Digital Turbine, Inc. - Quarter Report: 2017 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2017



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-35958

DIGITAL TURBINE, INC.

(Exact Name of Registrant as Specified in Its Charter)



Delaware		22-2267658
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

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

(512) 387-7717

(Issuer’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting, or an emerging growth company. See definitions of a “large accelerated filer,” “accelerated filer,”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check One)



Large Accelerated Filer	¨	Accelerated Filer	ý

Non-accelerated Filer	¨ (do not check if smaller reporting company)	Smaller Reporting Company	¨

Emerging Growth Company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act). Yes ¨ No ý

As of January 31, 2018, the Company had 75,143,354 shares of its common stock, $0.0001 par value per share, outstanding.

Digital Turbine, Inc.

FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED December 31, 2017

TABLE OF CONTENTS



	PART I - FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements

	Consolidated Balance Sheets as of December 31, 2017 (Unaudited) and March 31, 2017	3

	Consolidated Statements of Operations and Comprehensive Loss (Unaudited) for the Three and Nine Months Ended December 31, 2017 and 2016	4

	Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2017 and 2016 (Unaudited)	5

	Notes to Unaudited Consolidated Financial Statements	6

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	36

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47

Item 4.	Controls and Procedures	47

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	49

Item 1 (A).	Risk Factors	49

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49

Item 3.	Defaults	49

Item 4.	Mine Safety Disclosures	49

Item 5.	Other Information	49

	Exhibits	50

	Signatures	51

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

Digital Turbine, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except par value and share amounts)



	December 31, 2017			March 31, 2017
	(Unaudited)
ASSETS
Current assets
Cash	$	6,883		$	6,149
Restricted cash	331			331
Accounts receivable, net of allowances of $841 and $597, respectively	32,494			16,554
Deposits	155			121
Prepaid expenses and other current assets	551			510
Total current assets	40,414			23,665
Property and equipment, net	2,693			2,377
Deferred tax assets	593			352
Intangible assets, net	2,844			4,565
Goodwill	76,621			76,621
TOTAL ASSETS	$	123,165		$	107,580
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	28,404		$	19,868
Accrued license fees and revenue share	12,857			8,529
Accrued compensation	3,456			1,073
Short-term debt, net of debt issuance costs of $247 and $0, respectively	1,653			—
Other current liabilities	1,844			1,304
Total current liabilities	48,214			30,774
Convertible notes, net of debt issuance costs and discounts of $2,881 and $6,315, respectively	5,751			9,685
Convertible note embedded derivative liability	5,896			3,218
Warrant liability	3,602			1,076
Other non-current liabilities	51			782
Total liabilities	63,514			45,535
Stockholders' equity
Preferred stock
Series A convertible preferred stock at $0.0001 par value; 2,000,000 shares authorized, 100,000 issued and outstanding (liquidation preference of $1,000)	100			100
Common stock
$0.0001 par value: 200,000,000 shares authorized; 74,079,153 issued and 73,344,697 outstanding at December 31, 2017; 67,329,262 issued and 66,594,807 outstanding at March 31, 2017	10			8
Additional paid-in capital	311,621			299,580
Treasury stock (754,599 shares at December 31, 2017 and March 31, 2017)	(71		)	(71		)
Accumulated other comprehensive loss	(326		)	(321		)
Accumulated deficit	(251,683		)	(237,251		)
Total stockholders' equity	59,651			62,045
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	123,165		$	107,580

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

Digital Turbine, Inc. and Subsidiaries

Consolidated Statements of Operations and Comprehensive Loss (Unaudited)

(in thousands, except per share amounts)



	Three Months Ended December 31,						Nine Months Ended December 31,
	2017			2016			2017			2016
Net revenues	$	38,031		$	22,285		$	92,042		$	69,156
Cost of revenues
License fees and revenue share	27,719			17,039			66,485			54,060
Other direct cost of revenues	651			1,878			1,917			5,640
Total cost of revenues	28,370			18,917			68,402			59,700
Gross profit	9,661			3,368			23,640			9,456
Operating expenses
Product development	3,623			3,113			9,218			9,065
Sales and marketing	2,042			1,683			5,288			4,655
General and administrative	4,592			3,982			12,504			13,902
Total operating expenses	10,257			8,778			27,010			27,622
Loss from operations	(596		)	(5,410		)	(3,370		)	(18,166		)
Interest and other expense, net
Interest expense, net	(446		)	(725		)	(1,815		)	(2,029		)
Foreign exchange transaction gain / (loss)	35			(9		)	(182		)	(13		)
Change in fair value of convertible note embedded derivative liability	(1,658		)	2,853			(6,310		)	2,423
Change in fair value of warrant liability	(898		)	937			(2,526		)	797
Loss on extinguishment of debt	(284		)	—			(1,166		)	(293		)
Other income / (expense)	(36		)	68			—			101
Total interest and other expense, net	(3,287		)	3,124			(11,999		)	986
Loss from operations before income taxes	(3,883		)	(2,286		)	(15,369		)	(17,180		)
Income tax provision / (benefit)	(84		)	300			(937		)	159
Net loss	$	(3,799	)	$	(2,586	)	$	(14,432	)	$	(17,339	)
Other comprehensive income / (loss)
Foreign currency translation adjustment	—			5			(5		)	(48		)
Comprehensive loss	$	(3,799	)	$	(2,581	)	$	(14,437	)	$	(17,387	)
Basic and diluted net loss per common share	$	(0.05	)	$	(0.04	)	$	(0.21	)	$	(0.26	)
Weighted-average common shares outstanding, basic and diluted	72,148			66,634			68,575			66,416

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

Digital Turbine, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)



	Nine Months Ended December 31,
	2017			2016
Cash flows from operating activities
Net loss	$	(14,432	)	$	(17,339	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	2,707			6,325
Change in allowance for doubtful accounts	244			130
Amortization of debt discount and debt issuance costs	875			969
Accrued interest	165			297
Stock-based compensation	2,296			3,335
Stock-based compensation for services rendered	224			276
Change in fair value of convertible note embedded derivative liability	6,310			(2,423		)
Change in fair value of warrant liability	2,526			(797		)
Loss on extinguishment of debt	1,166			293
(Increase) / decrease in assets:
Restricted cash transferred from operating cash	—			(323		)
Accounts receivable	(16,184		)	(1,877		)
Deposits	(34		)	83
Deferred tax assets	(241		)	212
Prepaid expenses and other current assets	(41		)	30
Increase / (decrease) in liabilities:
Accounts payable	8,536			4,509
Accrued license fees and revenue share	4,328			(712		)
Accrued compensation	2,383			(241		)
Other current liabilities	385			(818		)
Other non-current liabilities	(731		)	283
Net cash provided by (used in) operating activities	482			(7,788		)

Cash flows from investing activities
Capital expenditures	(1,312		)	(1,381		)
Proceeds from sale of cost method investment in Sift	—			999
Net cash used in investing activities	(1,312		)	(382		)

Cash flows from financing activities
Cash received from issuance of convertible notes	—			16,000
Proceeds from short-term borrowings	2,500			—
Options exercised	261			11
Repayment of debt obligations	(847		)	(11,000		)
Payment of debt issuance costs	(346		)	(2,319		)
Net cash provided by financing activities	1,568			2,692

Effect of exchange rate changes on cash	(4		)	(48		)

Net change in cash	734			(5,526		)

Cash, beginning of period	6,149			11,231

Cash, end of period	$	6,883		$	5,705

Supplemental disclosure of cash flow information
Interest paid	$	770		$	741
Supplemental disclosure of non-cash financing activities
Common stock of the Company issued for extinguishment of debt	$	9,510		$	—

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

Digital Turbine, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

December 31, 2017

(in thousands, except share and per share amounts)

1. Description of Business

Digital Turbine, through its subsidiaries, operates at the convergence of media and mobile communications, delivering end-to-end products and solutions for mobile operators, application advertisers, device original equipment manufacturers ("OEMs") and other third parties to enable them to effectively monetize mobile content and generate higher value user acquisition. The Company operates its business in two reportable segments – Advertising and Content.

The Company's Advertising business is comprised of two businesses:


•	Operator and OEM ("O&O"), an advertiser solution for unique and exclusive carrier and original equipment manufacturer ("OEM") inventory which is comprised of services including:


◦	Ignite™ ("Ignite"), a mobile device management platform with targeted application distribution capabilities, and


◦	Other professional services directly related to the Ignite platform.


•	Advertiser and Publisher ("A&P"), a worldwide mobile user acquisition network which is comprised of the Syndicated network service.

The Company's Content business is comprised of services including:


•	Marketplace™ ("Marketplace"), an application and content store, and


•	Pay™ ("Pay"), a content management and mobile payment solution.

With global headquarters in Austin, Texas and offices in Durham, North Carolina, San Francisco, California, Singapore, Sydney, and Tel Aviv, Digital Turbine’s solutions are available worldwide.

Unless the context otherwise indicates, the use of the terms “we,” “our,” “us,” “Digital Turbine,” “DT,” or the “Company” refer to the collective business and operations of Digital Turbine, Inc. through its operating and wholly-owned subsidiaries, Digital Turbine USA, Inc. (“DT USA”), Digital Turbine (EMEA) Ltd. (“DT EMEA”), Digital Turbine Australia Pty Ltd (“DT APAC”), Digital Turbine Singapore Pte. Ltd. (“DT Singapore”), Digital Turbine Luxembourg S.a.r.l. (“DT Luxembourg”), Digital Turbine Germany, GmbH (“DT Germany”), and Digital Turbine Media, Inc. (“DT Media” or "DTM"). We refer to all the Company's subsidiaries collectively as "wholly-owned subsidiaries." We refer to Appia, Inc., a company we acquired on March 6, 2015, as “DT Media” or "DTM."

2. Liquidity

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("US GAAP"), which contemplate continuation of the Company as a going concern.

Our primary sources of liquidity have historically been issuance of common stock, preferred stock, and debt. As of December 31, 2017, we had cash and restricted cash totaling approximately $7,214.

On September 28, 2016, the Company closed a private placement of $16,000 aggregate principal amount of 8.75% Convertible Senior Notes due 2020 (the “Notes”), netting cash proceeds to the Company of $14,316, after deducting the initial purchaser's discounts and commissions and the estimated offering expenses payable by Digital Turbine. The net proceeds from the issuance of the Notes were used to repay approximately $11,000 of secured indebtedness, consisting of approximately $3,000 to Silicon Valley Bank ("SVB") and $8,000 to North Atlantic Capital ("NAC"), retiring both such debts in their entirety, and will otherwise be used for general corporate purposes and working capital. Refer to Note 7 "Debt" for more details.

On May 23, 2017, the Company entered into a Business Finance Agreement (the "Credit Agreement") with Western Alliance Bank (the "Bank"). The Credit Agreement provides for a $5,000 total facility. Refer to Note 7 "Debt" for more details.

The Company anticipates that its primary sources of liquidity will continue be cash on hand, cash provided by operations, and the remaining credit available under the Credit Agreement. In addition, the Company may raise additional capital through future equity or, subject to restrictions contained in the indenture for the Notes and the Credit Agreement, debt financing to provide for greater flexibility to make acquisitions, make new investments in under-capitalized opportunities, or invest in organic opportunities. Additional financing may not be available on acceptable terms or at all. If the Company issues additional equity securities to raise funds, the ownership percentage of its existing stockholders would be reduced. New investors may demand rights, preferences, or privileges senior to those of existing holders of common stock.

In view of the matters described in the preceding paragraphs, 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. The Company believes that it has sufficient cash and capital resources to operate its business for at least the next twelve months from the issuance date of this quarterly report on Form 10-Q.

3. Summary of Significant Accounting Policies

Interim Consolidated Financial Information

The accompanying consolidated financial statements of Digital Turbine, Inc. should be read in conjunction with the consolidated financial statements and accompanying notes filed with the U.S. Securities and Exchange Commission ("SEC") in Digital Turbine, Inc.'s Annual Report on Form 10-K for the fiscal year ended March 31, 2017, as amended. The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP and pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments of a normal recurring nature considered necessary to fairly state the financial position of Digital Turbine, Inc. and its consolidated subsidiaries at December 31, 2017, the results of its operations and corresponding comprehensive loss, and its cash flows for the nine months ended December 31, 2017 and 2016. The consolidated financial statements include the accounts of the Company and our wholly-owned subsidiaries. All material inter-company balances and transactions have been eliminated in consolidation. The results of operations for the interim period are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2018.

The significant accounting policies and recent accounting pronouncements were described in Note 4 of the consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended March 31, 2017. There have been no significant changes in or updates to the accounting policies since March 31, 2017. Only new accounting pronouncements, pertinent to the Company, issued subsequent to the issuance of our Annual Report are described below.

Recently Issued Accounting Pronouncements

In August 2017, the FASB issued Accounting Standard Update 2017-12: Targeted Improvements to Accounting for Hedging Activities. This update makes more financial and non-financial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess effectiveness. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted upon its issuance. The amendments in this update should be applied on a modified retrospective basis except for the presentation and disclosure guidance which is required prospectively. The Company will adopt ASU 2017-12 during the quarter ended June 30, 2019, and is currently assessing the impact of the future adoption of this standard on its consolidated results of operations, financial condition and cash flows.

In July 2017, the FASB issued ASU 2017-11, Accounting for Certain Financial Instruments with Down Round Features, which addresses the complexity of accounting for certain financial instruments with down round features under current guidance criterion. With this new update, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. This guidance is to be applied retrospectively for instruments outstanding as of the adoption date. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2018. Early application is permitted. The Company will adopt ASU 2017-11 during the quarter ended June 30, 2019, and does not expect the impact of this ASU to have a material impact on its consolidated results of operations, financial condition and cash flows.

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation, which modifies the scope of share-based payment award modification accounting in an effort to provide clarity and reduce diversity in practice under old guidance. Under this new standard, an entity should apply modification accounting (Topic 718) unless specific criterion related to fair value, vesting conditions, and equity/liability classification are all met. This guidance is to be applied prospectively for awards modified on or after the adoption date. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017. Early application is permitted. The Company will adopt ASU 2017-09 during the quarter ended June 30, 2018, and does not expect the impact of this ASU to have a material impact on its consolidated results of operations, financial condition and cash flows.

In May 2014, the FASB issued ASU 2014-09, 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 ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. Additionally, ASU 2014-09 requires enhanced disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In July 2015, the FASB decided to delay the effective date of ASU 2014-09 by one year. The deferral results in the new revenue standard being effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. ASU 2014-09, as amended, is effective using either the full retrospective or modified retrospective transition approach for fiscal years, and for interim periods within those years. In 2016 and 2017, the FASB has issued several accounting standards updates to clarify certain topics within ASU 2014-09. The Company will adopt ASU 2014-09, and its related clarifying ASUs, during the quarter ended June 30, 2018. Further, the Company is currently determining the impact of the standard on its consolidated results of operations, financial condition and cash flows.

