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 June 30, 2018
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.)
 
 
 
111 Nueces Street, 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 July 26, 2018, the Company had 76,810,423 shares of its common stock, $0.0001 par value per share, outstanding.




Digital Turbine, Inc.
FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED June 30, 2018
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)
 
 
June 30, 2018
 
March 31, 2018
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash
 
$
8,638

 
$
12,720

Restricted cash
 
331

 
331

Accounts receivable, net of allowances of $790 and $512, respectively
 
19,346

 
17,050

Deposits
 
151

 
151

Prepaid expenses and other current assets
 
802

 
750

Current assets held for disposal
 
4,393

 
8,753

Total current assets
 
33,661

 
39,755

Property and equipment, net
 
2,711

 
2,757

Deferred tax assets
 
632

 
596

Intangible assets, net
 
896

 
1,231

Goodwill
 
42,268

 
42,268

TOTAL ASSETS
 
$
80,168

 
$
86,607

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Current liabilities
 
 
 
 
Accounts payable
 
$
18,292

 
$
19,895

Accrued license fees and revenue share
 
11,491

 
8,232

Accrued compensation
 
1,177

 
2,966

Short-term debt, net of debt issuance costs of $163 and $205, respectively
 
1,437

 
1,445

Other current liabilities
 
1,486

 
1,142

Current liabilities held for disposal
 
8,048

 
12,726

Total current liabilities
 
41,931

 
46,406

Convertible notes, net of debt issuance costs and discounts of $1,709 and $1,827, respectively
 
3,991

 
3,873

Convertible note embedded derivative liability
 
3,056

 
4,676

Warrant liability
 
2,410

 
3,980

Total liabilities
 
51,388

 
58,935

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; 77,145,980 issued and 76,391,381 outstanding at June 30, 2018; 76,843,278 issued and 76,108,822 outstanding at March 31, 2018
 
10

 
10

Additional paid-in capital
 
318,690

 
318,066

Treasury stock (754,599 shares at June 30, 2018 and March 31, 2018)
 
(71
)
 
(71
)
Accumulated other comprehensive loss
 
(325
)
 
(325
)
Accumulated deficit
 
(289,624
)
 
(290,108
)
Total stockholders' equity
 
28,780

 
27,672

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
80,168

 
$
86,607

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 June 30,
 
 
2018
 
2017
Net revenues
 
$
22,112

 
$
15,153

Cost of revenues
 
 
 
 
License fees and revenue share
 
15,216

 
9,592

Other direct cost of revenues
 
507

 
409

Total cost of revenues
 
15,723

 
10,001

Gross profit
 
6,389

 
5,152

Operating expenses
 
 
 
 
Product development
 
3,109

 
2,174

Sales and marketing
 
1,836

 
1,137

General and administrative
 
2,704

 
3,358

Total operating expenses
 
7,649

 
6,669

Loss from operations
 
(1,260
)
 
(1,517
)
Interest and other income / (expense), net
 
 
 
 
Interest income / (expense)
 
(319
)
 
(707
)
Foreign exchange transaction gain / (loss)
 
8

 
(63
)
Change in fair value of convertible note embedded derivative liability
 
1,620

 
(1,308
)
Change in fair value of warrant liability
 
1,570

 
(464
)
Other income / (expense)
 
(127
)
 
3

Total interest and other income / (expense), net
 
2,752

 
(2,539
)
Income / (loss) from continuing operations before income taxes
 
1,492

 
(4,056
)
Income tax provision / (benefit)
 
(36
)
 
31

Net income / (loss) from continuing operations, net of taxes
 
1,528

 
(4,087
)
 
 
 
 
 
Loss from operations of discontinued components
 
(1,044
)
 
(88
)
Net loss from discontinued operations, net of taxes
 
(1,044
)
 
(88
)
Net income / (loss)
 
$
484

 
$
(4,175
)
Comprehensive income / (loss)
 
$
484

 
$
(4,175
)
Basic and diluted net income / (loss) per common share
 
 
 
 
Continuing operations
 
0.02

 
(0.06
)
Discontinued operations
 
(0.01
)
 

Net income / (loss)
 
0.01

 
(0.06
)
Weighted-average common shares outstanding, basic
 
76,204

 
66,599

Weighted-average common shares outstanding, diluted
 
79,598

 
66,599

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)
 
 
Three Months Ended June 30,
 
 
2018
 
2017
Cash flows from operating activities
 
 

 
 

Net income / (loss)
 
$
1,528

 
$
(4,087
)
Adjustments to reconcile net income / (loss) to net cash used in operating activities:
 
 
 
 
Depreciation and amortization
 
729

 
628

Change in allowance for doubtful accounts
 
278

 
146

Amortization of debt discount and debt issuance costs
 
161

 
353

Stock-based compensation
 
463

 
715

Stock-based compensation for services rendered
 
85

 
76

Change in fair value of convertible note embedded derivative liability
 
(1,620
)
 
1,308

Change in fair value of warrant liability
 
(1,570
)
 
464

(Increase) / decrease in assets:
 
 
 
 
Accounts receivable
 
(2,574
)
 
(3,119
)
Deferred tax assets
 
(36
)
 

Prepaid expenses and other current assets
 
(52
)
 
(72
)
Increase / (decrease) in liabilities:
 
 
 
 
Accounts payable
 
(1,603
)
 
(907
)
Accrued license fees and revenue share
 
3,259

 
2,905

Accrued compensation
 
(1,781
)
 
98

Accrued interest
 
135

 
344

Other current liabilities
 
209

 
(533
)
Other non-current liabilities
 
(6
)
 
73

Net cash used in operating activities - continuing operations
 
(2,395
)
 
(1,608
)
Net cash provided by / (used in) operating activities - discontinued operations
 
(1,224
)
 
204

Net cash used in operating activities
 
(3,619
)
 
(1,404
)

 
 
 
 
Cash flows from investing activities
 
 

 
 

Capital expenditures
 
(411
)
 
(365
)
Net cash used in investing activities - continuing operations
 
(411
)
 
