Digital Turbine(APPS) - 2022 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Consolidated Financial Statements Recent acquisitions significantly expanded the balance sheet and revenue, while impacting cash flow from operations Condensed Consolidated Balance Sheets The balance sheet significantly expanded due to acquisitions, with total assets growing to $1.42 billion and liabilities rising to $897.3 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2021 (Unaudited) | March 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $323,786 | $97,385 | | Goodwill | $572,607 | $80,176 | | Intangible Assets, net | $488,360 | $53,300 | | TOTAL ASSETS | $1,424,044 | $260,369 | | Total Current Liabilities | $618,544 | $111,149 | | Acquisition Purchase Price Liabilities | $313,413 | $— | | Long-term Debt, net | $233,830 | $— | | TOTAL LIABILITIES | $897,269 | $115,257 | | Total Stockholders' Equity | $526,775 | $145,112 | Condensed Consolidated Statements of Operations and Comprehensive Income Net revenues surged 264% to $212.6 million, driving operating income to $19.1 million and net income to $14.3 million Statement of Operations Highlights (in thousands, except per share amounts) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net Revenues | $212,615 | $59,012 | | Income from Operations | $19,145 | $10,622 | | Net Income Attributable to Digital Turbine, Inc. | $14,284 | $9,940 | | Diluted Net Income Per Share | $0.14 | $0.11 | Condensed Consolidated Statements of Cash Flows Operating cash flow turned negative $29.0 million, while investing activities used $131.0 million for acquisitions, funded by $215.1 million in financing Cash Flow Summary (in thousands) | Activity | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net cash provided by / (used in) operating activities | $(28,997) | $6,012 | | Net cash used in investing activities | $(130,968) | $(9,243) | | Net cash provided by financing activities | $215,068 | $437 | | Net change in cash | $52,894 | $(2,936) | Notes to Condensed Consolidated Financial Statements Notes detail the impact of Fyber and AdColony acquisitions, including segment reorganization, new debt, and significant earn-out liabilities - On May 25, 2021, the company acquired Fyber N.V. for an estimated aggregate consideration of up to $600 million, consisting of cash, common stock, and a potential earn-out of up to $50 million[32][35] - On April 29, 2021, the company acquired AdColony Holding AS for an estimated total consideration of $400-$425 million, including cash payments and an estimated earn-out of $200-$225 million[43] - Effective April 1, 2021, the company restructured into three operating segments: On Device Media (ODM), In App Media - AdColony (IAM-A), and In App Media - Fyber (IAM-F)[54] Segment Profit (Net revenues less license fees and revenue share) for Three Months Ended June 30, 2021 (in thousands) | Segment | Net Revenues | License Fees & Revenue Share | Segment Profit | | :--- | :--- | :--- | :--- | | On Device Media (ODM) | $120,383 | $70,031 | $50,352 | | In App Media - AdColony (IAM-A) | $44,937 | $30,194 | $14,743 | | In App Media - Fyber (IAM-F) | $49,641 | $40,469 | $9,172 | | Total | $212,615 | $138,348 | $74,267 | - The company entered into an amended credit agreement for a revolving line of credit up to $400 million to finance acquisitions, with $237.1 million drawn as of June 30, 2021[83][84] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses revenue growth driven by acquisitions, increased expenses, and substantial future payment obligations Results of Operations Net revenues increased 264.3% YoY, driven by organic growth and contributions from AdColony and Fyber, while operating expenses rose 300% due to acquisitions Net Revenues by Segment (in thousands) | Segment | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | % of Change | | :--- | :--- | :--- | :--- | | On Device Media | $120,383 | $59,012 | 104.0% | | In App Media - AdColony | $44,937 | $— | 100.0% | | In App Media - Fyber | $49,641 | $— | 100.0% | | Total Net Revenues | $214,961 | $59,012 | 264.3% | - The On Device Media segment's revenue growth was due to increased demand, higher CPI/CPP revenues, and expanded distribution with new and existing partners[136] - License fees and revenue share increased at a greater rate than revenues (328.3% vs 264.3%) because the acquired businesses have higher contractual revenue share percentages than the legacy business[141] - General and administrative expenses increased 242.4% due to higher headcount, increased bonus accruals, and amortization of intangible assets from the AdColony and Fyber acquisitions[146] Liquidity and Capital Resources Liquidity sources include $84.0 million cash and $162.9 million credit facility availability, offset by significant future acquisition payment obligations - Primary liquidity sources are cash from operations and debt. As of June 30, 2021, cash totaled approximately $84.0 million, with $162.9 million available under the New Credit