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.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and accounts receivable. A significant portion of the Company’s cash is held at one major financial institution that the Company's management has assessed to be of high credit quality. The Company has not experienced any losses in such accounts.

The Company mitigates its credit risk with respect to accounts receivable by performing credit evaluations and monitoring advertisers' and carriers' accounts receivable balances. The Company counts all advertisers and carriers within a single corporate structure as one customer, even in cases where multiple brands, branches, or divisions of an organization enter into separate contracts with the Company. As of December 31, 2017, one major Advertising customers and one Content customer represented approximately 20.8% and 15.7%, respectively, of the Company’s net accounts receivable balance. As of March 31, 2017, two major customers represented 11.2% and 10.7% of the Company's net accounts receivable balance, both within the Advertising business.

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. During the three and nine months ended December 31, 2017, Singapore Telecommunications Limited, a Content customer represented 20.5% and 19.4% of net revenues, respectively; Oath Inc., an Advertising customer represented 14.0% and 13.4% of net revenues, respectively; Telstra Corporation Limited, a Content customer represented 13.6% and 12.7% of net revenues, respectively; and Machine Zone, Inc., an Advertising customer represented 10.6% and 10.5% of net revenues, respectively. During the three and nine months ended December 31, 2016, Telstra Corporation Limited, a Content customer represented 16.2% and 23.7% of net revenues, respectively, Oath Inc., an Advertising customer, represented 16.2% and 13.4% of net revenues, respectively, and Jam City Inc., an Advertising customer represented 13.9% and 11.4% of net revenues, respectively

The Company partners with mobile carriers and OEMS to deliver applications on our Ignite platform through the carrier network. During the three and nine months ended December 31, 2017, Verizon Wireless, a carrier partner, generated 29.6% and 30.9% of our net revenues, respectively; while AT&T Inc., a carrier partner, primarily through its Cricket subsidiary, generated 24.0% and 19.0% of our net revenue, respectively. During the three and nine months ended December 31, 2016, Verizon Wireless, generated 32.9% and 26.6% of our net revenues, respectively.

The Company may not continue to receive significant revenues from any of these or from other large customers. A reduction or delay in operating activity from any of the Company’s significant customers, or a delay or default in payment by any significant customer could materially harm the Company’s business and prospects. Because of the Company’s significant customer concentration, its net sales and operating income could fluctuate significantly due to changes in political or economic conditions, or the loss, reduction of business, or less favorable terms for any of the Company's significant customers.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make certain estimates that impact the reported amounts in the consolidated financial statements and accompanying notes. These estimates are recurring in nature and relate to transactions occurring in the normal course of business. In the opinion of management these are appropriate estimates for arrangements to be settled at a later date based on the fact and circumstances available at the time of filing. Actual results could differ materially from those estimates.

4. Accounts Receivable



	December 31, 2017			March 31, 2017
	(Unaudited)
Billed	$	19,236		$	9,367
Unbilled	14,099			7,784
Allowance for doubtful accounts	(841		)	(597		)
Accounts receivable, net	$	32,494		$	16,554

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 December 31, 2017 and March 31, 2017 are expected to be billed and collected within twelve months.

The Company recorded $21 and $256 of bad debt expense during the three and nine months ended December 31, 2017, respectively. The Company recorded $123 and $528 of bad debt expense during the three and nine months ended December 31, 2016, respectively.

5. Property and Equipment



	December 31, 2017			March 31, 2017
	(Unaudited)
Computer-related equipment	$	5,452		$	4,133
Furniture and fixtures	116			116
Leasehold improvements	143			143
Property and equipment, gross	5,711			4,392
Accumulated depreciation	(3,018		)	(2,015		)
Property and equipment, net	$	2,693		$	2,377

Depreciation expense for the three and nine months ended December 31, 2017 was $350 and $986, respectively; and $248 and $685 for the three and nine months ended December 31, 2016, respectively. Depreciation expense in the three and nine months ended December 31, 2017 includes $261 and $803, respectively, related to internal use assets included in General and Administrative Expense and $89 and $184, respectively, related to internally developed software to be sold, leased, or otherwise marketed included in Other Direct Costs of Revenue. Depreciation expense in the prior year comparative periods related exclusively to internal use assets and is included in General and Administrative Expense.

6. Intangible Assets

The components of intangible assets at December 31, 2017 and March 31, 2017 were as follows:



	As of December 31, 2017
	(Unaudited)
	Cost		Accumulated Amortization			Net
Software	$	11,544	$	(9,781	)	$	1,763
Trade name / trademark	380		(380		)	—
Customer list	11,300		(10,238		)	1,062
License agreements	355		(336		)	19
Total	$	23,579	$	(20,735	)	$	2,844



	As of March 31, 2017
	Cost		Accumulated Amortization			Net
Software	$	11,544	$	(8,191	)	$	3,353
Trade name / trademark	380		(380		)	—
Customer list	11,300		(10,152		)	1,148
License agreements	355		(291		)	64
Total	$	23,579	$	(19,014	)	$	4,565

The Company has included amortization of acquired intangible assets directly attributable to revenue-generating activities in cost of revenues; since all of our acquired intangible assets are directly attributable to revenue-generating activities, all intangible amortization is included in cost of revenues.

The Company recorded amortization expense of $549 and $1,721, respectively, during the three and nine months ended December 31, 2017, and $1,878 and $5,640, respectively, during the three and nine months ended December 31, 2016. The decrease in amortization expense over the comparative three and nine month periods was primarily attributable to advertiser and publisher relationships acquired in the Appia Inc. transaction being fully amortized and the write-off of certain assets during fiscal year 2017.

Based on the amortizable intangible assets as of December 31, 2017, we estimate amortization expense for the next five years to be as follows:



Year Ending March 31,	Amortization Expense
2018	$	549
2019	1,375
2020	114
2021	114
2022	114
Thereafter	578
Total	$	2,844

7. Debt



	December 31, 2017		March 31, 2017
	(Unaudited)
Short-term debt
Secured line of credit, net of debt issuance costs of $247 and $0, respectively	$	1,653	$	—
Total short-term debt	$	1,653	$	—



	December 31, 2017		March 31, 2017
	(Unaudited)
Long-term debt
Convertible notes, net of issuance costs and discounts of $2,881 and $6,315, respectively	$	5,751	$	9,685
Total long-term debt	$	5,751	$	9,685

Convertible Notes

On September 28, 2016, the Company sold to BTIG, LLC (the "Initial Purchaser"), $16,000 aggregate principal amount of 8.75% convertible notes maturing on September 23, 2020, unless converted, repurchased or redeemed in accordance with their terms prior to such date. The $16,000 aggregate principal received from the issuance of the Notes was initially allocated between long-term debt at $11,084, the convertible note embedded derivative liability at $3,693 (see Note 8. "Fair Value Measurements" for more information), and the warrant liability at $1,223 (see Note 8. "Fair Value Measurements" for more information), within the consolidated balance sheet. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the liability. Fair value of the Notes is determined using the residual method of accounting whereby, first, a portion of the proceeds from the issuance of the Notes is allocated to derivatives embedded in the Notes and the warrants issued in connection with the issuance of the Notes, and the proceeds so allocated are accounted for as a convertible note embedded derivative liability and warrant liability, respectively (see Note 8. "Fair Value Measurements" for more information), and second, the remainder of the proceeds from the issuance of the Notes is allocated to the convertible notes, resulting in an original issue debt discount amounting to $4,916. As of the close of the issuance of the Notes on September 28, 2016, the Company incurred $1,700 in debt issuance costs directly related to the issuance of the Notes, which in accordance with ASU 2015-03, the Company has recorded these costs as a direct reduction to the face value of the Notes and will amortize this amount over the life of the Notes as a component of interest expense on the consolidated statement of operation and comprehensive loss. During the three months ended December 31, 2016, the Company further incurred $212 in costs directly associated with the issuance of the Notes, for the preparation and filing of a registration statement on Form S-1 to register the underlying common stock related to the Notes issued and related Warrants issued along with the Notes, which was required to be done in accordance with the Indenture (as defined below). The convertible notes will remain on the consolidated balance sheet at historical cost, accreted up for the amount of cumulative amortization of the debt discount over the life of the debt. If we or the note holders elect not to settle the debt through conversion, we must settle the Notes at face value. Therefore, the liability component will be accreted up to the face value of the Notes, which will result in additional non-cash interest expense being recognized within the consolidated statements of operations and comprehensive loss through the Notes maturity date.

The Company sold the Notes to the Initial Purchaser at a purchase price of 92.75% of the principal amount. The initial purchaser also received an additional 250,000 warrants on the same terms as the warrants issued with the Notes (as detailed below) and has the right to receive 2.5% of any cash consideration received by the Company in connection with a future exercise of any of the warrants issued with the Notes. The Notes were issued under an Indenture dated September 28, 2016, as amended and supplemented (the "Indenture"), between Digital Turbine, Inc., US Bank National Association, as trustee, and certain wholly-owned subsidiaries of the Company, specifically, DT USA, DT Media, DT EMEA, and DT APAC (collectively referred to as the "Guarantors"). The Notes are senior unsecured obligations of the Company, and bear interest at a rate of 8.75% per year, payable semiannually in arrears on March 15th and September 15th of each year, beginning on March 15, 2017. The Notes are unconditionally guaranteed by the Guarantors as to the payment of principal, premium, if any, and interest on a senior unsecured basis. The Notes were issued with an initial conversion price equal to $1.364 per share of the Company's common stock, subject to proportional adjustment for adjustments to outstanding common stock and anti-dilution provisions in case of dividends or distributions, stock split or combination, or if the Company issues or sells shares of common stock at a price per share less than the conversion price on the trading day immediately preceding such issuance of sale.

With respect to any conversion prior to September 23, 2019, in addition to the shares deliverable upon conversion, holders of the Notes will be entitled to receive a payment equal to the remaining scheduled payments of interest that would have been made on the notes being converted from the date of conversion until September 23, 2019 (an “Early Conversion Payment”). We may pay the Early Conversion Payment in cash or, subject to certain equity-related conditions set forth in the Indenture, in shares of our common stock.

Unless stockholder approval is obtained as required by NASDAQ rules, the Company will not have the right to issue shares of common stock as payment of the Early Conversion Payment, if the aggregate number of shares issued (and any other transaction aggregated for such purpose) after giving effect to such conversion or payment, as applicable, would exceed 19.99% of the number of shares of the Company’s common stock outstanding as of the Conversion date (or the "Notes Exchange Cap"). The Company will pay cash in lieu of any shares that would otherwise be deliverable in excess of the Notes Exchange Cap. The required stockholder approval was originally obtained at our annual meeting of stockholders held in January 2017. Due to the supplemental indenture entered in May 2017, a new stockholder approval was required to issue shares in excess of the Notes Exchange Cap, and such new stockholder approval was obtained at our annual meeting of stockholders held in January 2018. Please see the proxy statement for our 2018 annual meeting of stockholders for more information about the effect of the stockholder approval and our ability to issues shares of stock to satisfy our obligations under the Indenture and the warrants issued in connection with the Notes.

The Company may redeem the Notes, for cash, in whole or in part, at any time after September 23, 2018, at a redemption price equal to $1 per $1 principal amount of the notes to be redeemed plus accrued and unpaid interest, if any, to, but excluding, the date of redemption, plus an additional payment (payable in cash or stock) equivalent to the amount of, and subject to equivalent terms and conditions applicable for, an Early Conversion Payment had the notes been converted on the date of redemption, if (1) the closing price of our common shares on the NASDAQ Capital Market has exceeded 200% of the conversion price then in effect (but disregarding the effect on such price from certain anti-dilution adjustments) for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending within the five trading days immediately preceding the date on which we provide the redemption notice, (2) for the 15 consecutive trading days following the last trading day on which the closing price of our common shares was equal to or greater than 200% of the conversion price in effect (but disregarding the effect on such price from certain anti-dilution adjustments) on such trading day for the purpose of the foregoing clause, the closing price of our common shares remains equal to or greater than 150% of the conversion price in effect (but disregarding the effect on such price from certain anti-dilution adjustments) on the given trading day and (3) we are in compliance with certain other equity-related conditions as set forth in the Indenture.

If we undergo a fundamental change (as described below), holders may require us to purchase the Notes in whole or in part for cash at a price equal to 120% of the principal amount of the Notes to be purchased plus any accrued and unpaid interest, including additional interest, if any, to, but excluding, the repurchase date. Conversions that occur in connection with a fundamental change may entitle the holder to receive an increased number of shares of common stock issuable upon such conversion, depending on the date of such fundamental change and the valuation of the Company’s common stock related thereto. A fundamental change is defined as follows:

•

a “person” or “group” within the meaning of Section 13(d) of the Exchange Act other than the Company, the Company’s Subsidiaries or the Company’s or the Company’s Subsidiaries’ employee benefit plans files a Schedule TO or any schedule, form or report under the Exchange Act disclosing that such person or group has become the direct or indirect “beneficial owner,” as defined in Rule 13d-3 under the Exchange Act, of the Company’s common equity representing more than 50% of the voting power of all outstanding classes of the Company’s common equity entitled to vote generally in the election of the Company’s directors;

•

consummation of (A) any share exchange, consolidation or merger involving the Company pursuant to which the Common Stock will be converted into cash, securities or other property or (B) any sale, lease or other transfer in one transaction or a series of transactions of all or substantially all of the consolidated assets of the Company and the Company’s Subsidiaries, taken as a whole, to any person other than one or more of the Company’s Subsidiaries; provided, however, that a share exchange, consolidation or merger transaction described in clause (A) above in which the holders of more than 50% of all shares of Common Stock entitled to vote generally in the election of the Company’s directors immediately prior to such transaction own, directly or indirectly, more than 50% of all shares of Common Stock entitled to vote generally in the election of the directors of the continuing or surviving entity or the parent entity thereof immediately after such transaction in substantially the same proportions (relative to each other) as such ownership immediately prior to such transaction will not, in either case, be a Fundamental Change;


•	the Company’s shareholders approve any plan or proposal for the liquidation or dissolution of the Company; or


•	the Common Stock (or other Capital Stock into which the Notes are then convertible pursuant to the terms of this Indenture) ceases to be listed on any of The New York Stock Exchange, The NASDAQ Global Select Market, The NASDAQ Global Market, The NASDAQ Capital Market or The NYSE MKT (or their respective successors) (each, an “ Eligible Market ”).