(365
)
Net cash used in investing activities - discontinued operations
 
(41
)
 
(9
)
Net cash used in investing activities
 
(452
)
 
(374
)

 
 
 
 
Cash flows from financing activities
 
 

 
 

Proceeds from short-term borrowings
 

 
2,250

Options exercised
 
39

 
9

Repayment of debt obligations
 
(50
)
 

Payment of debt issuance costs
 

 
(320
)
Net cash provided by / (used in) financing activities
 
(11
)
 
1,939


 
 
 
 
Effect of exchange rate changes on cash
 

 
(8
)

 
 
 
 
Net change in cash
 
(4,082
)
 
153


 
 
 
 
Cash and restricted cash, beginning of period
 
13,051

 
6,480


 
 
 
 
Cash and restricted cash, end of period
 
$
8,969

 
$
6,633


 


 


Supplemental disclosure of cash flow information
 
 

 
 

Interest paid
 
$
26

 
$

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

5



Digital Turbine, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2018
(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 an end-to-end platform solution for mobile operators, application developers, 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 currently operates one reporting segment – Advertising.
The Company's Advertising business consists of Operator and OEM ("O&O"), an advertiser solution for unique and exclusive carrier and OEM inventory, which is comprised of services including:
Ignite™ ("Ignite"), a mobile device management platform with targeted application distribution capabilities, and
Other products and professional services directly related to the Ignite platform.
Prior to the sale of the A&P Assets described below under Note 4. Discontinued Operations, the O&O reporting segment also included the A&P Assets as an operating segment within O&O.
With global headquarters in Austin, Texas and offices in Durham, North Carolina; San Francisco, California; Singapore; Sydney, Australia; and Tel Aviv, Israel, 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 June 30, 2018, we had cash and restricted cash totaling approximately $8,969.
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 and retire indebtedness, and will otherwise be used for general corporate purposes and working capital. Refer to Note 8 "Debt" 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. Refer to Note 8 "Debt" for more details.
The Company anticipates that its primary sources of liquidity will continue be cash on hand, cash provided by operations, 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.

6



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.
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, 2018, 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 June 30, 2018, the results of its operations and corresponding comprehensive loss, and its cash flows for the three months ended June 30, 2018 and 2017. 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, 2019.
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, 2018. There have been no significant changes in or updates to the accounting policies since March 31, 2018. Only significant new accounting pronouncements, pertinent to the Company, issued and adopted subsequent to the issuance of our Annual Report are described below. Accounting pronouncements issued and adopted not described in either the Annual Report or in this report have been determined to either not apply or to have an immaterial impact on our business and related disclosures.
Recently Issued Accounting Pronouncements
In June 2018, the FASB issued Accounting Standard Update 2018-07: Compensation—Stock Compensation - Improvements to Non-employee Share-Based Payment Accounting. This update aligns the accounting for share-based payment awards issued to employees and non-employees. The existing employee guidance will apply to nonemployee share-based transactions with some exceptions. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing model for non-employee awards. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted upon its issuance. The amendments in this update should be applied prospectively. The Company will adopt ASU 2018-07 during the quarter ended June 30, 2019, and is currently assessing the impact of the future adoption of this standard on its consolidated results of operations, financial condition and cash flows.
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.

7



Accounting Pronouncements Adopted During the Period
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), 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 replaces most existing revenue recognition guidance in U.S. GAAP. 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 resulted in the new revenue standard being effective for the Company for fiscal years, and interim periods within those years, beginning April 1, 2018. ASU 2014-09, as amended, is effective using either the full retrospective or modified retrospective transition approach, and the Company has elected to use the modified retrospective approach. FASB has issued several accounting standards updates to clarify certain topics within ASU 2014-09. The Company has adopted ASU 2014-09, and its related clarifying amendments (collectively know as ASC 606), effective on April 1, 2018. Please see section included below within Note 3 titled "Revenue from Contracts with Customers" for the required disclosures related to the impact of adopting this standard and a discussion of the Company's updated policies related to revenue recognition and accounting for costs to obtain and fulfill a customer contract.
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.
Revenue from Contracts with Customers
The Company adopted ASC 606 on April 1, 2018, and is effective from the period beginning April 1, 2016 using the modified retrospective method for all contracts not completed as of the effective date. For contracts that were modified before the effective date, the Company reflected the aggregate effect of all modifications when identifying performance obligations and allocating transaction price in accordance with practical expedient ASC 606-10-65-1-(f)-4, which did not have a material effect on the adjustment to accumulated deficit. The reported results for 2017 reflect the application of ASC 606 guidance while the reported results for 2016 were prepared under the guidance of ASC 605, Revenue Recognition (ASC 605), which is also referred to herein as "legacy GAAP" or the "previous guidance". The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the Company's services and will provide financial statement readers with enhanced disclosures. In accordance with ASC 606, revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services.
To achieve this core principle, the Company applied the following five steps:
1) Identify the contract with a customer
A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the services to be transferred and identifies the payment terms related to these services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.
2) Identify the performance obligations in the contract
Performance obligations promised in a contract are identified based on the services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised services, the Company must apply judgment to determine whether promised services are capable of being distinct and distinct in the context of the contract. If these criteria are not met the promised services are accounted for as a combined performance obligation.

8



3) Determine the transaction price
The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring services to the customer. None of the Company's contracts contain financing or variable consideration components.
4) Allocate the transaction price to performance obligations in the contract
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.
5) Recognize revenue when or as the Company satisfies a performance obligation
The Company satisfies performance obligations at a point in time as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised service to a customer.

