Document

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 December 31, 2019



¨	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.)

110 San Antonio Street, Suite 160, Austin, TX		78701
(Address of Principal Executive Offices)		(Zip Code)

(512) 387-7717

(Registrant’s Telephone Number, Including Area Code)

Securities Registered Pursuant to Section 12(b) of the Act:



Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock, Par Value $0.0001 Per Share	APPS	The Nasdaq Stock Market LLC
		(NASDAQ Capital Market)

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 of 1934 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 company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large Accelerated Filer	¨	Accelerated Filer	ý

Non-accelerated Filer	¨	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 Exchange Act). Yes ¨ No ý

As of February 5, 2020, the Company had 86,741,096 shares of its common stock, $0.0001 par value per share, outstanding.

Digital Turbine, Inc.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED December 31, 2019

TABLE OF CONTENTS



	PART I - FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements

	Consolidated Balance Sheets as of December 31, 2019 (Unaudited) and March 31, 2019	4

	Consolidated Statements of Operations and Comprehensive Income / (Loss) for the Three and Nine Months Ended December 31, 2019 and 2018 (Unaudited)	5

	Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2019 and 2018 (Unaudited)	6

	Consolidated Statements of Stockholders' Equity for the Three and Nine Months Ended December 31, 2019 and 2018 (Unaudited)	7

	Notes to Consolidated Financial Statements (Unaudited)	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39

Item 4.	Controls and Procedures	40

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	41

Item 1A.	Risk Factors	41

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42

Item 3.	Defaults Upon Senior Securities	42

Item 4.	Mine Safety Disclosures	42

Item 5.	Other Information	42

Item 6.	Exhibits	43

	Signatures	44

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

Digital Turbine, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except par value and share amounts)



	December 31, 2019			March 31, 2019
	(Unaudited)
ASSETS
Current assets
Cash	$	33,714		$	10,894
Restricted cash	165			165
Accounts receivable, net of allowances of $1,101 and $895, respectively	26,694			22,707
Prepaid expenses and other current assets	2,141			1,331
Current assets held for disposal	1,527			2,026
Total current assets	64,241			37,123
Property and equipment, net	5,116			3,430
Right-of-use assets	2,029			—
Deferred tax assets	—			40
Goodwill	42,268			42,268
TOTAL ASSETS	$	113,654		$	82,861
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	20,820		$	14,912
Accrued license fees and revenue share	16,264			16,205
Accrued compensation	3,296			2,441
Warrant liability	6,300			—
Other current liabilities	4,285			826
Current liabilities held for disposal	3,431			3,924
Total current liabilities	54,396			38,308
Warrant liability	—			8,013
Other non-current liabilities	2,007			182
Total liabilities	56,403			46,503
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; 87,057,421 issued and 86,322,965 outstanding at December 31, 2019; 82,354,940 issued and 81,620,485 outstanding at March 31, 2019	10			10
Additional paid-in capital	353,968			332,793
Treasury stock (754,599 shares at December 31, 2019 and March 31, 2019)	(71		)	(71		)
Accumulated other comprehensive loss	(720		)	(356		)
Accumulated deficit	(296,036		)	(296,118		)
Total stockholders' equity	57,251			36,358
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	113,654		$	82,861

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

Digital Turbine, Inc. and Subsidiaries

Consolidated Statements of Operations and Comprehensive Income / (Loss) (Unaudited)

(in thousands, except per share amounts)



	Three months ended December 31,						Nine months ended December 31,
	2019			2018			2019			2018
Net revenues	$	36,016		$	30,411		$	99,364		$	76,377
Cost of revenues
License fees and revenue share	21,576			19,195			59,997			50,213
Other direct costs of revenues	400			538			1,022			1,553
Total cost of revenues	21,976			19,733			61,019			51,766
Gross profit	14,040			10,678			38,345			24,611
Operating expenses
Product development	2,783			2,428			8,312			8,174
Sales and marketing	2,815			1,962			7,534			5,711
General and administrative	4,310			3,832			12,212			9,215
Total operating expenses	9,908			8,222			28,058			23,100
Income from operations	4,132			2,456			10,287			1,511
Interest and other income / (expense), net
Interest income / (expense), net	59			(194		)	118			(648		)
Foreign exchange transaction gain / (loss)	—			(2		)	—			7
Change in fair value of convertible note embedded derivative liability	—			(1,476		)	—			1,096
Change in fair value of warrant liability	(870		)	(1,651		)	(10,601		)	845
Loss on extinguishment of debt	—			(10		)	—			(25		)
Other income / (expense)	(19		)	(43		)	455			(169		)
Total interest and other income / (expense), net	(830		)	(3,376		)	(10,028		)	1,106
Income / (loss) from continuing operations before income taxes	3,302			(920		)	259			2,617
Income tax provision	41			216			6			157
Income / (loss) from continuing operations, net of taxes	3,261			(1,136		)	253			2,460
Income / (loss) from discontinued operations	65			(212		)	(171		)	(1,612		)
Net income / (loss) from discontinued operations, net of taxes	65			(212		)	(171		)	(1,612		)
Net income / (loss)	$	3,326		$	(1,348	)	$	82		$	848
Other comprehensive loss
Foreign currency translation adjustment	(44		)	(5		)	(364		)	(5		)
Comprehensive income / (loss)	$	3,282		$	(1,353	)	$	(282	)	$	843
Basic and diluted net income / (loss) per common share
Continuing operations	$	0.04		$	(0.01	)	$	—		$	0.03
Discontinued operations	—			—			—			(0.02		)
Net income / (loss)	$	0.04		$	(0.01	)	$	—		$	0.01
Weighted-average common shares outstanding, basic	85,876			77,645			83,869			76,977
Weighted-average common shares outstanding, diluted	92,472			77,645			89,759			79,371

