Digital Turbine(APPS) - 2019 Q4 - Annual Report

Part I Item 1. Business Digital Turbine operates a single advertising segment, leveraging its Ignite™ platform to monetize mobile applications for operators and OEMs, after divesting its Direct Carrier Billing and A&P businesses in fiscal 2019, with significant customer concentration - The company operates as a single reportable segment, Advertising, which consists of its Operator and OEM (O&O) business[6][15][16] - The core product is Ignite™, a software platform for mobile operators and OEMs to control, manage, and monetize applications on devices, having delivered over 2 billion app preloads on over 260 million devices[6][7][17] - In April 2018, the company divested its Direct Carrier Billing business (formerly the Content segment) and its Advertising and Publishing (A&P) business to streamline its model and enhance management focus, which are now treated as discontinued operations[9][10][11] FY2019 Customer and Partner Revenue Concentration | Entity | Relationship | % of FY2019 Net Revenues | | :--- | :--- | :--- | | Oath Inc. (Verizon) | Customer | 28.6% | | Verizon Wireless | Partner | 45.9% | | AT&T Inc. | Partner | 38.7% | Item 1A. Risk Factors The company faces risks from net losses, high customer dependency, intense competition, evolving technology, cybersecurity threats, data privacy regulations, debt covenants, and stock price volatility Business & Operational Risks - The company has a history of net losses and may not achieve profitability as it expects to continue increasing expenses for growth initiatives[36][37] - A majority of revenues are derived from a limited number of wireless carriers, advertisers, and application developers, where termination of any relationship would significantly harm financial results[56][57] - The business is exposed to system security risks, data protection breaches, and cyber-attacks which could disrupt operations, increase expenses, and damage its reputation[96][97] Advertising & Partner Risks - The company's success is highly dependent on maintaining relationships with a very limited number of wireless carriers and OEMs, where the loss of any key partner could materially reduce revenues[110][111] - The mobile advertising market is intensely competitive, with primary competition from significantly larger companies like Facebook, Twitter, Snap, and Google[116] - The business depends on its ability to collect and use data to deliver applications, and any limitations on data collection could diminish the value of its services[131][133] Market & Industry Risks - The mobile products and services industry is highly competitive, with many competitors having significantly greater financial resources, stronger brand recognition, and more substantial intellectual property[137][138][140] - The company's business model, focused on mobile advertising and application installations, is in its early stages and not completely proven, with risks in predicting future revenues and profits[149] - Rapidly changing wireless communications technologies require continuous adaptation and investment, where failure to keep pace could render products technologically inferior or obsolete[152][153][154] Financial & Stock Risks - The company has secured indebtedness with financial covenants (e.g., current ratio, revenue targets) that could limit financial flexibility, and a breach could lead to debt acceleration[208][209] - The common stock price is highly volatile, and failure to comply with NASDAQ's continued listing requirements, such as the minimum $1.00 bid price, could result in delisting[216][219][220] - Future sales of securities to raise capital or for acquisitions could result in significant dilution to existing stockholders[223][224] Item 2. Properties The company's principal executive offices are in Austin, Texas, with additional leased office spaces in Durham, San Francisco, Tel Aviv, and Singapore - Principal offices are located at 111 Nueces Street, Austin, Texas 78701[251] - Digital Turbine leases additional office space in Durham, NC; San Francisco, CA; Tel Aviv, Israel; and Singapore[251] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under 'APPS', with 11,604 record holders as of May 28, 2019, and no cash dividends are anticipated due to debt restrictions - The company's common stock is traded on the NASDAQ Capital Market under the symbol "APPS"[253] - As of May 28, 2019, there were 11,604 