ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
The principal offices of Digital Turbine, Inc. are located at 1300 Guadalupe Street, Suite 302, Austin, Texas 78701. Digital Turbine also leased property in Los Angeles, California, which were closed on May 31, 2015 as part of the Company’s headquarter relocation move to Austin, Texas. Digital Turbine also leases property in Durham, North Carolina through its wholly-owned subsidiary, DT Media, and internationally in Australia, Israel, and Germany through its wholly-owned subsidiaries, Digital Turbine Group Pty Ltd, DT EMEA Ltd, and Digital Turbine Germany GmbH.
ITEM 3.
LEGAL PROCEEDINGS
The information required by this Item 3 is incorporated herein by reference to the information set forth under the caption “Legal Matters” in Note 18 of the Notes to the Consolidated Financial Statements.
ITEM 4.
MINE SAFETY DISCLOSURE
Not applicable.
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
As of June 8, 2016, the closing price of our common stock was $1.08. Our common stock is traded on the NASDAQ Capital Market under the symbol “APPS.” The following table sets forth the range of high and low closing sales prices reported on the NASDAQ Capital Market for our common stock for the following periods:
Holders
As of May 30, 2016, there were 2,559 holders of record of our common stock. There were also an undetermined number of holders who hold their stock in nominee or “street” name.
Dividends
We have not declared cash dividends on our common stock since our inception and we do not anticipate paying any cash dividends in the foreseeable future.
Adoption of Amended and Restated 2011 Equity Incentive Plan of Digital Turbine, Inc.
On May 26, 2011, our board of directors adopted the 2011 Equity Incentive Plan of Digital Turbine, Inc. and on April 27, 2012, our board of directors amended and restated the plan and the related plan documents and directed that they be submitted to our stockholders for their consideration and approval. On May 23, 2012, our stockholders approved and adopted by written consent the Amended and Restated 2011 Equity Incentive Plan of Digital Turbine, Inc. (the “2011 Plan”), the Digital Turbine, Inc. Amended and Restated 2011 Equity Incentive Plan Notice of Grant and Restricted Stock Agreement and the Digital Turbine, Inc. Amended and Restated 2011 Equity Incentive Plan Notice of Grant and Stock Option Agreement (collectively, the “Related Documents”).
The 2011 Plan provides for grants of stock options, stock appreciation rights (“SARs”), restricted stock and restricted stock units (sometimes referred to individually or collectively as “Awards”) to our and our subsidiaries’ officers, employees, non-employee directors and consultants. 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”). On September 10, 2012, the Company increased the 2011 Plan shares available for issuance from 4,000,000 to 20,000,000, of which 11,886,707 remain available for issuance as of March 31, 2016.
Equity Compensation Plan Information
The following table sets forth information concerning our 2007 Employee, Director and Consultant Stock Plan, our Amended and Restated 2011 Equity Incentive Plan, our Appia, Inc. 2008 Stock Incentive Plan and individual compensation arrangements with employees or consultants of the Company as of March 31, 2016.
Recent Sale of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchaser
There were no purchases of equity securities by us during the year ended March 31, 2016.
Performance Graph
This performance graph shall not be deemed ‘‘soliciting material’’ or to be ‘‘filed’’ with the SEC for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities under Section 18, and shall not be deemed to be incorporated by reference into any filing of ours under the Securities Act of 1933, as amended.
The graph set forth below compares the cumulative total stockholder return on an initial investment of $100 in our common stock between March 31, 2011 and March 31, 2016, with the comparative cumulative total return of such amount on (i) the NASDAQ Composite Index (IXIC), and (ii) the Russell 2000 Index (RUT) over the same period. We have not paid any cash dividends and, therefore, the cumulative total return calculation for us is based solely upon stock price appreciation (depreciation) and not upon reinvestment of cash dividends. The comparisons shown in the graph below are based upon historical data. We caution that the stock price performance shown in the graph below is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock.
COMPARISON OF CUMULATIVE TOTAL RETURN
ITEM 6.
SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operation," and our consolidated financial statements and the related notes included in Part II, Item 8, "Financial Statements and Supplementary Data," of this Annual Report on Form 10-K.
The consolidated statements of operations data for each of the three years ended March 31, 2016, 2015, and 2014 and the consolidated balance sheet data as of March 31, 2016 and 2015 are derived from and qualified by reference to our audited consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data," of this Annual Report on Form 10-K. The consolidated statements of operations data for the two years ended March 31, 2013 and 2012 and the consolidated balance sheet data as of March 31, 2014, 2013, and 2012 are derived from our audited financial statements not included elsewhere in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of our results in any future period.
It is important to note that the table below excludes the operations of Twistbox in all periods presented as the Company disposed of the Twistbox subsidiary on February 13, 2014, and as such, it is no longer reflected as part of our continuing operations in this Report. Other notable business acquisitions made by the Company over the periods presented in the table below include the acquisition which closed on April 12, 2013, where through its indirect, wholly-owned subsidiary organized under the laws of Australia, Digital Turbine Group Pty Ltd (“DT APAC”), acquired Mirror Image International Holdings Pty Ltd (“MIAH”), and the acquisition which closed on March 6, 2015, where the Company completed the acquisition of Appia, Inc. Appia was acquired into the Company’s wholly-owned subsidiary DTM Merger Sub, Inc., which was renamed to Digital Turbine Media, Inc. and referred to in this Form 10-K and the consolidated financial statements as DT Media. For further information see Part I, Item 1, "Business" under the heading "History of Digital Turbine, Inc." of this Annual Report on Form 10-K.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is qualified in its entirety by, the Financial Statements and the Notes thereto included in this Report. This discussion contains certain forward-looking statements that involve substantial risks and uncertainties. When used in this Annual Report on Form 10-K, the words “anticipate,” “believe,” “estimate,” “expect,” “would,” “could,” “may,” and similar expressions, as they relate to our management or us, are intended to identify such forward-looking statements. Our actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements as a result of a variety of factors including those set forth under “Risk Factors” set forth under Item IA and elsewhere in this filing. Historical operating results are not necessarily indicative of the trends in operating results for any future period.
All numbers are in thousands, except share and per share amounts.
Company Overview
Digital Turbine, through its subsidiaries, innovates at the convergence of media and mobile communications, delivering end-to-end products and solutions for mobile operators, application advertisers, device OEMs and other third parties to enable them to effectively monetize mobile content and generate higher value user acquisition. The Company operates its business by providing services in the Advertising and Content space.
The Company has grown through several recent acquisitions, which are relevant to understanding the Company’s current business. The Company acquired Xyologic and Appia, Inc. in fiscal 2015. The Xyologic acquisition was key to developing Discover, which is a product that provides application install recommendations. DT Media (formerly Appia, Inc.) provides the Company with a mobile user acquisition network, which allows mobile advertisers to engage with the right customers for their applications.
The Company operates its business in two reportable segments - Advertising and Content.
The Company's Advertising business is comprised of two businesses:
•
O&O, an advertiser solution for unique and exclusive carrier and OEM inventory which is comprised of services including:
◦
Ignite, a mobile device management platform with targeted application distribution capabilities,
◦
Discover, an intelligent application discovery platform,
•
A&P, a leading worldwide mobile user acquisition network which is comprised of services including:
◦
Syndicated network
◦
RTB or programmatic advertising
The Company's Content business is comprised of services including:
•
Marketplace, an application and content store, and
•
Pay, a content management and mobile payment solution.
With global headquarters in Austin, Texas and offices in Durham, North Carolina, Berlin, San Francisco Singapore, Sydney and Tel Aviv, Digital Turbine’s solutions are available worldwide.
Advertising
O&O Business
The Company's O&O business is an advertiser solution for unique and exclusive carrier and OEM inventory which is comprised of services including Ignite and Discover.
Ignite is a mobile application management software that enables mobile operators and OEMs to control, manage, and monetize applications installed at the time of activation and over the life of a mobile device. Ignite allows mobile operators to personalize the app activation experience for customers and monetize their home screens via Cost-Per-Install or CPI arrangements, Cost-Per-Placement or CPP arrangements, and/or Cost-Per-Action or CPA arrangements with third party advertisers. There are several different delivery methods available to operators and OEMs on first boot of the device: Wizard, Silent, SDK, or Direct through Discover. Optional notification features are available throughout the lifecycle of the device, providing operators additional opportunity for advertising revenue streams. The Company has launched Ignite with mobile operators and OEMs in North America, Latin America, Europe, Asia Pacific, India and Israel.
Discover enables end user application and content discovery, both organic and sponsored, through a variety of user interfaces. The recommendation engine powering Discover and other Digital Turbine products is AppSource, which provides intelligent recommendations to the device end user. Monetization occurs through the display of and/or recommendation of applications via the CPI commercial model. Discover has been deployed with mobile operators in North America and Asia Pacific.
A&P Business
The Company's A&P business, formerly Appia Core, is a leading worldwide mobile user acquisition network. Its mobile user acquisition platform is a demand side platform, or DSP. This platform allows mobile advertisers to engage with the right customers for their applications at the right time to gain them as customers. The A&P business, through its syndicated network service, accesses mobile ad inventory through publishers including direct developer relationships, mobile websites, mobile carriers and mediated relationships. The A&P business also accesses mobile ad inventory by purchasing inventory through exchanges using RTB. The advertising revenue generated by A&P platform is shared with publishers according to contractual rates in the case of direct or mediated relationships. When inventory is accessed using RTB, A&P buys inventory at a rate determined by the marketplace. Since inception, A&P has delivered over 150 million application installs for hundreds of advertisers.
Content
Pay is an API that integrates billing infrastructure between mobile operators and content publishers to facilitate mobile commerce. Increasingly, mobile content publishers want to go directly to consumers to sell their content rather than sell through traditional distributors such as Google Play or the Apple Application Store, which are not as prominent in select countries. Pay allows publishers and carriers to monetize those applications by allowing the content to be billed directly to the consumer via carrier billing. Pay has been launched in Australia, Philippines, India, and Singapore.
Marketplace is a white-label solution for mobile operators and OEMs to offer their own branded content store. Marketplace can be sold as an application storefront that manages the retailing of mobile content including features such as merchandising, product placements, reporting, pricing, promotions, and distribution of digital goods. Marketplace also includes
the distribution and licensing of content across multiple content categories including music, applications, wallpapers, videos, and games. Marketplace is deployed with many operators across multiple countries including Australia, Philippines, Singapore, and Indonesia.
All discussions in this Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations relate to continuing operations.
RESULTS OF OPERATIONS
Below are our revenues, cost of revenues, and expenses for fiscal 2016, 2015, and 2014. This information should be read in conjunction with our Consolidated Financial Statements and notes thereto. All financial results of operations during the year ended March 31, 2015 do not include Appia, Inc. financial results, other than the 26 days in March 2015 after the Company acquired Appia, Inc., as the acquisition did not close until March 6, 2015.
Comparison of the Years Ended March 31, 2016, 2015, and 2014
Revenues
Fiscal 2016 Compared to Fiscal 2015
During the year ended March 31, 2016 there was an approximately $58,289 or 206% increase in overall revenue, as compared to the year ended March 31, 2015. During fiscal 2016, as compared to fiscal 2015, the Company experienced growth in both the Content and Advertising businesses, with the Advertising growth stemming from both organic growth in Ignite and inorganic growth with a full year of A&P revenue as opposed to only 26 days of A&P revenue in fiscal 2015. Organic growth in Advertising was driven primarily by CPI and CPP revenue from new Advertising partners across two major US carrier distribution partners, and amounts earned from carrier partners related to software customization and integration. The increase in the Content business was driven primarily from growth in Pay, with overall increased demand for the product, the service being launched with new customers in Australia, as well as new Content services provided in new markets in Southeast Asia.
Overall revenue growth year-over-year was offset by a moderate decline in Marketplace as our contract in Israel was terminated during the quarterly period ended June 30, 2015. Additionally, the growth was further offset by continued decline in the foreign exchange rate of the Australian dollar to the United States dollar.
Fiscal 2015 Compared to Fiscal 2014
During the year ended March 31, 2015, there was an approximately $3,848 or 15.8% increase in overall revenue, as compared to the year ended March 31, 2014. During fiscal 2015, as compared to fiscal 2014, the Company experienced growth in the Advertising business and a moderate decline in the Content business, with the Advertising growth stemming from both organic growth in Ignite and inorganic growth with 26 days of A&P revenue in fiscal 2015. Organic growth in Advertising was driven primarily by CPI and CPP revenue from new advertising partners across commercial deployments of Ignite with new carrier partners, amounts earned from the Company’s carrier partners relating to sharing of costs of software customization and integration prior to device launch.
Overall revenue growth year-over-year was offset by a moderate decline in the Content business year-over-year driven primarily by a decrease in Marketplace in the first half of the fiscal year as our contract in Israel was terminated during the quarterly period ended June 30, 2015. The decline in Marketplace was partially mitigated by increased billing revenue as a result of new Pay customers.
Gross Margins
During fiscal 2016 the company changed its methodology for how hosting expense included in cost of revenues are allocated to the Company's Advertising and Content operating segments as the new method of allocation is deemed by management to be a more accurate representation for how the expenses relate to the operations of the Advertising and Content segments. Hosting expenses included in costs of sales in fiscal 2015 and 2014 were previously allocated between the Advertising and Content segments based on geographic location as the specific locations generally related only to either the Advertising or Content segment. Hosting expense included in cost of revenues in fiscal 2016 are now being allocated based on the percentage of revenue between Advertising and Content for the Company as a whole. Prior period fiscal 2015 and 2014 figures presented have been updated to reflect these changes and are comparable to the fiscal 2016 figures presented.
Fiscal 2016 Compared to Fiscal 2015
Total gross margin, inclusive of the impact of other direct cost of revenues (amortization of intangibles) was approximately $9,819 or 11.3% for the year ended March 31, 2016, versus approximately $6,132 or 21.7% for the year ended March 31, 2015. The increase in gross margin dollars from $6,132 to $9,819 is primarily attributable to the inclusion of a full year of A&P operations during fiscal 2016 as opposed to only 26 days of A&P operations in fiscal 2015, offset by increased amortization expense associated with the Appia, Inc. acquisition. Overall gross margin percentage has declined with the mix shift within Content from Marketplace to Pay coupled with the acquired Appia, Inc. A&P business which carries a significantly lower gross margin as compared to the O&O business within Advertising.
Total gross margin dollars, inclusive of the impact of other direct cost of revenues (amortization of intangibles), increased $3,687 or 60.1%, from $6,132 to $9,819 during the year ended March 31, 2015 and 2016, respectively. This increase includes the impact of an approximate $2,400 accelerated amortization expense related to customer relationship intangible assets associated with customer terminations related to our DT EMEA Content business. Excluding the effects of the approximately $2,400 amortization, total gross margin dollars would have been $12,219 or 14.1% during the year ended March 31, 2016, which is an increase of approximately $6,087 or 99.3% from the year ended March 31, 2015. This increase is due primarily to gross margin dollars attributable to the inclusion of a full year of A&P operations during fiscal 2016 as opposed to only 26 days of A&P operations in fiscal 2015.
