Digital Turbine, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended March 31, 2015 (not calendar-year Q4). Unless noted, amounts are in millions of U.S. dollars. The company provides mobile advertising and content products to operators, advertisers, publishers and device manufacturers.
Financial performance
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $28.25 | $24.40 | +15.8% |
| Gross profit / margin | $6.13 / 22% | $7.85 / 32% | Profit -21.8% |
| Operating loss | $(23.74) | $(15.52) | Loss widened |
| Net loss | $(24.65) | $(18.70) | Loss widened 31.8% |
| Diluted loss per share | $(0.63) | $(0.68) | Improved from share-count growth |
| Cash used in operations | $(14.50) | $(7.81) | Use increased |
| Cash and cash equivalents at year-end | $7.07 | $21.81 | Down $14.74 |
Advertising revenue rose to $6.24 from $0.77, reflecting DT Ignite deployments, carrier customization and integration fees, and 26 days of Appia Core results. Content revenue fell 6.9% to $22.01, mainly due to weaker DT Marketplace activity, partly offset by DT Pay growth. Gross margin pressure reflected a shift toward lower-margin DT Pay and revenue sharing with carriers, OEMs and Appia publishers. Operating expenses rose 27.8% to $29.87; management attributed the increase to acquisition and transaction costs, new offices, Appia expenses and higher stock compensation.
Liquidity, debt and capital
Current assets were $20.19 versus current liabilities of $23.95, leaving negative working capital of approximately $3.8. Total liabilities were $31.04. At March 31, debt included a $3.0 revolving balance, a $0.6 term loan and an $8.0 subordinated debenture (reported long-term debt net of discount: $7.09). The debenture bears 10% interest for its first year and 14% thereafter, matures in March 2017, and is subordinated to Silicon Valley Bank debt. The debt is secured, and the parent guaranteed obligations and pledged substantially all its assets, including intellectual property.
Management said available resources were expected to fund operations through March 31, 2016, but cash generation remained negative and additional capital could be needed, particularly for acquisitions or growth investments. A $100 million shelf registration became effective April 24, 2015. Subsequent to year-end, the SVB revolving facility was increased from $3.5 million to $5.0 million and extended to June 30, 2016, subject to borrowing-base, security, guarantee and covenant terms.
Material changes and notable items
- On March 6, 2015, Digital Turbine acquired Appia for approximately 18.9 million shares, with additional equity awards assumed. Appia contributed 26 days of reported results; acquisition accounting added substantial goodwill and intangible assets.
- Appia’s unaudited pro forma results, as if acquired at the start of the fiscal year, showed revenue of $57.98 million and a net loss of $35.16 million for FY2015. These figures are not the company’s reported consolidated results.
- At year-end, goodwill was $76.75 million and net intangible assets were $24.94 million; the company reported no impairment in FY2015.
- Weighted-average shares rose 41.8% to 38.97 million, principally reflecting the acquisition and other equity activity. The Appia consideration was a significant source of dilution.
Outlook, risks and contingencies
The filing provides no numerical revenue or earnings guidance. Management cited expected seasonal strength in the third and fourth fiscal quarters, but emphasized that results can vary substantially with advertiser spending, handset sales, product placement and customer activity. Management also described the mobile advertising strategy as early-stage and unproven.
- Customer and channel concentration is material: a major customer represented 50.6% of FY2015 gross revenue, and another represented 11.1%; a major customer accounted for 21.1% of year-end gross receivables. The filing also reports significant dependence on a limited number of operators, advertisers and publishers.
- The company reported ineffective disclosure controls and ineffective internal control over financial reporting at March 31, 2015, due to a material weakness in financial close and reporting, including inadequate systems and policies and reliance on manual processes. Appia was excluded from the assessment because it was acquired shortly before year-end. Management described remediation plans. The auditor issued an unqualified opinion on the financial statements but an adverse opinion on internal control.
- Other key risks include continuing losses and cash burn, secured debt and restrictive covenants, acquisition integration, competition, Android/platform dependence, carrier and publisher retention, privacy and data regulation, foreign exchange exposure, and cybersecurity or service disruptions.
- The company accrued $0.381 million for a potential settlement with an investor. It reported no accrual for the Coral Tell-related matter, which management considered remote; the Israeli Supreme Court rejected an appeal in April 2015, with related third-party claims still to be addressed.
Investor verification priorities
- Track operating cash burn, liquidity, borrowing availability and compliance with the amended SVB facility’s covenants and collateral requirements.
- Assess whether advertising growth can offset declining Content revenue and restore gross margins, especially after the full-year contribution and integration of Appia.
- Verify customer concentration, receivable collectability and the sustainability of major operator, advertiser and publisher relationships.
- Monitor remediation of the material weakness and the inclusion and integration of Appia in subsequent internal-control assessments.
- Review acquisition-related goodwill, intangible-asset amortization, dilution and the status of the accrued investor settlement and other contingencies.