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

Digital Turbine, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)



	Nine months ended December 31,
	2019			2018
Cash flows from operating activities
Net income from continuing operations, net of taxes	$	253		$	2,460
Adjustments to reconcile net income from continuing operations to net cash provided by / (used in) operating activities:
Depreciation and amortization	1,484			2,145
Loss on disposal of fixed assets	4			—
Change in allowance for doubtful accounts	206			425
Amortization of debt discount and debt issuance costs	—			251
Stock-based compensation	2,044			1,416
Stock-based compensation for services rendered	470			365
Change in fair value of convertible note embedded derivative liability	—			(1,096		)
Change in fair value of warrant liability	10,601			(845		)
Loss on extinguishment of debt	—			25
(Increase) / decrease in assets:
Accounts receivable	(4,193		)	(7,626		)
Deferred tax assets	40			157
Prepaid expenses and other current assets	(829		)	(561		)
Right-of-use assets	(2,029		)	—
Increase / (decrease) in liabilities:
Accounts payable	5,908			2,657
Accrued license fees and revenue share	59			3,258
Accrued compensation	855			(1,345		)
Other current liabilities	3,459			788
Other non-current liabilities	1,823			55
Net cash provided by operating activities - continuing operations	20,155			2,529
Net cash used in operating activities - discontinued operations	(145		)	(3,436		)
Net cash provided by / (used in) operating activities	20,010			(907		)

Cash flows from investing activities
Capital expenditures	(3,179		)	(1,781		)
Net cash used in investing activities	(3,179		)	(1,781		)

Cash flows from financing activities
Options and warrants exercised	6,353			223
Repayment of debt obligations	—			(50		)
Net cash provided by financing activities	6,353			173

Effect of exchange rate changes on cash	(364		)	(5		)

Net change in cash	22,820			(2,520		)

Cash and restricted cash, beginning of period	11,059			13,051

Cash and restricted cash, end of period	$	33,879		$	10,531

Supplemental disclosure of cash flow information
Interest paid	$	—		$	290
Supplemental disclosure of non-cash financing activities
Common stock of the Company issued for extinguishment of debt	$	—		$	1,190
Cashless exercise of warrants to purchase common stock of the Company	$	791		$	—

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

Digital Turbine, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity (Unaudited)

(in thousands, except share counts)



	Common Stock Shares	Amount		Preferred Stock Shares	Amount		Treasury Stock Shares	Amount			Additional Paid-In Capital		Accumulated Other Comprehensive Income / (Loss)			Accumulated Deficit			Total
Balance at March 31, 2019	81,620,485	$	10	100,000	$	100	754,599	$	(71	)	$	332,793	$	(356	)	$	(296,118	)	$	36,358
Net loss	—	—		—	—		—	—			—		—			(1,819		)	(1,819		)
Foreign currency translation	—	—		—	—		—	—			—		98			—			98
Settlement of warrant derivative liability	—	—		—	—		—	—			715		—			—			715
Stock-based compensation	38,759	—		—	—		—	—			560		—			—			560
Stock-based compensation for services rendered	—	—		—	—		—	—			122		—			—			122
Options exercised	616,208	—		—	—		—	—			910		—			—			910
Warrants exercised	212,250	—		—	—		—	—			289		—			—			289
Balance at June 30, 2019	82,487,702	10		100,000	100		754,599	(71		)	335,389		(258		)	(297,937		)	37,233
Net loss	—	—		—	—		—	—			—		—			(1,425		)	(1,425		)
Foreign currency translation	—	—		—	—		—	—			—		(418		)	—			(418		)
Settlement of warrant derivative liability	—	—		—	—		—	—			8,648		—			—			8,648
Stock-based compensation	9,690	—		—	—		—	—			740		—			—			740
Stock-based compensation for services rendered	75,494	—		—	—		—	—			175		—			—			175
Options exercised	1,006,792	—		—	—		—	—			1,891		—			—			1,891
Warrants exercised	1,667,293	—		—	—		—	—			1,723		—			—			1,723
Balance at September 30, 2019	85,246,971	10		100,000	100		754,599	(71		)	348,566		(676		)	(299,362		)	48,567
Net loss	—	—		—	—		—	—			—		—			3,326			3,326
Foreign currency translation	—	—		—	—		—	—			—		(44		)	—			(44		)
Settlement of warrant derivative liability	—	—		—	—		—	—			2,945		—			—			2,945
Stock-based compensation	—	—		—	—		—	—			744		—			—			744
Stock-based compensation for services rendered	—	—		—	—		—	—			173		—			—			173
Options exercised	546,876	—		—	—		—	—			927		—			—			927
Warrants exercised	529,118	—		—	—		—	—			613		—			—			613
Balance at December 31, 2019	86,322,965	$	10	100,000	$	100	754,599	$	(71	)	$	353,968	$	(720	)	$	(296,036	)	$	57,251