Content gross margin, inclusive of the impact of other direct cost of revenues (amortization of intangibles), was approximately $1,231 or 4.3% for the year ended March 31, 2016, versus approximately $4,272 or 19.4% for the year ended March 31, 2015. Excluding the effects of the $2,400 amortization expense, Content gross margin dollars and percentage would have been $3,631 or 12.6% during the year ended March 31, 2016, which is a decrease in gross margin dollars of approximately $641 or 15.0% from the year ended March 31, 2015. This decrease in Content gross margin dollars and percentage was due primarily to a mix shift from Marketplace to Pay, which carries a lower gross margin. For more details on the Company's services included in the Content segment, see PART II Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations relate to continuing operations, section titled "Revenue by Service Category".
Advertising gross margin, inclusive of the impact of other direct cost of revenues (amortization of intangibles), was approximately $8,588 or 14.9% for the year ended March 31, 2016, versus approximately $1,860 or 29.8% for the year ended March 31, 2015. The increase in advertising gross margin dollars was primarily attributable to the inclusion of a full year of A&P operations during fiscal 2016 as opposed to only 26 days of A&P operations in fiscal 2015. This increase in gross margin dollars was offset by the increase in amortization expense associated with the Appia Inc. acquisition. Appia Inc. acquisition-related amortization expense for the year ended March 31, 2016 and March 31, 2015 was approximately $6,995 and $495, respectively, an increase of approximately $6,500 or 1,313.1%. Overall Advertising gross margin percentage has declined as the acquired Appia, Inc. A&P business carries a significantly lower gross margin as compared to the O&O business within Advertising. For more details on the Company's services included in the Advertising segment, see PART II Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations relate to continuing operations, section titled "Revenue by Service Category".
Fiscal 2015 Compared to Fiscal 2014
Total gross margin, inclusive of the impact of other direct cost of revenues (amortization of intangibles) was approximately $6,132 or 21.7% for the year ended March 31, 2015, versus approximately $7,846 or 32.2% for the year ended March 31, 2014. The decrease in gross margin year-over-year is primarily attributable to the Content business being adversely impacted by a mix shift from Marketplace to Pay, which carries a lower gross margin, offset by an increase in Advertising gross margin dollars attributable to the inclusion of 26 days of A&P operations during fiscal 2015. Total gross margin was further decreased year-over-year by increased amortization expense associated with the Appia acquisition during fiscal 2015. For more details on the Company's services included in the Advertising and Content segments, see Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations relate to continuing operations, section titled "Revenue by Service Category".
Operating Expenses
Product development expenses include , the development and maintenance of the Company's product suite, including A&P and O&O, as well as the costs to support Pay and Marketplace through the optimization of content for consumption on a mobile phone. Expenses in this area are primarily a function of personnel.
Sales and marketing expenses represent the costs of sales and marketing personnel, advertising and marketing campaigns, and campaign management. Sales and marketing expenses have increased with bringing products to market and with the inclusion of the Appia Inc. acquired A&P business. The increase in sales and marketing expenses is also attributable to increased commissions associated with the sales team generating more revenue through new and existing advertising relationships.
General and administrative expenses represent management, finance, and support personnel costs in both the parent and subsidiary companies, which include professional and consulting costs, in addition to other costs such as rent, stock-based compensation, and depreciation expense.
Fiscal 2016 Compared to Fiscal 2015
Total operating expenses for the year ended March 31, 2016 and March 31, 2015 were approximately $35,755 and $29,869, respectively, an increase of approximately $5,886 or 19.7%. The increase in operating expenses year-over-year was primarily attributable to the inclusion of a full year of A&P operations during fiscal 2016 as opposed to only 26 days of A&P operations in fiscal 2015. The additional A&P operating expenses are related to product and marketing headcount directly related to the Advertising business.
Product development expenses for the year ended March 31, 2016 and March 31, 2015 were approximately $10,983 and $7,905, respectively, an increase of approximately $3,078 or 38.9%. The increase in product development expenses year-over-year was primarily attributable to the Company's investment in offices in Israel, Germany and Singapore contributed to the increase in product development expenses through additional headcount being added in those regions.
Sales and marketing expenses for the year ended March 31, 2016 and March 31, 2015 were approximately $6,067 and $2,933, respectively, an increase of approximately $3,134 or 106.9%. The increase in sales and marketing expenses year-over-year was primarily attributable to the inclusion of a full year of A&P operations during fiscal 2016 as opposed to only 26 days of A&P operations in fiscal 2015, due in part by increased commissions associated with the sales team generating more revenue through new and existing advertising relationships.
General and administrative expenses for the year ended March 31, 2016 and March 31, 2015 were approximately $18,705 and $19,031, respectively, a decrease of approximately $326 or 1.7%. The decrease in general and administrative expenses year-over-year includes a decrease in total stock compensation expense of $378 from $6,340 to $5,962, for the years ended March 31, 2015 and 2016, respectively.
Fiscal 2015 Compared to Fiscal 2014
Total operating expenses for the year ended March 31, 2015 and March 31, 2014 were approximately $29,869 and $23,370, respectively, an increase of approximately $6,499 or 27.8%. The increase in operating expenses year-over-year was primarily attributable to the inclusion of 26 days of A&P operations in fiscal 2015, investment in new offices in Germany and Singapore, transaction costs related to the acquisitions of XYO and Appia, Inc., as well as an increase in stock-based compensation.
Product development expenses for the year ended March 31, 2015 and March 31, 2014 were approximately $7,905 and $7,869, respectively, an increase of approximately $36 or 0.5%. The increase in product development expenses year-over-year was primarily attributable to the inclusion of 26 days of A&P operations in fiscal 2015.
Sales and marketing expenses for the year ended March 31, 2015 and March 31, 2014 were approximately $2,933 and $1,915, respectively, an increase of approximately $1,018 or 53.2%. The increase in sales and marketing expenses year-over-year was primarily attributable to the inclusion of 26 days of A&P operations, due in part by increased commissions associated with the sales team generating more revenue through new and existing advertising relationships.
General and administrative expenses for the year ended March 31, 2015 and March 31, 2014 were approximately $19,031 and $13,586, respectively, an increase of approximately $5,445 or 40.1%. The decrease in general and administrative expenses year-over-year was primarily attributable to the inclusion of 26 days of A&P operations in fiscal 2015, investment in new offices in Germany and Singapore, transaction costs related to the acquisitions of XYO and Appia, Inc., as well as an increase in stock-based compensation.
Other Income and Expenses
Fiscal 2016 Compared to Fiscal 2015
Total interest and expense, net, for the year ended March 31, 2016 and March 31, 2015 were approximately $1,882 and $163, respectively, an increase in net expenses of approximately $1,719 or 1,054.6%. Interest and other expense, net, includes net interest expense, foreign exchange transaction gain/(loss), loss on settlement of debt, gain/(loss) on disposal of fixed assets, and other ancillary costs incurred by the Company. This increase in total interest and other expense, net, was primarily attributable to a full year of interest expense incurred during fiscal 2016 related to the new debt brought on in connection with the acquisition of Appia, Inc. during March 2015, compared to the inclusion of only 26 days of interest expense during fiscal 2015.
Fiscal 2015 Compared to Fiscal 2014
Total interest and other expense, net, for the year ended March 31, 2015 and March 31, 2014 were approximately $163 and $1,950, respectively, a decrease in net expenses of approximately $1,787 or 91.6%. Interest and other expense, net, includes net interest expense, foreign exchange transaction gain, change in the fair value of warrant derivative liabilities loss, loss on extinguishment of debt, gain/(loss) on settlement of debt, and gain on change in valuation of long-term contingent liability. This decrease in total interest and other expense, net, was primarily attributable to significantly higher expenses in fiscal 2014 due to loan modification costs and interest expense incurred through September 2013 when the outstanding debt balance was paid off, as compared to fiscal 2015, which included only 26 days of interest expense related to the new debt brought on in connection with the acquisition of Appia, Inc.
Revenue by Service Categories
The following table summarizes our net revenues by service categories for each of the past three fiscal years. The amount or percentage of total revenue contributed by class of services has been presented for those classes accounting for 10% or more of total net revenue in any of the three latest years, with all other amounts individually representing less than 10% of total net revenue included in the Other category.
As a result of the strategic acquisitions of the entities now known as DT EMEA (formally the combination of the three operating subsidiaries of Logia Group Ltd, including Logia Content, Volas, and Mail Bit), DT APAC (formally MIAH), and DT Media (formally Appia, Inc.), the company has identified revenue streams that best represent its services.
Fiscal 2016 Compared to Fiscal 2015
Advertising
The Company's A&P business, formerly Appia Core, is a leading worldwide mobile user acquisition network. Its mobile user acquisition platform is a demand side platform, or DSP. This platform allows mobile advertisers to engage with the right customers for their applications at the right time to gain them as customers. The A&P business, through its syndicated network service, accesses mobile ad inventory through publishers including direct developer relationships, mobile websites, mobile carriers and mediated relationships. The advertising revenue generated by A&P platform is shared with publishers according to contractual rates in the case of direct or mediated relationships. During fiscal 2016, the main revenue driver for the A&P business was the syndicated network service. During the year ended March 31, 2016 there was an approximately $32,544 or 1,067.4% increase in syndicated network net revenues, as compared to the year ended March 31, 2015. During fiscal 2016, as compared to fiscal 2015, the Company experienced growth stemming primarily from inorganic growth with a full year of A&P revenue during fiscal 2016 compared to only 26 days of A&P revenue in fiscal 2015.
The Company's O&O business is an advertiser solution for unique and exclusive carrier and OEM inventory. During fiscal 2016, the main revenue drive for the O&O business was the Ignite service. Ignite is a mobile application management software that enables mobile operators and OEMs to control, manage, and monetize applications installed at the time of activation and over the life of a mobile device. During the year ended March 31, 2016 there was an approximately $18,691 or 647.6% increase in Ignite net revenues, as compared to the year ended March 31, 2015. During fiscal 2016, as compared to fiscal 2015, the Company experienced growth stemming from organic growth in Ignite, driven primarily by CPI and CPP revenue from new advertising partners across commercial deployments of Ignite with new carrier partners.
Content
Pay is an API that integrates billing infrastructure between mobile operators and content publishers to facilitate mobile commerce. Increasingly, mobile content publishers want to go directly to consumers to sell their content rather than sell through traditional distributors such as Google Play or the Apple Application Store, which are not as prominent in select countries. Pay allows publishers and carriers to monetize those applications by allowing the content to be billed directly to the consumer via carrier billing. Pay has been launched in Australia, Philippines, India, and Singapore. During the year ended March 31, 2016 there was an approximately $10,003 or 78.6% increase in Pay net revenues, as compared to the year ended March 31, 2015. During fiscal 2016, as compared to fiscal 2015, the Company experienced growth driven primarily by overall increased demand for the service and the service being launched with new customers in Australia.
Marketplace is a white-label solution for mobile operators and OEMs to offer their own branded content store. Marketplace can be sold as an application storefront that manages the retailing of mobile content including features such as merchandising, product placements, reporting, pricing, promotions, and distribution of digital goods. Marketplace also includes the distribution and licensing of content across multiple content categories including music, applications, wallpapers, videos, and games. Marketplace is deployed with many operators across multiple countries including Australia, Philippines, Singapore, and Indonesia. During the year ended March 31, 2016 there was an approximately $3,248 or 35.0% decrease in Marketplace net revenues, as compared to the year ended March 31, 2015. During fiscal 2016, as compared to fiscal 2015, the Company experienced a decrease in Marketplace driven primarily by the contract in Israel which was terminated during the quarterly period ended June 30, 2015, and due to the overall shift in the Content business with overall consumer demand shifting away from acquiring content at carrier specific branded content stores and instead acquiring content from other more popular content stores such as Google Play or the Apple Application Store and other distribution channels such as Facebook. Additionally, the decline in Marketplace net revenues was further increased due to continued decline in the foreign exchange rate of the Australian dollar to the United States dollar. The overall decrease in Marketplace net revenues was offset by a moderate increase in net revenues due to new Content services provided in new markets in Southeast Asia.
Fiscal 2015 Compared to Fiscal 2014
Advertising
During fiscal 2015, the main revenue driver for the A&P business was the syndicated network service. During the year ended March 31, 2015 there was an approximately $3,049 or 100% increase in syndicated network net revenues, as compared to the year ended March 31, 2014. During fiscal 2015, as compared to fiscal 2014, the Company experienced growth stemming completely from inorganic growth with inclusion of 26 days of A&P operations during fiscal 2015 with the acquisition of Appia, Inc. during March 2015.
The Company's O&O business is an advertiser solution for unique and exclusive carrier and OEM inventory. During fiscal 2015, the main revenue drive for the O&O business was the Ignite service. Ignite is a mobile application management software that enables mobile operators and OEMs to control, manage, and monetize applications installed at the time of activation and over the life of a mobile device. During the year ended March 31, 2015 there was an approximately $2,340 or 428.6% increase in Ignite net revenues, as compared to the year ended March 31, 2014. During fiscal 2015, as compared to fiscal 2014, the Company experienced 428.6% growth in Ignite net revenues, driven by the Company's acquisition on October 9, 2014, where the Company acquired certain intellectual property assets (now branded as Ignite) of XYO, through its Luxembourg subsidiary, DT Luxembourg. The Ignite product was not commercially deployed until late fiscal 2015 as compared to being in commercial use for all of fiscal 2016. During fiscal 2015, Ignite net revenues growth was driven primarily by CPI and CPP revenue from new advertising partners across commercial deployments of Ignite with new carrier partners.
Content
Pay is an API that integrates billing infrastructure between mobile operators and content publishers to facilitate mobile commerce. Increasingly, mobile content publishers want to go directly to consumers to sell their content rather than sell through traditional distributors such as Google Play or the Apple Application Store, which are not as prominent in select countries. Pay allows publishers and carriers to monetize those applications by allowing the content to be billed directly to the consumer via carrier billing. Pay has been launched in Australia, Philippines, India, and Singapore. During the year ended March 31, 2015, there was an approximately $2,905 or 29.6% increase in Pay net revenues, as compared to the year ended March 31, 2014. During fiscal 2015, as compared to fiscal 2014, the Company experienced growth driven primarily by overall increased demand for the service.