Disaggregation of Revenue
All of the Company's performance obligations, and associated revenue, are generally transferred to customers at a point in time.
O&O Services
The Company’s advertising business consists of O&O, an advertiser solution for unique and exclusive carrier and OEM inventory, which is comprised of services including:
Ignite, a mobile application management software that enables mobile operators and OEMs to control, manage, and monetize applications installed at the time of activation and over the life of a mobile device. Ignite allows mobile operators to personalize the application activation experience for customers and monetize their home screens via Cost-Per-Install or CPI arrangements, Cost-Per-Placement or CPP arrangements, and/or Cost-Per-Action or CPA arrangements with third party advertisers. There are several different delivery methods available to operators and OEMs on first boot of the device: Wizard, Silent, or Software Development Kit ("SDK"). Optional notification features are available throughout the life-cycle of the device, providing operators additional opportunity for advertising revenue streams.
Other products and professional services directly related to the Ignite platform.
Carriers and OEMs
The Company generally offers these services under a vendor contract revenue share model or under a customer contract per device license fee model with carriers and OEMs two to four year software as a service ("SaaS") license agreement. These agreements typically include the following services: the access to the SaaS platform, hosting fees, solution features, and general support and maintenance. The Company has concluded that each promised service is delivered concurrently with all other promised service over the contract term and, as such, has concluded these promises are a single performance obligation that includes a series of distinct services that have the same pattern of transfer to the customer. Consideration for the Company’s license arrangements consist of fixed and usage based fees, invoiced monthly or quarterly. The Company's contracts do not include advance non-refundable fees. Monthly license fees are based on the number of devices on a per device license fee basis. Monthly hosting and maintenance fees are generally fixed. These monthly fees are subject to a service level agreement (SLA), which requires that the services are available to the customer based on a predefined performance criteria. If the services do not meet these criteria, monthly fees are subject to adjustment or refund. The Company satisfies its performance obligation by providing access to its SaaS platform over time and processing transactions. For non-usage based fees, the period of time over which the Company performs its obligations is inherently commensurate with the contract term. The performance obligation is recognized on time elapsed basis, by month for which the services are provided. For usage-based fees, revenue is recognized in the month in which the Company provides the usage to the customer.

9



Third-Party Advertisers
The Company generally offers these services under a customer contract Cost-Per-Install or CPI arrangements, Cost-Per-Placement or CPP arrangements, and/or Cost-Per-Action or CPA arrangements with third-party advertisers and developers, as well as advertising aggregators, generally in the form of insertion orders that specify the type of arrangement (as detailed above) at particular set budget amounts/restraints. These advertiser customer contracts are generally short term in nature at less than one year as the budget amounts are typically spent in full within this time period. These agreements typically include the delivery of applications through partner networks, defined as carriers or OEMs, to home screens of devices. The Company has concluded that the delivery of the advertisers application is delivered at a point in time, as such, has concluded these deliveries as a single performance obligation. The Company invoices fees which are generally variable based on the arrangement, which would typically include the number of applications delivered at a specified price per application. For applications delivered, revenue is recognized in the month in which the Company delivers the application to the end consumer.
Professional Services
The Company offers professional services that support the implementation of its Ignite platform for carriers and OEMs, including technology development and integration services. These contracts generally include delivery and integration of the technology development product and revenue recognized when formal acceptance is confirmed by the Customer. Services are billed in one lump sum. For the majority of these contacts, the Company has the right to invoice the customer in an amount that directly corresponds with the value to the customer of the Company's performance to date, the Company recognizes revenue based on the amount billable to the customer in accordance with practical expedient ASC 606-10-55-18.
Costs to Obtain and Fulfill a Contract
The Company capitalizes commission expenses paid to internal sales personnel that are incremental to obtaining customer contracts. These costs are deferred in “prepaid expenses and other current assets”, net of any long term portion included in “other noncurrent assets”. The judgments made in determining the amount of costs incurred include whether the commissions are in fact incremental and would not have occurred absent the customer contract. Costs to obtain a contract are amortized as sales and marketing expense on a straight line basis over the expected period of benefit. These costs are periodically reviewed for impairment. The Company has evaluated related activity in prior periods and have determined the costs to obtain a contract to be immaterial and do not require disclosure.
The Company capitalizes costs incurred to fulfill its contracts that i) relate directly to the contract ii) are expected to generate resources that will be used to satisfy the Company’s performance obligation under the contract and iii) are expected to be recovered through revenue generated under the contract. Contract fulfillment costs are expensed to cost of revenue as the Company satisfies its performance obligations by transferring the service to the customer. These costs, which are classified in “prepaid expenses and other current assets”, net of any long term portion included in “other noncurrent assets”, principally relate to direct costs that enhance resources under the Company’s demand response contracts that will be used in satisfying future performance obligations. The Company has evaluated related activity in prior periods and have determined the costs to fulfill a contract to be immaterial and do not require disclosure.

Financial Statement Impact of Adopting ASC 606
The Company adopted ASC 606 using the modified retrospective method. After applying the new guidance to all contracts with customers that were not completed as of April 1, 2017, the Company has determined no changes in revenues or contract costs for which an adjustment would be required to accumulated deficit as of the adoption date. As a result of applying the modified retrospective method to adopt the new revenue guidance, the Company determined that no adjustments to be made to accounts to the consolidated balance sheet as of April 1, 2017.
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.