Agreement[151] - The company has recognized an acquisition purchase price liability of $313.4 million, comprising $100 million in unpaid cash consideration and $213.4 million in estimated contingent earn-out consideration for the AdColony acquisition[154] - Cash flow from operations was negative $(29.0) million for the quarter, a decrease of $35.0 million YoY, primarily due to significant increases in accounts receivable and decreases in accrued compensation related to the recent acquisitions[160] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks primarily from variable interest rates on debt and foreign currency exchange rate fluctuations - Borrowings under the credit facility are subject to variable interest rates, exposing the company to interest rate fluctuations. A hypothetical 100 basis point increase in rates would increase annual interest expense by $0.01 million for every $1 million of outstanding debt[167] - The company has foreign currency risks from revenues and expenses denominated in non-U.S. dollar currencies. As foreign operations expand, results may be more impacted by exchange rate fluctuations[169] Controls and Procedures Management concluded disclosure controls were effective, while integrating new acquisitions into internal control over financial reporting - Based on an evaluation, the CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[171] - The company is integrating the acquisitions of Fyber N.V. and AdColony Holdings, AS into its internal control over financial reporting[172] PART II - OTHER INFORMATION Legal Proceedings The company reported no material legal proceedings - None[174] Risk Factors The company faces significant risks from integrating acquisitions, intense competition, data privacy regulations, and substantial new debt General Company Risks General risks include challenges in integrating recent acquisitions, managing growth, meeting future payment obligations, and revenue concentration from limited partners - The failure to successfully integrate the recent acquisitions of Appreciate, AdColony, and Fyber may adversely affect future results[204] - The company must pay $100.0 million in cash by October 29, 2021, and an estimated earn-out of $200.0 to $225.0 million for the AdColony acquisition, posing a financial risk if funds are not available[208] - A significant portion of Media Distribution business revenue is derived from a limited number of wireless carriers, and the loss of any relationship could materially harm the business[220][221] Risks Related to the Mobile Advertising Industry Generally Risks include intense competition, dependence on mobile operating systems, potential data access restrictions (e.g., IDFA changes), and ad-blocking technologies - The mobile advertising industry is intensely competitive, with competition from large, well-established companies like Google, Facebook, and Amazon, as well as internally-developed solutions by operators and OEMs[232][233][234] - The business is highly dependent on decisions by third parties that control mobile operating systems, such as Google (Android) and Apple (iOS), which could prevent or impair the company's advertising services[243][269] - Restrictions on the use of third-party cookies and mobile device identifiers (like Apple's IDFA) could significantly harm performance, as these are crucial for ad targeting, measurement, and effectiveness[286][291] Industry Regulatory Risks The company faces significant compliance costs and risks from stringent global data privacy laws (GDPR, CCPA/CPRA) and international anti-corruption regulations - The company is subject to stringent data privacy laws like GDPR and the UK GDPR, which carry fines of up to 4% of global turnover for non-compliance and restrict cross-border data transfers[306][309] - The California Consumer Privacy Act (CCPA) and the upcoming California Privacy Rights Act (CPRA) create new consumer rights and obligations that increase compliance costs and may restrict the use of personal information for advertising[311][312] - Due to global operations, the company is subject to anti-bribery laws like the FCPA and economic sanctions regulations, which could lead to significant penalties if violated[327][331] Risks Related to Our Common Stock and Capital Structure Significant secured debt limits financial flexibility, future capital needs may dilute stockholders, and failure to maintain internal controls could impact stock price - The company has $237.1 million in outstanding secured indebtedness as of June 30, 2021, which could limit financial flexibility and requires a significant amount of cash to service[385] - Future payments for acquisitions may require raising additional capital, potentially through equity financing, which could dilute existing stockholders[395][396] - Failure to maintain an effective system of internal controls, especially with the complexity of recent acquisitions, could lead to inaccurate financial reporting and a negative impact on the stock price[403][404]