Marketplace is a white-label solution for mobile operators and OEMs to offer their own branded content store. Marketplace can be sold as an application storefront that manages the retailing of mobile content including features such as merchandising, product placements, reporting, pricing, promotions, and distribution of digital goods. Marketplace also includes the distribution and licensing of content across multiple content categories including music, applications, wallpapers, videos, and games. Marketplace is deployed with many operators across multiple countries including Australia, Philippines, Singapore, and Indonesia. During the year ended March 31, 2015, there was an approximately $4,530 or 32.8% decrease in Marketplace net revenues, as compared to the year ended March 31, 2014. During fiscal 2015, as compared to fiscal 2014, the Company experienced a decrease in Marketplace driven primarily by the contract in Israel which was terminated during the quarterly period ended June 30, 2015, and due to the overall shift in the Content business with overall consumer demand shifting away from acquiring content at carrier specific branded content stores and instead acquiring content from other more popular content stores such as Google Play or the Apple Application Store and other distribution channels such as Facebook. Additionally, the decline in Marketplace net revenues was further increased due to continued decline in the foreign exchange rate of the Australian dollar to the United States dollar. The overall decrease in Marketplace net revenues was offset by a moderate increase in net revenues due to new Content services provided in new markets in Southeast Asia.
Liquidity and Capital Resources
Selected Financial Information
Working Capital
Cash and cash equivalents and restricted cash totaled approximately $11,231 and approximately $7,269 at March 31, 2016 and March 31, 2015, respectively, an increase of approximately $3,962 or 54.5%. Current assets totaled approximately $29,674 and approximately $20,274 at March 31, 2016 and March 31, 2015, respectively, an increase of approximately $9,400 or 46.4%. As of March 31, 2016 and March 31, 2015, the Company had approximately $17,519 and $12,174, respectively, in accounts receivable, an increase of $5,345 or 43.9%. As of March 31, 2016 and March 31, 2015 the Company's working capital deficit was $9,308 and $3,678, respectively, an increase of $5,630 or 153.1%. The increase in working capital deficit was primarily attributable to the subordinated debenture with North Atlantic maturing on March 6, 2017 amounting to $7,560 (net of discounts of $440) now included in short-term debt as of March 31, 2016 as compared to long-term debt as of March 31, 2015, offset by the net proceeds of $12,627 received from the completed public offering on October 2, 2015 and the net cash received from our investment in Sift of $875. Working capital deficit was further increased due to working capital and liquidity management, with a focus on accounts receivable collections and utilizing the full and extended payment terms on our accounts payable. Excluding the classification of the subordinated debenture with North Atlantic in current assets at March 31, 2016, the Company's working capital deficit would have been $1,748 at March 31, 2016, an improvement of $1,930 compared to the working capital deficit of $3,678 at March 31, 2015.
Our primary sources of liquidity have historically been issuances of common and preferred stock and convertible debt. The Company completed a public offering on October 2, 2015, netting cash proceeds to the Company of $12,627. The Company expects to use the net proceeds from the offering for organic business opportunities, product development, general corporate purposes, working capital, and capital expenditures. The Company believes that it has, after the public offering, sufficient cash, cash equivalents, and capital resources to operate its business at least through March 31, 2017. As of March 31, 2016, we had cash and cash equivalents totaling approximately $11,231, which includes the net cash proceeds of $875 received from the Sift Media, Inc. transaction. Additionally, the Company currently has a $5,000 revolving credit facility in place with SVB, which it uses to fund working capital requirements, as needed. As of March 31, 2016, the Company also had $3,000 outstanding on its revolving credit facility with SVB, which is included in current liabilities. As of March 31, 2016, the Company had fully paid off its term loan with Silicon Valley Bank.
On June 11, 2015, DT Media and SVB, entered into a Third Amended and Restated Loan and Security Agreement, pursuant to which SVB agreed to increase the revolving line of credit available under such facility from $3,500 to $5,000, to extend the maturity date under the facility to June 30, 2016, and to make certain other changes to the terms of the existing agreement.
On November 30, 2015, DT Media and SVB, entered into an amendment (the “Amendment”) to the Third Amended and Restated Loan and Security Agreement dated June 11, 2015. Pursuant to the Amendment, the adjusted EBITDA financial covenant was removed and replaced with the requirement to maintain an adjusted quick ratio of not less than 0.90:1.00 unless (a) there are no advances outstanding under the revolving facility, or (b) if the Company’s cash and cash equivalents held at the SVB or SVB’s Affiliates is greater than or equal to $15,000. Furthermore, the Streamline Period, which is not a financial covenant but applies to application of receivables, was amended so that it is achieved if DT Media’s trailing three-month period revenue is not less than 85% of projections for the three months ending August 31, 2015 through November 30, 2015, 75% of projections for the three months ending December 31, 2015 and thereafter, with the projected revenue for such three month period as set forth in DT Media’s operating budget provided to the SVB. The Amendment also added the requirement for the Company to deliver consolidated financial statements in addition to DT Media. The Company was non-Streamline as of March 31, 2016. As of April 30, 2016, given the Company did not meet the requirements set forth in the Amendment, specifically items (a) and (b) noted previously, the Company was required to maintain an adjusted quick ratio of not less than 0.90:1.00. As of April 30, 2016, the Company's quick ratio was estimated at 0.89 versus the 0.90 minimum level.
On June 10, 2016, prior to the required testing of the above-mentioned covenant, SVB and DT Media entered into a Consent Agreement, effective as of May 31, 2016, whereby SVB provided its consent to DT Media (for a de minimis fee) to not exercise any rights or remedies solely in connection with the non-compliance with such covenant for the period ended April 30, 2016, without which consent DT Media would have been in default of the Loan Agreement. Please see "Risk Factors" included in PART I Item 1A. of this Annual Report on Form 10-K within section "General Risk - The Company has secured indebtedness, which could limit its financial flexibility", regarding financial covenant compliance.
Cash Flow Summary
Operating Activities
During the year ended March 31, 2016 and March 31, 2015, the Company's net cash used in operating activities was $7,069 and $14,500, respectively, a decrease of $7,431 or 51.2%. The decrease in net cash used in operating activities was primarily attributable to the net loss during the year ended March 31, 2016 and March 31, 2015 of $28,032 and $24,647, respectively, an increase of $3,385 or 13.7%, offset by other non-cash expenses, most notably depreciation and amortization, which during fiscal 2016 and fiscal 2015 was $10,974 and $2,108, respectively, an increase of $8,866 or 420.6%.
During the year ended March 31, 2016, net cash used in operating activities was $7,069, resulting from a net loss of $28,032, offset by net non-cash expenses of $17,467, which included depreciation and amortization, stock-based compensation, stock-based compensation related to vesting of restricted stock for services, stock issued for settlement of liability, amortization of debt discount, a reduction in the allowance for doubtful accounts, and an increase in accrued interest of approximately $10,974, $5,095, $867, $283, $470, $234, and $12 respectively. Depreciation and amortization expense increased $8,866 during fiscal 2016 compared to fiscal 2015, due primarily to increased Appia, Inc. acquisition-related amortization expense of $6,500 or 1,313.1%, which for the years ended ended March 31, 2016 and March 31, 2015 was approximately $6,995 and $495, respectively, and due to accelerated amortization expense of approximately $2,400 related to customer relationship intangible assets associated with customer terminations related to our DT EMEA Content business. Net cash used in operating activities during fiscal 2016 was positively impacted by the change in net working capital accounts as of March 31, 2016 compared to March 31, 2015, with an increase over the comparative periods in accounts payable and accrued license fees and revenue share of approximately $7,308 and $2,789, offset by an increase in accounts receivable of approximately $5,111. The increase in accounts payable and accrued license fees and revenue share was driven by working capital and liquidity management, with a focus on accounts receivable collections and utilizing the full and extended payment terms on our accounts payable. Accounts receivable increased primarily due to the inclusion of the acquired Appia, Inc. business for all of fiscal 2016 compared to only 26 days of operations in fiscal 2015. Net cash used in operating activities is further comprised of an increase in deposits and deferred financing costs of approximately $104 and $128, respectively, offset by a decrease in restricted cash transferred to operating cash, prepaid expenses and other current assets, accrued compensation, and other liabilities and other items of $200, $57, $831, and $266, respectively.
During the year ended March 31, 2015, net cash used in operating activities was $14,500, resulting from a net loss of $24,647, offset by net non-cash expenses of $9,257, which included depreciation and amortization, stock-based compensation, stock-based compensation related to vesting of restricted stock for services, amortization of debt discount, an increase in the allowance for doubtful accounts, and an increase in accrued interest of approximately $2,108, $5,850, $490, $34, $698, and $77, respectively. Net cash used in operating activities during fiscal 2015 was negatively impacted by the
change in net working capital accounts as of March 31, 2015 compared to March 31, 2014, with an increase in accounts receivable, deposits, and prepaid expenses and other current assets of approximately $406, $63, $142, a decrease in accounts payable and other liabilities and other items of $379 and $4,589, offset by an increase in accrued license fees and revenue share of approximately $2,988. The increase in accrued license fees and revenue share was driven by working capital and liquidity management, with a focus on accounts receivable collections and utilizing the full and extended payment terms on our accounts payable. Net cash used in operating activities is further comprised of a decrease in deferred tax assets of $3,156 and an increase in accrued compensation of $325.
During the year ended March 31, 2014, net cash used in operating activities was $7,807, resulting from a net loss of $18,704, offset by net non-cash expenses of $10,151, which included depreciation and amortization, loss on disposal of discontinued operations (net of taxes), stock-based compensation, stock-based compensation related to vesting of restricted stock for services, finance costs, increase in fair value of derivative liabilities, fair value of financing costs related to conversion options, warrants issued for services, impairment of goodwill and intangibles, amortization of debt discount, an increase in accrued interest, settlement of debt with a supplier, stock issued as settlement of debt with a supplier, and revaluation of contingent liability of approximately $1,856, $820, $1,938, $2,755, $1,173, $811, $470, $406, $154, $187, $109, $51, $24, and $603, respectively. Net cash used in operating activities during fiscal 2014 was positively impacted by the change in net working capital accounts as of March 31, 2015 and March 31, 2014, with an increase over the comparative periods in accrued license fees and revenue share, accrued compensation, and other liabilities and other items of approximately $737, $650 and $3,229, offset by an increase in accounts receivable and prepaid expenses and other current assets of approximately $734 and $2,566, respectively. The increase in accounts payable, accrued license fees and revenue share was driven by working capital and liquidity management, with a focus on accounts receivable collections and utilizing the full and extended payment terms on our accounts payable. Net cash used in operating activities is further comprised of a decrease in deposits and accounts payables of $523 and $893, respectively.
Investing Activities
During the year ended March 31, 2016, cash used in investing activities was approximately $674, which includes capital expenditures of $1,549 comprised mostly of internally-developed software, offset by net cash received from the investment in Sift of $875.
During the year ended March 31, 2015, cash used in investing activities was approximately $878, which includes cash used in the acquisition of the XYO assets of $2,125, capital expenditures net of disposals of $67, cash paid for settlement of contingent liability of $49, offset by cash acquired with the acquisition of Appia, Inc. of $1,363.
During the year ended March 31, 2014, cash used in investing activities was approximately $981, which includes cash used and acquired in the acquisition of MIA of $1,287 and $513, respectively, and capital expenditures, net of disposals, of $207.
Financing Activities
During the year ended March 31, 2016, cash used in financing activities was approximately $12,078, which is primarily attributable to stock issued for cash (net) in stock offering of $12,627 and proceeds received from the exercise of stock options of approximately $51, offset by repayment of principal on the credit facility and loss on exchange rate changes on cash and cash equivalents of approximately $600 and $173, respectively.
During the year ended March 31, 2015, cash provided in financing activities was approximately $511, which is primarily attributable to stock issued for options exercised and warrants exercised of $136 and $375, respectively.
During the year ended March 31, 2014, net cash provided in financing activities was approximately $29,640, which is primarily attributable to stock issued for cash (net) in stock offering of $33,297, and repayment of debt obligations of $3,657.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not have any undisclosed
borrowings or debt, and we have not entered into any synthetic leases. We believe, therefore, that we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Contractual Cash Obligations
The following table summarizes our contractual cash obligations at March 31, 2016:
(a)
We have approximately $815 in additional liabilities associated with uncertain tax positions that are not expected to be liquidated in fiscal 2017. We are unable to reliably estimate the expected payment dates for these additional non-current liabilities.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to contingencies, litigation and goodwill and intangibles acquired relating to our acquisitions. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.
Basis of Presentation
The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for annual financial statements. The financial statements, in the opinion of management, include all adjustments necessary for a fair statement of the results of operations, financial position and cash flows for each period presented.
Estimates and Assumptions
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
Advertising
Advertising revenues are generated via direct Cost-Per-Install (CPI), Cost-Per-Placement (CPP), or Cost-Per-Action (CPA) arrangements with application developers, or indirect CPI, CPP or CPA arrangements through advertising aggregators (ad networks). Transactions are processed by the Company’s software services: mobile application management through Ignite, and user experience and discovery through Discover.
The Company recognizes as revenue the amount billed to the application developer or advertising aggregator. Revenue share payments to the carrier are recorded as a cost of revenues. The Company has evaluated its agreements with the developers and aggregators and the carriers in accordance with the guidance at FASB ASC 605-45 Revenue Recognition - Principal Agent Considerations and has concluded that it is the principal under these agreements. Key indicators that it evaluated to reach this determination include:
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The Company has the contractual relationship with the application developers or advertising aggregators (collectively, the advertisers), and we have the performance obligation to these parties;
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Through our Ignite and Discover software, we provide application installation and management as well as detailed reporting to advertisers and carriers. We are responsible for billing the advertisers, and for reporting revenues and revenue share to the carriers;
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As part of the application management process, we use our data, and post-install event data provided back to us by the advertisers, to match applications to end users. We currently target end users based on carrier, geography, demographics (including by handset type), among other attributes, by leveraging carrier data. We have discretion as to which applications are delivered to each end user;
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Pricing is established in our agreements with advertisers. We negotiate pricing with the advertisers, based on prevailing rates typical in the industry; and
•
The Company is responsible for billing and collecting the gross amount from the advertiser. Our carrier agreements do not include any specific provisions that allow us to mitigate our credit risk by reducing the revenue share payable to the carrier.
In certain instances the carrier may enter directly into a CPI, CPP or CPA arrangement with a developer, where the installation will be made using the Company’s Ignite and Discover software services. In these instances, the Company receives a share of the carrier’s revenue, which is recognized on a net basis.
In addition to revenues from application developers and advertising aggregators, the Company may receive fees from the carriers relating to the initial set-up of the arrangements with the carriers. Set-up activities typically include customization, testing and implementation of the Ignite software for specific handsets. When the Company determines that the set-up fees do not have standalone value, such fees are deferred and recognized over the estimated period the carrier benefits from the set-up fee, which is generally the estimated life of the related handsets.