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

Digital Turbine, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity (Unaudited)

(in thousands, except share counts)



	Common Stock Shares	Amount		Preferred Stock Shares	Amount		Treasury Stock Shares	Amount			Additional Paid-In Capital		Accumulated Other Comprehensive Income / (Loss)			Accumulated Deficit			Total
Balance at March 31, 2018	76,108,823	$	10	100,000	$	100	754,599	$	(71	)	$	318,066	$	(325	)	$	(290,108	)	$	27,672
Net loss	—	—		—	—		—	—			—		—			484			484
Stock-based compensation	—	—		—	—		—	—			500		—			—			500
Stock-based compensation for services rendered	—	—		—	—		—	—			85		—			—			85
Options exercised	50,000	—		—	—		—	—			39		—			—			39
Balance at June 30, 2018	76,158,823	10		100,000	100		754,599	(71		)	318,690		(325		)	(289,624		)	28,780
Net loss	—	—		—	—		—	—			—		—			1,712			1,712
Foreign currency translation	—	—		—	—		—	—			—		2			—			2
Conversion of convertible notes to equity	670,878	—		—	—		—	—			948		—			—			948
Stock-based compensation	306,656	—		—	—		—	—			602		—			—			602
Options exercised	111,200	—		—	—		—	—			121		—			—			121
Balance at September 30, 2018	77,247,557	10		100,000	100		754,599	(71		)	320,361		(323		)	(287,912		)	32,165
Net loss	—	—		—	—		—	—			—		—			(1,348		)	(1,348		)
Conversion of convertible notes to equity	168,773	—		—	—		—	—			241		—			—			241
Stock-based compensation	—	—		—	—		—	—			632		—			—			632
Options exercised	55,583	—		—	—		—	—			63		—			—			63
Balance at December 31, 2018	77,471,913	$	10	100,000	$	100	754,599	$	(71	)	$	321,297	$	(323	)	$	(289,260	)	$	31,753

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

Digital Turbine, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

December 31, 2019

(in thousands, except share and per share amounts)

1. Description of Business

Digital Turbine, Inc., 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. Through December 31, 2019, Digital Turbine has delivered over 3 billion application pre-loads on over 369 million devices across thirty-five Operator and OEM ("O&O") partnerships. The Company operates this business as one reportable segment – Advertising.

The Company's Advertising segment operates the O&O business, an advertiser solution for unique and exclusive carrier and OEM inventory, which is comprised of services including:


•	Ignite™ ("Ignite"), a software platform with targeted media delivery and management capabilities, and


•	Other recurring and life-cycle products, features, and professional services delivered on the Ignite platform.

Prior to the sale of the Advertiser and Publisher ("A&P") Assets described below under Note 4. "Discontinued Operations," the Advertising reporting segment also included the A&P Assets as an operating segment within Advertising.

With global headquarters in Austin, Texas and offices in Durham, North Carolina; San Francisco, California; Singapore; 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 businesses 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”), which we acquired on March 6, 2015. We refer to all of the Company's subsidiaries collectively as "wholly-owned subsidiaries."

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 cash from operations, issuance of common stock, preferred stock, and debt. As of December 31, 2019, we had cash, including restricted cash, totaling approximately $33,879.

On May 23, 2017, the Company entered into a Business Finance Agreement (the "Credit Agreement") with Western Alliance Bank (the "Bank"). The Credit Agreement provided for a $5,000 total facility. On May 22, 2019, the Company amended its existing Credit Agreement with the Bank. The Credit Agreement, as amended, provides for up to a $20,000 total revolving credit facility, subject to draw limitations derived from current levels of eligible domestic receivables. Please refer to Note 8. "Debt" for more details.

The Company anticipates that its primary sources of liquidity will continue to be cash-on-hand, cash provided by operations, and the credit available under the Credit Agreement. In addition, the Company may raise additional capital through future equity or, subject to restrictions contained in the Credit Agreement, debt financing to provide for greater flexibility to make acquisitions, new investments in under-capitalized opportunities, or to 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.

During the evaluation by management of the Company’s financial position, factors such as working capital, current market capitalization, enterprise value, and the fiscal year 2020 operating plan of the Company were considered when determining the ability of the Company to continue as a going concern. 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. Based on the year-over-year revenue and gross margin increases, coupled with the Company’s management of operating expenses and access to debt, management has determined that when considering all relevant quantitative and qualitative factors, the Company has sufficient cash and capital resources to continue to operate its business for at least twelve months from the issuance date of this quarterly report on Form 10-Q.

In view of the matters described in the preceding paragraphs, the consolidated 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.

3. Summary of Significant Accounting Policies

Interim Consolidated Financial Information

The accompanying consolidated financial statements of Digital Turbine, Inc. and its subsidiaries 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, 2019. 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 December 31, 2019, the results of their operations and corresponding comprehensive income / (loss) for the three and nine months ended December 31, 2019 and 2018, and their cash flows for the nine months ended December 31, 2019 and 2018. 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, 2020.

Recently Issued Accounting Pronouncements

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, 2019. There have been no significant changes in or updates to the accounting policies since March 31, 2019. 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 quarterly report have been determined to either not apply or to have an immaterial impact on our business and related disclosures.