holders of record of the common stock[253] - The company has not paid cash dividends since inception and does not anticipate doing so in the foreseeable future, partly due to restrictions in its debt agreements[254] Item 6. Selected Financial Data This section presents a five-year summary of continuing operations, showing revenue growth from $3.4 million in FY2015 to $103.6 million in FY2019, and a shift to positive operating income Selected Financial Data (Continuing Operations, in thousands) | Fiscal Year Ended March 31, | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net revenues | $103,569 | $74,751 | $40,207 | $22,251 | $3,371 | | Income / (loss) from operations | $3,445 | $(5,809) | $(16,971) | $(22,534) | $(16,556) | | Loss from continuing operations | $(4,302) | $(19,697) | $(19,138) | $(24,492) | $(16,173) | | Total assets | $82,861 | $86,607 | $107,580 | $121,940 | $122,571 | | Total stockholders' equity | $36,358 | $27,672 | $62,045 | $82,271 | $91,529 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses FY2019 financial performance, highlighting a 38.6% revenue increase to $103.6 million, improved gross margin, and a turnaround to $3.4 million in operating income, supported by an expanded $20 million credit facility Results of Operations FY2019 net revenues rose 38.6% to $103.6 million, driven by Ignite platform demand, leading to a 41.9% gross profit increase and a shift to $3.4 million in operating income Fiscal 2019 vs. Fiscal 2018 Performance (Continuing Operations, in thousands) | Metric | FY 2019 | FY 2018 | % Change | | :--- | :--- | :--- | :--- | | Net revenues | $103,569 | $74,751 | 38.6% | | Gross profit | $35,565 | $25,055 | 41.9% | | Gross Margin % | 34.3% | 33.5% | N/A | | Income / (loss) from operations | $3,445 | $(5,809) | (159.3)% | | Loss from continuing operations | $(4,302) | $(19,697) | (78.2)% | - The increase in Ignite net revenue was driven by higher demand, leading to better CPI (Cost-Per-Install) and CPP (Cost-Per-Placement) revenue, expanded placement with existing partners, and new partner distribution[283] - Total operating expenses increased by only 4.1% year-over-year, demonstrating the company's ability to scale revenue at a greater rate than operating expenses[296] Liquidity and Capital Resources As of March 31, 2019, the company held $11.1 million in cash, generated $5.0 million in operating cash flow, and enhanced liquidity by expanding its credit facility to $20 million post-fiscal year-end - As of March 31, 2019, the company had cash and restricted cash totaling approximately $11.1 million[320][404] - Net cash provided by operating activities from continuing operations was $5.0 million for the year ended March 31, 2019[324][325] - Subsequent to March 31, 2019, the company amended its credit agreement, increasing the total facility from $5 million to $20 million and extending it to May 2021[321][405][597] Critical Accounting Policies Key accounting policies include ASC 606 revenue recognition, annual goodwill impairment testing with no FY2019 impairment, and fair value measurement of derivative liabilities using Level 3 inputs - The company adopted the new revenue recognition standard, ASC 606, on April 1, 2018, using the modified retrospective method[341][422] - Goodwill and indefinite-life intangible assets are not amortized but are tested for impairment at least annually, and no impairment was recorded for continuing operations in FY2019[363][464] - The company uses a lattice approach with a Monte Carlo simulation model (Level 3 inputs) to determine the fair value of its convertible note embedded derivative liability and warrant liability[442][447] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from variable interest rates on its credit facility and foreign currency exchange rate fluctuations, primarily involving the Australian dollar, impacting financial results - The company is exposed to interest rate risk as borrowings under its credit facility are at variable rates, where a hypothetical 100 basis point increase would increase annual interest expense by $0.01 million for every $1 million of outstanding debt[378] - The company faces foreign currency exchange risk related to revenues and operating expenses denominated in currencies other than the U.S. dollar, primarily the Australian dollar[379] Item 8. Financial Statements and Supplementary Data This section includes audited consolidated financial statements for