10



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 June 30, 2018, one major customer represented approximately 33.1% respectively, of the Company’s net accounts receivable balance. As of March 31, 2018, one major customer represented 28.3% of the Company's net accounts receivable balance.
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 months ended June 30, 2018, Oath Inc. represented 29.0% of net revenues. During the three months ended June 30, 2017, Oath Inc. represented 20.8% of net revenues, Machine Zone Inc. represented 17.5% of net revenues, and Cheetah Mobile Inc. represented 10.8% 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 months ended June 30, 2018, Verizon Wireless, a carrier partner, generated 50.7%, while AT&T Inc., a carrier partner, including its Cricket subsidiary, generated 37.9% of our net revenue. During the three months ended June 30, 2017, Verizon Wireless, generated 55.9%, while AT&T Inc., a carrier partner, primarily through its Cricket subsidiary, generated 24.2% of our net revenue, respectively.
There is no assurance that the Company will 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 impact the reported amounts in the consolidated financial statements and accompanying notes. These estimates are recurring in nature and relate to transactions occurring in the normal course of business. In the opinion of management these are appropriate estimates for arrangements to be settled at a later date based on the fact and circumstances available at the time of filing. Actual results could differ materially from those estimates.
4.    Discontinued Operations
On April 29, 2018, the Company entered into two distinct disposition agreements with respect to selected assets owned by our subsidiaries.
DT APAC and DT Singapore (together, “Pay Seller”), each wholly owned subsidiaries of the Company, entered into an Asset Purchase Pay Agreement (the “Pay Agreement”), dated as of April 23, 2018, with Chargewave Ptd Ltd (“Pay Purchaser”) to sell certain assets (the “Pay Assets”) owned by the Pay Seller related to the Company’s Direct Carrier Billing business. The Pay Purchaser is principally owned and controlled by Jon Mooney, an officer of the Pay Seller. At the closing of the asset sale, Mr. Mooney was no longer employed by the Company or Pay Seller. As consideration for this asset sale, Digital Turbine is entitled to receive certain license fees, profit sharing and equity participation rights as outlined in the Company’s Form 8-K filed May 1, 2018 with the Securities and Exchange Commission. The transaction was completed subsequent to period end on July 1, 2018 with an effective date of July 1, 2018. With the sale of these assets, the Company has determined that it will exit the segment of the business previously referred to as the Content business.

11



DT Media (the “A&P Seller”), a wholly owned subsidiary of the Company, entered into an Asset Purchase Agreement (the “A&P Agreement”), dated as of April 28, 2018, with Creative Clicks B.V. (the “A&P Purchaser”) to sell business relationships with various advertisers and publishers (the “A&P Assets”) related to the Company’s Advertising and Publishing business. As consideration for this asset sale, we are entitled to receive a percentage of the gross profit derived from these customer agreements for a period of three years as outlined in the Company’s Form 8-K filed May 1, 2018 with the Securities and Exchange Commission. The transaction was completed on June 28, 2018 with an effective date of June 1, 2018. With the sale of these assets, the Company has determined that it will exit the operating segment of the business previously referred to as the A&P business, which was previously part of Advertising, the Company's sole continuing reporting unit. No gain or loss on sale was recognized related to this divestiture. All transfered assets and liabilities, with the exception of goodwill, were fully amortized prior to entering into the sales agreement. As the consideration given by the purchaser was already materially determined at March 31, 2018, goodwill was impaired to the estimated future cash flows of the divested business which was effectively the purchase price. With the consummation of the sale, the remaining goodwill asset was netted against the purchase price receivable for a net impact of $0 on the Consolidated Statement of Operations for the three months ended June 30, 2018.
These dispositions will allow the Company to benefit from a streamlined business model, simplified operating structure, and enhanced management focus. Additionally, the Company expects to be able to generate additional cash via the announced transactions that can be re-invested into key O&O growth initiatives.
The following table summarizes the financial results of our discontinued operations for all periods presented herein:

Condensed Statements of Operations and Comprehensive Loss
For Discontinued Operations
(in thousands, except per share amounts)
(Unaudited)
 
 
Three months ended June 30,
 
 
2018
 
2017
Net revenues
 
3,870

 
10,967

Total cost of revenues
 
3,074

 
9,503

Gross profit
 
796

 
1,464

Product development
 
571

 
584

Sales and marketing
 
227

 
421

General and administrative
 
910

 
466

Income / (loss) from operations
 
(912
)
 
(7
)
Interest and other income (expense), net
 
(132
)
 
(81
)
Net loss from discontinued operations, net of taxes
 
(1,044
)
 
(88
)
Comprehensive loss
 
(1,044
)
 
(88
)
Basic and diluted net loss per common share
 
$
(0.01
)
 
$

Weighted-average common shares outstanding, basic and diluted
 
76,204

 
66,599


12



Details on assets and liabilities classified as held for disposal in the accompanying consolidated balance sheets are presented in the following table:
 
 
June 30, 2018
 
March 31, 2018
 
 
(Unaudited)
 
 
Assets held for disposal
 
 
 
 
Accounts receivable, net of allowances of $268 and $578, respectively
 
3,790

 
8,013

Property and equipment, net
 
336

 
377

Goodwill
 

 
309

Prepaid expenses and other current assets
 
267

 
54

Current assets held for disposal
 
4,393

 
8,753

Total assets held for disposal
 
4,393

 
8,753

 
 
 
 
 
Liabilities held for disposal
 
 
 
 
Accounts payable
 
4,524

 
8,789

Accrued license fees and revenue share
 
2,446

 
3,059

Accrued compensation
 
859

 
529

Other current liabilities
 
219

 
349

Current liabilities held for disposal
 
8,048

 
12,726

Total liabilities held for disposal
 
8,048

 
12,726


Assets and liabilities held for disposal as of June 30, 2018 and March 31, 2018 are classified as current since we expect the dispositions to be completed within one year.

The following table provides reconciling cash flow information for our discontinued operations:

 
 
Three months ended June 30,
 
 
2018
 
2017
 
 
 
(Unaudited)
 
Cash flows from operating activities
 
 
 
 
 
Net loss
 
(1,044
)
 
(88
)
 
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
 
Depreciation and amortization
 
155

 
260

 
Change in allowance for doubtful accounts
 
(310
)
 
(71
)
 
Stock-based compensation
 
37

 
73

 
(Increase) / decrease in assets:
 
 
 
 
 
Accounts receivable
 
4,533

 
(537
)
 
Goodwill
 
309

 

 
Prepaid expenses and other current assets
 
(214
)
 

 
Increase / (decrease) in liabilities:
 
 
 
 
 
Accounts payable
 
(4,265
)
 
1,302

 
Accrued license fees and revenue share
 
(613
)
 
(1,482
)
 
Accrued compensation
 
330

 
96

 
Other current liabilities
 
(142
)
 
651

 
Cash provided by / (used in) operating activities
 
(1,224
)
 
204

 
 
 
 
 
 
 
Cash flows from investing activities
 
 
 
 
 
Capital expenditures
 
(41
)
 
(9
)
 
Cash used in investing activities
 
(41
)
 
(9
)
 
 
 
 
 
 
 