Subject to limited exceptions, the Indenture prohibits us from incurring additional indebtedness at any time while the Notes remain outstanding.

Each purchaser of the Notes also received warrants to purchase 256.60 shares of the Company's common stock for each $1 in Notes purchased, or up to 4,105,600 warrants in aggregate, in addition to the 250,000 warrants issued to the initial purchaser, as described above. The warrants were issued under a Warrant Agreement (the "Warrant Agreement"), dated as of September 28, 2016, between Digital Turbine, Inc. and US Bank National Association, as the warrant agent.

The warrants are immediately exercisable on the date of issuance at an initial exercise price of $1.364 per share and will expire on September 23, 2020. The exercise price is subject to proportional adjustment for adjustments to outstanding common stock and anti-dilution provisions in case of dividends or distributions, stock split or combination, or if the Company issues or sells shares of common stock at a price per share less than the conversion price on the trading day immediately preceding such issuance of sale. Certain caps on the number of shares that could be issued under the Notes and the Warrants were effectively lifted by our stockholders approving the full issuance of all potentially issuable shares at our January 2017 annual meeting of stockholders.

In the event of a fundamental change, as set forth in the Warrant Agreement, the holders can elect to exercise their warrants or to receive an amount of cash under a Black-Scholes calculation of the value of such warrants.

The Company received net cash proceeds of $14,316, after deducting the initial purchaser's discounts and commissions and the estimated offering expenses payable by Digital Turbine. The net proceeds from the issuance of the Notes were used to repay $11,000 of secured indebtedness, retiring such debt in its entirety, and will otherwise be used for general corporate purposes and working capital.

In May 2017, the Company entered a supplemental indenture and warrant amendment, described in its Current Report on Form 8-K filed May 24, 2017, which provided for a 30 day stock price measurement period to determine whether or not there would be any change to the conversion price or exercise price of the Company’s outstanding convertible notes or related warrants. The measurement period concluded on September 20, 2017, with no change to the existing $1.364 per share conversion or exercise price of our convertible notes or related warrants.

During September 2017, holders of $6,000 of Notes elected to convert such Notes. These Notes were extinguished by issuing shares of common stock, based on the applicable conversion price of $1.364 per share, plus additional shares of common stock and cash to satisfy the early conversion payments required by the Indenture. Associated with this conversion, gross debt net of debt discount and capitalized debt issuance costs of $1,579 and $621, respectively, was extinguished for a net debt extinguishment of $3,800. In total, 5,043,018 shares of common stock were issued and $247 in cash was paid to settle these positions. This resulted in an adjustment of approximately $7,187 to additional paid in capital to reflect the shares issued upon conversion. A loss on extinguishment of debt of $882 was recorded as a result of the difference in carrying value of the debt, inclusive of the associated debt discount and capitalized debt issuance costs, compared to the fair market value of the consideration given comprising both common stock issued and cash paid. The proportionate amount of the underlying derivative instrument was also extinguished as calculated on the respective conversion dates in September 2017. See Note 8. "Fair Value Measurements" for more information.

During December 2017, holders of $1,368 of Notes elected to convert such Notes. These Notes were extinguished by issuing shares of common stock, based on the applicable conversion price of $1.364 per share, plus additional shares of common stock and cash to satisfy the early conversion payments required by the Indenture. Associated with this conversion, gross debt net of debt discount and capitalized debt issuance costs of $328 and $129, respectively, was extinguished amounting to a net debt extinguishment of $911. In total, 1,149,424 shares of common stock were issued to settle these positions. This resulted in an adjustment of approximately $2,074 to additional paid in capital to reflect the shares issued upon conversion. A loss on extinguishment of debt of $284 was recorded as a result of the difference in carrying value of the debt, inclusive of the associated debt discount and capitalized debt issuance costs, compared to the fair market value of the consideration given comprising of the issuance of common stock. The proportionate amount of the underlying derivative instrument was also extinguished as calculated on the respective conversion dates in December 2017. See Note 8. "Fair Value Measurements" for more information.

As of December 31, 2017, the outstanding principal on the Notes was $8,632, the unamortized debt issuance costs and debt discount in aggregate was $2,881, and the net carrying amount of the Notes was $5,751 , which was recorded as long-term debt within the consolidated balance sheet. The Company recorded $195 and $875, respectively, of aggregate debt discount and debt issuance cost amortization during the three and nine months ended December 31, 2017, and $288 and $969, respectively, for the three and nine months ended December 31, 2016.

Senior Secured Credit Facility

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

The amounts advanced under the Credit Agreement mature in two (2) years, and accrue interest at the following rates and bear the following fees:

(1) Wall Street Journal Prime Rate + 1.25% (currently approximately 5.25%), with a floor of 4.0%.

(2) Annual Facility Fee of $45.5.

(3) Early termination fee of 0.5% if terminated during the first year.

The obligations under the Credit Agreement are secured by a perfected first position security interest in all assets of the Company and its subsidiaries, subject to partial (65%) pledges of stock of non-US subsidiaries. The Company’s subsidiaries Digital Turbine USA and Digital Turbine Media are co-borrowers.

In addition to customary covenants, including restrictions on payments (subject to specified exceptions), and restrictions on indebtedness (subject to specified exceptions), the Credit Agreement requires the Company to comply with the following financial covenants, measured on a monthly basis:

(1) Maintain a Current Ratio of at least 0.65, defined as unrestricted cash plus accounts receivable, divided by all current liabilities.

(2) Revenue must exceed 85% of projected quarterly revenue.

As of December 31, 2017, the Company was in compliance with the covenants of the Credit Agreement.

The Credit Agreement required that at least two-thirds (2/3rds) of the holders of the Notes at all times be subject to subordination agreements with the Bank. The Company obtained the consent of the holders of at least two-thirds (2/3rds) of the Notes, which were held by a small number of institutional investors. In consideration for such consents, the Company entered into a Second Supplemental Indenture, dated May 23, 2017 (the “Supplemental Indenture”) to the Indenture, and also entered into a First Amendment, dated May 23, 2017 (the “Warrant Amendment”) to the Warrant Agreement. The Supplemental Indenture and Warrant Amendment provided for a 30 day stock price measurement period to determine whether or not there would be any change to the conversion price or exercise price of the Company’s outstanding convertible notes or related warrants. The measurement period concluded on September 20, 2017, with no change to the existing $1.364 per share conversion or exercise price of our convertible notes or related warrants.

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

At December 31, 2017, the gross outstanding principle on the Credit Agreement was $1,900 which is presented, net of capitalized debt issuance costs of $247, as net secured short-term line of credit of $1,653.

Interest Expense

Inclusive of the Notes issued on September 28, 2016 and the Credit Agreement entered into on May 23, 2017 during the current fiscal year, and the Notes and the NAC subordinated debenture which was retired in full on September 28, 2016 during the prior fiscal year, the Company recorded $251 and $940, respectively, of interest expense during the three and nine months ended December 31, 2017 and $437 and $1,060, respectively, for the three and nine months ended December 31, 2016.

Additionally, aggregate debt discount and debt issuance cost amortization related to the Notes, detailed in the paragraph above, is reflected on the Consolidated Statement of Operations as interest expense. Inclusive of this amortization of $195 and $875 recorded during the three and nine months ended December 31, 2017, respectively, and the $288 and $969 recorded during the three and nine months ended December 31, 2016, respectively, the Company recorded $446 and $1,815 of total interest expense for the three and nine months ended December 31, 2017, respectively, and $725 and $2,029 of total interest expense for the three and nine months ended December 31, 2016, respectively.

8. Fair Value Measurements

The inputs to the valuation techniques used to measure fair value are classified into the following categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

The Company’s financial liabilities as of the issuance date of the convertible notes on the initial measurement date of September 28, 2016 are presented below at fair value and were classified within the fair value hierarchy as follows:



	Level 1		Level 2		Level 3		Balance at Inception
Financial Liabilities
Convertible note embedded derivative liability	$	—	$	—	$	3,693	$	3,693
Warrant liability	—		—		1,223		1,223
Total	$	—	$	—	$	4,916	$	4,916

The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the liability. Considerable judgment is necessary to interpret market data and determine an estimated fair value. The use of different market assumptions or valuation methods may have a material effect on the estimated fair values. Fair value of the Notes is determined using the residual method of accounting whereby, first, a portion of the proceeds from the issuance of the Notes is allocated to derivatives embedded in the Notes and the warrants issued in connection with the issuance of the Notes, and the proceeds so allocated are accounted for as a convertible note embedded derivative liability and warrant liability, respectively, and second, the remainder of the proceeds from the issuance of the Notes is allocated to the convertible notes, resulting in an original debt discount amounting to $4,916. The convertible notes will remain on the consolidated balance sheet at historical cost, accreted up for the amount of cumulative amortization of the debt discount over the life of the debt. The method of determining the fair value of the convertible note embedded derivative liability and warrant liability are described subsequently in this note. Market risk associated with the convertible note embedded derivative liability and warrant liability relates to the potential reduction in fair value and negative impact to future earnings from an increase in price of the Company's common stock. Please refer to Note 7. "Debt" for more information.

The carrying amounts of certain financial instruments, such as cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities.

As of December 31, 2017 and March 31, 2017, the Company’s financial assets and financial liabilities are presented below at fair value and were classified within the fair value hierarchy as follows:



	Level 1		Level 2		Level 3		Balance as of December 31, 2017
							(Unaudited)
Financial Liabilities
Convertible note embedded derivative liability	$	—	$	—	$	5,896	$	5,896
Warrant liability	—		—		3,602		3,602
Total	$	—	$	—	$	9,498	$	9,498



	Level 1		Level 2		Level 3		Balance as of March 31, 2017
Financial Liabilities
Convertible note embedded derivative liability	$	—	$	—	$	3,218	$	3,218
Warrant liability	—		—		1,076		1,076
Total	$	—	$	—	$	4,294	$	4,294

Convertible Note Embedded Derivative Liability

We evaluated the terms and features of our convertible notes and identified embedded derivatives (conversion options that contain “make-whole interest” provisions, fundamental change provisions, or down round conversion price adjustment provisions; collectively called the "convertible note embedded derivative liability") requiring bifurcation and accounting at fair value because the economic and contractual characteristics of the embedded derivatives met the criteria for bifurcation and separate accounting. ASC 815-10-15-83 (c) states that if terms implicitly or explicitly require or permit net settlement, then it can readily be settled net by means outside the contract, or it provides for delivery of an asset that puts the recipient in a position not substantially different from net settlement. The conversion features related to the convertible notes consists of a “make-whole interest” provision, fundamental change provision, and down round conversion price adjustment provisions, which if the convertible notes were to be converted, would put the convertible note holder in a position not substantially different from net settlement. Given this fact pattern, the conversion features meet the definition of embedded derivatives and require bifurcation and accounting at fair value.

During September 2017 and December 2017, holders of $6,000 and $1,368 of the Notes, respectively, elected to convert such Notes. At December 31, 2017, aggregate principal amount of $8,632 remained outstanding and is reflected on the balance sheet, net of debt issuance costs and discounts of $2,881, in the amount of $5,751. Refer to Note 7 "Debt - Convertible Notes" and Note 10 "Capital Stock Transactions" for more details.

The convertible note embedded derivative liability represent the fair value of the conversion option, fundamental change provision, and "make-whole" provisions, as well as the down round conversion price adjustment or conversion rate adjustment provisions of the convertible notes. There is no current observable market for these types of derivatives and, as such, the Company determined the fair value of the derivative liability using a lattice approach that incorporates a Monte Carlo simulation valuation model. A Monte Carlo simulation valuation model considers the Company's future stock price, stock price volatility, probability of a change of control and the trading information of the Company's common stock into which the notes are or may become convertible. The Company marks the derivative liability to market at the end of each reporting period due to the conversion price not being indexed to the Company's own stock.

Changes in the fair value of the convertible note embedded derivative liability is reflected in our consolidated statements of operations as “Change in fair value of convertible note embedded derivative liability.”

The following table provides a reconciliation of the beginning and ending balances for the convertible note embedded derivative liability measured at fair value using significant unobservable inputs (Level 3):



	Level 3
Balance at March 31, 2017	$	3,218
Change in fair value of convertible note embedded derivative liability	6,310
Derecognition on extinguishment or conversion	(3,632		)
Balance at December 31, 2017	$	5,896

Due to the valuation of the derivative liability being highly sensitive to the trading price of the Company's stock, the increase and decrease in the trading price of the Company's stock has the impact of increasing the loss and gain, respectively. During the three months ended December 31, 2017, the Company recorded a loss from change in fair value of convertible note embedded derivative liability of $1,658 due to the increase in the Company's closing stock price during the current quarter from $1.51 to $1.79, offset by the extinguishment of $1,368 of Notes, and the underlying derivative instruments, during the current quarter. During the nine months ended December 31, 2017, the Company recorded a loss from change in fair value of convertible note embedded derivative liability of $6,310 due to the increase in the Company's closing stock price during the current fiscal year from $0.94 to $1.79, offset by the derecognition of $3,632 of derivative liability on the extinguishment of $7,368 of Notes, and the underlying derivative instruments, during the fiscal year. During the three and nine months ended December 31, 2016, the Company recorded a gain from change in fair value of convertible note embedded derivative liability of $2,853 and $2,423, respectively, due to the decrease in the Company's closing stock price from September 30, 2017 to December 31, 2016 from $1.05 to $0.68, and a decrease in the Company's closing stock price from inception of the issuance of the Notes from September 28, 2016 to December 31, 2016 from $0.99 to $0.68, respectively.

The market-based assumptions and estimates used in valuing the convertible note embedded derivative liability include amounts in the following amounts:



	December 31, 2017
Stock price volatility	70	%
Probability of change in control	1.75	%
Stock price (per share)	$1.79
Expected term	2.75 years
Risk-free rate (1)	1.94	%
Assumed early conversion/exercise price (per share)	$2.73

^{(1) The Monte Carlo simulation assumes the continuously compounded equivalent (CCE) interest rate of}^1.0%^{based on the average of the 3-year and 5-year U.S. Treasury securities as of the valuation date.}

Changes in valuation assumptions can have a significant impact on the valuation of the convertible note embedded derivative liability. For example, all other things being equal, a decrease/increase in our stock price, probability of change of control, or stock price volatility decreases/increases the valuation of the liabilities, whereas a decrease/increase in risk-free interest rates increases/decreases the valuation of the liabilities.