The Company has determined that certain set-up activities are within the scope of FASB ASC 985-605 Software Revenue Recognition and, accordingly, the Company applies the provisions of ASC 985-605 to the software components. As a result, the Company typically defers recognition of the set-up fee until all elements of the arrangement have been delivered. In those instances where the set-up fee covers ongoing support and maintenance, the fee is deferred and amortized over the term of the carrier agreement.
Content and Billing
The Company’s Content and Billing revenues are derived primarily from transactions with the carriers’ customers (end users). The carriers bill the end users upon the sale of content, including music, images or games, and the Company shares the end user revenues with the carrier. The end user transactions are processed by the Company’s software services: white labeled mobile storefront and content management solutions through Marketplace, and mobile payments with direct operator billing through Pay.
The Company utilizes its reporting system to capture and recognize revenue due from carriers, based on monthly transactional reporting and other fees earned upon delivery of content to the end user. Determination of the appropriate amount of revenue recognized is based on the Company’s reporting system, but it is possible that actual results may differ from the Company’s estimates once the reports are reconciled with the carrier. When the Company receives the final carrier reports, to the extent not received within a reasonable time frame following the end of each month, the Company records any differences between estimated revenues and actual revenues in the reporting period when the Company determines the actual amounts. The Company has not experienced material adjustments to its estimates when the final amounts were reported by carriers. If the Company deems a carrier not to be credit worthy, the Company defers all revenues from the arrangement until the Company receives payment and all other revenue recognition criteria have been met.
The Company recognizes as revenues the amount billed to the carrier upon the sale of content, which is net of sales taxes, the carrier’s fees and other deductions. The Company has evaluated its agreements with carriers in accordance with
the guidance at FASB ASC 605-45 Revenue Recognition - Principal Agent Considerations and has concluded that it is not the principal under these agreements.
Key indicators that it evaluated to reach this determination include:
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End users directly contract with the carriers, which have most of the service interaction and are generally viewed as the primary obligor by the subscribers;
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Carriers generally have significant control over the types of content that they offer to their subscribers; the Company has the content provider relationships and has discretion, within the parameters set by the carriers, regarding the actual offerings;
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Carriers are directly responsible for billing and collecting fees from their subscribers, including the resolution of billing disputes;
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Carriers generally pay the Company a fixed percentage of their revenues or a fixed fee for each content sale;
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Carriers generally must approve the price of the Company’s content in advance of their sale to subscribers, and the Company’s more significant carriers generally have the ability to set the ultimate price charged to their subscribers; and
•
The Company has limited risks, including no inventory risk and limited credit risk.
The Company has also evaluated its agreements with content providers, and has concluded that it is the principal under these agreements. Accordingly, payments to content providers are reported as cost of revenues.
Content Provider Licenses and Carrier Revenue Share
Carrier Revenue Share
Revenues generated from advertising via direct CPI, CPP or CPA arrangements with application developers, or indirect arrangements through advertising aggregators (ad networks) are shared with the carrier and the shared revenue is recorded as a cost of goods sold. In each case the revenue share with the carrier varies depending on the agreement with the carrier, and, in some cases, is based upon revenue tiers.
Content Provider License Fees
The Company’s royalty expenses consist of fees that it pays to branded content owners for the use of their intellectual property in the development of the Company’s music, games and other content, and other expenses directly incurred in earning revenue. Royalty-based obligations are either, accrued as incurred and subsequently paid, or in the case of content acquisitions, paid in advance and capitalized on our balance sheet as prepaid license fees. These royalty-based obligations are expensed to cost of revenues either at the applicable contractual rate related to that revenue or over the estimated life of the content acquired. Minimum guarantee license payments that are not recoupable against future royalties are capitalized and amortized over the lesser of the estimated life of the branded title or the term of the license agreement.
Software Development Costs
The Company applies the principles of FASB ASC 985-20, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed (“ASC 985-20”). ASC 985-20 requires that software development costs incurred in conjunction with product development be charged to research and development expense until technological feasibility is established. Thereafter, until the product is released for sale, software development costs must be capitalized and reported at the lower of unamortized cost or net realizable value of the related product.
The Company has adopted the “tested working model” approach to establishing technological feasibility for its products and games. Under this approach, the Company does not consider a product in development to have passed the technological feasibility milestone until the Company has completed a model of the product that contains essentially all the functionality and features of the final product and has tested the model to ensure that it works as expected. To date, the Company has not incurred significant costs between the establishment of technological feasibility and the release of a product for sale; thus, the Company has expensed all software development costs as incurred. The Company considers the following factors in determining whether costs can be capitalized: the emerging nature of the mobile market; the gradual evolution of the wireless carrier platforms and mobile phones for which it develops products and games; the lack of pre-orders or sales history for its products and games; the uncertainty regarding a product’s or game’s revenue-generating potential; its lack of control over the carrier distribution channel resulting in uncertainty as to when, if ever, a product or game will be available for sale; and its historical practice of canceling products and games at any stage of the development process.
Presentation
In order to facilitate the comparison of financial information, certain amounts reported in the prior year have been reclassified to conform to the current year presentation.
Concentrations of Credit Risk and Significant Customers
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. As of March 31, 2016, two major customers represented 15.6% and 11.0% of the Company's net accounts receivable balance within both the Content and Advertising businesses, respectively. As of March 31, 2015, the previously mentioned first major Content customer represented 21.1% 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. 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. During the year ended March 31, 2016, the previously mentioned first major customer represented 26.1% of revenue. During the year ended March 31, 2015, the two previously mentioned major customers represented 50.6% and 11.1%, respectively, of revenue and during the year ended March 31, 2014, the two previously mentioned major customers and a third major customer represented 45.8%, 22.2%, and 10.5% of revenue.
Goodwill and Indefinite Life Intangible Assets
Goodwill represents the excess of cost over fair value of net assets of businesses acquired. In accordance with FASB ASC 350-20 Goodwill and Other Intangible Assets, the value assigned to goodwill and indefinite lived intangible assets is not amortized to expense, but rather they are evaluated at least on an annual basis to determine if there are potential impairments. For goodwill and indefinite lived intangible assets, we complete what is referred to as the “Step 0” analysis which involves evaluating qualitative factors including macroeconomic conditions, industry and market considerations, cost factors, and overall financial performance. If our “Step 0” analysis indicates it is more likely than not that the fair value is less than the carrying amount, we would perform a quantitative two-step impairment test. The quantitative analysis compares the fair value of our reporting unit or indefinite-lived intangible assets to the carrying amounts, and an impairment loss is recognized equivalent to the excess of the carrying amount over the fair value. Fair value is determined based on discounted cash flows, market multiples or appraised values, as appropriate. Discounted cash flow analysis requires assumptions about the timing and amount of future cash inflows and outflows, risk, the cost of capital, and terminal values. Each of these factors can significantly affect the value of the intangible asset. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management’s judgment. Any changes in key assumptions about the Company’s businesses and their prospects, or changes in market conditions, could result in an impairment charge. Some of the more significant estimates and assumptions inherent in the intangible asset valuation process include: the timing and amount of projected future cash flows; the discount rate selected to measure the risks inherent in the future cash flows; and the assessment of the asset’s life cycle and the competitive trends impacting the asset, including consideration of any technical, legal or regulatory trends.
In the year ended March 31, 2015, the Company determined that there was no impairment of goodwill. In performing the related valuation analysis, the Company used various valuation methodologies including probability weighted discounted cash flows, comparable transaction analysis, and market capitalization and comparable company multiple comparison. There were no indications of impairment present during the period ended March 31, 2016.
Impairment of Long-Lived Assets and Finite Life Intangibles
Long-lived assets, including, intangible assets subject to amortization primarily consist of customer lists, license agreements and software that have been acquired are amortized using the straight-line method over their useful life ranging from five to eight years and are reviewed for impairment in accordance with FASB ASC 360-10, Accounting for the
Impairment or Disposal of Long-Lived Assets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
There were no indications of impairment present during the period ended March 31, 2016. In performing the related valuation analysis the Company used various valuation methodologies including probability weighted discounted cash flows, comparable transaction analysis, and market capitalization and comparable company multiple comparison.
Income Taxes
The Company accounts for income taxes in accordance with FASB ASC 740-10, Accounting for Income Taxes (“ASC 740-10”), which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in its financial statements or tax returns. Under ASC 740-10, the Company determines deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of assets and liabilities along with net operating losses, if it is more likely than not the tax benefits will be realized using the enacted tax rates in effect for the year in which it expects the differences to reverse. To the extent a deferred tax asset cannot be recognized, a valuation allowance is established if necessary.
ASC 740-10 prescribes that a company should use a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax positions that meet the “more-likely-than-not” recognition threshold should be measured as the largest amount of the tax benefits, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement in the financial statements. We recognize interest and penalties related to income tax matters as a component of the provision for income taxes.
The Company’s income is subject to taxation in both the U.S. and foreign jurisdictions, including Israel, Germany, Luxembourg, Singapore and Australia. Significant judgment is required in evaluating the Company’s tax positions and determining its provision for income taxes. The Company establishes reserves for income tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves for tax contingencies are established when the Company believes that positions do not meet the more-likely-than-not recognition threshold. The Company adjusts uncertain tax liabilities in light of changing facts and circumstances, such as the outcome of a tax audit or lapse of a statute of limitations. The provision for income taxes includes the impact of uncertain tax liabilities and changes in liabilities that are considered appropriate.
Stock-based compensation.
We have applied FASB ASC 718 Share-Based Payment (“ASC 718”) and accordingly, we record stock-based compensation expense for all of our stock-based awards.
Under ASC 718, we estimate the fair value of stock options granted using the Black-Scholes option pricing model. The fair value for awards that are expected to vest is then amortized on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. The amount of expense recognized represents the expense associated with the stock options we expect to ultimately vest based upon an estimated rate of forfeitures; this rate of forfeitures is updated as necessary and any adjustments needed to recognize the fair value of options that actually vest or are forfeited are recorded.
The Black-Scholes option pricing model, used to estimate the fair value of an award, requires the input of subjective assumptions, including the expected volatility of our common stock, interest rates, dividend rates and an option’s expected life. As a result, the financial statements include amounts that are based upon our best estimates and judgments relating to the expenses recognized for stock-based compensation.
In the past, the Company granted restricted stock subject to market or performance conditions that vest based on the satisfaction of the conditions of the award. Unvested restricted stock entitles the grantees to dividends, if any, with voting rights determined in each agreement. The fair market values of market condition-based awards are determined using the Monte Carlo simulation method. The Monte Carlo simulation method is subject to variability as several factors utilized must be estimated, including the derived service period, which is estimated based on the Company’s judgment of likely future
performance and the Company’s stock price volatility. The fair value of performance-based awards is determined using the market closing price on the grant date. Derived service periods and the periods charged with compensation expense for performance-based awards are estimated based on the Company’s judgment of likely future performance and may be adjusted in future periods depending on actual performance.
Preferred Stock
The Company applies the guidance enumerated in FASB ASC 480-10, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“ASC 480-10”) when determining the classification and measurement of preferred stock. Preferred shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value in accordance with ASC 480-10. All other issuances of preferred stock are subject to the classification and measurement principles of ASC 480-10. Accordingly, the Company classifies conditionally redeemable preferred shares (if any), which includes preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control, as temporary equity. At all other times, the Company classifies its preferred shares in stockholders’ equity.
Recently Issued Accounting Pronouncements
Recent accounting pronouncements are detailed in Note 4 to our Consolidated Financial Statements included in PART II, Item 8 of this Annual Report on Form 10-K.
Recent Developments
On June 13, 2016, DT Media and North Atlantic entered into a Third Amendment to Securities Purchase Agreement, where DT Media agreed to pay North Atlantic the amount of $60 as consideration to extend the Retirement Date (defined below) to July 15, 2016.
On May 6, 2016, DT Media and North Atlantic, entered into a Second Amendment to Securities Purchase Agreement, where DT Media agreed to pay North Atlantic the amount of $140 as a fee in connection with the preparation, negotiation, and execution of this amendment. Pursuant to this amendment, the warrant vesting date was modified to June 15, 2016 (the “Retirement Date”) and provided that the vesting date may be further extended by North Atlantic to no later than June 22, 2016, if North Atlantic believes, in its reasonable discretion, that (i) DT Media is unable to refinance the obligations by the vesting date, (ii) reasonable progress has been made by DT Media in refinancing the obligations, and (iii) in all likelihood, DT Media will be able to refinance the obligations by June 22, 2016. If these conditions are not satisfied or the debt is not refinanced by June 15, 2016, then a warrant for 400,000 shares would be issued to North Atlantic and North Atlantic would receive a board observer. The payment of $140 to North Atlantic was in lieu of any prepayment premium described below.
On February 17, 2016, DT Media and North Atlantic, entered into an amendment to the Securities Purchase Agreement dated March 6, 2015 where DT Media agreed to the prepayment premium in the table below if the debt is retired within the date ranges set forth. Although the Company’s debt to North Atlantic is not due until March 6, 2017, if the debt is not retired by May 6, North Atlantic has a right to receive a warrant for 400,000 shares (0.6% of outstanding as of March 31, 2016) and a board observer right. As the Company is in discussions to refinance its debt, it sought to defer the issuance of the warrant (and board observer rights) in exchange for the prepayment premium. Accordingly, pursuant to this amendment, the warrant vesting was modified to May 6, 2016.
On December 28, 2015, DT Media entered into a license with respect to certain of DT Media’s intellectual property assets with Sift Media, Inc. ("Sift"), in exchange for 9.9% of Sift’s newly-issued Preferred Stock and a cash payment of $1,000. Judson Bowman, a former director of the Company, is the founder, CEO, and majority shareholder of Sift. Mr Bowman stepped down from Digital Turbine's board effective January 25, 2016. For so long as DT Media holds Preferred Stock in Sift, DT Media shall be entitled to nominate for election one member of the five-member Board of Sift, which DT Media nominated as director CEO of Digital Turbine, Bill Stone.
On November 30, 2015, DT Media and Silicon Valley Bank ("SVB"), entered into an amendment to the Third Amended and Restated Loan and Security Agreement dated June 11, 2015. Pursuant to this amendment, the adjusted EBITDA financial covenant was removed and replaced with the requirement to maintain an adjusted quick ratio of not less than 0.90:1.00 unless (a) there are no advances outstanding under the revolving facility, or (b) if Digital Turbine’s cash and cash equivalents held at the SVB or SVB's Affiliates is greater than or equal to $15,000. Furthermore, the Streamline Period, which is not a financial covenant but applies to application of receivables, was amended so that it is achieved if DT Media’s trailing three-month period revenue is not less than 85% of projections for the three months ending August 31, 2015 through November 30, 2015, 75% of projections for the three months ending December 31, 2015 and thereafter, with the projected revenue for such three month period as set forth in DT Media’s operating budget provided to the SVB. This amendment also added the requirement for the Digital Turbine to deliver consolidated financial statements in addition to DT Media.