Cash provided by / (used in) discontinued operations
 
(1,265
)
 
195

 


13



5.    Accounts Receivable
 
 
June 30, 2018
 
March 31, 2018
 
 
(Unaudited)
 
 
Billed
 
$
12,780

 
$
9,172

Unbilled
 
7,356

 
8,390

Allowance for doubtful accounts
 
(790
)
 
(512
)
Accounts receivable, net
 
$
19,346

 
$
17,050

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 June 30, 2018 and March 31, 2018 are expected to be billed and collected within twelve months.
The Company recorded $89 of bad debt expense during the three months ended June 30, 2018, and $64 of bad debt expense during the three months ended June 30, 2017, respectively.
6.    Property and Equipment
 
 
June 30, 2018
 
March 31, 2018
 
 
(Unaudited)
 
 
Computer-related equipment
 
$
5,519

 
$
5,464

Furniture and fixtures
 
116

 
115

Leasehold improvements
 
172

 
166

Property and equipment, gross
 
5,807

 
5,745

Accumulated depreciation
 
(3,096
)
 
(2,988
)
Property and equipment, net
 
$
2,711

 
$
2,757

Depreciation expense for the three months ended June 30, 2018 was $394, and $252 for the three months ended June 30, 2017, respectively. Depreciation expense in the three months ended June 30, 2018 includes $222 related to internal use assets included in General and Administrative Expense and $172 related to internally developed software to be sold, leased, or otherwise marketed included in Other Direct Costs of Revenue. Depreciation expense in the three months ended June 30, 2017 includes $219 related to internal use assets included in General and Administrative Expense and $33 related to internally developed software to be sold, leased, or otherwise marketed included in Other Direct Costs of Revenue.
7.    Intangible Assets
The components of intangible assets at June 30, 2018 and March 31, 2018 were as follows:
 
 
As of June 30, 2018
 
 
(Unaudited)
 
 
Cost
 
Accumulated Amortization
 
Net
Software
 
$
5,826

 
$
(4,930
)
 
$
896

Total
 
$
5,826

 
$
(4,930
)
 
$
896

 
 
As of March 31, 2018
 
 
Cost
 
Accumulated Amortization
 
Net
Software
 
$
5,826

 
$
(4,595
)
 
$
1,231

Total
 
$
5,826

 
$
(4,595
)
 
$
1,231


14



The Company has included amortization of acquired intangible assets directly attributable to revenue-generating activities in cost of revenues; since all of our acquired intangible assets are directly attributable to revenue-generating activities, all intangible amortization is included in cost of revenues.
The Company recorded amortization expense of $335 during the three months ended June 30, 2018 and $376 during the three months ended June 30, 2017.
Based on the amortizable intangible assets as of June 30, 2018, we estimate amortization expense for the next five years to be as follows:
Year Ending March 31,
 
Amortization Expense
2019
 
$
1,231

2020
 

2021
 

2022
 

2023
 

Thereafter
 

Total
 
$
1,231

8.    Debt
 
 
June 30, 2018
 
March 31, 2018
 
 
(Unaudited)
 
 
Short-term debt
 
 
 
 
Short-term debt, net of debt issuance costs of $163 and $205, respectively
 
$
1,437

 
$
1,445

Total short-term debt
 
$
1,437

 
$
1,445

 
 
June 30, 2018
 
March 31, 2018
 
 
(Unaudited)
 
 
Long-term debt
 
 
 
 
Convertible notes, net of debt issuance costs and discounts of $1,709 and $1,827, respectively
 
$
3,991

 
$
3,873

Total long-term debt
 
$
3,991

 
$
3,873


15



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 a registration statement on Form 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 and supplemented (the "Indenture"), between Digital Turbine, Inc., US Bank National Association, as trustee, and certain wholly-owned subsidiaries of the Company, specifically, DT USA, DT Media, DT EMEA, 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.
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.
Without stockholder approval, as required by NASDAQ rules, the Company would 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"). In such case, the Company will pay cash in lieu of any shares that would otherwise be deliverable in excess of the Notes Exchange Cap. The required stockholder approval was originally obtained at our annual meeting of stockholders held in January 2017. Due to the supplemental indenture entered in May 2017, a new stockholder approval was required to issue shares in excess of the Notes Exchange Cap, and such new stockholder approval was obtained at our annual meeting of stockholders held in January 2018. Please see the proxy statement for our 2018 annual meeting of stockholders for more information about the effect of the stockholder approval and our ability to issues shares of stock to satisfy our obligations under the Indenture and the warrants issued in connection with the Notes.

16



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.
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.

17



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, and again at our January 2018 annual meeting of stockholders in respect of our May 2017 supplemental indenture.
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.
In May 2017, the Company 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 fiscal year 2018, holders of $10,300 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. Associated with this conversion, gross debt net of debt discount and capitalized debt issuance costs of $2,591 and $1,019, respectively, was extinguished for a net debt extinguishment of $6,690. In total, 8,624,445 shares of common stock were issued and $247 in cash was paid to settle these positions. This resulted in an adjustment of approximately $14,238 to additional paid in capital to reflect the shares issued upon conversion. A loss on extinguishment of debt of $1,785 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 fair market value 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. No Notes were converted during the three months ended June 30, 2018. See Note 9. "Fair Value Measurements" for more information.
As of June 30, 2018, the outstanding principal on the Notes was $5,700, the unamortized debt issuance costs and debt discount in aggregate was $1,709, and the net carrying amount of the Notes was $3,991, which was recorded as long-term debt within the consolidated balance sheet. The Company recorded $161 of aggregate debt discount and debt issuance cost amortization during the three months ended June 30, 2018, and $353 during the three months ended June 30, 2017.