Warrant Liability

The Company issued detachable warrants with the convertible notes issued on September 28, 2016. The Company accounts for its warrants issued in accordance with US GAAP accounting guidance under ASC 815 applicable to derivative instruments, which requires every derivative instrument within its scope to be recorded on the balance sheet as either an asset or liability measured at its fair value, with changes in fair value recognized in earnings. Based on this guidance, the Company determined that these warrants did not meet the criteria for classification as equity. Accordingly, the Company classified the warrants as long-term liabilities. The warrants are subject to re-measurement at each balance sheet date, with any change in fair value recognized as a component of other income (expense), net in the statements of operations. We estimated the fair value of these warrants at the respective balance sheet dates using a lattice approach that incorporates a Monte Carlo simulation that considers the Company's future stock price. Option pricing models employ subjective factors to estimate warrant liability; and, therefore, the assumptions used in the model are judgmental.

Changes in the fair value of the warrant liability is primarily related to the change in price of the underlying common stock of the Company and is reflected in our consolidated statements of operations as “Change in fair value of warrant liability.”

The following table provides a reconciliation of the beginning and ending balances for the warrant liability measured at fair value using significant unobservable inputs (Level 3):



	Level 3
Balance at March 31, 2017	$	1,076
Change in fair value of warrant liability	2,526
Balance at December 31, 2017	$	3,602

Due to the valuation of the derivative liability being highly sensitive to the trading price of the Company's stock, the increase and decrease in the trading price of the Company's stock has the impact of increasing the loss and gain, respectively. Due to the Company's closing stock price increasing during the three and nine months ended December 31, 2017, from $1.51 to $1.79 and $0.94 to $1.79, respectively, this had the impact during the three and nine months ended December 31, 2017 of recording a loss from change in fair value of the warrant liability of $898 and $2,526, respectively. During the three and nine months ended December 31, 2016, the Company recorded a gain from change in fair value of the warrant liability of $937 and $797, respectively, due to the decrease in the Company's closing stock price from September 30, 2017 to December 31, 2016 from $1.05 to $0.68, and a decrease in the Company's closing stock price from inception of the issuance of the Notes on September 28, 2016 to December 31, 2016 from $0.99 to $0.68, respectively.

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



	December 31, 2017
Stock price volatility	70	%
Probability of change in control	1.75	%
Stock price (per share)	$1.79
Expected term	2.75 years
Risk-free rate (1)	1.94	%
Assumed early conversion/exercise price (per share)	$2.73

Changes in valuation assumptions can have a significant impact on the valuation of the warrant liability. For example, all other things being equal, a decrease/increase in our stock price, probability of change of control, or stock price volatility decreases/increases the valuation of the liabilities, whereas a decrease/increase in risk-free interest rates increases/decreases the valuation of the liabilities.

9. Description of Stock Plans

Employee Stock Plan

The Company is currently issuing stock awards under the Amended and Restated Digital Turbine, Inc. 2011 Equity Incentive Plan (the “2011 Plan”), which was approved and adopted by our stockholders by written consent on May 23, 2012. No future grants will be made under the previous plan, the 2007 Employee, Director and Consultant Stock Plan (the “2007 Plan”). The 2011 Plan and 2007 Plan are collectively referred to as "Digital Turbine's Incentive Plans." In the year ended March 31, 2015, in connection with the acquisition of Appia, the Company assumed the Appia, Inc. 2008 Stock Incentive Plan (the “Appia Plan”). Digital Turbine’s Incentive Plans and the Appia Plan are all collectively referred to as the “Stock Plans.”

The 2011 Plan provides for grants of stock-based incentive awards to our and our subsidiaries’ officers, employees, non-employee directors, and consultants. Awards issued under the 2011 Plan can include stock options, stock appreciation rights (“SARs”), restricted stock, and restricted stock units (sometimes referred to individually or collectively as “Awards”). Stock options may be either “incentive stock options” (“ISOs”), as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), or non-qualified stock options (“NQSOs”).

The 2011 Plan reserves 20,000,000 shares for issuance, of which 9,033,506 and 9,665,123 remained available for future grants as of December 31, 2017 and March 31, 2017, respectively. The change over the comparative period represents stock option grants, stock option forfeitures/cancellations, and restricted shares of common stock of 1,338,778, 972,299, and 265,138, respectively.

Stock Option Agreements

Stock options granted under Digital Turbine's Stock Plans typically vest over a three-to-four year period. These options, which are granted with option exercise prices equal to the fair market value of the Company’s common stock on the date of grant, generally expire up to ten years from the date of grant. In the year ended March 31, 2015, in connection with the Appia acquisition, the Company exchanged stock options previously granted under the Appia Plan for options to purchase shares of the Company’s common stock under the 2011 Plan. 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.

Stock Option Activity

The following table summarizes stock option activity for the Stock Plans for the periods or as of the dates indicated:



	Number of Shares		Weighted Average Exercise Price (per share)		Weighted Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value (in thousands)
Options Outstanding, March 31, 2017	9,735,778		$	2.56	7.95	$	801
Granted	1,338,778		1.17
Forfeited / Cancelled	(972,299	)	1.91
Exercised	(182,769	)	1.05
Options Outstanding, December 31, 2017	9,919,488		2.48		7.36	4,977
Vested and expected to vest (net of estimated forfeitures) at December 31, 2017 (a)	8,984,997		2.63		7.19	4,228
Exercisable, December 31, 2017	5,065,645		$	3.81	5.97	$	1,196

(a) For options vested and expected to vest, options exercisable, and options outstanding, the aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between Digital Turbine's closing stock price on December 31, 2017 and the exercise price multiplied by the number of in-the-money options) that would have been received by the option holders, had the holders exercised their options on December 31, 2017. The intrinsic value changes based on changes in the price of the Company's common stock.

Information about options outstanding and exercisable at December 31, 2017 is as follows:



	Options Outstanding				Options Exercisable
Exercise Price	Number of Shares	Weighted-Average Exercise Price		Weighted-Average Remaining Life (Years)	Number of Shares	Weighted-Average Exercise Price
$0.00 - 0.50	7,652	$	0.24	2.23	7,652	$	0.24
$0.51 - 1.00	3,202,046	$	0.73	8.82	520,025	$	0.71
$1.01 - 1.50	2,832,305	$	1.27	8.42	1,215,155	$	1.31
$1.51 - 2.00	446,000	$	1.55	8.95	148,622	$	1.51
$2.01 - 2.50	253,779	$	2.43	3.08	220,445	$	2.42
$2.51 - 3.00	908,756	$	2.61	6.19	818,757	$	2.62
$3.51 - 4.00	907,384	$	3.96	5.75	850,507	$	3.96
$4.01 - 4.50	831,566	$	4.14	5.45	763,443	$	4.14
$4.51 - 5.00	60,000	$	4.65	5.24	60,000	$	4.65
$5.01 and over	470,000	$	16.32	1.01	461,039	$	16.53
	9,919,488				5,065,645

Other information pertaining to stock options for the Stock Plans for the nine months ended December 31, 2017 and 2016, as stated in the table below, is as follows:



	December 31,
	2017		2016
Total fair value of options vested	$	2,750	$	2,250
Total intrinsic value of options exercised (a)	$	101	$	8

(a) The total intrinsic value of options exercised represents the total pre-tax intrinsic value (the difference between the stock price at exercise and the exercise price multiplied by the number of options exercised) that was received by the option holders who exercised their options during the nine months ended December 31, 2017 and 2016.

During the nine months ended December 31, 2017 and 2016, the Company granted options to purchase 1,338,778 and 1,525,500 shares of its common stock, respectively, to employees with weighted-average grant-date fair values of $1.17 and $0.64, respectively.

At December 31, 2017 and 2016, there was $2,691 and $5,706 of total unrecognized stock-based compensation expense, respectively, net of estimated forfeitures, related to unvested stock options expected to be recognized over a weighted-average period of 2.04 and 2.27 years, respectively.

Valuation of Awards

For stock options granted under Digital Turbine’s Stock Plans, the Company typically uses the Black-Scholes option pricing model to estimate the fair value of stock options at grant date. The Black-Scholes option pricing model incorporates various assumptions, including volatility, expected term, risk-free interest rates, and dividend yields. The assumptions utilized in this model for options granted during the nine months ended December 31, 2017 are presented below.



		December 31, 2017
Risk-free interest rate		1.8% to 2.4%
Expected life of the options		5.69 to 9.43 years
Expected volatility		68% to 73%
Expected dividend yield		—%
Expected forfeitures		20%

Expected volatility is based on a blend of implied and historical volatility of the Company's common stock over the most recent period commensurate with the estimated expected term of the Company’s stock options. The Company uses this blend of implied and historical volatility, as well as other economic data, because management believes such volatility is more representative of prospective trends. The expected term of an award is based on historical experience and on the terms and conditions of the stock awards granted to employees.

Total stock compensation expense for the Company’s Stock Plans for the three and nine months ended December 31, 2017 and 2016, which includes both stock options and restricted stock, was $891 and $2,520, respectively, and $1,118 and $3,611, respectively. Please refer to Note 10. "Capital Stock Transactions" regarding restricted stock.

10. 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 if-converted basis and (3) a liquidation preference equal to the greater of $10 per share of Series A (subject to adjustment) or such amount that would have been paid to the common stock holders on an if-converted basis.

Common Stock and Warrants

For the nine months ended December 31, 2017, the Company issued 182,769 shares of common stock for the exercise of employee options.

In December 2017, in connection with the redemption of $1,368 of the Notes, the Company issued 1,149,414 shares to the holders of those Notes in exchange for the extinguishment of the Notes. Refer to Note 7 "Debt" and Note 8 "Fair Value Measurements" for more details.

In September 2017, in connection with the redemption of $6,000 of the Notes, the Company issued 5,043,018 shares to the holders of those Notes in exchange for the extinguishment of the Notes. Refer to Note 7 "Debt" and Note 8 "Fair Value Measurements" for more details.

The following table provides activity for warrants issued and outstanding during the nine months ended December 31, 2017:



	Number of Warrants Outstanding		Weighted-Average Exercise Price
Outstanding as of March 31, 2017	5,003,813		1.62
Issued	—		—
Exercised	—		—
Expired	(166,070	)	3.50
Outstanding as of December 31, 2017	4,837,743		1.56

Restricted Stock Agreements

From time to time, the Company enters into restricted stock agreements (“RSAs”) with certain employees, directors, and consultants. The RSAs have performance conditions, market conditions, time conditions, or a combination thereof. In some cases, once the stock vests, the individual is restricted from selling the shares of stock for a certain defined period, from three months to two years, depending on the terms of the RSA. As reported in our Current Reports on Form 8-K filed with the SEC on February 12, 2014 and June 25, 2014, the Company adopted a Board Member Equity Ownership Policy that supersedes any post-vesting lock-up in RSAs that are applicable to people covered by the policy, which includes the Company’s Board of Directors and Chief Executive Officer.

Service and Time Condition RSAs

Awards of restricted stock are grants of restricted stock that are issued at no cost to the recipient. The cost of these awards is determined using the fair market value of the Company’s common stock on the date of the grant. Compensation expense for restricted stock awards with a service condition is recognized on a straight-line basis over the requisite service period.

In August 2017, the Company issued 265,138 restricted shares to its directors for services. The shares vest over one year. The fair value of the shares on the date of issuance was $289.

With respect to time condition RSAs, the Company expensed $74 and $224 during the three and nine months ended December 31, 2017, and $92 and $258 during three and nine months ended December 31, 2016, respectively.

The following is a summary of restricted stock awards and activities for all vesting conditions for the nine months ended December 31, 2017:



	Number of Shares		Weighted-Average Grant Date Fair Value
Unvested restricted stock outstanding as of March 31, 2017	139,318		1.10
Granted	265,138		1.09
Vested	(205,602	)	1.10
Cancelled	—		—
Unvested restricted stock outstanding as of December 31, 2017	198,854		1.09

All restricted shares, vested and unvested, cancellable and not cancelled, have been included in the outstanding shares as of December 31, 2017.

At December 31, 2017, there was $169 of unrecognized stock-based compensation expense, net of estimated forfeitures, related to non-vested restricted stock awards expected to be recognized over a weighted-average period of approximately 0.58 years.

11. Net Loss Per Share

Basic net loss per share is calculated by dividing net loss by the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase, and excludes any dilutive effects of employee stock-based awards in periods where the Company has net losses. Because the Company had net losses for the three and nine months ended December 31, 2017 and 2016, all potentially dilutive shares of common stock were determined to be anti-dilutive, and accordingly, were not included in the calculation of diluted net loss per share.

The following table sets forth the computation of net loss per share of common stock (in thousands, except per share amounts):



	Three Months Ended December 31,						Nine Months Ended December 31,
	2017			2016			2017			2016
Net loss	$	(3,799	)	$	(2,586	)	$	(14,432	)	$	(17,339	)
Weighted-average common shares outstanding, basic and diluted	72,148			66,634			68,575			66,416
Basic and diluted net loss per common share	$	(0.05	)	$	(0.04	)	$	(0.21	)	$	(0.26	)
Common stock equivalents excluded from net loss per diluted share because their effect would have been anti-dilutive	3,294			123			1,677			218

12. Income Taxes

Our provision for income taxes as a percentage of pre-tax earnings (“effective tax rate”) is based on a current estimate of the annual effective income tax rate, adjusted to reflect the impact of discrete items. In accordance with ASC 740, jurisdictions forecasting losses that are not benefited due to valuation allowances are not included in our forecasted effective tax rate.

During the three and nine months ended December 31, 2017, a tax benefit of $84 and $937, respectively, resulted in an effective tax rate of 2.2% and 6.1%, respectively. Differences in the tax provision and the statutory rate are primarily due to changes in the valuation allowance. The tax benefit reported in the current year is largely due to the true up of an estimate resulting from the finalization of a transfer pricing study.

During the three and nine months ended December 31, 2016, a tax expense of $300 and $159, respectively, resulted in an effective tax rate of (13.1)% and (0.9)%, respectively. Differences in the tax provision and statutory rate are primarily due to changes in the valuation allowance.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the Tax Act). The Tax Act significantly revises the future ongoing U.S. corporate income tax by, among other things, lowering U. S. corporate income tax rate from 35% to 21% and implementing a territorial tax system. As the Company has a March 31 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in a U.S. statutory federal rate of approximately 31.5% for the fiscal year ending March 31, 2018, and 21 % for subsequent fiscal years.

Since the Company has a valuation allowance recorded against all of its U.S. federal deferred tax assets the change in U.S. federal statutory tax rate and the related remeasurement of U.S. federal deferred tax assets and liabilities had no impact on the Company’s third quarter income tax provision.