On June 11, 2015, DT Media and SVB, entered into a Third Amended and Restated Loan and Security Agreement, pursuant to which SVB agreed to amend and restate the existing Second Amended and Restated Loan and Security Agreement to increase the revolving line of credit available under such facility from $3,500 to $5,000, to extend the maturity date under the facility to June 30, 2016, and to make certain other changes to the terms of the existing agreement. The revolving line of credit under the this amendment allows DT Media to borrow up to the lesser of $5,000 or the borrowing base, which is 80% of eligible accounts receivable after consideration of other amounts outstanding, under the revolving line of credit. The revolving line requires interest payable monthly at a floating annual rate equal to (a) during any month for which DT Media maintained an adjusted quick ratio (as customarily defined) of not less than 1.00:1.00 as of the last day of a month, the prime rate as reported by The Wall Street Journal, plus (1.75%) and (b) at all other times, the prime rate as reported by The Wall Street Journal, plus (2.75%).
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have operations both within the United States and internationally, and we are exposed to market risks in the ordinary course of our business. These risks primarily consist of interest rate and foreign currency exchange risks.
Interest Rate Fluctuation Risk
The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. Our cash and cash equivalents consist of cash and deposits which are not insensitive to interest rate changes.
Our borrowings under our credit facility are subject to variable interest rates and thus expose us to interest rate fluctuations depending on the extent to which we utilize the credit facility. If market interest rates materially increase, our results of operations could be adversely affected. Our borrowings under our credit facility are subject to variable interest rates and thus expose us to interest rate fluctuations depending on the extent to which we utilize the credit facility. If market interest rates materially increase, our results of operations could be adversely affected. A hypothetical increase in market interest rates of 100 basis points would result in an increase in our interest expense of $0.01 million per year for every $1 million of outstanding debt under the credit facility.”
Foreign Currency Exchange Risk
We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar, primarily the Australian dollar.
While a portion of our sales are denominated in these foreign currencies and then translated into the U.S. dollar, the vast majority of our media costs are billed in the U.S. dollar, causing both our revenue and, disproportionately, our operating loss and net loss to be impacted by fluctuations in the exchange rates. In addition, gains (losses) related to translating certain cash balances, trade accounts receivable balances and intercompany balances that are denominated in these currencies impact our net income (loss). As our foreign operations expand, our results may be more impacted by fluctuations in the exchange rates of the currencies in which we do business. At this time we do not, but we may in the future, enter into financial instruments to hedge our foreign currency exchange risk.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DIGITAL TURBINE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Income / (Loss)
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
The supplementary financial information required by this Item 8 is set forth in Note 19 of the Notes to the Consolidated Financial Statements under the caption "Supplemental Consolidated Financial Information".
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Digital Turbine, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Digital Turbine, Inc. and Subsidiaries (collectively, the “Company”) as of March 31, 2016 and 2015, and the related consolidated statements of operations and comprehensive loss, stockholders' equity, and cash flows for each of the three years in the period ended March 31, 2016. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2016 and 2015, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2016, in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of March 31, 2016, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Our report dated June 14, 2016 expressed an opinion that the Company had not maintained effective internal control over financial reporting as of March 31, 2016, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
/s/ SingerLewak LLP
Los Angeles, California
June 14, 2016
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Digital Turbine, Inc. and Subsidiaries
We have audited Digital Turbine, Inc. and Subsidiaries’ (collectively, the “Company”) internal control over financial reporting as of March 31, 2016, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management's assessment. The Company’s control environment did not sufficiently promote effective internal control over financial reporting; this includes deficiencies in the design and operations of monitoring controls over information technology systems. Furthermore, the Company’s financial reporting and close process is not operating effectively, specifically related to the aggregation of deficiencies related to the lack of formal accounting policies, processes and technical resources restraints, and a reliance on a manual close process. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2016 consolidated financial statements, and this report does not affect our report dated June 14, 2016 on those financial statements.
In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of March 31, 2016, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of March 31, 2016 and 2015 and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended March 31, 2016, and our report dated June 14, 2016 expressed an unqualified opinion.
/s/ SingerLewak LLP
Los Angeles, California
June 14, 2016
Digital Turbine, Inc. and Subsidiaries
Digital Turbine, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
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)
(in thousands, except per share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
Digital Turbine, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(in thousands, except share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
Digital Turbine, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
1. Organization
Digital Turbine was incorporated in the state of Delaware in 1998. Digital Turbine, through its subsidiaries, works at the convergence of media and mobile communications, delivering end-to-end products and solutions for mobile operators, app advertisers, device OEMs and other third parties to enable them to effectively monetize mobile content and generate higher value user acquisition.
2. Liquidity
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern.
Our primary sources of liquidity have historically been issuance of common and preferred stock and convertible debt. In fiscal 2014, the Company raised $33,297 through equity financings. The Company completed a public offering on October 2, 2015, netting cash proceeds to the Company of $12,627. The Company expects to use net cash proceeds from the offering for organic business opportunities, product development, general corporate purposes, working capital, and capital expenditures. The Company believes that it has, after the public offering, sufficient cash, cash equivalents, and capital resources to operate its business at least through March 31, 2017. As of March 31, 2016, the Company had approximately $11,231 of cash and cash equivalents, which includes the cash gross proceeds of $1,000 received from the Sift transaction. Additionally, the Company currently has a $5,000 revolving credit facility in place with SVB which it uses to fund working capital requirements, as needed. As of March 31, 2016, the Company also had $3,000 outstanding on its revolving credit facility with SVB. As of March 31, 2016, the Company had fully paid off its term loan with SVB.
Pursuant to the amendment to the Third Amended and Restated Loan and Security Agreement dated June 11, 2015, entered into by DT Media and SVB on November 30, 2015, the covenant requirement was put in place for the Company to maintain an adjusted quick ratio of not less than 0.90:1.00 unless (a) there are no advances outstanding under the revolving facility, or (b) if the Company’s cash and cash equivalents held at SVB or SVB's Affiliates is greater than or equal to $15,000. As of April 30, 2016, given the Company did not meet the requirements set forth in (a) and (b) noted previously, the Company was required to maintain an adjusted quick ratio of not less than 0.90:1.00. As of April 30, 2016, the Company's quick ratio was estimated at 0.89 versus the 0.90 minimum level.
On June 10, 2016, prior to the required testing of the above-mentioned covenant, SVB and DT Media entered into a Consent Agreement, effective as of May 31, 2016, whereby SVB provided its consent to DT Media (for a de minimis fee) to not exercise any rights or remedies solely in connection with the non-compliance with such covenant for the period ended April 30, 2016, without which consent DT Media would have been in default of the Loan Agreement. Please see "Risk Factors" included in PART I Item 1A. of this Annual Report on Form 10-K within section "General Risk - The Company has secured indebtedness, which could limit its financial flexibility", regarding financial covenant compliance.
Until the Company becomes cash flow positive, the Company anticipates that its primary source of liquidity will be cash on hand and access to the $5,000 revolving credit facility, which matures on June 30, 2016. In addition, the Company may make acquisitions, make new investments in under-capitalized opportunities, or invest in organic opportunities, including Real-Time Bidding ("RTB"), integration of Content/Pay into advertising infrastructure, or new product development, and may need to raise additional capital through future debt or equity financing to provide for greater flexibility to fund any such acquisitions and organic growth opportunities. Additional financing may not be available on acceptable terms or at all. If the Company issues additional equity securities to raise funds, the ownership percentage of its existing stockholders would be reduced. New investors may demand rights, preferences, or privileges senior to those of existing holders of common stock.
In view of the matters described in the preceding paragraph, 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.
3. Acquisitions and Disposals
Mirror Image Access
On April 12, 2013, Digital Turbine acquired all of the issued and outstanding stock of Mirror Image Australia Holdings, which directly or indirectly owns subsidiaries Mirror Image Access (Australia) Pty Ltd, MIA Technology Australia Pty Ltd and MIA Technology IP Pty Ltd.
The purpose of the acquisition was an effort not only to build on the Company’s current distribution network, but to enhance its mobile content infrastructure with the intellectual property acquired in the purchase.
The acquisition of was capitalized through a combination of intercompany debt and the issuance of equity.
The purchase consideration for the transaction was comprised of cash, a note, and common stock of the Company, as follows:
(1) At closing AUD 1,220 in cash, translated to $1,287 for U.S. GAAP reporting purposes;
(2) Convertible Note payable of AUD 2,280, translated to $2,404;
(3) Shares of common stock of the Company (the “Closing Shares”) equivalent to AUD 3,500, translated to $3,691 and under the agreement, converted to shares at $3.65 per share, or 1,011,164 shares of the common stock of the Company. The closing price of the stock on that day was $4.40 per share, for a total value of $4,449.
The Closing Shares are subject to a Registration Rights Agreement that provides for piggyback rights for 3 years and were included on the Company’s Form S-3 filed August 30, 2013, and subsequently made effective on October 31, 2013.
The following table summarizes the final fair values of the assets acquired and liabilities assumed at the date of acquisition.
In addition to the value assigned to the acquired workforce, the Company recorded the excess of the purchase price over the estimated fair value of the assets acquired as an increase in goodwill. This goodwill arises because the purchase price reflects the strategic fit and resulting synergies that the acquired business brings to the Company’s existing operations. In the fiscal year ended March 31, 2014, the Company recorded an impairment charge of $54 to write down trade names pursuant to its decision to rename and rebrand trade names associated with Logia and MIA. In the period ended June 30, 2014, the Company finalized the purchase price allocation which resulted in an adjustment from intangibles to goodwill of $1,472.
The amortization period for the intangible assets acquired in the MIA transaction is as follows:
Xyologic Mobile Analysis
On October 9, 2014, the Company acquired certain intellectual property assets of Xyologic Mobile Analysis, GmbH ("XYO"), related to mobile application recommendation, search and discovery. The Company has completed the integration of the acquired technology into the DT Discover software solution.
The acquisition was effected pursuant to an Asset Purchase Agreement dated October 8, 2014 (the “Asset Purchase Agreement”). The aggregate purchase price was US $2,500, paid in cash, subject to a twelve (12) month hold-back of US $375, which acts as partial security for potential future indemnification claims. During April 2016, the Company reached a settlement with the sellers of XYO, whereby the Company was relieved of the $375 liability.
The purchase price fair values have been allocated to goodwill of $1,000 and developed technology of $1,500. The Company finalized the purchase price allocation in the year ended March 31, 2015.
Appia, Inc.
On March 6, 2015, the Company completed the merger of Appia, Inc. into its wholly owned subsidiary, DT Media Merger Sub, Inc. The surviving entity was renamed Digital Turbine Media, Inc. (“DT Media”). Under the Merger Agreement, the Company is to issue shares of its common stock in exchange for all of Appia Inc's outstanding common and preferred stock and warrants.
The number of shares that were issued by the Company is subject to adjustment based on Appia Inc's working capital and net indebtedness as of the closing date of the merger. Based on Appia Inc's working capital and net indebtedness as of March 6, 2015, the Company issued 18,883,723 shares of its common stock and reserved 245,955 of its common stock for Appia Inc's equity awards outstanding at the closing date that are assumed by the Company and converted into equity awards for Digital Turbine common stock. Vested equity awards held by Appia Inc's employees and service providers are considered part of the purchase price; accordingly, the estimated purchase price includes an estimated fair value of equity awards to be issued by the Company of approximately $633. The value of the Company’s common stock used to estimate the purchase price was $3.94 per share, the closing price on March 6, 2015. The following table summarizes the final fair values of the assets acquired and liabilities assumed at the date of acquisition, based on information available as of March 31, 2016. These final fair values differ from the estimated fair values reflected in the pro forma financial information included in the Company’s previously filed S-4 to the availability of additional and updated information. In the year ended March 31, 2016, the Company adjusted the purchase price allocation of DT Media due to the finalization of the working capital adjustment, which resulted in a net decrease in goodwill of $126, from $69,438 down to $69,312 as detailed in the table below.
The following table summarizes the final fair values of the assets acquired and liabilities assumed at the date of acquisition.
The amortization period for the intangible assets acquired in the DT Media transaction is as follows:
The pro forma financial information of the Company’s consolidated operations if the acquisition of DT Media, Inc. had occurred as of April 1, 2013 is presented below.
The operating results of DT Media are included in the accompanying consolidated statements of operations from the acquisition date. The combined consolidated operating results from the acquisition date to March 31, 2015 are included in the table below. The combined consolidated operating results for fiscal 2016 include a full year of operating results of DT Media.
TWISTBOX
On February 13, 2014, the Company sold its wholly-owned subsidiary, Twistbox, and its subsidiaries.
The Company sold Twistbox for $0.001 at closing plus potential future payments from the buyer (seller earn-out) related to contracts assumed by the buyer and contracts sourced by the Company post-closing. Under the stock purchase agreement, the buyers assumed net liabilities of $2,300, while the Company left $100 in the Twistbox bank account, and took financial responsibility for the French and German employees and the facility lease in Germany. The Company indemnified the buyer for any losses that may result from select liabilities assumed by the buyer up to $336 for a period of eighteen months following the closing. This amount, along with other liabilities related to accrued compensation, total $440.
In accordance with FASB ASC 205-20, Discontinued Operations, the operating results and net assets and liabilities related to Twistbox were reclassified as of February 13, 2014 and reported as discontinued operations in the accompanying consolidated financial statements.
The Company recorded a loss on the sale of $1,502.
The following is a summary of the assets and liabilities of the discontinued operations as of February 13, 2014:
4. Summary of Significant Accounting Policies
Basis of Presentation
The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for annual financial statements. The financial statements, in the opinion of management, include all adjustments necessary for a fair statement of the results of operations, financial position and cash flows for each period presented.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and our wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. See Part I for a detailed listing of the Company's wholly-owned subsidiaries.
Revenue Recognition
Advertising
Advertising revenues are generated via direct Cost-Per-Install (CPI), Cost-Per-Placement (CPP), or Cost-Per-Action (CPA) arrangements with application developers, or indirect CPI, CPP or CPA arrangements through advertising aggregators (ad networks). Transactions are processed by the Company’s software services: mobile application management through Ignite, and user experience and discovery through Discover. The Company recognizes advertising related revenue when it has persuasive evidence of an arrangement, delivery of has occurred or services have been performed, the price is fixed or determinable, and collectability is reasonably assured.