Accounting Pronouncements Adopted During the Period

In February 2016, the FASB issued Account Standards Update ("ASU") 2016-02: Leases (Topic 842). This update changes lessee accounting to reflect the financial liability and right-of-use assets that are inherent to leasing an asset on the balance sheet. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2018. As such, the Company adopted this standard during our quarter ended June 30, 2019 using the modified retrospective method, such that we will account for leases that commenced before the effective date of ASU No. 2016-02 in accordance with previous GAAP unless the lease is modified, except we will recognize right-of-use assets and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. The impact of adoption resulted in a gross-up of the Consolidated Balance Sheet with the creation of a right-of-use asset and a corresponding financial liability partially offset by the relief of other liability accounts related to the change in accounting standard. The impact on the Consolidated Statements of Operations and Comprehensive Income / (Loss) was negligible. The adoption of this standard did not have a material net impact on the Company's consolidated results of operations, financial condition, or cash flows. Please refer to Note 7. "Leases" for details.

Revenue from Contracts with Customers

The Company adopted Accounting Standards Codification ("ASC") 606 on April 1, 2018, and ASC 606 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 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.

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 under "Disaggregation of Revenue" 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 one operating segment (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 and OEMs 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, Dynamic Installs, or Software Development Kit ("SDK"). Optional notification features are available throughout the life-cycle of the device, providing operators and OEMs 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 for a 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.

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 and, as such, has concluded these deliveries are 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 is recognized when formal acceptance is confirmed by the customer. Services are billed in one lump sum. For the majority of these contracts, for which 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 non-current 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 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 non-current 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 and has 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 the impact of adoption was not material and that no adjustments would need 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.

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 December 31, 2019, one major customer represented approximately 20.9% of the Company’s net accounts receivable balance. As of March 31, 2019, one major customer represented 25.7% of the Company's net accounts receivable balance.

With respect to customer revenue concentration, the Company defines a customer as an advertiser or a carrier that is a distinct source of revenue and is legally bound to pay for the services that the Company delivers on the advertiser’s or carrier's behalf. During the three and nine months ended December 31, 2019, Verizon Communications Inc., primarily through its subsidiary Oath Inc., represented 14.4% and 17.7% of net revenues, respectively. During the three and nine months ended December 31, 2018, Oath Inc. represented 28.8% and 31.1% of net revenues, respectively.

With respect to partner revenue concentration, the Company partners with mobile carriers and OEMs to deliver applications on our Ignite platform through the carrier network. During the three and nine months ended December 31, 2019, Verizon Wireless, a carrier partner, generated 37.5% and 40.3%, respectively; AT&T Inc., a carrier partner, including its Cricket subsidiary, generated 29.8% and 30.9%, respectively; and America Movil Inc., a carrier partner, primarily through its subsidiary TracFone Wireless Inc., generated 12.4% and 10%, respectively, of our net revenues. During the three and nine months ended December 31, 2018, Verizon Wireless, a carrier partner, generated 43.7% and 47.6%, respectively; and AT&T Inc., a carrier partner, including its Cricket subsidiary, generated 38.5% and 38.4%, respectively, of our net revenues.

There is no assurance that the Company will continue to receive significant revenues from any of these or other large customers. A reduction or delay in operating activity from any of the Company’s significant customers or partners, or a delay or default in payment by any significant customer, or a termination of agreements with significant customers, could materially harm the Company’s business and prospects. Because of the Company’s significant customer concentrations, its net sales and operating income could fluctuate significantly due to changes in political or economic conditions, or the loss of, reduction of business from, or less favorable terms with 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 facts 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 disclosed in the Company’s Form 8-K filed on May 1, 2018 with the SEC. The transaction was completed on July 1, 2018. With the sale of these assets, the Company has exited the segment of the business previously referred to as the Content business.

In accordance with the Pay Agreement, the Company assigned and transferred a material contract to the Pay Purchaser. Subsequent to the transaction closing associated with the Pay Agreement, the Company received notification from the Pay Purchaser that the partner to the material contract had terminated the contract with the Pay Purchaser. Due to the material contract being terminated, the Company has determined that the estimated earn out from the Pay Purchaser to be $0. As all the assets being transferred had been fully impaired prior to the closing of the transaction, the gain/loss on sale related to the Pay Agreement transaction was $0. Furthermore, the Company retained certain receivables and payables for content delivered for the benefit of the partner to the material contract, where these certain receivables and payables were all recognized prior to the closing of the Pay Agreement. These amounts are presented below as assets and liabilities held for disposal. As of December 31, 2019, the Company has determined there to be uncertainty surrounding the collectability of the receivables due to ongoing discussions with the business partner. If at a later date it is determined that the receivables recorded are not collectible due to disputes surrounding the content delivered, the related payables would likewise not be payable. At this time, the Company is negotiating settlement but does not have enough information to reasonably estimate which receivables and payables, if any, may be un-collectible and un-payable, respectively. The total net exposure to the Company if all of the remaining receivables and payables are determined to be un-collectible and un-payable, respectively, is immaterial. These assets and liabilities remain on our books as a component of discontinued operations as of December 31, 2019.

DT Media, 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 disclosed in the Company’s Form 8-K filed on May 1, 2018 with the SEC. 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 exited 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 transferred assets and liabilities, with the exception of goodwill, were fully amortized prior to entering into the sale 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.