The new U.S. tax law also requires corporations to include in income a deemed repatriation of foreign earnings and profits previously unremitted to the U.S. and pay a repatriation tax for the move to a territorial system, whether or not the foreign subsidiaries repatriate cash or property to the U.S. The payment of the repatriation tax can be spread over eight years with the first installment due April 15, 2018. Since the Company’s foreign corporate subsidiaries have a net deficit in earnings and profits no transition tax accrual is required or expected.

As a result of the valuation allowance against U.S. deferred tax assets and the Company’s U.S. federal and state NOL carryovers, the Company does not anticipate the changes in U.S. tax law to impact its annual effective tax rate in future periods for which the valuation allowance remains.

13. Commitments and Contingencies

Legal Matters

The Company may be involved in various claims, suits, assessments, investigations, and legal proceedings that arise from time to time in the ordinary course of its business, including any that are identified below, and, unlrss otherwise stated below, we do not believe that these proceedings and claims would reasonably be expected to have a material adverse effect on our financial position, results of operations or cash flows. The Company accrues a liability when it is both probable that a liability has been incurred, and the amount of the loss can be reasonably estimated. The Company reviews these accruals at least quarterly, and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel, and other relevant information. To the extent new information is obtained and the Company's views on the probable outcomes of claims, suits, assessments, investigations, or legal proceedings change, changes in the Company's accrued liabilities would be recorded in the period in which such determination is made. For some matters, the amount of liability is not probable or the amount cannot be reasonably estimated, and therefore, accruals have not been made. In those cases, we assess whether there is at least a reasonable possibility that a loss, or additional losses, may have been incurred. If there is a reasonable possibility that a loss or additional loss may have been incurred for such proceedings, we disclose the estimate of the amount of loss or possible range of loss, or disclose that an estimate of loss cannot be made, as applicable.

No legal matters or other proceedings requiring disclosure or accrual exist at this time.

14. Segment and Geographic Information

The Company manages its business in three operating segments: O&O, A&P, and Content. The three operating segments have been aggregated into two reportable segments: Advertising and Content. Our chief operating decision maker does not evaluate operating segments using asset information. The Company has considered guidance in Accounting Standards Codification (ASC) 280 in reaching its conclusion with respect to aggregating its operating segments into two reportable segments. Specifically, the Company has evaluated guidance in ASC 280-10-50-11 and determined that aggregation is consistent with the objectives of ASC 280 in that aggregation into two reportable segments allows users of our financial statements to view the Company’s business through the eyes of management based upon the way management reviews performance and makes decisions. Additional factors that were considered included: whether or not the operating segments have similar economic characteristics, the nature of the products/services under each operating segment, the nature of the production/go-to-market process, the type and geographic location of our customers, and the distribution of our products/services.

The following table sets forth segment information on our net revenues and loss from operations for the three and nine months ended December 31, 2017 and 2016.



	Three Months Ended December 31, 2017									Three Months Ended December 31, 2016
	Content			Advertising			Total			Content			Advertising			Total
Net revenues	$	13,830		$	24,201		$	38,031		$	6,073		$	16,212		$	22,285
Loss from operations	(1,146		)	550			(596		)	(1,229		)	(4,181		)	(5,410		)

	Nine Months Ended December 31, 2017									Nine Months Ended December 31, 2016
	Content			Advertising			Total			Content			Advertising			Total
Net revenues	$	31,544		$	60,498		$	92,042		$	24,929		$	44,227		$	69,156
Loss from operations	(3,254		)	(116		)	(3,370		)	(3,980		)	(14,186		)	(18,166		)

The following table sets forth geographic information on our net revenues for the three and nine months ended December 31, 2017 and 2016. Net revenues by geography are based on the billing addresses of our customers.



	Three Months Ended December 31,
	2017		2016
Net revenues
United States and Canada	$	11,715	$	8,197
Europe, Middle East, and Africa	2,757		3,575
Asia Pacific and China	22,436		9,746
Mexico, Central America, and South America	1,123		767
Consolidated net revenues	$	38,031	$	22,285

	Nine Months Ended December 31,
	2017		2016
Net revenues
United States and Canada	$	27,200	$	23,677
Europe, Middle East, and Africa	7,642		11,380
Asia Pacific and China	53,384		32,700
Mexico, Central America, and South America	3,816		1,399
Consolidated net revenues	$	92,042	$	69,156

15. Guarantor and Non-Guarantor Financial Statements

On September 28, 2016, the Company sold to the Initial Purchaser, $16,000 principal amount of 8.75% convertible notes maturing on September 23, 2020, unless converted, repurchased or redeemed in accordance with their terms prior to such date. The Notes were issued under the Indenture, as amended and supplemented to date, between Digital Turbine, Inc., US Bank National Association, as trustee, and certain wholly-owned subsidiaries of the Company, specifically, DT USA, DT Media, DT EMEA, and DT APAC. Given the Notes are unconditionally guaranteed as to the payment of principal, premium, if any, and interest on a senior unsecured basis by four of the wholly-owned subsidiaries of the Company, the Company is required by SEC Reg S-X 210.3-10 to include, in a footnote, consolidating financial information for the same periods with a separate column for:


•	The parent company;


•	The subsidiary guarantors on a combined basis;


•	Any other subsidiaries of the parent company on a combined basis;


•	Consolidating adjustments; and


•	The total consolidated amounts.

The following consolidated financial information includes:

(1) Consolidated balance sheets as of December 31, 2017 and March 31, 2017; consolidated statements of operations for the three and nine months ended December 31, 2017 and 2016; and consolidated statements of cash flows for the nine months ended December 31, 2017 and 2016 of (a) Digital Turbine, Inc. as the parent, (b) the guarantor subsidiaries, (c) the non-guarantor subsidiaries, and (d) Digital Turbine, Inc. on a consolidated basis; and

(2) Elimination entries necessary to consolidate Digital Turbine, Inc., as the parent, with its guarantor and non-guarantor subsidiaries.

Digital Turbine, Inc. owns 100% of all of the guarantor subsidiaries, and as a result, in accordance with Rule 3-10(d) of Regulation S-X promulgated by the SEC, no separate financial statements are required for these subsidiaries as of and for the three and nine months ended December 31, 2017 or 2016.

Consolidated Balance Sheet

as of December 31, 2017 (Unaudited)

(in thousands, except par value and share amounts)



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidated Total
ASSETS
Current assets
Cash	$	176		$	6,094		$	613		$	6,883
Restricted cash	156			175			—			331
Accounts receivable, net of allowance of $841	—			31,857			637			32,494
Deposits	34			117			4			155
Prepaid expenses and other current assets	299			239			13			551
Total current assets	665			38,482			1,267			40,414
Property and equipment, net	64			2,614			15			2,693
Deferred tax assets	593									593
Intangible assets, net	1			1,565			1,278			2,844
Goodwill	—			70,377			6,244			76,621
TOTAL ASSETS	$	1,323		$	113,038		$	8,804		$	123,165
INTERCOMPANY
Intercompany payable/receivable, net	120,223			(104,874		)	(15,349		)	—
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	791		$	27,307		$	306		$	28,404
Accrued license fees and revenue share	—			12,369			488			12,857
Accrued compensation	2,057			1,393			6			3,456
Short-term debt, net of debt issuance costs and discounts of $247	1,653			—			—			1,653
Other current liabilities	1,002			(516		)	1,358			1,844
Total current liabilities	5,503			40,553			2,158			48,214
Convertible notes, net of debt issuance costs and discounts of $3,491	5,751			—			—			5,751
Convertible note embedded derivative liability	5,896			—			—			5,896
Warrant liability	3,602			—			—			3,602
Other non-current liabilities	—			51			—			51
Total liabilities	20,752			40,604			2,158			63,514
Stockholders' equity
Preferred stock
Series A convertible preferred stock at $0.0001 par value; 2,000,000 shares authorized, 100,000 issued and outstanding (liquidation preference of $1,000)	100			—			—			100
Common stock
$0.0001 par value: 200,000,000 shares authorized; 74,079,153 issued and 73,344,697 outstanding at December 31, 2017.	10			—			—			10
Additional paid-in capital	311,621			—			—			311,621
Treasury stock (754,599 shares at December 31, 2017)	(71		)	—			—			(71		)
Accumulated other comprehensive loss	(18		)	(1,443		)	1,135			(326		)
Accumulated deficit	(210,848		)	(30,997		)	(9,838		)	(251,683		)
Total stockholders' equity	100,794			(32,440		)	(8,703		)	59,651
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	121,546		$	8,164		$	(6,545	)	$	123,165

Consolidated Balance Sheet

as of March 31, 2017 (Unaudited)

(in thousands, except par value and share amounts)



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidated Total
ASSETS
Current assets
Cash	$	258		$	5,333		$	558		$	6,149
Restricted cash	156			175			—			331
Accounts receivable, net of allowance of $597	—			15,740			814			16,554
Deposits	—			121			—			121
Prepaid expenses and other current assets	282			226			2			510
Total current assets	696			21,595			1,374			23,665
Property and equipment, net	64			2,296			17			2,377
Deferred tax assets	352			—			—			352
Intangible assets, net	—			2,647			1,918			4,565
Goodwill	—			70,377			6,244			76,621
TOTAL ASSETS	$	1,112		$	96,915		$	9,553		$	107,580
INTERCOMPANY
Intercompany payable/receivable, net	123,800			(107,348		)	(16,452		)	—
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	1,023		$	18,697		$	148		$	19,868
Accrued license fees and revenue share	—			8,312			217			8,529
Accrued compensation	32			1,041			—			1,073
Other current liabilities	794			510			—			1,304
Total current liabilities	1,849			28,560			365			30,774
Convertible notes, net of debt issuance costs and discounts of $6,315	9,685			—			—			9,685
Convertible note embedded derivative liability	3,218			—			—			3,218
Warrant liability	1,076			—			—			1,076
Other non-current liabilities	695			87			—			782
Total liabilities	16,523			28,647			365			45,535
Stockholders' equity
Preferred stock
Series A convertible preferred stock at $0.0001 par value; 2,000,000 shares authorized, 100,000 issued and outstanding (liquidation preference of $1,000)	100			—			—			100
Common stock
$0.0001 par value: 200,000,000 shares authorized; 67,329,262 issued and 66,594,806 outstanding at March 31, 2017	8			—			—			8
Additional paid-in capital	299,580			—			—			299,580
Treasury stock (754,599 shares at March 31, 2017)	(71		)	—			—			(71		)
Accumulated other comprehensive loss	—			(1,704		)	1,383			(321		)
Accumulated deficit	(191,228		)	(37,376		)	(8,647		)	(237,251		)
Total stockholders' equity	108,389			(39,080		)	(7,264		)	62,045
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	124,912		$	(10,433	)	$	(6,899	)	$	107,580

Consolidated Statement of Operations and Comprehensive Loss

for the three months ended December 31, 2017 (Unaudited)

(in thousands, except par value and share amounts)



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Elimination			Consolidated Total
Net revenues	$	—		$	56,730		$	470		$	(19,169	)	$	38,031
Cost of revenues
License fees and revenue share	—			46,598			290			(19,169		)	27,719
Other direct cost of revenues	—			437			214			—			651
Total cost of revenues	—			47,035			504			(19,169		)	28,370
Gross profit	—			9,695			(34		)	—			9,661
Operating expenses
Product development	2			3,560			61			—			3,623
Sales and marketing	75			1,860			107			—			2,042
General and administrative	3,769			700			123			—			4,592
Total operating expenses	3,846			6,120			291			—			10,257
Income / (loss) from operations	(3,846		)	3,575			(325		)	—			(596		)
Interest and other expense, net
Interest expense, net	(446		)	—			—			—			(446		)
Foreign exchange transaction gain / (loss)	—			34			1			—			35
Change in fair value of convertible note embedded derivative liability	(1,658		)	—			—			—			(1,658		)
Change in fair value of warrant liability	(898		)	—			—			—			(898		)
Loss on extinguishment of debt	(284		)	—			—			—			(284		)
Other income / (expense)	27			(63		)				—			(36		)
Total interest and other expense, net	(3,259		)	(29		)	1			—			(3,287		)
Income / (loss) from operations before income taxes	(7,105		)	3,546			(324		)	—			(3,883		)
Income tax benefit	(88		)	6			(2		)	—			(84		)
Net income / (loss)	$	(7,017	)	$	3,540		$	(322	)	$	—		$	(3,799	)
Other comprehensive income / (loss)
Foreign currency translation adjustment	—			—			—			—			—
Comprehensive income / (loss)	$	(7,017	)	$	3,540		$	(322	)	$	—		$	(3,799	)

Consolidated Statement of Operations and Comprehensive Loss

for the nine months ended December 31, 2017 (Unaudited)

(in thousands, except par value and share amounts)



(dollars in thousands)	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Elimination			Consolidated Total
Net revenues	$	—		$	135,442		$	1,321		$	(44,721	)	$	92,042
Cost of revenues
License fees and revenue share	—			110,458			748			(44,721		)	66,485
Other direct cost of revenues	—			1,276			641			—			1,917
Total cost of revenues	—			111,734			1,389			(44,721		)	68,402
Gross profit	—			23,708			(68		)	—			23,640
Operating expenses
Product development	14			9,113			91			—			9,218
Sales and marketing	249			4,810			229			—			5,288
General and administrative	8,487			3,700			317			—			12,504
Total operating expenses	8,750			17,623			637			—			27,010
Income / (loss) from operations	(8,750		)	6,085			(705		)	—			(3,370		)
Interest and other expense, net
Interest expense, net	(1,815		)	—			—			—			(1,815		)
Foreign exchange transaction gain / (loss)	—			(183		)	1			—			(182		)
Change in fair value of convertible note embedded derivative liability	(6,310		)	—			—			—			(6,310		)
Change in fair value of warrant liability	(2,526		)	—			—			—			(2,526		)
Loss on extinguishment of debt	(1,166		)	—			—			—			(1,166		)
Other income / (expense)	6			(6		)	—			—			—
Total interest and other expense, net	(11,811		)	(189		)	1			—			(11,999		)
Income / (loss) from operations before income taxes	(20,561		)	5,896			(704		)	—			(15,369		)
Income tax benefit	(941		)	6			(2		)	—			(937		)
Net income / (loss)	$	(19,620	)	$	5,890		$	(702	)	$	—		$	(14,432	)
Other comprehensive income / (loss)
Foreign currency translation adjustment	—			(5		)	—			—			(5		)
Comprehensive income / (loss)	$	(19,620	)	$	5,885		$	(702	)	$	—		$	(14,437	)

Consolidated Statement of Operations and Comprehensive Loss

for the three months ended December 31, 2016 (Unaudited)