The Company recognizes as revenue the amount billed to the application developer or advertising aggregator. Revenue share payments to the carrier are recorded as a cost of revenues. The Company has evaluated its agreements with the developers and aggregators and the carriers in accordance with the guidance at FASB ASC 605-45 Revenue Recognition - Principal Agent Considerations and has concluded that it is the principal under these agreements. Key indicators that it evaluated to reach this determination include:
•
The Company has the contractual relationship with the application developers or advertising aggregators (collectively, the advertisers), and we have the performance obligation to these parties;
•
Through our Ignite and Discover software, we provide application installation and management as well as detailed reporting to advertisers and carriers. We are responsible for billing the advertisers, and for reporting revenues and revenue share to the carriers;
•
As part of the application management process, we use our data, and post-install event data provided back to us by the advertisers, to match applications to end users. We currently target end users based on carrier, geography, demographics (including by handset type), among other attributes, by leveraging carrier data. We have discretion as to which applications are delivered to each end user;
•
Pricing is established in our agreements with advertisers. We negotiate pricing with the advertisers, based on prevailing rates typical in the industry; and
•
The Company is responsible for billing and collecting the gross amount from the advertiser. Our carrier agreements do not include any specific provisions that allow us to mitigate our credit risk by reducing the revenue share payable to the carrier.
In certain instances the carrier may enter directly into a CPI, CPP or CPA arrangement with a developer, where the installation will be made using the Company’s Ignite and Discover software services. In these instances, the Company receives a share of the carrier’s revenue, which is recognized on a net basis.
In addition to revenues from application developers and advertising aggregators, the Company may receive fees from the carriers relating to the initial set-up of the arrangements with the carriers. Set-up activities typically include customization, testing and implementation of the Ignite software for specific handsets. When the Company determines that the set-up fees do not have standalone value, such fees are deferred and recognized over the estimated period the carrier benefits from the set-up fee, which is generally the estimated life of the related handsets.
The Company has determined that certain set-up activities are within the scope of FASB ASC 985-605 Software Revenue Recognition and, accordingly, the Company applies the provisions of ASC 985-605 to the software components. As a result, the Company typically defers recognition of the set-up fee until all elements of the arrangement have been delivered. In those instances where the set-up fee covers ongoing support and maintenance, the fee is deferred and amortized over the term of the carrier agreement.
Content and Billing
The Company’s Content and Billing revenues are derived primarily from transactions with the carriers’ customers (end users). The carriers bill the end users upon the sale of content, including music, images or games, and the Company shares the end user revenues with the carrier. The end user transactions are processed by the Company’s software services: white labeled mobile storefront and content management solutions through Marketplace, and mobile payments with direct operator billing through Pay. The Company recognizes Content related revenue when it has persuasive evidence of an arrangement, delivery of has occurred or services have been performed, the price is fixed or determinable, and collectability is reasonably assured.
The Company utilizes its reporting system to capture and recognize revenue due from carriers, based on monthly transactional reporting and other fees earned upon delivery of content to the end user. Determination of the appropriate amount of revenue recognized is based on the Company’s reporting system, but it is possible that actual results may differ from the Company’s estimates once the reports are reconciled with the carrier. When the Company receives the final carrier reports, to the extent not received within a reasonable time frame following the end of each month, the Company records any differences between estimated revenues and actual revenues in the reporting period when the Company determines the actual amounts. The Company has not experienced material adjustments to its estimates when the final amounts were reported by carriers. If the Company deems a carrier not to be creditworthy, the Company defers all revenues from the arrangement until the Company receives payment and all other revenue recognition criteria have been met.
The Company recognizes as revenues the amount billed to the carrier upon the sale of content, which is net of sales taxes, the carrier’s fees and other deductions. The Company has evaluated its agreements with carriers in accordance with the guidance at FASB ASC 605-45 Revenue Recognition - Principal Agent Considerations and has concluded that it is not the principal under these agreements. Key indicators that it evaluated to reach this determination include:
•
End users directly contract with the carriers, which have most of the service interaction and are generally viewed as the primary obligor by the subscribers;
•
Carriers generally have significant control over the types of content that they offer to their subscribers; the Company has the content provider relationships and has discretion, within the parameters set by the carriers, regarding the actual offerings;
•
Carriers are directly responsible for billing and collecting fees from their subscribers, including the resolution of billing disputes;
•
Carriers generally pay the Company a fixed percentage of their revenues or a fixed fee for each content sale;
•
Carriers generally must approve the price of the Company’s content in advance of their sale to subscribers, and the Company’s more significant carriers generally have the ability to set the ultimate price charged to their subscribers; and
•
The Company has limited risks, including no inventory risk and limited credit risk.
The Company has also evaluated its agreements with content providers, and has concluded that it is the principal under these agreements. Accordingly, payments to content providers are reported as cost of revenues.
Comprehensive Loss
Comprehensive loss consists of two components, net loss and other comprehensive income. Other comprehensive income refers to gains and losses that under generally accepted accounting principles are recorded as an element of stockholders’ equity, but are excluded from net income. The Company’s other comprehensive income currently includes only foreign currency translation adjustments.
Cash and Cash Equivalents
The Company considers all highly liquid short-term investments purchased with a maturity of three months or less to be cash equivalents.
Accounts Receivable
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.
Deposits
As of March 31, 2016, the Company has deposits of $213 comprised of facility and equipment lease deposits, as compared to $109 as of March 31, 2015.
Carrier Revenue Share and Content Provider License Fees
Carrier Revenue Share
Revenues generated from advertising via direct CPI, CPP or CPA arrangements with application developers, or indirect arrangements through advertising aggregators (ad networks) are shared with the carrier and the shared revenue is recorded as a cost of goods sold. In each case the revenue share with the carrier varies depending on the agreement with the carrier, and, in some cases, is based upon revenue tiers.
Content Provider License Fees
The Company’s royalty expenses consist of fees that it pays to content owners for the use of their intellectual property in the distribution of music, games and other content services, and other expenses directly incurred in earning revenue. Royalty-based obligations are either accrued as incurred and subsequently paid or, in the case of content acquisitions, paid in advance and capitalized on our balance sheet as prepaid license fees. These royalty-based obligations are expensed to cost of revenues either at the applicable contractual rate related to that revenue or over the estimated life of the content acquired. Minimum guarantee license payments that are not recoupable against future royalties are capitalized and amortized over the lesser of the estimated life of the branded title or the term of the license agreement.
Software Development Costs
The Company applies the principles of FASB ASC 985-20, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed (“ASC 985-20”). ASC 985-20 requires that software development costs incurred in conjunction with product development be charged to research and development expense until technological feasibility is established. Thereafter, until the product is released for sale, software development costs must be capitalized and reported at the lower of unamortized cost or net realizable value of the related product.
The Company has adopted the “tested working model” approach to establishing technological feasibility for its products. Under this approach, the Company does not consider a product in development to have passed the technological feasibility milestone until the Company has completed a model of the product that contains essentially all the functionality and features of the final product and has tested the model to ensure that it works as expected. To date, the Company has not incurred significant costs between the establishment of technological feasibility and the release of a product for sale; thus, the Company has expensed all software development costs as incurred. The Company considers the following factors in determining whether costs can be capitalized: the emerging nature of the mobile market; the gradual evolution of the wireless carrier platforms and mobile phones for which it develops products; the lack of pre-orders or sales history for its products; the uncertainty regarding a product’s revenue-generating potential; its lack of control over the carrier distribution channel resulting in uncertainty as to when, if ever, a product will be available for sale; and its historical practice of canceling products at any stage of the development process.
The Company also applies the principles of FASB ASC 350-40, Accounting for the Cost of Computer Software Developed or Obtained for Internal Use (“ASC 350-40”). ASC 350-40 requires that software development costs incurred before the preliminary project stage be expensed as incurred. We capitalize development costs related to these software applications once the preliminary project stage is complete and it is probable that the project will be completed and the software will be used to perform the function intended. For fiscal 2016, 2015, and 2014 the Company capitalized software development costs in the amount of $1,263, $62, and $0.
Product Development Costs
The Company charges costs related to research, design and development and deployment of products to product development expense as incurred. The types of costs included in product development expenses include salaries, contractor fees and allocated facilities costs.
Advertising Expenses
The Company expenses the costs of advertising the first time the advertising takes place. Advertising expense was $396, $406, and $186 in the years ended March 31, 2016, 2015, and 2014, respectively.
Fair Value of Financial Instruments
As of March 31, 2016 and 2015, the carrying value of cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued license fees, accrued compensation, and other current liabilities approximates fair value due to the short-term nature of such instruments.
Foreign Currency Translation
The Company uses the United States dollar for financial reporting purposes. Assets and liabilities of foreign operations are translated using current rates of exchange prevailing at the balance sheet date. Equity accounts have been translated at their historical exchange rates when the capital transaction occurred. Statement of Operations amounts are translated at average rates in effect for the reporting period. The foreign currency translation adjustment loss of $(150), $147, and $67 in the years ended March 31, 2016, 2015, and 2014 has been reported as a component of comprehensive loss in the consolidated statements of stockholders’ equity and comprehensive loss.
Concentrations of Credit Risk and Significant Customers
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. As of March 31, 2016, two major customers represented 15.6% and 11.0% of the Company's net accounts receivable balance within both the Content and Advertising businesses, respectively. As of March 31, 2015, the previously mentioned first major Content customer represented 21.1% 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. 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. During the year ended March 31, 2016, the previously mentioned first major customer represented 26.1% of our consolidated net revenues. During the year ended March 31, 2015, the two previously mentioned major customers represented 50.6% and 11.1%, respectively, of our consolidated net revenues, and during the year ended March 31, 2014, the two previously mentioned major customers and a third major customer represented 45.8%, 22.2%, and 10.5% of our consolidated net revenues.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of the related assets. Estimated useful lives are the lesser of 8 to 10 years or the term of the lease for leasehold improvements and 3-5 years for other assets.
Goodwill and Indefinite Life Intangible Assets
Goodwill represents the excess of cost over fair value of net assets of businesses acquired. In accordance with FASB ASC 350-20 Goodwill and Other Intangible Assets, the value assigned to goodwill and indefinite lived intangible assets, including trademarks and trade names, is not amortized to expense, but rather they are evaluated at least on an annual basis to determine if there are potential impairments. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the implied fair value of the reporting unit goodwill is less than the carrying value. If the fair value of an indefinite lived intangible (such as trademarks and trade names) is less than its carrying amount, an impairment loss is recorded. Fair value is determined based on discounted cash flows, market multiples or appraised values, as appropriate. Discounted cash flow analysis requires assumptions about the timing and amount of future cash inflows and outflows, risk, the cost of capital, and terminal values. Each of these factors can significantly affect the value of the intangible asset. The estimates
of future cash flows, based on reasonable and supportable assumptions and projections, require management’s judgment. Any changes in key assumptions about the Company’s businesses and their prospects, or changes in market conditions, could result in an impairment charge. Some of the more significant estimates and assumptions inherent in the intangible asset valuation process include: the timing and amount of projected future cash flows; the discount rate selected to measure the risks inherent in the future cash flows; and the assessment of the asset’s life cycle and the competitive trends impacting the asset, including consideration of any technical, legal or regulatory trends.
Goodwill is tested annually during the fourth fiscal quarter and whenever events or circumstances indicate an impairment may have occurred. Based on the results of the annual impairment tests performed during the fourth quarter of fiscal 2016, no impairment of goodwill existed at March 31, 2016. See disclosure surrounding additional procedures performed by the Company in performing its fiscal 2016 annual impairment test at “Goodwill” in Note 9 of the Notes to the Consolidated Financial Statements.
Impairment of Long-Lived Assets and Finite Life Intangibles
Long-lived assets, including, intangible assets subject to amortization primarily consist of customer lists, license agreements and software that have been acquired are amortized using the straight-line method over their useful life ranging from two to fourteen years and are reviewed for impairment in accordance with FASB ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets , whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
There were no indications of impairment present or that the carrying amounts may not be recoverable during the fiscal years ended March 31, 2016 and March 31, 2015. In the fiscal year ended March 31, 2014, the Company determined that there was an impairment of intangible assets of $154 related to the change in trade names as the Company has rebranded its acquisitions under the Digital Turbine name. The impairment is detailed in Note 10 to our consolidated financial statements under Item 8 of this Annual Report.
Income Taxes
The Company accounts for income taxes in accordance with FASB ASC 740-10, Accounting for Income Taxes (“ASC 740-10”), which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in its financial statements or tax returns. Under ASC 740-10, the Company determines deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of assets and liabilities along with net operating losses, if it is more likely than not the tax benefits will be realized using the enacted tax rates in effect for the year in which it expects the differences to reverse. To the extent a deferred tax asset cannot be recognized, a valuation allowance is established if necessary.
ASC 740-10 prescribes that a company should use a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax positions that meet the “more-likely-than-not” recognition threshold should be measured as the largest amount of the tax benefits, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement in the financial statements. We recognize interest and penalties related to income tax matters as a component of the provision for income taxes.
Stock-Based Compensation
We have applied FASB ASC 718 Share-Based Payment (“ASC 718”) and accordingly, we record stock-based compensation expense for all of our stock-based awards.
Under ASC 718, we estimate the fair value of stock options granted using the Black-Scholes option pricing model. The fair value for awards that are expected to vest is then amortized on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. The amount of expense recognized represents the expense associated with the stock options we expect to ultimately vest based upon an estimated rate of forfeitures; this rate of forfeitures is updated as necessary and any adjustments needed to recognize the fair value of options that actually vest or are forfeited are recorded.
The Black-Scholes option pricing model, used to estimate the fair value of an award, requires the input of subjective assumptions, including the expected volatility of our common stock, interest rates, dividend rates and an option’s expected life. As a result, the financial statements include amounts that are based upon our best estimates and judgments relating to the expenses recognized for stock-based compensation.
The Company grants restricted stock subject to market or performance conditions that vest based on the satisfaction of the conditions of the award. Unvested restricted stock entitles the grantees to dividends, if any, with voting rights determined in each agreement. The fair market values of market condition-based awards are determined using the Monte Carlo simulation method. The Monte Carlo simulation method is subject to variability as several factors utilized must be estimated, including the derived service period, which is estimated based on the Company’s judgment of likely future performance and the Company’s stock price volatility. The fair value of performance-based awards is determined using the market closing price on the grant date. Derived service periods and the periods charged with compensation expense for performance-based awards are estimated based on the Company’s judgment of likely future performance and may be adjusted in future periods depending on actual performance.
Preferred Stock
The Company applies the guidance enumerated in FASB ASC 480-10, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“ASC 480-10”) when determining the classification and measurement of preferred stock. Preferred shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value in accordance with ASC 480-10. All other issuances of preferred stock are subject to the classification and measurement principles of ASC 480-10. Accordingly, the Company classifies conditionally redeemable preferred shares (if any), which includes preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control, as temporary equity. At all other times, the Company classifies its preferred shares in stockholders’ equity.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires the use of management's estimates. These estimates are subjective in nature and involve judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at fiscal year-end, and the reported amounts of revenues and expenses during the fiscal year. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements
February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 842 (“ASC 842”), “Leases” which replaces the existing guidance in ASC 840, Leases. The amendment is effective for the Company for fiscal years, and interim periods within those years, beginning after December 15, 2018. ASC 842 requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use ("ROU") asset and a corresponding lease liability. For finance leases the lessee would recognize interest expense and amortization of the ROU asset and for operating leases the lessee would recognize a straight-line total lease expense. The Company is evaluating the impact of the adoption on the consolidated financial statements.