The following table summarizes the financial results of our discontinued operations for all periods presented in the accompanying Consolidated Statements of Operations and Comprehensive Income / (Loss):

Condensed Statements of Operations and Comprehensive Income / (Loss)

For Discontinued Operations

(in thousands, except per share amounts)

(Unaudited)



	Three months ended December 31,						Nine months ended December 31,
	2019			2018			2019			2018
Net revenues	$	—		$	3		$	—		$	3,880
Total cost of revenues	(102		)	—			(102		)	3,070
Gross profit	102			3			102			810
Product development	—			37			62			703
Sales and marketing	—			7			—			350
General and administrative	37			160			122			1,212
Income / (loss) from operations	65			(201		)	(82		)	(1,455		)
Interest and other income / (expense), net	—			(11		)	(89		)	(157		)
Income / (loss) from discontinued operations before income taxes	65			(212		)	(171		)	(1,612		)
Income / (loss) from discontinued operations, net of taxes	65			(212		)	(171		)	(1,612		)
Comprehensive income / (loss)	$	65		$	(212	)	$	(171	)	$	(1,612	)
Basic and diluted net income / (loss) per common share	$	—		$	—		$	—		$	(0.02	)
Weighted-average common shares outstanding, basic	85,876			77,645			83,869			76,977
Weighted-average common shares outstanding, diluted	92,472			77,645			89,759			79,371

Details on assets and liabilities classified as held-for-disposal in the accompanying consolidated balance sheets are presented in the following table:



	December 31, 2019		March 31, 2019
	(Unaudited)
Assets held for disposal
Accounts receivable, net of allowances of $1,542 and $1,589, respectively	$	1,525	$	1,883
Property and equipment, net	2		143
Total assets held for disposal	$	1,527	$	2,026

Liabilities held for disposal
Accounts payable	$	2,926	$	3,158
Accrued license fees and revenue share	335		537
Accrued compensation	170		226
Other current liabilities	—		3
Total liabilities held for disposal	$	3,431	$	3,924

Assets and liabilities held for disposal as of December 31, 2019 and March 31, 2019 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:



	Nine months ended December 31,
	2019			2018
	(Unaudited)			(Unaudited)
Cash flows from operating activities
Net loss from discontinued operations, net of taxes	$	(171	)	$	(1,612	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	19			247
Impairment of goodwill	—			309
Change in allowance for doubtful accounts	(47		)	(380		)
Loss on disposal of fixed assets	104			—
Stock-based compensation	—			37
(Increase) / decrease in assets:
Accounts receivable	405			5,164
Prepaid expenses and other current assets	—			95
Increase / (decrease) in liabilities:
Accounts payable	(232		)	(4,675		)
Accrued license fees and revenue share	(202		)	(1,991		)
Accrued compensation	(56		)	(302		)
Other current liabilities	35			(328		)
Cash used in operating activities	(145		)	(3,436		)

Cash used in discontinued operations	$	(145	)	$	(3,436	)

5. Accounts Receivable



	December 31, 2019			March 31, 2019
	(Unaudited)
Billed	$	13,314		$	11,833
Unbilled	14,481			11,769
Allowance for doubtful accounts	(1,101		)	(895		)
Accounts receivable, net	$	26,694		$	22,707

Billed accounts receivable represents amounts billed to customers that have yet to be collected. Unbilled accounts receivable represents revenue recognized but billed after period end. All unbilled receivables as of December 31, 2019 and March 31, 2019 are expected to be billed and collected within twelve months.

The Company recorded $56 and $184 of bad debt expense during the three and nine months ended December 31, 2019, respectively, and $59 and $229 of bad debt expense during the three and nine months ended December 31, 2018, respectively.

6. Property and Equipment



	December 31, 2019			March 31, 2019
	(Unaudited)
Computer-related equipment	$	9,691		$	7,077
Furniture and fixtures	414			223
Leasehold improvements	623			558
Property and equipment, gross	10,728			7,858
Accumulated depreciation	(5,612		)	(4,428		)
Property and equipment, net	$	5,116		$	3,430

Depreciation expense was $540 and $1,484 for the three and nine months ended December 31, 2019, respectively, and $374 and $1,139 for the three and nine months ended December 31, 2018, respectively. Depreciation expense for the three and nine months ended December 31, 2019 includes $140 and $462, respectively, related to internal-use assets included in general and administrative expense, and $400 and $1,022, respectively, related to internally-developed software to be sold, leased, or otherwise marketed included in other direct costs of revenue. Depreciation expense for the three and nine months ended December 31, 2018 includes $170 and $591, respectively, related to internal-use assets included in general and administrative expense, and $204 and $548, respectively, related to internally-developed software to be sold, leased, or otherwise marketed included in other direct costs of revenue.

7. Leases

The Company has entered into various non-cancelable operating lease agreements for certain offices. These leases currently have lease periods expiring between fiscal years 2024 and 2025. The lease agreements may include one or more options to renew. Renewals were not assumed in the Company's determination of the lease term unless the renewals were deemed to be reasonably assured at lease commencement. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. The components of lease costs, weighted-average lease term, and discount rate are detailed below.