(in thousands, except par value and share amounts)



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Elimination			Consolidated Total
Net revenues	$	—		$	30,897		$	751	$	(9,363	)	$	22,285
Cost of revenues
License fees and revenue share	—			26,176			226		(9,363		)	17,039
Other direct cost of revenues	—			1,589			289		—			1,878
Total cost of revenues	—			27,765			515		(9,363		)	18,917
Gross profit	—			3,132			236		—			3,368
Operating expenses
Product development	15			3,082			16		—			3,113
Sales and marketing	77			1,558			48		—			1,683
General and administrative	2,468			1,444			70		—			3,982
Total operating expenses	2,560			6,084			134		—			8,778
Loss from operations	(2,560		)	(2,952		)	102		—			(5,410		)
Interest and other expense, net
Interest expense, net	(674		)	(51		)	—		—			(725		)
Foreign exchange transaction gain / (loss)	—			(9		)	—		—			(9		)
Change in fair value of convertible note embedded derivative liability	2,853			—			—		—			2,853
Change in fair value of warrant liability	937			—			—		—			937
Loss on extinguishment of debt	—			—			—		—			—
Other income / (expense)	22			46			—		—			68
Total interest and other expense, net	3,138			(14		)	—		—			3,124
Loss from operations before income taxes	578			(2,966		)	102		—			(2,286		)
Income tax provision / (benefit)	300			—			—		—			300
Net loss	$	278		$	(2,966	)	$	102	$	—		$	(2,586	)
Other comprehensive income / (loss)
Foreign currency translation adjustment	5			—			—		—			5
Comprehensive loss	$	283		$	(2,966	)	$	102	$	—		$	(2,581	)

Consolidated Statement of Operations and Comprehensive Loss

for the nine months ended December 31, 2016 (Unaudited)

(in thousands, except par value and share amounts)



	Parent		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Elimination		Consolidated Total
Net revenues	—		90,839		1,331		(23,014	)	69,156
Cost of revenues
License fees and revenue share	—		76,600		474		(23,014	)	54,060
Other direct cost of revenues	—		4,774		866				5,640
Total cost of revenues	—		81,374		1,340		(23,014	)	59,700
Gross profit	—		9,465		(9	)	—		9,456
Operating expenses
Product development	24		8,967		74		—		9,065
Sales and marketing	159		4,468		28		—		4,655
General and administrative	9,562		4,516		(176	)	—		13,902
Total operating expenses	9,745		17,951		(74	)	—		27,622
Loss from operations	(9,745	)	(8,486	)	65		—		(18,166	)
Interest and other expense, net
Interest expense, net	(680	)	(1,349	)	—		—		(2,029	)
Foreign exchange transaction gain / (loss)	—		(9	)	(4	)	—		(13	)
Change in fair value of convertible note embedded derivative liability	2,423		—		—		—		2,423
Change in fair value of warrant liability	797		—		—		—		797
Loss on extinguishment of debt	(293	)	—		—		—		(293	)
Other income / (expense)	52		49		—		—		101
Total interest and other expense, net	2,299		(1,309	)	(4	)	—		986
Loss from operations before income taxes	(7,446	)	(9,795	)	61		—		(17,180	)
Income tax provision / (benefit)	159		—		—		—		159
Net loss	(7,605	)	(9,795	)	61		—		(17,339	)
Other comprehensive income / (loss)
Foreign currency translation adjustment	(48	)	—		—		—		(48	)
Comprehensive loss	(7,653	)	(9,795	)	61		—		(17,387	)

Consolidated Statement of Cash Flows

for the nine months ended December 31, 2017 (Unaudited)

(in thousands, except par value and share amounts)



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidated Total
Cash flows from operating activities
Net loss	$	(19,620	)	$	5,890		$	(702	)	$	(14,432	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	—			2,093			614			2,707
Change in allowance for doubtful accounts	—			252			(8		)	244
Amortization of debt discount and debt issuance costs	875			—			—			875
Accrued interest	165			—			—			165
Stock-based compensation	2,296			—			—			2,296
Stock-based compensation for services rendered	224			—			—			224
Change in fair value of convertible note embedded derivative liability	6,310			—			—			6,310
Change in fair value of warrant liability	2,526			—			—			2,526
Loss on extinguishment of debt	1,166			—			—			1,166
(Increase) / decrease in assets:
Accounts receivable	—			(16,370		)	186			(16,184		)
Deposits	(34		)	4			(4		)	(34		)
Deferred tax assets	(241		)	—			—			(241		)
Prepaid expenses and other current assets	(54		)	24			(11		)	(41		)
Increase / (decrease) in liabilities:
Accounts payable	(232		)	8,611			157			8,536
Accrued license fees and revenue share	—			4,055			273			4,328
Accrued compensation	2,024			353			6			2,383
Other current liabilities	3,666			(2,831		)	(450		)	385
Other non-current liabilities	(692		)	(39		)	—			(731		)
Intercompany movement of cash	(16		)	18			(2		)	—
Net cash provided by (used in) operating activities	(1,637		)	2,060			59			482

Cash flows from investing activities
Capital expenditures	(13		)	(1,294		)	(5		)	(1,312		)
Net cash used in investing activities	(13		)	(1,294		)	(5		)	(1,312		)

Cash flows from financing activities
Proceeds from short-term borrowings	2,500			—			—			2,500
Payment of debt issuance costs	(346		)	—			—			(346		)
Options exercised	261			—			—			261
Stock issued for cash in stock offering, net	(847		)	—			—			(847		)
Net cash provided by financing activities	1,568			—			—			1,568

Effect of exchange rate changes on cash	—			(5		)	1			(4		)

Net change in cash	(82		)	761			55			734

Cash, beginning of period	258			5,333			558			6,149

Cash, end of period	$	176		$	6,094		$	613		$	6,883

Consolidated Statement of Cash Flows

for the nine months ended December 31, 2016 (Unaudited)

(in thousands, except par value and share amounts)



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidated Total
Cash flows from operating activities
Net loss	$	(7,605	)	$	(9,795	)	$	61		$	(17,339	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	9			5,518			798			6,325
Change in allowance for doubtful accounts	—			130			—			130
Amortization of debt discount and debt issuance costs	287			682			—			969
Accrued interest	388			(91		)	—			297
Stock-based compensation	3,335			—			—			3,335
Stock-based compensation for services rendered	276			—			—			276
Change in fair value of convertible note embedded derivative liability	(2,423		)	—			—			(2,423		)
Change in fair value of warrant liability	(797		)	—			—			(797		)
Loss on extinguishment of debt	293			—			—			293
(Increase) / decrease in assets:
Restricted cash transferred from operating cash	—			(323		)	—			(323		)
Accounts receivable	19			(976		)	(920		)	(1,877		)
Deposits	—			(34		)	117			83
Deferred tax assets	212			—			—			212
Prepaid expenses and other current assets	(86		)	104			12			30
Increase / (decrease) in liabilities:
Accounts payable	340			4,003			166			4,509
Accrued license fees and revenue share	—			(830		)	118			(712		)
Accrued compensation	576			(720		)	(97		)	(241		)
Other current liabilities	(34		)	(862		)	78			(818		)
Other non-current liabilities	1,927			(1,370		)	(274		)	283
Net cash provided by (used in) operating activities	(3,283		)	(4,564		)	59			(7,788		)

Cash flows from investing activities
Capital expenditures	(3		)	(1,358		)	(20		)	(1,381		)
Net cash proceeds from cost method investment in Sift	—			999			—			999
Net cash used in investing activities	(3		)	(359		)	(20		)	(382		)

Cash flows from financing activities
Cash received from issuance of convertible notes	—			16,000			—			16,000
Proceeds from short-term borrowings	—			(11,000		)	—			(11,000		)
Payment of debt issuance costs	(1,912		)	(407		)	—			(2,319		)
Options exercised	11			—			—			11
Net cash provided by financing activities	(1,901		)	4,593			—			2,692

Effect of exchange rate changes on cash	(48		)	—			—			(48		)

Net change in cash	(5,235		)	(330		)	39			(5,526		)

Cash, beginning of period	6,712			4,466			53			11,231

Cash, end of period	$	1,477		$	4,136		$	92		$	5,705

16. Subsequent Events

Subsequent to period end, Telstra Corporation Limited informed the Company that it did not plan to continue utilizing the Company's Pay service at the conclusion of the current contracted period which ends in March 2018. While this is not a discontinuation of all services provided to Telstra Corporation Limited by the Company, it will substantially impact the total activity between the two parties. The Company does not believe the non-renewal will have a material impact on its Consolidated Statement of Operations as the gross profit contribution resulting from the impacted revenue is nominal.


ITEM 2.	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 Quarterly Report on Form 10-Q (the “Report”). The following discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1993, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements involve substantial risks and uncertainties. When used in this Report, the words “anticipate,” “believe,” “estimate,” “expect,” “will,” “seeks,” “should,” “could,” “would,” “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” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2017 as well as those described elsewhere in this Report and in our other public filings. The risks included are not exhaustive, and additional factors could adversely affect our business and financial performance. We operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Historical operating results are not necessarily indicative of the trends in operating results for any future period. We do not undertake any obligation to update any forward-looking statements made in this Report. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on known results and trends at the time they are made, to anticipate future results or trends. This Report and all subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.

All numbers are in thousands, except share and per share amounts.

Company Overview

Digital Turbine, through its subsidiaries, operates 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 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, and


◦	Other professional services directly related to the Ignite platform.


•	A&P, a leading worldwide mobile user acquisition network which is comprised of the Syndicated network.

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.

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 Ignite and other professional services directly related to the Ignite platform.

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, or Software Development Kit ("SDK"). Optional notification features are available throughout the life cycle 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. Since inception, Ignite has delivered over one billion application preloads.

A&P Business

The Company's A&P business, formerly Appia Core, is a 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.

Content

Pay is an Application Programming Interface ("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.

RESULTS OF OPERATIONS (unaudited)



	Three Months Ended December 31,								Nine Months Ended December 31,
	2017			2016			% of Change		2017			2016			% of Change
	(in thousands, except per share amounts)								(in thousands, except per share amounts)
Net revenues	$	38,031		$	22,285		70.7	%	$	92,042		$	69,156		33.1	%
License fees and revenue share	27,719			17,039			62.7	%	66,485			54,060			23.0	%
Other direct cost of revenues	651			1,878			(65.3	)%	1,917			5,640			(66.0	)%
Gross profit	9,661			3,368			186.8	%	23,640			9,456			150.0	%
Total operating expenses	10,257			8,778			16.8	%	27,010			27,622			(2.2	)%
Loss from operations	(596		)	(5,410		)	(89.0	)%	(3,370		)	(18,166		)	(81.4	)%
Interest expense, net	(446		)	(725		)	(38.5	)%	(1,815		)	(2,029		)	(10.5	)%
Foreign exchange transaction gain / (loss)	35			(9		)	(488.9	)%	(182		)	(13		)	1,300.0	%
Change in fair value of convertible note embedded derivative liability	(1,658		)	2,853			(158.1	)%	(6,310		)	2,423			(360.4	)%
Change in fair value of warrant liability	(898		)	937			(195.8	)%	(2,526		)	797			(416.9	)%
Loss on extinguishment of debt	(284		)	—			100.0	%	(1,166		)	(293		)	298.0	%
Other income / (expense)	(36		)	68			(152.9	)%	—			101			(100.0	)%
Loss from operations before income taxes	(3,883		)	(2,286		)	69.9	%	(15,369		)	(17,180		)	(10.5	)%
Income tax provision / (benefit)	(84		)	300			(128.0	)%	(937		)	159			(689.3	)%
Net loss	$	(3,799	)	$	(2,586	)	46.9	%	$	(14,432	)	$	(17,339	)	(16.8	)%
Basic and diluted net loss per common share	$	(0.05	)	$	(0.04	)	25.0	%	$	(0.21	)	$	(0.26	)	(19.2	)%
Weighted-average common shares outstanding, basic and diluted	72,148			66,634			8.3	%	68,575			66,416			3.3	%

Comparison of the three and nine months ended December 31, 2017 and 2016

Revenues



	Three Months Ended December 31,						Nine Months Ended December 31,
	2017		2016		% of Change		2017		2016		% of Change
	(in thousands)						(in thousands)
Revenues by type:
Content	$	13,830	$	6,073	127.7	%	$	31,544	$	24,929	26.5	%
Advertising	24,201		16,212		49.3	%	60,498		44,227		36.8	%
Total	$	38,031	$	22,285	70.7	%	$	92,042	$	69,156	33.1	%

During the three and nine months ended December 31, 2017 there was an approximately $15,746 and $22,886 or 70.7% and 33.1% increase, in overall revenue, as compared to the three and nine months ended December 31, 2016, respectively. This is primarily due to growth in Advertising revenue driven by increased O&O revenue from Advertising partners across existing carrier distribution partners as well as expansion with multiple new carrier distribution partners, partially offset by a decline in traditional A&P revenue. A&P revenue declined due to decrease in demand from advertising partners and a decline in publisher distribution partners, reflecting a trend we expect to continue as the market shifts away from non-automated syndicated networks such as our current A&P business towards more programmatic advertising. The increase in the Content business was driven primarily by growth in Pay from overall increased demand for the product with customers in Australia, and the continued increase of Pay revenue from other Asia-Pacific markets. The increase in the Pay business was partially offset by a continued decline in Marketplace. For more details on the Company's services included in the Advertising and Content segments, see PART I Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations, section titled "Revenues by Product and Service Category."

Revenues from Oath, Inc. and Machine Zone, Inc., both Advertising customers; and Singapore Telecommunications Limited and Telstra Corporation Limited, both Content customers, each represented more than 10% of the Company's total revenue for the three and nine months ended December 31, 2017. A reduction or delay in the collective operating activity from these customers, or a delay or default in payment by these customers could potentially harm the Company’s business and prospects. The Company does not expect to experience reductions or delays in operating activity with these customers that would cause a material impact on the Consolidated Statement of Operations.

The Company partners with mobile carriers and OEMS to deliver applications on our Ignite platform through the carrier network. During the three and nine months ended December 31, 2017, Verizon Wireless, a carrier partner, generated 29.6% and 30.9% of our net revenues; while AT&T Inc., a carrier partner, primarily through its Cricket subsidiary, generated 24.0% and 19.0% of our net revenue. During the three and nine months ended December 31, 2016, Verizon Wireless, generated 32.9% and 26.6% of our net revenues.

