
ASSETS
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
Cash
 
$
533

 
$
4,878

 
$
456

 
$
5,867

Restricted cash
 
156

 
175

 

 
331

Accounts receivable, net of allowance of $832
 

 
23,110

 
677

 
23,787

Deposits
 

 
117

 

 
117

Prepaid expenses and other current assets
 
217

 
213

 
14

 
444

Total current assets
 
906

 
28,493

 
1,147

 
30,546

Property and equipment, net
 
55

 
2,493

 
17

 
2,565

Deferred tax assets
 
688

 


 


 
688

Intangible assets, net
 
1

 
1,900

 
1,492

 
3,393

Goodwill
 

 
70,377

 
6,244

 
76,621

TOTAL ASSETS
 
$
1,650

 
$
103,263

 
$
8,900

 
$
113,813

INTERCOMPANY
 
 
 
 
 
 
 
 
Intercompany payable/receivable, net
 
121,681

 
(106,267
)
 
(15,414
)
 

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
Accounts payable
 
$
751

 
$
22,326

 
$
200

 
$
23,277

Accrued license fees and revenue share
 

 
10,051

 
391

 
10,442

Accrued compensation
 
534

 
1,342

 

 
1,876

Short-term debt, net of debt issuance costs and discounts of $290
 
2,210

 

 

 
2,210

Other current liabilities
 
714

 
544

 
(64
)
 
1,194

Total current liabilities
 
4,209

 
34,263

 
527

 
38,999

Convertible notes, net of debt issuance costs and discounts of $3,491
 
6,509

 

 

 
6,509

Convertible note embedded derivative liability
 
5,116

 

 

 
5,116

Warrant liability
 
2,704

 

 

 
2,704

Other non-current liabilities
 
168

 
73

 

 
241

Total liabilities
 
18,706

 
34,336

 
527

 
53,569

Stockholders' equity
 
 
 
 
 
 
 
 
Preferred stock
 
 
 
 
 
 
 
 
Series A convertible preferred stock at $0.0001 par value; 2,000,000 shares authorized, 100,000 issued and outstanding (liquidation preference of $1,000)
 
100

 

 

 
100

Common stock
 
 
 
 
 
 
 
 
$0.0001 par value: 200,000,000 shares authorized; 72,396,491 issued and 71,662,035 outstanding at September 30, 2017.
 
10

 

 

 
10

Additional paid-in capital
 
308,415

 

 

 
308,415

Treasury stock (754,599 shares at September 30, 2017)
 
(71
)
 

 

 
(71
)
Accumulated other comprehensive loss
 
(18
)
 
(1,443
)
 
1,135

 
(326
)
Accumulated deficit
 
(203,811
)
 
(35,897
)
 
(8,176
)
 
(247,884
)
Total stockholders' equity
 
104,625

 
(37,340
)
 
(7,041
)
 
60,244

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
123,331

 
$
(3,004
)
 
$
(6,514
)
 
$
113,813


27



Condensed Consolidated Balance Sheet
as of March 31, 2017 (Unaudited)
(in thousands, except par value and share amounts)
 
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidated Total
ASSETS
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
Cash
 
$
258

 
$
5,333

 
$
558

 
$
6,149

Restricted cash
 
156

 
175

 

 
331

Accounts receivable, net of allowance of $597
 

 
15,740

 
814

 
16,554

Deposits
 

 
121

 

 
121

Prepaid expenses and other current assets
 
282

 
226

 
2

 
510

Total current assets
 
696

 
21,595

 
1,374

 
23,665

Property and equipment, net
 
64

 
2,296

 
17

 
2,377

Deferred tax assets
 
352

 

 

 
352

Intangible assets, net
 

 
2,647

 
1,918

 
4,565

Goodwill
 

 
70,377

 
6,244

 
76,621

TOTAL ASSETS
 
$
1,112

 
$
96,915

 
$
9,553

 
$
107,580

INTERCOMPANY
 
 
 
 
 
 
 
 
Intercompany payable/receivable, net
 
123,800

 
(107,348
)
 
(16,452
)
 

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
Accounts payable
 
$
1,023

 
$
18,697

 
$
148

 
$
19,868

Accrued license fees and revenue share
 

 
8,312

 
217

 
8,529

Accrued compensation
 
32

 
1,041

 

 
1,073

Other current liabilities
 
794

 
510

 

 
1,304

Total current liabilities
 
1,849

 
28,560

 
365

 
30,774

Convertible notes, net of debt issuance costs and discounts of $6,315
 
9,685

 

 

 
9,685

Convertible note embedded derivative liability
 
3,218

 

 

 
3,218

Warrant liability
 
1,076

 

 

 
1,076

Other non-current liabilities
 
695

 
87

 

 
782

Total liabilities
 
16,523

 
28,647

 
365

 
45,535

Stockholders' equity
 
 
 
 
 
 
 
 
Preferred stock
 
 
 
 
 
 
 
 
Series A convertible preferred stock at $0.0001 par value; 2,000,000 shares authorized, 100,000 issued and outstanding (liquidation preference of $1,000)
 
100

 

 

 
100

Common stock
 
 
 
 
 
 
 
 
$0.0001 par value: 200,000,000 shares authorized; 67,329,262 issued and 66,594,806 outstanding at March 31, 2017
 
8

 

 

 
8

Additional paid-in capital
 
299,580

 

 

 
299,580

Treasury stock (754,599 shares at March 31, 2017)
 
(71
)
 

 

 
(71
)
Accumulated other comprehensive loss
 

 
(1,704
)
 
1,383

 
(321
)
Accumulated deficit
 
(191,228
)
 
(37,376
)
 
(8,647
)
 
(237,251
)
Total stockholders' equity
 
108,389

 
(39,080
)
 
(7,264
)
 
62,045

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
124,912

 
$
(10,433
)
 
$
(6,899
)
 
$
107,580


28



Consolidated Statement of Operations and Comprehensive Loss
for the three months ended September 30, 2017 (Unaudited)
(in thousands, except par value and share amounts)
 
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Elimination
 
Consolidated Total
Net revenues
 
$

 
$
40,775

 
$
504

 
$
(13,388
)
 
$
27,891

Cost of revenues
 
 
 
 
 
 
 
 
 
 
License fees and revenue share
 

 
32,991

 
282

 
(13,388
)
 
19,885

Other direct cost of revenues
 

 
430

 
213

 

 
643

Total cost of revenues
 

 
33,421

 
495

 
(13,388
)
 
20,528

Gross profit
 

 
7,354

 
9

 

 
7,363

Operating expenses
 
 
 
 
 
 
 
 
 
 
Product development
 
7

 
2,812

 
18

 

 
2,837

Sales and marketing
 
72

 
1,547

 
69

 

 
1,688

General and administrative
 
2,393

 
1,575

 
120

 

 
4,088

Total operating expenses
 
2,472

 
5,934

 
207

 

 
8,613

Income / (loss) from operations
 
(2,472
)
 
1,420

 
(198
)
 

 
(1,250
)
Interest and other expense, net
 
 
 
 
 
 
 
 
 
 
Interest expense, net
 
(662
)
 

 

 

 
(662
)
Foreign exchange transaction loss