Schedule, by fiscal year, of maturities of lease liabilities as of:



	December 31, 2019
	(Unaudited)
Remainder of fiscal year 2020	$	169
Fiscal year 2021	688
Fiscal year 2022	705
Fiscal year 2023	723
Fiscal year 2024	520
Thereafter	203
Total undiscounted cash flows	3,008
(Less imputed interest)	(368		)
Present value of lease liabilities	$	2,640

The current portion of our lease liabilities, payable within the next 12 months, is included in other current liabilities and the long-term portion of our lease liabilities is included in other non-current liabilities on our Consolidated Balance Sheets.

Associated with this financial liability, the Company has recorded a right-of-use asset of $2,029, which is calculated using the present value of lease liabilities less any lease incentives received from our landlords and any deferred rent liability balance as of the date of implementation. The discount rate used to calculate the imputed interest above is 6.00% and the weighted-average remaining lease term is 4.31 years.

8. Debt

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 (the "Notes"), 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 of $11,084, convertible note embedded derivative liability of $3,693 (see Note 9. "Fair Value Measurements" for more information), and warrant liability of $1,223 (see Note 9. "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 was determined using the residual method of accounting whereby, first, a portion of the proceeds from the issuance of the Notes was allocated to derivatives embedded in the Notes and the warrants issued in connection with the issuance of the Notes, and the proceeds so allocated were accounted for as a convertible note embedded derivative liability and warrant liability, respectively (see Note 9. "Fair Value Measurements" for more information), and second, the remainder of the proceeds from the issuance of the Notes was allocated to the convertible notes, which resulted in an original-issue debt discount of $4,916. At 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 recorded as a direct reduction to the face value of the Notes and amortized over the life of the Notes as a component of interest expense on the Consolidated Statements of Operations and Comprehensive Income / (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. This was required to be done in accordance with the terms of the Indenture (as defined below).

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, further noting that this liability has been accrued and is immaterial. 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 were senior unsecured obligations of the Company and bore 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 were 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 issued or sold shares of common stock at a price per share less than the conversion price on the trading day immediately preceding such issuance or sale.

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 the aggregate, in addition to the 250,000 warrants issued to the Initial Purchaser, as described above. The warrants were issued under a Warrant Agreement (the "Warrant Agreement"), dated as of September 28, 2016, between Digital Turbine, Inc. and US Bank National Association as the warrant agent.

The warrants were 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 or 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 based on 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 were otherwise 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, and as described further below under "Senior Secured Credit Facility."

During the year ended March 31, 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. See Note 9. "Fair Value Measurements" for more information.

During the year ended March 31, 2019, holders of the remaining $5,700 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 $1,360, was extinguished for a net debt extinguishment of $4,340. In total, 4,446,265 shares of common stock were issued to settle these positions. This resulted in an adjustment of approximately $10,582 to additional paid-in capital to reflect the shares issued upon conversion. A loss on extinguishment of debt of $431 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. See Note 9. "Fair Value Measurements" for more information.

As of March 31, 2019, all of the Notes have been extinguished, the underlying indenture relieved, and all derivative liabilities related to the Notes settled.

Senior Secured Credit Facility

On May 23, 2017, the Company entered into a Business Finance Agreement (the “Credit Agreement”) with Western Alliance Bank (the “Bank”). The Credit Agreement provided for a $5,000 total revolving credit facility.

On May 22, 2019, the Company amended its existing Credit Agreement with the Bank, to extend the term of the agreement and to modify the covenants as detailed below. The Credit Agreement, as amended, provides for up to a $20,000 total facility, subject to draw limitations derived from current levels of eligible domestic receivables.

The amounts advanced under the Credit Agreement, as amended, mature in two years, or May 22, 2021, and accrue interest at prime plus 0.50%, subject to a 6.00% floor, with the prime rate defined as the greater of the prime rate published in the Wall Street Journal or 5.50%. The Credit Agreement, as amended, also carries an annual facility fee of 0.20% of our available credit limit, and an unused line fee of 0.10% per annum. The obligations under the Credit Agreement are secured by a perfected first-position security interest in all assets of the Company and its subsidiaries. Two of the Company’s subsidiaries, Digital Turbine USA and Digital Turbine Media, are additional co-borrowers.

The Credit Agreement contains customary covenants, representations, indemnities, and events of default. 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:

(1) Maintain a Quick Ratio, measured at the end of each month during which any advances are outstanding, of at least:

0.75:1.00 May 31, 2019 - August 31, 2019

0.80:1.00 September 1, 2019 - February 28, 2020

0.85:1.00 March 1, 2020 - August 31, 2020

0.90:1.00 September 1, 2020 and thereafter

(2) Trailing six-month earnings before depreciation, amortization, stock compensation, non-cash warrant and derivative liability expense, and any other onetime non-recurring expenses the Bank deems appropriate ("EBDAS") of not less than $1, tested as of each fiscal quarter end during which any advances are outstanding.

The Company was in compliance with all covenants of the Credit Agreement as of December 31, 2019.

At December 31, 2019, there was no outstanding principal on the Credit Agreement.

Interest Income / (Expense)

The Company recorded $59 and $118 of interest income, net, during the three and nine months ended December 31, 2019, respectively. This is comprised of interest earned on cash balances, partially offset by amortization of annual facility fees on the Credit Agreement.