Gross Margins



	Three Months Ended December 31,								Nine Months Ended December 31,
	2017			2016			% of Change		2017			2016			% of Change
	(in thousands)								(in thousands)
Gross margin by type:
Content gross margin $	$	1,541		$	478		222.4	%	$	3,491		$	2,448		42.6	%
Content gross margin %	11.1		%	7.9		%			11.1		%	9.8		%
Advertising gross margin $	$	8,120		$	2,890		181.0	%	$	20,149		$	7,008		187.5	%
Advertising gross margin %	33.6		%	17.8		%			33.3		%	15.8		%
Total gross margin $	$	9,661		$	3,368		186.8	%	$	23,640		$	9,456		150.0	%
Total gross margin %	25.4		%	15.1		%			25.7		%	13.7		%

Total gross margin, inclusive of the impact of other direct cost of revenues (including amortization of intangibles), was approximately $9,661 and $23,640 or 25.4% and 25.7% for the three and nine months ended December 31, 2017, respectively, versus approximately $3,368 and $9,456 or 15.1% and 13.7% for the three and nine months ended December 31, 2016, respectively. Overall gross margin increased as growth in higher gross margin Advertising revenue was coupled with lower amortization of intangibles.

Advertising gross margin, inclusive of the impact of other direct cost of revenues (including amortization of intangibles), was approximately $8,120 and $20,149 or 33.6% and 33.3% for the three and nine months ended December 31, 2017, respectively, versus approximately $2,890 and $7,008 or 17.8% and 15.8% for the three and nine months ended December 31, 2016, respectively. The increase in Advertising gross margin dollars and percentage is primarily attributable to an increase in Advertiser demand in the O&O business, which carries a higher gross margin than the A&P business, and a decrease in overall amortization of intangibles due to intangibles becoming fully amortized over the comparative periods. For more details on the Company's services included in the Advertising segment, see PART I Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations, section titled "Revenues by Product and Service Category."

Content gross margin, inclusive of the impact of other direct cost of revenues (including amortization of intangibles), was approximately $1,541 and $3,491 or 11.1% and 11.1% for the three and nine months ended December 31, 2017, respectively, versus approximately $478 and $2,448 or 7.9% and 9.8% for the three and nine months ended December 31, 2016, respectively. The increase in Content gross margin percentage was driven primarily by an increase in professional services within Pay, which carry a higher margin than the actual Pay service offering. The increase in Content gross margin dollars was due primarily to an increase in activity over comparative periods with Pay partners. For more details on the Company's services included in the Content segment, see PART I Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations, section titled "Revenues by Product and Service Category."

Operating Expenses



	Three Months Ended December 31,						Nine Months Ended December 31,
	2017		2016		% of Change		2017		2016		% of Change
	(in thousands)						(in thousands)
Product development	$	3,623	$	3,113	16.4	%	$	9,218	$	9,065	1.7	%
Sales and marketing	2,042		1,683		21.3	%	5,288		4,655		13.6	%
General and administrative	4,592		3,982		15.3	%	12,504		13,902		(10.1	)%
Total operating expenses	$	10,257	$	8,778	16.8	%	$	27,010	$	27,622	(2.2	)%

Total operating expenses for the three and nine months ended December 31, 2017, and 2016 were approximately $10,257 and $27,010; and $8,778 and $27,622, respectively, an increase of approximately $1,479 or 16.8% and a decrease of $612 or 2.2%, respectively, over comparative periods.

Product development expenses include the development, maintenance, and hosting 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 and hosting expenses. Product development expenses for the three and nine months ended December 31, 2017 and 2016 were approximately $3,623 and $9,218; and $3,113 and $9,065, respectively, an increase of approximately $510 or 16.4% and $153 or 1.7%, respectively, over the comparative periods. The increase in costs over the comparative periods was primarily a function of recently hired incremental personnel offset by efficiencies in data hosting realized by the Company leading to cost savings.

Sales and marketing expenses represent the costs of sales and marketing personnel, advertising and marketing campaigns, and campaign management. Sales and marketing expenses for the three and nine months ended December 31, 2017, and 2016 were approximately $2,042 and $5,288; and $1,683 and $4,655, respectively, an increase of approximately $359 and$633 or 21.3% and 13.6%, respectively, over the comparative periods. The increase in sales and marketing expenses over the comparative three and nine month periods was primarily attributable to increased travel expense related to the Company's continued expansion of its global footprint and 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. General and administrative expenses for the three and nine months ended December 31, 2017, and 2016 were approximately $4,592 and $12,504; and $3,982 and $13,902, respectively, an increase of approximately $610 or 15.3% and a decrease of $1,398 or 10.1%, respectively, over the comparative periods. The increase in general and administrative expenses over the comparative three month periods is primarily attributable to a company wide bonus accrual of $1,525 in the current three month period based on the attainment of certain financial performance goals, compared to no bonus accrual in the prior three month period partially offset by lower stock option expense due to stock option grants issued over the comparative periods being issued at lower fair values, which has the impact of lower expense being recorded. The decrease over the comparative nine month periods is primarily attributable to lower legal, accounting, professional consulting costs; and reduced stock option compensation expense due to stock option grants issued over the comparative periods being issued at lower fair values, which has the impact of lower expense being recorded.

Interest and Other Income / (Expense)



	Three Months Ended December 31,								Nine Months Ended December 31,
	2017			2016			% of Change		2017			2016			% of Change
	(in thousands)								(in thousands)
Interest expense, net	$	(446	)	$	(725	)	(38.5	)%	$	(1,815	)	$	(2,029	)	(10.5	)%
Foreign exchange transaction gain / (loss)	35			(9		)	(488.9	)%	(182		)	(13		)	1,300.0	%
Change in fair value of convertible note embedded derivative liability	(1,658		)	2,853			(158.1	)%	(6,310		)	2,423			(360.4	)%
Change in fair value of warrant liability	(898		)	937			(195.8	)%	(2,526		)	797			(416.9	)%
Loss on extinguishment of debt	(284		)	—			100.0	%	(1,166		)	(293		)	298.0	%
Other income / (expense)	(36		)	68			(152.9	)%	—			101			(100.0	)%
Total interest and other expense, net	$	(3,287	)	$	3,124		(205.2	)%	$	(11,999	)	$	986		(1,316.9	)%

Total interest and other income / (expense), net, for the three and nine months ended December 31, 2017, and 2016 were approximately $(3,287) and $(11,999); and $3,124 and $986, respectively, an increase in net expenses of approximately $6,411 and $12,985 or 205.2% and 1,316.9%, respectively, over the comparative periods. The increase in expense over the comparative three and nine month periods is primarily attributable to the change in fair value of convertible note embedded derivative liability, the change in fair value of warrant liability, and loss on extinguishment of debt associated with the conversion of the Notes. Interest and other income / (expense), net, includes net interest expense, foreign exchange transaction loss, change in fair value of convertible note embedded derivative liability, change in fair value of warrant liability, and other ancillary income / (expense) earned or incurred by the Company.

Interest Expense, Net

Interest expense is generated from the Notes and the Western Alliance Bank Credit Agreement in the current comparative period; and from our debt under the Term Loan Agreement with SVB and the Secured Debenture with NAC, both of which the Company entered into during March 2015 and retired in their entirety on September 28, 2016 in connection with the issuance of the Notes (see further details at Note 7 "Debt") during the prior period. Interest income consists of interest income earned on our cash and cash equivalents. The decrease in total interest expense, net, was primarily attributable to less underlying debt outstanding during the current period as compared to the comparative period. This is a trend we expect to continue as holders of our Notes continue to convert their positions to equity. Inclusive of the Notes issued on September 28, 2016 and the Western Alliance Bank Credit Agreement, the Company recorded $195 and $875, and $288 and $969 of aggregate debt discount and debt issuance cost amortization during the three and nine months ended December 31, 2017, and 2016, respectively. Inclusive of the Notes issued on September 28, 2016 and the Credit Agreement entered into on May 23, 2017 during the current fiscal year, and the Notes and the NAC subordinated debenture which was retired in full on September 28, 2016 during the prior fiscal year, the Company recorded $251 and $940 of interest expense during the three and nine months ended December 31, 2017, respectively, and $437 and $1,060 for the three and nine months ended December 31, 2016, respectively. In total, the Company recorded $446 and $1,815 of interest expense for the three and nine months ended December 31, 2017, respectively, and $725 and $2,029 of interest expense for the three and nine months ended December 31, 2016, respectively.

Foreign Exchange Transaction Loss

Foreign exchange transaction gain/(loss) for the three and nine months ended December 31, 2017, and 2016 consists of foreign exchange gains and losses, based on fluctuations of the Company’s foreign denominated currencies.

Loss From Change in Fair Value of Convertible Note Embedded Derivative Liability

The Company accounts for the convertible note embedded derivative liability in accordance with US GAAP accounting guidance under ASC 815 applicable to derivative instruments, which requires every derivative instrument within its scope to be recorded on the balance sheet as either an asset or liability measured at its fair value, with changes in fair value recognized in earnings.

Due to the valuation of the derivative liability being highly sensitive to the trading price of the Company's stock, the increase and decrease in the trading price of the Company's stock has the impact of increasing the loss and gain, respectively. During the three months ended December 31, 2017, the Company recorded a loss from change in fair value of convertible note embedded derivative liability of $1,658 due to the increase in the Company's closing stock price during the current quarter from $1.51 to $1.79, offset by the extinguishment of $1,368 of Notes, and the underlying derivative instruments, during the current quarter. During the nine months ended December 31, 2017, the Company recorded a loss from change in fair value of convertible note embedded derivative liability of $6,310 due to the increase in the Company's closing stock price during the current fiscal year from $0.94 to $1.79, partially offset by a derecognition of derivative liability of $3,632 on the extinguishment of $7,368 of Notes, and the underlying derivative instruments, during the current fiscal year. During the three months ended December 31, 2016, the Company recorded a gain from change in fair value of convertible note embedded derivative liability of $2,853 due to the decrease in the Company's closing stock price from September 30, 2016 to December 31, 2016 from $1.05 to $0.68. During the nine months ended December 31, 2016 the Company recorded a gain from change in fair value of convertible note embedded derivative liability of $2,423 due to the decrease in the Company's closing stock price from inception to December 31, 2016 from $0.99 to $0.68.

Loss From Change in Fair Value of Warrant Liability

The Company accounts for the warrants issued in connection with the above-noted sale of Notes to the Initial Purchaser in accordance with US GAAP accounting guidance under ASC 815 applicable to derivative instruments, which requires every derivative instrument within its scope to be recorded on the balance sheet as either an asset or liability measured at its fair value, with changes in fair value recognized in earnings. Based on this guidance, the Company determined that these warrants did not meet the criteria for classification as equity. Accordingly, the Company classified the warrants as long-term liabilities. The warrants are subject to re-measurement at each balance sheet date, with any change in fair value recognized as a component of other income (expense), net in the statements of operations.

For similar reasons as applicable to the convertible notes, due to the valuation of the derivative liability being highly sensitive to the trading price of the Company's stock, the increase and decrease in the trading price of the Company's stock has the impact of increasing the (loss) and gain, respectively. During the three and nine months ended December 31, 2017, the Company recorded a loss from change in fair value of warrant liability of $898 and $2,526, respectively, due to the increase in the Company's closing stock price during the comparative period from $1.51 to $1.79, and $0.94 to $1.79, respectively. During the three months ended December 31, 2016, the Company recorded a gain from change in fair value of warrant liability of $937 due to the decrease in the Company's closing stock price from September 30, 2016 to December 31, 2016 from $1.05 to $0.68. During the nine months ended December 31, 2016 the Company recorded a gain from change in fair value of warrant liability of $797 due to the decrease in the Company's closing stock price from inception of the issuance of the Notes from September 28, 2016 to December 31, 2016 from $0.99 to $0.68.

Revenues by Product and Service Categories

The following table summarizes our net revenues by product and service categories for the three and nine months ended December 31, 2017 and 2016. The amount or percentage of total revenue contributed by class of products and services has been presented for those classes accounting for more than 10% or more of total net revenue in any of the periods presented, with all other amounts individually representing less than 10% of total net revenue included in the Other categories.



	Three Months Ended December 31, 2017			Three Months Ended December 31, 2016			% of Change		Nine Months Ended December 31, 2017			Nine Months Ended December 31, 2016			% of Change
	Dollars	% of Net Revenues		Dollars	% of Net Revenues		% of Change		Dollars	% of Net Revenues		Dollars	% of Net Revenues		% of Change
Net revenues	(in thousands)			(in thousands)					(in thousands)			(in thousands)

Ignite	22,693	59.7	%	11,572	51.9	%	96.1	%	53,598	58.2	%	27,698	40.1	%	93.5	%
Other O&O	42	0.1	%	202	0.9	%	(79.2	)%	193	0.2	%	911	1.3	%	(78.8	)%
Total O&O	22,735	59.8	%	11,774	52.8	%	93.1	%	53,791	58.4	%	28,609	41.4	%	88.0	%

Syndicated Network	1,466	3.9	%	4,378	19.6	%	(66.5	)%	6,707	7.3	%	15,378	22.2	%	(56.4	)%
Other A&P	—	—	%	60	0.3	%	(100.0	)%	—	—	%	240	0.3	%	(100.0	)%
Total A&P	1,466	3.9	%	4,438	19.9	%	(67.0	)%	6,707	7.3	%	15,618	22.6	%	(57.1	)%

Total Advertising	24,201	63.6	%	16,212	72.7	%	49.3	%	60,498	65.7	%	44,227	64.0	%	36.8	%

Pay	13,657	35.9	%	5,696	25.6	%	139.8	%	30,889	33.6	%	23,608	34.1	%	30.8	%
Other Content	173	0.5	%	377	1.7	%	(54.1	)%	655	0.7	%	1,321	1.9	%	(50.4	)%
Total Content	13,830	36.4	%	6,073	27.3	%	127.7	%	31,544	34.3	%	24,929	36.0	%	26.5	%

Total net revenues	38,031	100.0	%	22,285	100.0	%	70.7	%	92,042	100.0	%	69,156	100.0	%	33.1	%

Advertising

The Company's O&O business is an advertiser solution for unique and exclusive carrier and OEM inventory. During the three and nine months ended December 31, 2017, the main revenue driver for the O&O business was the Ignite platform. 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 current periods there was an approximately $11,121 and $25,900 or 96.1% and 93.5% increase in Ignite net revenues as compared to the three and nine months ended December 31, 2016. This increase in Ignite net revenue was attributable to increased demand for the Ignite service, driven primarily by increased CPI and CPP revenue from advertising partners across existing commercial deployments of Ignite with carrier partners as well as expanded distribution with new carrier partners.