In November 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-17, Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”), which simplifies the presentation of deferred income taxes by eliminating the need for entities to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. The standard is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for financial statements that have not been previously issued. The ASU may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. We adopted this ASU on a prospective basis in the fourth quarter of the 2016 fiscal year.
In September 2015, the FASB issued accounting guidance which simplifies measurement period adjustments in a business combination under ASU 2015-16. The guidance is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years and early adoption is permitted. The Company is evaluating the impact of the adoption on the consolidated financial statements.
In June 2015, the FASB issued ASU No. 2015-10, Technical Corrections and Improvements. The amendments in this update cover a wide range of topics in the Codification and are generally categorized as follows: Amendments Related to Differences between Original Guidance and the Codification; Guidance Clarification and Reference Corrections; Simplification; and Minor Improvements. The amendments in the ASU that require transition guidance are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. All other amendments were effective upon the issuance of the ASU on June 12, 2015.
In May 1, 2015, the FASB issued ASU No. 2015-5, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement ("ASU No. 2015-5") to reduce the diversity in practice, and reduce the costs and complexity of assessing fees paid in a Cloud Computing Arrangements (“CCA”). While the new standard does not provide explicit guidance on how to account for fees paid in a CCA, it does provide guidance on which existing accounting model should be applied. ASU No. 2015-5 is effective for annual reporting periods beginning on or after December 15, 2015, and interim periods within those annual periods. The Company expects to adopt this guidance during its 2017 fiscal year and does not expect it will have a significant impact on its consolidated results of operations, financial condition and cash flows.
In April 2015, the FASB issued accounting guidance which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability under ASU 2015-03. The guidance is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years and early adoption is permitted. The Company expects to adopt this guidance during its 2017 fiscal year and does not expect it will have a significant impact on its consolidated results of operations, financial condition, and cash flows.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The amendments in this ASU provide guidance which changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The ASU is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015.
In January 2015, the FASB issued ASU No. 2015-1, Income Statement-Extraordinary and Unusual Items (Subtopic 225-20). The objective is to identify, evaluate, and improve areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to the users of the financial statements. The pronouncement is effective for reporting periods beginning after December 15, 2015. The adoption of this ASU is not expected to have a material impact on our financial position, results of operations, cash flows, or presentation thereof.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going concern (Subtopic 205-40). The amendments in this update provide guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. In doing so, the amendments should reduce diversity in the timing and content of footnote disclosures. The pronouncement is effective for reporting periods beginning after December 15, 2016. The adoption of this ASU is not expected to have a material impact on our financial position, results of operations, cash flows, or presentation thereof.
In June 2014, the FASB issued ASU No. 2014-12, Compensation - Stock Compensation (Topic 718). The pronouncement was issued to clarify the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The pronouncement is effective for reporting periods beginning after December 15, 2015. The adoption of this ASU is not expected to have a material impact on our financial position, results of operations, cash flows, or presentation thereof.
In May 2014, the FASB issued ASU 2014-9, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new standard is effective as of the first interim period within annual reporting periods beginning on or after December 15, 2018, and will replace most existing revenue recognition guidance in U.S. GAAP. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-9 will have on our consolidated financial statements and related disclosures. The Company has not yet selected a transition method or determined the effect of the standard on our financial position, results of operations, cash flows, or presentation thereof.
In April 2014, the FASB issued ASU 2014-8, Presentation of Financial Statements and Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-8 limits the requirement to report discontinued operations to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. The amendments also require expanded
disclosures concerning discontinued operations and disclosures of certain financial results attributable to a disposal of a significant component of an entity that does not qualify for discontinued operations reporting. These amendments are effective prospectively for reporting periods beginning on or after December 15, 2014, with early adoption permitted. The adoption of this ASU is not expected to have a material impact on our financial position, results of operations, cash flows, or presentation thereof.
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.
5. Fair Value Measurements
The Company applies the provisions of ASC 820-10, “Fair Value Measurements and Disclosures.” ASC 820-10 defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
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Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.
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Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
•
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The Company analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities From Equity” and ASC 815, “Derivatives and Hedging.” Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The effects of interactions between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments. In addition, the fair values of freestanding derivative instruments such as warrant and option derivatives are valued using the Black-Scholes model.
The Company did not identify any recurring assets and liabilities that are required to be presented in the consolidated balance sheets at fair value in accordance with ASC 825.
6. Accounts Receivable
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 March 31, 2016 are expected to be billed and collected within twelve months.
The Company recorded $132, $505, and $13 of bad debt expense during the years ended March 31, 2016, 2015, and 2014.
7. Property and Equipment
Depreciation expense for the years ended March 31, 2016, 2015, and 2014 was $437, $98, and $87, respectively.
8. 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”). In the year ended March 31, 2016, in connection with the acquisition of Appia, the Company assumed the Appia, Inc. 2008 Stock Incentive Plan (the “Appia Plan”). The 2011 Plan and 2007 Plan are collectively referred to as “Digital Turbine’s Incentive Plans.” 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 approximately 11,886,707 and 14,393,741 remained available for future grants as of March 31, 2016 and 2015, respectively.
Stock Option Agreements
Stock options granted under the Company’s Incentive Plans typically vest over a three to four years period. These options, which are granted with option exercise prices equal to the fair market value of the Company’s common stock on the date of grant, generally expire up to ten years from the date of grant. In the year ended March 31, 2016, in connection the Appia acquisition, the Company exchanged stock options previously granted under the Appia Plan for options to purchase the shares of the Company’s common stock. These assumed Appia options typically vest over a period of four years and generally expire within ten years from the date of grant. Compensation expense for all stock options is recognized on a straight-line basis over the requisite service period.
Restricted Stock Awards
Awards of restricted stock may be either grants of restricted stock or performance-based restricted stock 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. Compensation expense for restricted stock awards with a service condition 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 during the years ended March 31, 2016 and 2015:
(a)
During fiscal year ended March 31, 2015, in connection with the Appia acquisition, Digital Turbine, Inc. assumed approximately 246,000 stock options, with a weighted-average exercise price per share of $0.64.
(b)
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 March 31, 2016 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 March 31, 2016. The intrinsic value changes based on changes in the price of Digital Turbine's common stock.
Information about options outstanding and exercisable at March 31, 2016 is as follows:
Other information pertaining to stock options for the Stock Plans is as follows:
(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 fiscal year.
The weighted-average grant-date fair value for the options granted during the fiscal years ended March 31, 2016, 2015, and 2014 was $1.60, $3.44, and $3.33 respectively.
At March 31, 2016 and March 31, 2015, there was $9,377 and $11,492 of total unrecognized stock-based compensation expense, net of estimated forfeitures, related to unvested stock options expected to be recognized over a weighted-average period of 2.6 years and 2.4 years, respectively.
Valuation of Awards
For stock options granted under Digital Turbine’s Incentive Plans, Digital Turbine Inc. 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 fair value of options assumed under the Appia Plan was estimated as of the March 6, 2015 closing date using the Black-Scholes option pricing model. The assumptions utilized in this model during fiscal 2016 and 2015 are presented below.
Expected volatility is based on a blend of implied and historical volatility of Digital Turbine's common stock over the most recent period commensurate with the estimated expected term of Digital Turbine’s stock options. Digital Turbine 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 equity plans, which includes both stock options and restricted stock is included in the following statements of operations components. Please see Note 13 regarding restricted stock:
9. Goodwill
A reconciliation of the changes to the Company’s carrying amount of goodwill for the periods or as of the dates indicated:
Fair value is defined under ASC 820, Fair Value Measurements and Disclosures as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The Company considered the income and market approaches to derive an opinion of value. Under the income approach,
the Company utilized the discounted cash flow method, and under the market approach, consideration was given to the guideline public company method, the merger and acquisition method, and the market capitalization method.
Goodwill is recorded when the purchase price for an acquisition exceeds the estimated fair value of the net tangible and identified intangible assets acquired. Goodwill is allocated to our reporting units based on relative fair value of the future benefit of the purchased operations to our existing business units as well as the acquired business unit. Reporting units may be operating segments as a whole or an operation one level below an operating segment, referred to as a component. Our reporting units are consistent with the operating segments identified in Part I, Item 1 under the section “Business” of this Form 10-K.
We perform an annual impairment assessment in the fourth quarter of each year, or more frequently if indicators of potential impairment exist, to determine whether it is more likely than not that the fair value of a reporting unit in which goodwill resides is less than its carrying value. For reporting units in which this assessment concludes that it is more likely than not that the fair value is more than its carrying value, goodwill is not considered impaired and we are not required to perform the two-step goodwill impairment test. Qualitative factors considered in this assessment include industry and market considerations, overall financial performance, and other relevant events and factors affecting the reporting unit.
For reporting units in which the impairment assessment concludes that it is more likely than not that the fair value is less than its carrying value, we perform the first step of the goodwill impairment test, which compares the fair value of the reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not considered impaired and we are not required to perform additional analysis. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the goodwill impairment test to determine the implied fair value of the reporting unit’s goodwill. If we determine during the second step that the carrying value of a reporting unit’s goodwill exceeds its implied fair value, we record an impairment loss equal to the difference.
Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. The goodwill impairment test we utilized in the fourth quarter ended March 31, 2016 utilized an income method to estimate a reporting unit’s fair value. The Company believes that the income method is the best method of determining fair value for our Company. The income method is based on a discounted future cash flow approach that uses the following reporting unit estimates: revenue, based on assumed growth rates; estimated costs; and appropriate discount rates based on a reporting unit's weighted average cost of capital as determined by considering the observable weighted average cost of capital of comparable companies. We test the reasonableness of the inputs and outcomes of our discounted cash flow analysis against available comparable market data and against the Company’s market capitalization value which includes a control premium estimate. A reporting unit’s carrying value represents the assignment of various assets and liabilities.
Based on the valuation performed for fiscal 2016, all goodwill reporting units have an estimated fair value in excess of their respective carrying values. The estimated fair values of two of the goodwill reporting units exceeded their carrying values by over 10%. One of the goodwill reporting unit’s estimated fair value exceeded the carrying value by less than 10%.
As a result of all goodwill reporting units having an estimated fair value in excess of their respective carrying values, the second step of the goodwill impairment test was not necessary.
In the year ended March 31, 2016, the Company adjusted the purchase price allocation of DTM due to the finalization of the working capital adjustment, which resulted in a net decrease in goodwill of $126.
In the year ended March 31, 2015, the Company finalized the purchase price allocation of MIA, which resulted in an adjustment to goodwill of $1,472, and acquired XYO and Appia, Inc. which resulted in an increase in goodwill of $1,000 and $69,438, respectively.
In the year ended March 31, 2014, there was a net increase in goodwill of $1,249, which included an increase in goodwill of $1,182 related to acquisition of MIA, an increase in goodwill of $209 related to adjustment to goodwill for tax, and a decrease in goodwill of $142 related to discontinued operations.
10. Intangible Assets
We make judgments about the recoverability of purchased finite-lived intangible assets whenever events or changes in circumstances indicate that an impairment may exist. Recoverability of finite-lived intangible assets is measured by comparing the carrying amount of the asset to the future undiscounted cash flows that the asset is expected to generate. We perform an annual impairment assessment in the fourth quarter of each year for indefinite-lived intangible assets, or more frequently if indicators of potential impairment exist, to determine whether it is more likely than not that the carrying value of the assets may not be recoverable. Recoverability of indefinite-lived intangible assets is measured by comparing the carrying amount of the asset to the future undiscounted cash flows that the asset is expected to generate. If we determine that an individual asset is impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.
The assumptions and estimates used to determine future values and remaining useful lives of our intangible and other long-lived assets are complex and subjective. They can be affected by various factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our forecasts.
We complete our annual impairment tests in the fourth quarter of each year unless events or circumstances indicate that an asset may be impaired. There were no other indications of impairment present during the fiscal year ended March 31, 2016. In the fiscal year ended March 31, 2015, the Company determined there to be a need to accelerate amortization expense by $224 due to the Company's decision to stop using the Appia trade name, rename, and re-brand the trademarks acquired through the Appia acquisition. There were no other indications of impairment present during the period ended March 31, 2015. In the fiscal year ended March 31, 2014, the Company recorded an impairment charge of $154 to write down trade names pursuant to its decision to rename and rebrand the subsidiaries under DT to DT EMEA and DT APAC. There were no other indications of impairment present during the period ended March 31, 2014.
The components of intangible assets as at March 31, 2016 and 2015 were as follows:
The Company has included amortization of acquired intangible assets directly attributable to revenue-generating activities in cost of revenues. The Company has included amortization of acquired intangible assets not directly attributable to revenue-generating activities in operating expenses.
During the years ended March 31, 2016, 2015, and 2014, the Company recorded amortization expense in the amount of $10,537, $2,010, and $1,769, respectively.
Included in the $10,537 amortization expense recorded during the year ended March 31, 2016 is $2,404 of amortization expense recorded for customer relationship intangible assets related to a customer relationship the Company terminated from our September 2012 acquisition of Logia Mobile Ltd.
In connection with the Company's investment in Sift, the Company recorded approximately a $1,874 reduction to the cost basis of internal use software acquired in the Appia Inc. transaction as the licensing technology in the Sift agreement was specifically tied to such software. We do not expect any further adjustments to the software intangibles related to this transaction.
Based on the amortizable intangible assets as of March 31, 2016, we estimate amortization expense for the next five years to be as follows:
Below is a summary of intangible assets:
11. Debt
Senior Debt
On March 6, 2015, in connection with the Company’s acquisition of Appia, Inc., DT Media entered into a Second Amended and Restated Loan and Security Agreement with SVB in connection with the closing of the Appia, Inc. acquisition, which included a term loan and revolving line of credit. This amendment replaced and restated Appia Inc's prior loan agreement with SVB, and was then amended and restated in June 2015 (as described under "Revolving Line of Credit"). As of March 31, 2016, the term loan has been fully paid off, whereas at March 31, 2015 the balance was $600.
Revolving Line of Credit
On June 11, 2015, DT Media, and SVB, entered into a Third Amended and Restated Loan and Security Agreement, pursuant to which SVB agreed to amend and restate the existing Second Amended and Restated Loan and Security Agreement to increase the revolving line of credit available under such facility from $3,500 to $5,000, to extend the maturity date under the facility from June 30, 2015 to June 30, 2016, and to make certain other changes to the terms of the existing agreement.
