Digital Turbine Inc

Previous wording

We are impacted by the volume of sales of new mobile devices by our partners, which has been below our expectations. We believe this is is driven by the impact of inflation, economic uncertainty, and their potential impacts on consumers. These negative macroeconomic trends have resulted, and may continue to result in, a decrease in mobile phone sales volume. Continued weakness in the sale of new mobile devices is likely to continue to impact our business, financial condition, and results of operations, the full impact of which remains uncertain at this time.

Current wording

We are impacted by the volume of sales of new mobile devices by our partners, which has been below our expectations. We believe this is driven by the impact of inflation, economic uncertainty, and their potential impacts on consumers. These negative macroeconomic trends have resulted, and may continue to result in, a decrease in mobile phone sales volume. Continued weakness in the sale of new mobile devices is likely to continue to impact our business, financial condition, and results of operations, the full impact of which remains uncertain at this time.

Previous wording

In addition to evaluating goodwill for impairment when events or circumstances indicate they would more likely than not reduce the fair value of a reporting unit below its carrying value, the Company also evaluates goodwill for impairment on an annual basis. The Company’s next annual evaluation of goodwill for impairment will be as of March 31, 2024. Given the goodwill impairment recorded for our AGP reporting unit during the three months ended September 30, 2023, material reductions in expected growth rates or increases in the discount rate could result in further goodwill impairments.

Current wording

In addition to evaluating goodwill for impairment when events or circumstances indicate they would more likely than not reduce the fair value of a reporting unit below its carrying value, the Company also evaluates goodwill for impairment on an annual basis. The Company’s next annual evaluation of goodwill for impairment will be as of March 31, 2025.

Previous wording

This is a multi-year project that includes various costs, including software configuration and implementation costs that would be recognized as either capital expenditures or deferred costs in accordance with applicable accounting policies, with certain costs recognized as operating expense associated with project development and project management costs, and professional services with business partners engaged in the planning, design and business process review that would not qualify as software configuration and implementation costs. In addition, the Company is incurring duplicative personnel and other operating costs to maintain legacy systems and operations during the deployment of the new systems and certain other ancillary platforms and systems. The Company completed the first deployment phase in the third quarter of fiscal year 2024. Costs are anticipated to be incurred through various deployment phases that are expected to continue through early fiscal year 2026. The Company incurred $4,763 and $7,291 of business transformation costs in the three and nine months ended December 31, 2023, respectively. These costs are recorded in General and Administrative expenses and Product Development expenses in our Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income.

Current wording

This is a multi-year project that includes various costs, including software configuration and implementation costs that would be recognized as either capital expenditures or deferred costs in accordance with applicable accounting policies, with certain costs recognized as operating expense associated with project development and project management costs, and professional services with business partners engaged in the planning, design and business process review that would not qualify as software configuration and implementation costs. In addition, the Company is incurring duplicative personnel and other operating costs to maintain legacy systems and operations during the deployment of the new systems and certain other ancillary platforms and systems. The Company completed the first deployment phase in the third quarter of fiscal year 2024. Costs are anticipated to be incurred through various deployment phases that are expected to continue through early fiscal year 2026. The Company incurred $1,072 of business transformation costs in the three months ended June 30, 2024. These costs are recorded in General and Administrative expenses and Product Development expenses in our Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income.

Previous wording

The following table sets forth our results of operations for the three and six months ended December 31, 2023 and 2022 (in thousands):

Current wording

The following table sets forth our results of operations for the years ended June 30, 2024 and 2023 (in thousands):

Previous wording

Over the three-month comparative periods, net revenue decreased by $19,676 or 12.1%, and over the nine-month comparative periods, net revenue decreased by $93,543 or 17.8%. See the segment discussion below for further details regarding net revenue.

Current wording

Net revenue decreased by $28,377 or 19.4% for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. See the segment discussion below for further details regarding net revenue.

Previous wording

ODS revenue for the three months ended December 31, 2023, decreased by $2,018 or 2.1% compared to the three months ended December 31, 2022. Revenue from content media declined by approximately $3,332 primarily due to the end of a carrier partnership that resulted in lower daily active users on prepaid devices. Revenue from application media increased by approximately $1,314. The increase was primarily driven by higher strategic demand and revenue-per-device in the United States (“US”) market. This increase was partially offset by lower device volume in our international markets.