The Company's A&P business, is a 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 the three and nine months ended December 31, 2017, there was an approximately $2,912 and $8,671 or 66.5% and 56.4% decrease in Syndicated network net revenues as compared to the three and nine months ended December 31, 2016. This decrease in Syndicated network revenue was attributable primarily to the decrease in demand from advertising partners, reflecting a trend we expect to continue as the market shifts away from non-automated networks such as our current A&P business towards more programmatic advertising.

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 three and nine months ended December 31, 2017 there was an approximately $7,961 and $7,281 or 139.8% and 30.8% increase in Pay net revenues as compared to the three and nine months ended December 31, 2016, respectively.

The increase in the Content business over the comparative periods for the three and nine months ended December 31, 2017 and 2016 was attributable primarily to a increase in activity with multiple large partners as compared to the same period in prior year, partially offset by a continued decline in Marketplace revenues. The decline in Marketplace revenues reflects a trend we expect to continue as the end user market has shifted away from carrier specific content stores in favor of a growing number of other application delivery options.

Liquidity and Capital Resources

Selected Liquidity Information



	December 31, 2017			March 31, 2017
	(unaudited)
	(in thousands)
Cash	$	6,883		$	6,149

Short-term debt
Short-term debt, net of debt issuance costs of $247 and $0, respectively	1,653			—
Total short-term debt	$	1,653		$	—

Long-term debt
Convertible notes, net of debt issuance costs and discounts of $2,881 and $6,315, respectively	5,751			9,685
Total long-term debt	$	5,751		$	9,685
Total debt	$	7,404		$	9,685

Working capital
Current assets	$	40,414		$	23,665
Current liabilities	48,214			30,774
Working capital	$	(7,800	)	$	(7,109	)

Working Capital

Cash totaled approximately $6,883 and $6,149 at December 31, 2017 and March 31, 2017, respectively, an increase of approximately $734 or 11.9%. Current assets totaled $40,414 and $23,665 at December 31, 2017 and March 31, 2017, respectively, an increase of approximately $16,749 or 70.8%. As of December 31, 2017 and March 31, 2017, the Company had approximately $32,494 and $16,554, respectively, in accounts receivable, an increase of $15,940 or 96.3%. As of December 31, 2017 and March 31, 2017 the Company's working capital deficit was $7,800 and $7,109, respectively, an increase in working capital deficit of $691 or 9.7%. The working capital deficit as of December 31, 2017 includes the impact of the Western Alliance Bank Credit Agreement being classified as a current liability of $1,653 (net of aggregate debt issuance costs and debt discount of $247), as compared to $0 as of March 31, 2017 due to the payoff of the subordinated debenture with NAC on September 28, 2016.

Our primary sources of liquidity have historically been issuance of common, preferred stock, and debt. The Company may raise additional capital through future equity raises or, subject to restrictions contained in our Indenture and Credit Agreement, debt financing to provide for greater flexibility for the Company to complete acquisitions, fund new investments in under-capitalized opportunities, or invest in organic opportunities. Additional financing may not be available on acceptable terms or at all. If the Company issues additional equity or equity linked 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. The Company believes that it has sufficient cash and capital resources to operate its business for at least the next twelve months from the issuance date of this Report. See Note 2 - Liquidity for more discussion.

As of December 31, 2017, our total contractual cash obligations were as follows:



			Payments Due by Period
	Total		Within the Next 12 Months		1 to 3 Years		3 to 5 Years		More Than 5 Years
Contractual cash obligations	(in thousands)
Convertible notes (a)	$	8,632	$	—	$	8,632	$	—	$	—
Operating leases (b)	6,396		1,069		2,280		1,789		1,258
Employment agreements and other obligations (c)	325		325		—		—		—
Interest and bank fees	2,312		755		1,557		—		—
Uncertain tax positions (d)	—		—		—		—		—
Total contractual cash obligations	$	17,665	$	2,149	$	12,469	$	1,789	$	1,258

(a) convertible notes maturing on September 23, 2020 (the “Notes”), unless converted, repurchased or redeemed in accordance with their terms prior to such date.

(b) Consists of operating leases for our office facilities.

(d) We have approximately $921 in additional liabilities associated with uncertain tax positions that are not expected to be liquidated within the next twelve months. We are unable to reliably estimate the expected payment dates for these additional non-current liabilities.

Cash Flow Summary



	Nine Months Ended December 31,
	2017			2016			% of Change
	(in thousands)
Consolidated statement of cash flows data:
Net cash provided by (used in) operating activities	$	482		$	(7,788	)	(106.2	)%
Capital expenditures	(1,312		)	(1,381		)	(5.0	)%
Proceeds from sale of cost method investment in Sift	—			999			(100.0	)%
Cash received from issuance of convertible notes	—			16,000			(100.0	)%
Proceeds from short-term borrowings	2,500			—			100.0	%
Payment of debt issuance costs	(346		)	(2,319		)	(85.1	)%
Options exercised	261			11			2,272.7	%
Repayment of debt obligations	(847		)	(11,000		)	(92.3	)%
Effect of exchange rate changes on cash	(4		)	(48		)	(91.7	)%

Operating Activities

During the nine months ended December 31, 2017 and 2016, the Company's net cash provided by / (used in) operating activities was $482 and $(7,788), respectively, a positive change of $8,270 or 106.2%. The increase in net cash provided by operating activities was primarily attributable to the change in working capital accounts over the comparative periods.

During the nine months ended December 31, 2017, net cash provided by operating activities was $482, resulting from a net loss of $14,432 offset by net non-cash expenses of $16,513, which included depreciation and amortization expense, change in the allowance for doubtful accounts, amortization of debt discount and debt issuance costs, accrued interest, stock option expense, stock-based compensation related to vesting of restricted stock for services, change in fair value of convertible note embedded derivative liability, change in fair value of warrant liability, and loss on extinguishment of debt of approximately $2,707, $244, $875, $165, $2,296, $224, $6,310, $2,526, and $1,166, respectively. Net cash used in operating activities during the nine months ended December 31, 2017 was also impacted by the change in net working capital accounts as of December 31, 2017 compared to March 31, 2017, with a net increase in current liabilities of approximately $14,901 (inclusive of accounts payable, accrued license fees and revenue share, accrued compensation, and other liabilities), offset by a net increase in current assets of approximately $16,500 (inclusive of accounts receivable, deposits, and prepaid expenses and other current assets) over the comparative periods. The net increase in working capital account liabilities was driven primarily by the increase in accounts payable and accrued license fees and revenue share of $12,864, mostly due to the timing of payments to our carrier partners. The net increase in working capital assets was driven primarily by the increase in accounts receivable of $16,184, mostly due to the timing of payments from our advertising and content customers.

During the nine months ended December 31, 2016, net cash used in operating activities was $7,788, resulting from a net loss of $17,339 offset by net non-cash expenses of $8,405, which included depreciation and amortization, stock option expense, stock-based compensation related to vesting of restricted stock for services, amortization of debt discount, amortization of debt issuance costs, an decrease in the allowance for doubtful accounts, change in fair value of convertible note embedded derivative liability, change in fair value of warrant liability, loss on extinguishment of debt, and an increase in accrued interest of approximately $6,325, $3,335, $276, $450, $519, $130, $(2,423), $(797), $293, and $297, respectively. Net cash used in operating activities during the nine months ended December 31, 2016 was impacted by the change in net working capital accounts as of December 31, 2016 compared to March 31, 2016, with a net increase in current liabilities of approximately $2,738 (inclusive only of accounts payable, accrued license fees and revenue share, accrued compensation, and other liabilities), offset by a net increase in current assets of approximately $1,875 (inclusive only of restricted cash, accounts receivable, deposits, and prepaid expenses and other current assets) over the comparative periods. The net increase in working capital account liabilities was driven primarily by the increase in accounts payable of $4,509, mostly due to the timing of payments to our carrier partners. Net cash used in operating activities was further impacted by an increase in other non-current liabilities of $283, related entirely to changes in non-current uncertain tax liabilities over the comparative periods.

Investing Activities

For the nine months ended December 31, 2017 and 2016, cash used in investing activities was approximately $1,312 and $382, respectively, which is comprised of capital expenditures related mostly to internally developed software in the current fiscal year, and capital expenditures related mostly to internally developed software of $1,381 offset by proceeds from the sale of a cost method investment of $999 in the prior fiscal year.

Financing Activities

For the nine months ended December 31, 2017, cash provided by financing activities was approximately $1,568, inclusive of $2,500 in proceeds from our Credit Agreement, and $261 in proceeds from the exercise of stock options; offset by cash paid for the settlement of debt of $847, and the payment of capitalized debt issuance cots of $346. For the nine months ended December 31, 2016, cash used in financing activities was approximately $2,692, primarily due to proceeds from the issuance of debt of $16,000 and proceeds from the exercise of stock options of $11, offset by the repayment of debt of $11,000 and $2,319 in debt issuance costs payments.

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.

Critical Accounting Policies and Judgments

Management’s discussion and analysis of our financial condition and results of operations is based on our unaudited financial statements. The preparation of these financial statements is based on the selection of accounting policies and the application of significant accounting estimates, some of which require management to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and notes. For more information regarding our critical accounting estimates and policies, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Judgments” of our Annual Report on Form 10-K for the year ended March 31, 2017, as amended

ITEM 3. 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, primarily 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.

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 foreign currencies and then translated into U.S. dollars, the vast majority of our media costs are billed in U.S. dollars, causing both our revenue and, disproportionately, our operating loss and net loss to be impacted by fluctuations in exchange rates. In addition, gains/(losses) related to translating certain cash balances, trade accounts receivable balances, and inter-company 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.

ITEM 4. CONTROLS AND PROCEDURES

This Report includes the certifications of our Chief Executive Officer and Chief Financial Officer, as required by Rule 13a-14 of the Securities Exchange Act of 1934 (the “Exchange Act”). See Exhibits 31.1 and 31.2. Item 4 includes information concerning the controls and control evaluations referred to in those certifications.

Background

As previously disclosed under “Part II - Item 9A - Controls and Procedures” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2017, management concluded that our internal controls over financial reporting were not effective as of March 31, 2017, because of certain deficiencies that constituted material weaknesses in our internal controls over financial reporting. Material weaknesses could result in material misstatements of substantially all of our financial statement accounts, which would result in a material misstatement of our annual or interim consolidated financial statements that would not be prevented or detected on a timely basis.

Our management has been actively engaged in the implementation of remediation efforts to address the material weaknesses, as well as other identified areas of risk. For a complete description of management’s remediation plan, see “Part II - Item 9A - Controls and Procedures” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2017, as amended.

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.

In connection with the preparation of this Report, Digital Turbine's management, under the supervision of and with the participation of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation and the identification of certain material weaknesses in internal controls over financial reporting, which we view as an integral part of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of December 31, 2017. Nevertheless, based on a number of factors, including the performance of additional procedures by management designed to ensure the reliability of our financial reporting, we believe that the consolidated financial statements in this Report fairly present, in all material respects, our financial position, results of operations, and cash flows as of the dates, and for the periods, presented, in conformity with US GAAP.

Management’s Plan for Remediation

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, hindering the Company's ability 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.

The lack of staff resources and financial expertise arose as a result of employee turnover and our inability to timely fill accounting and financial-related positions. During the second half of fiscal 2017 we had filled all open accounting and financial-related positions with qualified replacements and continue to more fully develop the technical expertise of our existing staff and newly hired staff.

In addition, we had implemented a consolidated accounting ERP system across the entire organization and stock option accounting software during the third and fourth quarter of fiscal 2017, respectively, which has significantly enhanced our capabilities and efficiencies across many accounting disciplines, particularly as it relates to consolidation of financial information, foreign currency translation, and share-based compensation.

Many of the remedial actions we have taken are recent, and other planned remedial actions are in process of being implemented as detailed below. Because many of the remedial actions taken are very recent, management will not be able to conclude that the material weakness has been eliminated until the controls have been successfully operated and tested. We, along with our Audit Committee, will continue to monitor and evaluate the effectiveness of these remedial actions and make further changes as deemed appropriate. Management, with the oversight of our Audit Committee, has devoted considerable effort to remediate the material weakness identified above, with the planned actions detailed below to be completed during fiscal 2018 to remediate the material weakness.

Planned Actions


•	Completing the development and execution of the plan to fully implement and effectively operate the key controls identified through the completion of the documentation of internal control procedures over all significant accounting areas and information technology that have an impact on financial reporting.


•	Completing the implementation of a cyclical process for evaluating and testing the control environment to help ensure any future key control failures will be identified on a timely basis, and allow for the possibility of immediate detection and remediation.


•	Continue conducting formal training related to key accounting policies, internal controls, and SEC compliance for all key personnel who have an impact on the transactions underlying the financial statements.

The remediation plan, once fully implemented and determined to be operating effectively, is expected to result in the remediation of the identified material weaknesses in internal controls over financial reporting.

Changes in Internal Controls Over Financial Reporting

There were no changes in our internal controls over financial reporting during the three months ended December 31, 2017 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

See Note 13 “Commitments and Contingencies - Legal Matters” of our Notes to Consolidated Financial Statements, which is incorporated herein by reference.

Item 1 (A). Risk Factors

Registrant is not aware of any material risk factors since those set forth under “Risk Factors” in its Annual Report in Form 10-K, as amended, for the year ended March 31, 2017.

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

None.

Item 3. Defaults

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

ITEM 6. EXHIBITS



31.1		Certification of William Stone, Principal Executive Officer. *

31.2		Certification of Barrett Garrison, Principal Financial Officer. *

32.1		Certification of William Stone, Principal Executive Officer pursuant to U.S.C. Section 1350. +

32.2		Certification of Barrett Garrison, Principal Financial Officer pursuant to U.S.C. Section 1350. +

101		INS XBRL Instance Document. *

101		SCH XBRL Schema Document. *

101		CAL XBRL Taxonomy Extension Calculation Linkbase Document. *

101		DEF XBRL Taxonomy Extension Definition Linkbase Document. *

101		LAB XBRL Taxonomy Extension Label Linkbase Document. *

101		PRE XBRL Taxonomy Extension Presentation Linkbase Document. *


*	Filed herewith.


+	In accordance with SEC Release No. 33-8212, these exhibits are being furnished, and are not being filed, as part of the Report on Form 10-Q or as a separate disclosure document, and are not being incorporated by reference into any Securities Act registration statement.

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.



	Digital Turbine, Inc.
Dated: February 7, 2018
	By:	/s/ William Stone
		William Stone
		Chief Executive Officer
		(Principal Executive Officer)



	Digital Turbine, Inc.
Dated: February 7, 2018
	By:	/s/ Barrett Garrison
		Barrett Garrison
		Chief Financial Officer
		(Principal Financial Officer)