18



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.
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 6.25%), 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 June 30, 2018, the Company was in compliance with the covenants of the Credit Agreement.
The Credit Agreement required that at least two-thirds (2/3rds) of the holders of the Notes at all times be subject to subordination agreements with the Bank. 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 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. 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.
The Credit Agreement contains other customary covenants, representations, indemnities, and events of default.
At June 30, 2018, the gross outstanding principle on the Credit Agreement was $1,600, which is presented, net of capitalized debt issuance costs of $163, as net secured short-term line of credit of $1,437.
Interest Expense
Inclusive of the Notes issued on September 28, 2016 and the Credit Agreement entered into on May 23, 2017, the Company recorded $158 of interest expense during the three months ended June 30, 2018 and $354 during the three months ended June 30, 2017.
Additionally, aggregate debt discount and debt issuance cost amortization related to the Notes, detailed in the paragraph above, is reflected on the Consolidated Statement of Operations as interest expense. Inclusive of this amortization of $161 recorded during the three months ended June 30, 2018 and $353 recorded during the three months ended June 30, 2017, the Company recorded $319 of total interest expense for the three months ended June 30, 2018 and $707 of total interest expense for the three months ended June 30, 2017.


19



9.    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 an original 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 8. "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.

20



As of June 30, 2018 and March 31, 2018, 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 June 30, 2018
 
 
 
 
 
 
 
 
(Unaudited)
Financial Liabilities
 
 
 
 
 
 
 
 
Convertible note embedded derivative liability
 
$

 
$

 
$
3,056

 
$
3,056

Warrant liability
 

 

 
2,410

 
2,410

Total
 
$

 
$

 
$
5,466

 
$
5,466

 
 
Level 1
 
Level 2
 
Level 3
 
Balance as of March 31, 2018
Financial Liabilities
 
 
 
 
 
 
 
 
Convertible note embedded derivative liability
 
$

 
$

 
$
4,676

 
$
4,676

Warrant liability
 

 

 
3,980

 
3,980

Total
 
$

 
$

 
$
8,656

 
$
8,656

Convertible Note Embedded Derivative Liability
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, 2018
 
$
4,676

Change in fair value of convertible note embedded derivative liability
 
(1,620
)
Balance at June 30, 2018
 
$
3,056


21



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 June 30, 2018, the Company recorded a gain from change in fair value of convertible note embedded derivative liability of $1,620 due to the decrease in the Company's closing stock price during the current quarter from $2.01 to $1.51. During the three months ended June 30, 2017, the Company recorded a loss from change in fair value of convertible note embedded derivative liability of $1,308 due to the increase in the Company's closing stock price from March 31, 2017 to June 30, 2017 from $0.94 to $1.03.
The market-based assumptions and estimates used in valuing the convertible note embedded derivative liability include amounts in the following amounts:
 
June 30, 2018
Stock price volatility
65
%
Probability of change in control
1.75
%
Stock price (per share)
$1.51
Expected term
2.25 years

Risk-free rate (1)
2.51
%
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 2-year and 3-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, 2018
 
$
3,980

Change in fair value of warrant liability
 
(1,570
)
Balance at June 30, 2018
 
$
2,410


22



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 decreasing during the three months ended June 30, 2018, from $2.01 to $1.51, the Company recorded a gain from change in fair value of the warrant liability of $1,570. During the three months ended June 30, 2017, the Company recorded a loss from change in fair value of the warrant liability of $464 due to the increase in the Company's closing stock price from March 31, 2017 to June 30, 2017 from $0.94 to $1.03.
The market-based assumptions and estimates used in valuing the warrant liability include amounts in the following amounts:
 
June 30, 2018
Stock price volatility
65
%
Probability of change in control
1.75
%
Stock price (per share)
$1.51
Expected term
2.25 years

Risk-free rate (1)
2.51
%
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 2-year and 3-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.
10.    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 8,093,100 and 9,135,513 remained available for future grants as of June 30, 2018 and March 31, 2018, respectively. The change over the comparative period represents stock option grants, stock option forfeitures/cancellations, and restricted shares of common stock of 1,198,425, 388,570, and 232,558, 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. Compensation expense for all stock options is recognized on a straight-line basis over the requisite service period.

23



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, 2018
 
9,741,969

 
$
2.08

 
7.82
 
$
6,286

Granted
 
1,198,425

 
1.68

 
 
 
 
Forfeited / Cancelled
 
(388,570
)
 
9.59

 
 
 
 
Exercised
 
(150,001
)
 
0.79

 
 
 
 
Options Outstanding, June 30, 2018
 
10,401,823

 
1.77

 
7.99
 
2,960

Vested and expected to vest (net of estimated forfeitures) at June 30, 2018 (a)
 
8,549,126

 
1.88

 
7.77
 
2,268

Exercisable, June 30, 2018
 
4,642,180

 
$
2.43

 
6.94
 
$
743

(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 June 30, 2018 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 June 30, 2018. The intrinsic value changes based on changes in the price of the Company's common stock.
Information about options outstanding and exercisable at June 30, 2018 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
 
6,618

 
$
0.24

 
1.74
 
6,618

 
$
0.24

$0.51 - 1.00
 
2,971,934

 
$
0.73

 
8.36
 
555,511

 
$
0.74

$1.01 - 1.50
 
2,737,634

 
$
1.28

 
7.97
 
1,421,057

 
$
1.29

$1.51 - 2.00
 
1,586,370

 
$
1.65

 
9.52
 
197,055

 
$
1.53

$2.01 - 2.50
 
709,267

 
$
2.22

 
9.29
 
122,735

 
$
2.33

$2.51 - 3.00
 
853,200

 
$
2.61

 
6.09
 
809,696

 
$
2.62

$3.51 - 4.00
 
765,300

 
$
3.96

 
6.22
 
765,300

 
$
3.96

$4.01 - 4.50
 
661,500

 
$
4.15

 
6.16
 
657,333

 
$
4.15

$4.51 - 5.00
 
60,000

 
$
4.65

 
4.74
 
60,000

 
$
4.65

$5.01 and over
 
50,000

 
$
5.89

 
6.20
 
46,875

 
$
5.89

 
 
10,401,823

 
 
 
 
 
4,642,180

 
 
Other information pertaining to stock options for the Stock Plans for the three months ended June 30, 2018 and 2017, as stated in the table below, is as follows:
 
 
June 30,
 
 
2018
 
2017
Total fair value of options vested
 
$
404

 
$
597

Total intrinsic value of options exercised (a)
 
$
115

 
$
4

(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 three months ended June 30, 2018 and 2017.