Current wording

On Device Solutions revenue decreased by $17,600 or 17.9% for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. Revenue from content media increased by approximately $753 primarily due to increased activity with a carrier that resulted in higher daily active users on prepaid devices. Revenue from application media declined by approximately $18,352 due to lower new device volumes in the US and internationally, which was partially offset by an increase in revenue-per-device in the US. Additionally, the decrease is partially due to the winding down of certain strategic demand contracts in the current period.

Previous wording

The decrease in total costs of revenue and operating expenses for both comparative periods, after excluding the impairment of goodwill, was primarily due to lower revenue share, partially offset by higher general and administrative costs. The reduced revenue share is the result of lower revenue over the same comparative periods. Costs of revenue and operating expenses included total business transformation, severance and transaction costs of $5,718 and $9,535, respectively, for the three and nine months ended December 31, 2023, compared to $2,407 and $4,990, respectively, for the three and nine months ended December 31, 2022.

Current wording

Costs of revenue and operating expenses decreased by $17,004 or 11.3% for the three months ended June 30, 2024 compared to the three months ended June 30, 2023, primarily due to lower revenue share, which is the result of lower revenue over the same comparative periods. This decrease was also partially due to lower operating costs, primarily for product development activities. Costs of revenue and operating expenses included severance costs as well as business transformation and acquisition-related costs of $557 and $1,072, respectively, for the three months ended June 30, 2024, compared to $367 and $36, respectively, for the three months ended June 30, 2023. See below for further discussion regarding changes in costs of revenue and operating expenses.

Previous wording

Revenue share includes amounts paid to our carrier and OEM partners, as well as app publishers and developers, and are recorded as a cost of revenue.

Current wording

License fees and revenue share are reflective of amounts paid to our carrier and OEM partners, as well as app publishers and developers, and are recorded as a cost of revenue. In addition, when indirect arrangements exist through advertising aggregators (ad networks) and revenue is shared with our carrier and app development partners, the shared revenue is also recorded as a cost of revenue.

Previous wording

Other direct costs of revenue decreased by $710 or 7.6% to $8,614 for the three months ended December 31, 2023, and was 6.0% as a percentage of total net revenue compared to $9,324, or 5.7% of total net revenue, for the three months ended December 31, 2022. The decrease in other direct costs was primarily due to slightly lower amortization of developed technology intangible assets. The increase in other direct costs as a percentage of total net revenue was due to the decline in total net revenue.

Current wording

Other direct costs of revenue decreased by $1,823 to $7,790 for the three months ended June 30, 2024 and was 6.6% as a percentage of total net revenue compared to $9,613, or 6.6% of total net revenue, for the three months ended June 30, 2023. The decrease in other direct costs was primarily due to lower hosting costs as a result of both a strategic switch in web hosting providers during fiscal year 2024 and a comparable decrease in total net revenues between comparable periods. Other direct costs as a percentage of total net revenue remained flat between comparable periods.

Previous wording

Product development expenses include the development and maintenance of the Company’s product suite. Expenses in this area are primarily a function of personnel. Additionally, product development expenses include certain integration and business transformation costs, which may impact the comparability of product development expenses between periods.

Current wording

Product development expenses include the development and maintenance of the Company’s product suite. Expenses in this area are primarily a function of personnel.

Previous wording

Sales and marketing expenses represent the costs of sales and marketing personnel, advertising and marketing campaigns, and campaign management. Additionally, sales and marketing expenses include certain integration and business transformation costs, which may impact the comparability of sales and marketing expenses between periods.

Current wording

Sales and marketing expenses represent the costs of sales and marketing personnel, advertising and marketing campaigns, and campaign management.

Previous wording

General and administrative expenses represent management, finance, and support personnel costs in both the parent and subsidiary companies, which include professional services and consulting costs, in addition to other costs such as rent, stock-based compensation, and depreciation and amortization expense. Additionally, general and administrative expenses include certain integration and business transformation costs, which may impact the comparability of general and administrative expenses between periods.

Current wording

General and administrative expenses represent management, finance, and support personnel costs in both the parent and subsidiary companies, which include professional services and consulting costs, in addition to other costs such as rent, stock-based compensation, and depreciation and amortization expense.

Previous wording

General and administrative expenses increased by $13,011 or 11.4% to $127,339 for the nine months ended December 31, 2023, compared to $114,328 for the nine months ended December 31, 2022. General and administrative expenses included severance and acquisition-related costs of approximately $400 and $2,226 for the nine months ended December 31, 2023 and December 31, 2022, respectively. General and administrative expenses for nine months ended December 31, 2023 also included business transformation costs of approximately $4,575.