In the prior fiscal year, inclusive of the Notes issued on September 28, 2016 and the Credit Agreement entered into on May 23, 2017, the Company recorded $131 and $397 of interest expense during the three and nine months ended December 31, 2018, respectively.

Additionally in the prior fiscal year, aggregate debt discount and debt issuance cost amortization related to the Notes, detailed in the paragraphs above, are reflected on the Consolidated Statements of Operations and Comprehensive Income / (Loss) as interest expense. Inclusive of this amortization of $63 and $251 recorded during the three and nine months ended December 31, 2018, respectively, the Company recorded $194 and $648 of total interest expense for the three and nine months ended December 31, 2018, respectively.

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 was determined using the residual method of accounting whereby, first, a portion of the proceeds from the issuance of the Notes was allocated to derivatives embedded in the Notes and the warrants issued in connection with the issuance of the Notes, and the proceeds so allocated were 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 was allocated to the convertible notes, resulting in an original debt discount amounting to $4,916. The convertible notes remained 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 related 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.

During the fiscal year ended March 31, 2019, all of the Notes were extinguished, the underlying indenture relieved, and all derivative liabilities, except warrants, related to the Notes settled. As such, as of December 31, 2019 and March 31, 2019, the Company’s financial liability presented below at fair value was classified within the fair value hierarchy as follows:



	Level 1		Level 2		Level 3		Balance as of December 31, 2019
							(Unaudited)
Financial Liabilities
Warrant liability	$	—	$	—	$	6,300	$	6,300
Total	$	—	$	—	$	6,300	$	6,300



	Level 1		Level 2		Level 3		Balance as of March 31, 2019
Financial Liabilities
Warrant liability	$	—	$	—	$	8,013	$	8,013
Total	$	—	$	—	$	8,013	$	8,013

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 consist 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 met the definition of embedded derivatives and required bifurcation and accounting at fair value.

The convertible note embedded derivative liability represented the fair value of the conversion option, fundamental change provision, and "make-whole interest" 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 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 marked 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 were reflected in our Consolidated Statements of Operations and Comprehensive Income / (Loss) as “Change in fair value of convertible note embedded derivative liability.”

During the fiscal year ended March 31, 2019, all of the Notes were extinguished, the underlying indenture relieved, and all derivative liabilities related to the Notes settled.

Due to the valuation of the derivative liability being highly sensitive to the trading price of the Company's stock, the increase and decrease in the trading price of the Company's stock has the impact of increasing the loss and gain, respectively. During the three and nine months ended December 31, 2018, the Company recorded a (loss) and gain from change in fair value of convertible note embedded derivative liability of $(1,476) and $1,096, respectively, due to the increase in the Company's closing stock price during the three months ended December 31, 2018 from $1.24 to $1.83 and due to the decrease in the Company's closing stock price during the nine months ended December 31, 2018 from $2.01 to $1.83. In addition to the Company's stock price being the primary driver, valuation of the derivative liability is also impacted by the conversion of underlying notes and associated warrants. See Note 8. "Debt" for more information regarding the conversion of Convertible Notes during fiscal years 2018 and 2019.

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 until one year from the maturity date when the liability was re-classified to current. 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 Consolidated Statements of Operations and Comprehensive Income / (Loss). We estimated the fair value of these warrants at the respective balance sheet dates using a Black-Scholes model 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 are primarily related to the change in price of the underlying common stock of the Company and is reflected in our Consolidated Statements of Operations and Comprehensive Income / (Loss) 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, 2019	$	8,013
Change in fair value of warrant liability	10,601
De-recognition on exercises	(12,314		)
Balance at December 31, 2019	$	6,300

Due to the valuation of the derivative liability being highly sensitive to the trading price of the Company's stock, the increase and decrease in the trading price of the Company's stock has the impact of increasing the loss and gain, respectively. During the three and nine months ended December 31, 2019, the Company recorded a loss from change in fair value of warrant liability of $870 and $10,601, respectively, due to the increase in the Company's closing stock price during the three months ended December 31, 2019 from $6.45 to $7.13 and during the nine months ended December 31, 2019 from $3.78 to $7.13. During the three and nine months ended December 31, 2018, the Company recorded a (loss) and gain from change in fair value of warrant liability of $(1,651) and $845, respectively, due to the increase in the Company's closing stock price during the three months ended December 31, 2018 from $1.24 to $1.83 and due to the decrease in the Company's closing stock price during the nine months ended December 31, 2018 from $2.01 to $1.83.

The market-based assumptions and estimates used in valuing the warrant liability include the following:



	December 31, 2019
Stock price volatility	60	%
Stock price (per share)	$7.13
Expected term	0.73 years
Risk-free rate (1)	1.59	%

^{(1) The Black-Scholes model assumes the continuously compounded equivalent (CCE) interest rate of}^1.59%^{based on the 1-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 liability, respectively, whereas a decrease/increase in risk-free interest rates increases/decreases the valuation of the liability, respectively.

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 (i.e., DT Media), 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 7,159,118 and 8,685,457 remained available for future grants as of December 31, 2019 and March 31, 2019, respectively. The change over the comparative period represents stock option grants, stock option forfeitures/cancellations, and restricted shares/units of common stock of 1,738,750 shares, 397,321 shares, and 184,910 shares, respectively.