The revolving line of credit under this amendment allows DT Media to borrow up to the lesser of $5,000 or the Borrowing Base, which is 80% of eligible accounts receivable after consideration of other amounts outstanding, under the revolving line of credit. At March 31, 2016 and March 31, 2015, DT Media had borrowed $3,000 under the revolving line. The revolving line matures on June 30, 2016, with interest payable monthly at a floating annual rate equal to (a) during any month for which DT Media maintained an adjusted quick ratio (as customarily defined) of not less than 1.00:1.00 as of the last day of a month, the prime rate as reported by The Wall Street Journal, plus (1.75%) and (b) at all other times, the prime rate as reported by The Wall Street Journal, plus (2.75%). At March 31, 2016, the interest rate was 6.25%.
On November 30, 2015, DT Media and SVB, entered into an amendment to the Third Amended and Restated Loan and Security Agreement dated June 11, 2015. Pursuant to this amendment, the adjusted EBITDA financial covenant was removed and replaced with the requirement to maintain an adjusted quick ratio of not less than 0.90:1.00 unless (a) there are no advances outstanding under the revolving facility, or (b) if the Company’s cash and cash equivalents held at SVB or SVB's Affiliates is greater than or equal to $15,000. Furthermore, the Streamline Period, which is not a financial covenant but applies to application of receivables, was amended so that it is achieved if DT Media’s trailing three-month period revenue is not less than 85% of projections for the three months ending August 31, 2015 through November 30, 2015, 75% of projections for the three months ending December 31, 2015 and thereafter, with the projected revenue for such three month period as set forth in DT Media’s operating budget provided to SVB. This amendment also added the requirement for the Company to deliver consolidated financial statements in addition to DT Media. At March 31, 2016, DT Media and the Company were compliant with all covenants. The Company was non-Streamline as of March 31, 2016.
DT Media’s obligations under this amendment are secured by substantially all of DT Media’s assets. Additionally, Digital Turbine, Inc. has guaranteed DT Media’s obligations under this amendment, and pledged substantially all of its assets, including its intellectual property, to SVB in support of this amendment.
Pursuant to the amendment to the Third Amended and Restated Loan and Security Agreement dated June 11, 2015, entered into by DT Media and SVB on November 30, 2015, the covenant requirement was put in place for the Company to maintain an adjusted quick ratio of not less than 0.90:1.00 unless (a) there are no advances outstanding under the revolving facility, or (b) if the Company’s cash and cash equivalents held at SVB or SVB's Affiliates is greater than or equal to $15,000. As of April 30, 2016, given the Company did not meet the requirements set forth in (a) and (b) noted previously, the Company was required to maintain an adjusted quick ratio of not less than 0.90:1.00. As of April 30, 2016, the Company's quick ratio was estimated at 0.89 versus the 0.90 minimum level.
On June 10, 2016, prior to the required testing of the above-mentioned covenant, SVB and DT Media entered into a Consent Agreement, effective as of May 31, 2016, whereby SVB provided its consent to DT Media (for a de minimis fee) to not exercise any rights or remedies solely in connection with the non-compliance with such covenant for the period ended April 30, 2016, without which consent DT Media would have been in default of the Loan Agreement. Please see "Risk Factors"
included in PART I Item 1A. of this Annual Report on Form 10-K within section "General Risk - The Company has secured indebtedness, which could limit its financial flexibility", regarding financial covenant compliance.
Subordinated Debenture and Warrant
On March 6, 2015, in connection with the acquisition of DT Media, the Company entered into a Securities Purchase Agreement with North Atlantic, pursuant to which DT Media sold a senior secured debenture with a principal amount of $8,000 (the “New Debenture”) to North Atlantic. The New Debenture was issued in exchange for two debentures previously sold by Appia, Inc. to North Atlantic, which were cancelled.
The New Debenture matures on March 6, 2017, at which time the principal amount is due and payable. The Company may prepay the New Debenture in whole or in part at any time without penalty. The New Debenture bears interest at 10% per annum for the first twelve months, and 14% thereafter; interest is payable monthly.
DT Media’s obligations under the New Debenture are secured by all of DT Media’s assets; additionally, Digital Turbine, Inc. has guaranteed DT Media’s obligations under the New Debenture, and pledged substantially all of its assets, including its intellectual property, to North Atlantic in support of the New Debenture. The New Debenture is subordinated to the Amended and Restated Credit Facility.
In connection with the issuance of the New Debenture, the Company issued to North Atlantic (i) 200,000 shares of the Company’s common stock, and (ii) a warrant to purchase an additional 400,000 shares of the Company’s common stock at an exercise price of $0.001 per share. The warrant is not exercisable until the one year anniversary of the closing date of the merger and would have terminated if the Company had repaid the New Debenture prior to such one year anniversary. The value of the common shares, and the estimated value of the warrant, have been recorded as debt discount and are being amortized over the term of the New Debenture during the years ended March 31, 2016, 2015. During the years ended March 31, 2016 and 2015, debt discount amortized amounted to $470 and $34, respectively, with the debt discount balance amounting to $440 and $910 at March 31, 2016 and 2015, respectively.
On February 17, 2016, DT Media and North Atlantic, entered into an amendment to the Securities Purchase Agreement dated March 6, 2015 where DT Media agreed to the prepayment premium in the table below if the debt is retired within the date ranges set forth. Although the Company’s debt to North Atlantic is not due until March 6, 2017, if the debt is not retired by May 6, North Atlantic has a right to receive a warrant for 400,000 shares (0.6% of outstanding as of March 31, 2016) and a board observer right. As the Company is in discussions to refinance its debt, it sought to defer the issuance of the warrant (and board observer rights) in exchange for the prepayment premium. Accordingly, pursuant to this amendment, the warrant vesting was modified to May 6, 2016.
On May 6, 2016, DT Media and North Atlantic, entered into a Second Amendment to Securities Purchase Agreement, where DT Media agreed to pay North Atlantic the amount of $140 as a fee in connection with the preparation, negotiation, and execution of this amendment. Pursuant to this amendment, the warrant vesting date was modified to June 15, 2016 (the “Retirement Date”) and provided that the vesting date may be further extended by North Atlantic to no later than June 22, 2016, if North Atlantic believes, in its reasonable discretion, that (i) DT Media is unable to refinance the obligations by the vesting date, (ii) reasonable progress has been made by DT Media in refinancing the obligations, and (iii) in all likelihood, DT Media will be able to refinance the obligations by June 22, 2016. If these conditions are not satisfied or the debt is not refinanced by June 15, 2016, then a warrant for 400,000 shares would be issued to North Atlantic and North Atlantic would receive a board observer. The payment of $140 to North Atlantic was in lieu of any prepayment premium described above.
On June 13, 2016, DT Media and North Atlantic entered into a Third Amendment to Securities Purchase Agreement, where DT Media agreed to pay North Atlantic the amount of $60 as consideration to extend the Retirement Date to July 15, 2016.
The New Debenture, and the Company’s secured guarantees of such debt, contain covenants, among others, limiting the Company’s ability to undergo a change of control, incur indebtedness, grant liens, make dividends in cash, and other customary covenants. At March 31, 2016, DT Media and the Company were compliant with all such covenants.
The Company’s required principal repayments for its outstanding debt as of March 31, 2016, are as follows:
12. Related-Party Transactions
On December 28, 2015, DT Media entered into a license with respect to certain of DTM’s intellectual property assets with Sift, in exchange for 9.9% of Sift’s newly-issued Preferred Stock and a cash payment of $1,000. Judson Bowman, a Director at the time of the transaction, is the founder, CEO, and majority shareholder of Sift. Mr Bowman has subsequently stepped down from Digital Turbine's board effective January 25, 2016. For so long as DT Media holds Preferred Stock in Sift, DT Media shall be entitled to nominate for election one member of the five-member Board of Sift, which DT Media nominated as director Bill Stone, CEO of Digital Turbine.
The investment in Sift’s Preferred Stock is recorded at cost, equal to its fair value at the date of issuance of $999.
13. 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 as 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 as if-converted basis.
Common Stock and Warrants
In April 2015, the Company issued 452,974 unregistered shares of common stock of the Company to a director for the cashless exercise of 666,667 warrants granted in June 2010. See additional disclosure regarding the issuance of unregistered shares at "PART II - OTHER INFORMATION", section "Item 2.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision of and with the participation of our management, including our chief executive officer, who is our principal executive officer, and our chief financial officer, who is our principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of March 31, 2016, the end of the period covered by this Annual Report. The term “disclosure controls and procedures,” as set forth in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2016 our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were ineffective due to the material weakness described below. As a result, the disclosure controls and procedures were ineffective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reporting within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to our management, including the chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding disclosure.
Changes in Internal Controls Over Financial Reporting
In fiscal 2015 DT Media (formerly known as Appia, Inc.) was not included in the scope of the review of our internal controls. DT Media was included in the scope of our internal controls review in fiscal year 2016. David Wesch became our Acting Chief Accounting Officer after the resignation of James Alejandro, our prior Chief Accounting Officer.
See "Completed Actions" subsection below which summarizes additional changes in internal controls over financial reporting.
Other than as described above, there were no changes in our internal controls over financial reporting or in other factors identified in connection with the evaluation required by Exchange Act Rules 13a-15(d) or 15d-15(d) that occurred during the fiscal period ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal controls over financial reporting were ineffective as of March 31, 2016 because of the material weakness described below.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Material Weakness
Management identified control deficiencies that in the aggregate represent a material weakness in our internal control over financial reporting as of March 31, 2016. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.
We have identified deficiencies in the design and/or operations of our controls associated with the Financial Close and Reporting process that in the aggregate represent a material weakness including: (i) deficiencies in control design and operating effectiveness relating to manual processes performed in spreadsheets used for consolidation and stock compensation; (ii) deficiencies in operating effectiveness of controls over reconciliations of balance sheet accounts and review of journal entries; and (iii) deficiencies in operating effectiveness of controls over review of financial statements for compliance with GAAP and SEC reporting requirements. Additionally, we have identified deficiencies in the design and operations of our controls over information technology that represent a material weakness relating to deficiencies in control design, including lack of formal documentation of controls, and monitoring.
In light of the material weakness in internal control over financial reporting described above, we performed additional analysis and other post-closing procedures to ensure that our financial statements were prepared in accordance with generally accepted accounting principles. Despite the material weakness in our internal controls over financial reporting, we
believe that the financial statements included in our Form 10-K for the period ended March 31, 2016 fairly present, in all material respects, our financial condition, results of operations, changes in stockholders’ deficiency and cash flows for the periods presented.
The foregoing has been approved by our management, including our Chief Executive Officer and Chief Financial Officer, who have been involved with the reassessment and analysis of our internal control over financial reporting.
SingerLewak LLP, an independent registered public accounting firm, has issued an attestation report on our internal control over financial reporting. This report is included in Part II, Item 8 of this 10K.
Remedial Actions
The material weakness we identified associated with the Financial Close and Reporting process arises primarily from (i) a lack of a sufficient complement of accounting and financial reporting personnel who were unable to implement formal accounting policies with an appropriate level of accounting knowledge and experience commensurate with our financial reporting requirements, and (ii) inadequate accounting systems including information technology systems directly related to financial statement processes and a heavy reliance on manual processes.
We have taken and completed certain actions, with other planned actions to be taken over the next 12 months to remediate the material weakness.
Completed Actions
•
Hired a Chief Accounting Officer “CAO” on February 27, 2015 (who recently resigned; Mr. David Wesch is now our current Acting CAO). The CAO hired during fiscal 2015 was with the Company for all of fiscal 2016 and through the year end close process.
•
Implemented a management representation letter in which key members of management and accounting/finance staff attest to certain questions related to the financial statements.
•
Implemented a Company signature authority policy, which outlines requirements and signing authority for executing contracts.
•
Implemented expense reporting tool in the US.
•
Implemented a process for contract reviews, operating expense actual versus budget reviews, and strengthened policies and procedures for balance sheet reconciliations and reviews.
•
Documented key accounting policies, including policies for revenue recognition, goodwill and intangibles, journal entries, accounts receivable, accounts payable, capital and depreciation, interest and other, and income statement classification.
•
Drafted position papers for all complex, non-recurring transactions.
Planned Actions
•
Expect to hire additional finance and accounting resources across the global organization.
•
Evaluate accounting and finance headcount resources globally to ensure that resources are sufficient to meeting the accounting and finance requirements of the Company.
•
Continue working to document and remediate weaknesses, and to structure the Company’s accounting/finance department to meet SOX 404 (b) requirements.
•
Continue to utilize third party accounting experts to augment Company accounting staff as necessary.
•
Finalize the system implementation related to SAP.
•
Implement a billing, disbursement and stock option accounting system and integrate with SAP.
•
Continue to document internal control procedures for significant accounting areas with an emphasis on implementing additional documented review and approval procedures and automated controls within the Company’s accounting system
•
Continue to conduct formal training related to key accounting policies, internal controls, and SEC compliance for all key personal which have a direct and indirect impact on the transactions underlying the financial statements.
•
Implement Information Technology documentation and new controls that have an impact on financial reporting.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference to our Proxy Statement or 10K/A for the 2016 Annual Meeting of Stockholders (or Form 10-K/A).
The information required by this item is incorporated by reference to our Proxy Statement for the 2016 Annual Meeting of Stockholders (or Form 10-K/A).
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to our Proxy Statement for the 2016 Annual Meeting of Stockholders (or Form 10-K/A).
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to our Proxy Statement for the 2016 Annual Meeting of Stockholders (or Form 10-K/A).
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to our Proxy Statement for the 2016 Annual Meeting of Stockholders (or Form 10-K/A).
PART IV
ITEM 15.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
We have filed the following documents as part of this Annual Report on Form 10-K:
1. Consolidated Financial Statements:
Our consolidated financial statements are listed in the "Index to Consolidated Financial Statements" under Part II, Item 8 of this Annual Report on Form 10-K.
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statement of Comprehensive Loss
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
The supplementary financial information required by this Item 8 is set forth in Note 19 of the Notes to the Consolidated Financial Statements under the caption "Supplemental Consolidated Financial Information".
2. Financial Statement Schedules
Unaudited Quarterly Results and Valuation and Qualifying Accounts for the three fiscal years ended March 31, 2016, 2015, and 2014 is included in Note 19 of Notes to Consolidated Financial Statements included in Part II Item 8 "Financial Statements and Supplementary Data." All other schedules called for by Form 10-K are omitted because they are inapplicable or the required information is shown in the consolidated financial statements, or notes thereto, included herein.
3. Exhibits
See the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Principal Executive Officer:
Pursuant to the requirements of the Exchange Act, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
*
Filed herewith
**
The certifications attached as Exhibit 32.1 and 32.2 that accompany this Annual Report on Form 10-K are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Digital Turbine Inc under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-K, irrespective of any general incorporation language contained in such filing.
†
Management contract or compensatory plan or arrangement