24



During the three months ended June 30, 2018 and 2017, the Company granted options to purchase 1,198,425 and 326,500 shares of its common stock, respectively, to employees with weighted-average grant-date fair values of $1.68 and $1.00, respectively.
At June 30, 2018 and 2017, there was $2,747 and $3,491 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 2.31 and 2.07 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 months ended June 30, 2018 are presented below.

 
June 30, 2018
Risk-free interest rate
 
 2.79% to 2.85%
Expected life of the options
 
 5.65 to 9.94 years
Expected volatility
 
66%
Expected dividend yield
 
—%
Expected forfeitures
 
29%
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 months ended June 30, 2018 and 2017, which includes both stock options and restricted stock was $548, and $791, respectively. Please refer to Note 11. "Capital Stock Transactions" regarding restricted stock.
11.    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
For the three months ended June 30, 2018, the Company issued 150,001 shares of common stock for the exercise of employee options.

25



The following table provides activity for warrants issued and outstanding during the three months ended June 30, 2018:
 
 
Number of Warrants Outstanding
 
Weighted-Average Exercise Price
Outstanding as of March 31, 2018
 
4,536,857

 
1.56

Issued
 

 

Exercised
 

 

Expired
 
(292,857
)
 
3.81

Outstanding as of June 30, 2018
 
4,244,000

 
1.40

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 June 2018, the Company issued 232,558 restricted shares to the Chief Executive Officer and Chief Financial Officer. The shares vest over three years. The fair value of the shares on the date of issuance was $400.
With respect to time condition RSAs, the Company expensed $85 during the three months ended June 30, 2018 and $76 during three months ended June 30, 2017, respectively.
The following is a summary of restricted stock awards and activities for all vesting conditions for the three months ended June 30, 2018:
 
 
Number of Shares
 
Weighted-Average Grant Date Fair Value
Unvested restricted stock outstanding as of March 31, 2018
 
132,569

 
1.09

Granted
 
232,558

 
1.72

Vested
 
(66,284
)
 
1.09

Cancelled
 

 

Unvested restricted stock outstanding as of June 30, 2018
 
298,843

 
1.58

All restricted shares, vested and unvested, cancellable and not cancelled, have been included in the outstanding shares as of June 30, 2018.
At June 30, 2018, there was $413 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 3.00 years.

26



12.    Net Loss Per Share
Basic net income (loss) per share is calculated by dividing net income (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 was in a net loss position for the three months ended June 30, 2017, 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. For the three months ended June 30, 2018, the Company was in a net income position, and has included the dilutive effect of employee stock-based awards using the treasury method and assuming an average stock price over the period of $1.71.
The following table sets forth the computation of net income (loss) per share of common stock (in thousands, except per share amounts):
 
 
Three Months Ended June 30,
 
 
2018
 
2017
Net income / (loss)
 
$
1,528

 
$
(4,087
)
Weighted-average common shares outstanding, basic
 
76,204

 
66,599

Weighted-average common shares outstanding, diluted
 
79,598

 
66,599

 
 
 
 
 
Basic and diluted net income / (loss) per common share
 
$
0.02

 
$
(0.06
)
Common stock equivalents included in net income per diluted share
 
3,394

 

Common stock equivalents excluded from net loss per diluted share because their effect would have been anti-dilutive
 

 
1,033

13.    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 months ended June 30, 2018, a tax benefit of $36 resulted in an effective tax rate of (6.2)%. Differences in the tax provision and the statutory rate are primarily due to changes in the valuation allowance.
During the three months ended June 30, 2017, a tax expense of $31 resulted in an effective tax rate of (0.7)%. Differences in the tax provision and statutory rate are primarily due to changes in the valuation allowance.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the Tax Act). The Tax Act significantly revises the future ongoing U.S. corporate income tax by, among other things, lowering U. S. corporate income tax rate from 35% to 21% and implementing a territorial tax system. As a result of the valuation allowance against U.S. deferred tax assets and the Company’s U.S. federal and state NOL carryovers, the changes in U.S. tax law have not impacted Company’s annual effective tax rate for the three months ended June 30, 2018.
14.    Commitments and Contingencies
No legal matters or other proceedings requiring disclosure exist at this time.

27



15.    Geographic Information
The following table sets forth geographic information on our net revenues for the three months ended June 30, 2018 and 2017. Net revenues by geography are based on the billing addresses of our customers.
 
 
Three Months Ended June 30,
 
 
2018
 
2017
 
 
(Unaudited)
Net revenues
 
 
 
 
     United States and Canada
 
$
15,778

 
$
6,054

     Europe, Middle East, and Africa
 
3,838

 
1,263

     Asia Pacific and China
 
2,004

 
6,230

     Mexico, Central America, and South America
 
492

 
1,606

Consolidated net revenues
 
$
22,112

 
$
15,153


16.    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, as amended and supplemented to date, between Digital Turbine, Inc., US Bank National Association, as trustee, and certain wholly-owned subsidiaries of the Company, specifically, DT USA, DT Media, DT EMEA, 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, 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 includes:
(1) Consolidated balance sheets as of June 30, 2018 and March 31, 2018; consolidated statements of operations for the three months ended June 30, 2018 and 2017; and consolidated statements of cash flows for the three months ended June 30, 2018 and 2017 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 months ended June 30, 2018 or 2017.