Restricted Stock Units

Awards of restricted stock units ("RSUs") may be either grants of time-based restricted units or performance-based restricted units 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. No capital transaction occurs until the units vest, at which time they are converted to restricted or unrestricted stock. Compensation expense for RSUs with a time condition is recognized on a straight-line basis over the requisite service period. Compensation expense for RSUs with a performance condition are recognized on a straight-line basis based on the most likely attainment scenario, which is re-evaluated each period.

In June 2018, the Company issued 232,558 RSUs to its 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.

In May 2019, the Company issued 109,416 RSUs to its 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 $413.

With respect to RSUs, the Company expensed $68 and $152 during the three and nine months ended December 31, 2019, respectively, and $50 and $90 during the three and nine months ended December 31, 2018, 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.

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, 2019	9,128,885		$	1.80	7.31	$	16,347
Granted	1,738,750		4.34
Forfeited / Cancelled	(397,321	)	1.78
Exercised	(2,169,876	)	1.72
Options Outstanding, December 31, 2019	8,300,438		2.36		7.15	39,656
Vested and expected to vest (net of estimated forfeitures) at December 31, 2019 (a)	7,413,546		2.29		6.97	35,900
Exercisable, December 31, 2019	5,119,274		$	2.15	6.28	$	25,517

(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 December 31, 2019 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 December 31, 2019. The intrinsic value changes based on changes in the price of the Company's common stock.

Information about options outstanding and exercisable at December 31, 2019 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
$0.51 - 1.00	1,591,790	$	0.73	6.84	828,032	$	0.73
$1.01 - 1.50	1,863,050	$	1.29	6.60	1,718,255	$	1.30
$1.51 - 2.00	1,024,212	$	1.67	8.31	492,253	$	1.66
$2.01 - 2.50	560,778	$	2.23	8.30	250,156	$	2.21
$2.51 - 3.00	535,958	$	2.59	4.34	535,958	$	2.59
$3.51 - 4.00	1,812,650	$	3.89	8.15	680,783	$	3.93
$4.01 - 4.50	475,000	$	4.13	4.78	475,000	$	4.13
$4.51 - 5.00	60,000	$	4.65	3.24	60,000	$	4.65
$5.01 and over	377,000	$	6.32	9.03	78,837	$	5.96
	8,300,438	2.36		7.15	5,119,274	2.15

Other information pertaining to stock options for the Stock Plans for the nine months ended December 31, 2019 and 2018, as stated in the table below, is as follows:



	December 31,
	2019		2018
Total fair value of options vested	$	2,028	$	1,202
Total intrinsic value of options exercised (a)	$	10,364	$	192

(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 nine months ended December 31, 2019 and 2018.

During the nine months ended December 31, 2019 and 2018, the Company granted options to purchase 1,738,750 and 1,349,925 shares of its common stock, respectively, to employees with weighted-average grant-date fair values of $4.34 and $1.64, respectively.

At December 31, 2019 and 2018, there was $3,547 and $2,194 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 2.16 and 2.01 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 nine months ended December 31, 2019 are presented below.



		December 31, 2019
Risk-free interest rate		1.67% to 2.25%
Expected life of the options		5.35 to 9.83 years
Expected volatility		65% to 66%
Expected dividend yield		—%
Expected forfeitures		27% to 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 and nine months ended December 31, 2019, which includes both stock options and restricted stock, was $917 and $2,514, respectively. Total stock compensation expense for the Company’s Stock Plans for the three and nine months ended December 31, 2018, which includes both stock options and restricted stock, was $631 and $1,781, 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 authorized, $0.0001 par value per share (“Series A”), and 100,000 shares of Series A 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 nine months ended December 31, 2019, the Company issued 2,169,876 shares of common stock for the exercise of employee options.

The following table provides activity for warrants issued and outstanding during the nine months ended December 31, 2019:



	Number of Warrants Outstanding		Weighted-Average Exercise Price
Outstanding as of March 31, 2019	3,639,100		$	1.37
Exercised	(2,524,500	)	1.36
Outstanding as of December 31, 2019	1,114,600		$	1.38

Restricted Stock Awards

From time to time, the Company enters into restricted stock award (“RSAs”) agreements 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, except for Company Board members and the Chief Executive Officer, who are subject to the Company's Board Member Equity Ownership Policy, which supersedes any post-vesting lock-up in RSAs that are applicable to such persons.

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 and time condition is recognized on a straight-line basis over the requisite service period.

In July 2019, the Company issued 75,494 restricted shares to its Board of Directors for their next annual service period. The shares vest quarterly over one year. The fair value of the shares on the date of issuance was $421.

With respect to time condition RSAs, the Company expensed $105 and $318 during the three and nine months ended December 31, 2019, respectively, and $123 and $365 during the three and nine months ended December 31, 2018, respectively.

The following is a summary of restricted stock awards and activities for all vesting conditions for the nine months ended December 31, 2019:



	Number of Shares		Weighted-Average Grant Date Fair Value
Unvested restricted stock outstanding as of March 31, 2019	153,328		$	1.39
Granted	75,494		5.58
Vested	(172,202	)	1.85
Unvested restricted stock outstanding as of December 31, 2019	56,620		$	5.58

All restricted shares, vested and unvested, cancelable and not cancelled, have been included in the outstanding shares as of December 31, 2019.

At December 31, 2019, there was $246 of unrecognized stock-base