FY2017-2019, auditor's report, and notes detailing discontinued operations, debt conversion, derivative fair value, and segment information Consolidated Balance Sheets Consolidated Balance Sheet Data (in thousands) | | March 31, 2019 | March 31, 2018 | | :--- | :--- | :--- | | Cash | $10,894 | $12,720 | | Total Current Assets | $37,123 | $39,755 | | Total Assets | $82,861 | $86,607 | | Total Current Liabilities | $38,308 | $46,406 | | Total Liabilities | $46,503 | $58,935 | | Total Stockholders' Equity | $36,358 | $27,672 | Consolidated Statements of Operations and Comprehensive Loss Consolidated Statement of Operations Data (in thousands) | | FY 2019 | FY 2018 | FY 2017 | | :--- | :--- | :--- | :--- | | Net revenues | $103,569 | $74,751 | $40,207 | | Gross profit | $35,565 | $25,055 | $11,258 | | Income / (loss) from operations | $3,445 | $(5,809) | $(16,971) | | Loss from continuing operations | $(4,302) | $(19,697) | $(19,138) | | Net loss | $(6,010) | $(52,857) | $(24,264) | | Basic & diluted net loss per share (Continuing) | $(0.06) | $(0.28) | $(0.29) | Consolidated Statements of Cash Flows Consolidated Cash Flow Data (in thousands) | | FY 2019 | FY 2018 | FY 2017 | | :--- | :--- | :--- | :--- | | Net cash from operating activities (Continuing) | $4,970 | $7,290 | $(11,258) | | Net cash used in investing activities (Continuing) | $(2,314) | $(1,992) | $(419) | | Net cash (used in) / from financing activities | $(916) | $1,743 | $2,628 | | Net change in cash | $(1,992) | $6,571 | $(4,751) | Notes to Consolidated Financial Statements Notes detail discontinued operations with a $34 million goodwill impairment, full conversion of convertible debt, fair value measurement of derivative liabilities, and confirm Advertising as the sole reportable segment - Note 3 (Discontinued Operations): Details the sale of the Content and A&P businesses, now classified as discontinued operations, with a $34.0 million goodwill impairment loss related to these divested units recorded in fiscal 2018[410][412][414] - Note 9 (Debt): During fiscal 2019, the remaining $5.7 million of convertible notes were converted into common stock, and as of March 31, 2019, all convertible notes have been extinguished[502][503] - Note 17 (Segment and Geographic Information): The company manages its business as one operating and reportable segment: Advertising, and for FY2019, the United States and Canada accounted for $72.9 million of the $103.6 million in total net revenues[583][586] Item 9A. Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of March 31, 2019, with the independent auditor issuing an unqualified opinion on internal controls - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2019[600] - Management concluded that the company maintained effective internal control over financial reporting as of March 31, 2019, based on the COSO 2013 framework[603] - The independent registered public accounting firm, SingerLewak LLP, audited and issued an unqualified attestation report on the company's internal control over financial reporting[604][605] Part III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2019 Proxy Statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2019 Proxy Statement[607] Item 11. Executive Compensation Executive compensation details are incorporated by reference from the company's 2019 Proxy Statement - Information regarding executive compensation is incorporated by reference from the 2019 Proxy Statement[608] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details equity compensation plans, including the 2011 Equity Incentive Plan, with 9,128,885 securities for outstanding options and 8,685,457 available for future issuance Equity Compensation Plan Information as of March 31, 2019 | Plan Category | Securities to be Issued Upon Exercise (a) | Weighted-Average Exercise Price | Securities Remaining for Future Issuance (b) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 9,128,885 | $1.80 | 8,685,457 | - The 2011 Equity Incentive Plan was amended to increase shares available for issuance from 4,000,000 to 20,000,000[611] Part IV Item 15. Exhibits and Financial Statement Schedules This section provides an index of consolidated financial statements and all exhibits filed with the Form 10-K, including various agreements and corporate documents - This section contains the index to the consolidated financial statements and a list of all exhibits filed with the Form 10-K[618][621]