28




Consolidated Balance Sheet
as of June 30, 2018 (Unaudited)
(in thousands, except par value and share amounts)
 
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidated Total
ASSETS
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
Cash
 
$
946

 
$
7,612

 
$
80

 
$
8,638

Restricted cash
 
156

 
175

 

 
331

Accounts receivable, net of allowance of $790
 

 
19,102

 
244

 
19,346

Deposits
 
34

 
113

 
4

 
151

Prepaid expenses and other current assets
 
349

 
443

 
10

 
802

Current assets held for disposal
 

 
4,053

 
340

 
4,393

Total current assets
 
1,485

 
31,498

 
678

 
33,661

Property and equipment, net
 
267

 
2,435

 
9

 
2,711

Deferred tax assets
 
632

 

 

 
632

Intangible assets, net
 
1

 
895

 

 
896

Goodwill
 
1,065

 
40,201

 
1,002

 
42,268

Long-term assets held for disposal
 

 

 

 

TOTAL ASSETS
 
$
3,450

 
$
75,029

 
$
1,689

 
$
80,168

INTERCOMPANY
 
 
 
 
 
 
 
 
Intercompany payable / (receivable), net
 
114,746

 
(98,385
)
 
(16,361
)
 

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
Accounts payable
 
$
1,015

 
$
17,285

 
$
(8
)
 
$
18,292

Accrued license fees and revenue share
 

 
11,169

 
322

 
11,491

Accrued compensation
 
489

 
688

 

 
1,177

Short-term debt, net of debt issuance costs and discounts of $163
 
1,437

 

 

 
1,437

Other current liabilities
 
1,138

 
(163
)
 
511

 
1,486

Current liabilities held for disposal
 

 
7,610

 
438

 
8,048

Total current liabilities
 
4,079

 
36,589

 
1,263

 
41,931

Convertible notes, net of debt issuance costs and discounts of $1,709
 
3,991

 

 

 
3,991

Convertible note embedded derivative liability
 
3,056

 

 

 
3,056

Warrant liability
 
2,410

 

 

 
2,410

Total liabilities
 
13,536

 
36,589

 
1,263

 
51,388

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; 77,145,980 issued and 76,391,381 outstanding at June 30, 2018.
 
10

 

 

 
10

Additional paid-in capital
 
318,690

 

 

 
318,690

Treasury stock (754,599 shares at June 30, 2018)
 
(71
)
 

 

 
(71
)
Accumulated other comprehensive loss
 
30

 
(1,491
)
 
1,136

 
(325
)
Accumulated deficit
 
(214,099
)
 
(58,454
)
 
(17,071
)
 
(289,624
)
Total stockholders' equity
 
104,660

 
(59,945
)
 
(15,935
)
 
28,780

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
118,196

 
$
(23,356
)
 
$
(14,672
)
 
$
80,168


29




Consolidated Balance Sheet
as of March 31, 2018 (Unaudited)
(in thousands, except par value and share amounts)
 
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidated Total
ASSETS
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
Cash
 
$
501

 
$
11,800

 
$
419

 
$
12,720

Restricted cash
 
156

 
175

 

 
331

Accounts receivable, net of allowance of $512
 

 
16,777

 
273

 
17,050

Deposits
 
34

 
113

 
4

 
151

Prepaid expenses and other current assets
 
330

 
406

 
14

 
750

Current assets held for disposal
 

 
8,610

 
143

 
8,753

Total current assets
 
1,021

 
37,881

 
853

 
39,755

Property and equipment, net
 
257

 
2,485

 
15

 
2,757

Deferred tax assets
 
596

 

 

 
596

Intangible assets, net
 

 
1,231

 

 
1,231

Goodwill
 

 
41,268

 
1,000

 
42,268

TOTAL ASSETS
 
$
1,874

 
$
82,865

 
$
1,868

 
$
86,607

INTERCOMPANY
 
 
 
 
 
 
 
 
Intercompany payable / (receivable), net
 
117,873

 
(114,234
)
 
(3,639
)
 

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
Accounts payable
 
$
1,031

 
$
18,841

 
$
23

 
$
19,895

Accrued license fees and revenue share
 

 
7,989

 
243

 
8,232

Accrued compensation
 
2,285

 
661

 
20

 
2,966

Short-term debt, net of debt issuance costs and discounts of $205
 
1,445

 

 

 
1,445

Other current liabilities
 
911

 
231

 

 
1,142

Current liabilities held for disposal
 

 
12,246

 
480

 
12,726

Total current liabilities
 
5,672

 
39,968

 
766

 
46,406

Convertible notes, net of debt issuance costs and discounts of $1,827
 
3,873

 

 

 
3,873

Convertible note embedded derivative liability
 
3,218

 

 

 
3,218

Warrant liability
 
1,076

 

 

 
1,076

Total liabilities
 
18,201

 
39,968

 
766

 
58,935

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; 76,843,278 issued and 76,108,822 outstanding at March 31, 2018
 
10

 

 

 
10

Additional paid-in capital
 
318,066

 

 

 
318,066

Treasury stock (754,599 shares at March 31, 2018)
 
(71
)
 

 

 
(71
)
Accumulated other comprehensive loss
 
(15
)
 
(621
)
 
311

 
(325
)
Accumulated deficit
 
(216,544
)
 
(70,716
)
 
(2,848
)
 
(290,108
)
Total stockholders' equity
 
101,546

 
(71,337
)
 
(2,537
)
 
27,672

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
119,747

 
$
(31,369
)
 
$
(1,771
)
 
$
86,607


30



Consolidated Statement of Operations and Comprehensive Loss
for the three months ended June 30, 2018 (Unaudited)
(in thousands, except par value and share amounts)
 
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Elimination
 
Consolidated Total
Net revenues
 
$

 
$
40,927

 
$
204

 
$
(19,019
)
 
$
22,112

Cost of revenues
 
 
 
 
 
 
 
 
 
 
License fees and revenue share
 

 
34,145

 
90

 
(19,019
)
 
15,216

Other direct cost of revenues
 

 
507

 

 

 
507

Total cost of revenues
 

 
34,652

 
90

 
(19,019
)
 
15,723

Gross profit
 

 
6,275

 
114

 

 
6,389

Operating expenses
 
 
 
 
 
 
 
 
 
 
Product development
 
90

 
2,904

 
115

 

 
3,109

Sales and marketing
 
124

 
1,508

 
204

 

 
1,836

General and administrative
 
1,162

 
1,490

 
52

 

 
2,704

Total operating expenses
 
1,376

 
5,902

 
371