Current wording

General and administrative expenses increased by $3,018 to $43,517 for the three months ended June 30, 2024 compared to $40,499 for the three months ended June 30, 2023. General and administrative expenses included severance costs of $76 and business transformation costs of $1,072 for the three months ended June 30, 2024. General and administrative expenses included severance costs and acquisition-related costs of $181 for the three months ended June 30, 2023. Excluding severance costs, acquisition-related costs, and business transformation costs, general and administrative expenses increased by $2,051 for the three months ended June 30, 2024.

Previous wording

For the three and nine months ended December 31, 2023, interest expense, net, increased by $753 or 10.9% and $6,676 or 41.1%, respectively, compared to the three and nine months ended December 31, 2022, primarily due to an increase in interest rates of 201 basis points and 309 basis points, respectively, and lower average outstanding borrowings of $71,967 and $77,178, respectively, over the comparative periods.

Current wording

For the three months ended June 30, 2024, interest expense, net, increased by $860 or 11.6% compared to the three months ended June 30, 2023, primarily due to an increase in interest rates of 112 basis points offset by lower average outstanding borrowings of $13,967 over the comparative period.

Previous wording

Our primary sources of liquidity are our cash and cash equivalents, cash from operations, and borrowings under our New Credit Agreement. As of December 31, 2023, we had unrestricted cash of approximately $48,959 and $149,000 available to draw under the New Credit Agreement with BoA, excluding the accordion feature, subject to the required covenants. We generated $40,433 in cash flows from operating activities for the nine months ended December 31, 2023.

Current wording

Our primary sources of liquidity are our cash and cash equivalents, cash from operations, and borrowings under our New Credit Agreement. As of June 30, 2024, we had unrestricted cash of approximately $35,042 and $29,000 available to draw under the New Credit Agreement with BoA, excluding the accordion feature, subject to the required covenants. We generated $(1,352) in cash flows from operating activities for the three months ended June 30, 2024.

Previous wording

Our ability to meet our debt service obligations and to fund working capital, capital expenditures, and investments in our business will depend upon our future performance, which will be subject to availability of borrowing capacity under our credit facility and our ability to access capital markets as well as financial, business, and other factors affecting our operations, many of which are beyond our control. These factors include general and regional economic, financial, competitive, legislative, regulatory, and other factors such as health epidemics including COVID-19, economic and macro-economic factors like labor shortages, supply chain disruptions, and inflation, and geopolitical developments, including the conflict in Ukraine, the political climate related to China, and the conflict in Israel. We cannot guarantee we will generate sufficient cash flow from operations, or that future borrowings or capital markets will be available, in an amount sufficient to enable us to pay our debt or to fund our other liquidity needs.

Current wording

Our ability to meet our debt service obligations and to fund working capital, capital expenditures, and investments in our business will depend upon our future performance, which will be subject to availability of borrowing capacity under our credit facility and our ability to access capital markets as well as financial, business, and other factors affecting our operations, many of which are beyond our control. These factors include general and regional economic, financial, competitive, legislative, regulatory, and other factors such as health epidemics, economic and macro-economic factors like labor shortages, supply chain disruptions, and inflation, and geopolitical developments, including the conflict in Ukraine, the political climate related to China, and the conflict in Israel. We cannot guarantee we will generate sufficient cash flow from operations, or that future borrowings or capital markets will be available, in an amount sufficient to enable us to pay our debt or to fund our other liquidity needs.

Previous wording

Our outstanding secured indebtedness under the New Credit Agreement is $376,000 as of December 31, 2023. The maturity date of the New Credit Agreement is April 29, 2026, and the outstanding balance is classified as long-term debt, net of debt issuance costs of $1,966, on our condensed consolidated balance sheets as of December 31, 2023. For further description of the terms of the New Credit Agreement, see Note 9—Debt under the heading “Revolver” in the notes to our consolidated financial statements under Part I, Item 1 of this Report.

Current wording

Our outstanding secured indebtedness under the New Credit Agreement is $396,000 as of June 30, 2024. The maturity date of the New Credit Agreement is April 29, 2026, and the outstanding balance is classified as long-term debt, net of debt issuance costs of $2,209, on our consolidated balance sheets as of June 30, 2024. For further description of the terms of the New Credit Agreement, see Note 10—Debt under the heading “Revolver” in the notes to our condensed consolidated financial statements under Part I, Item 1 of this Report.

Previous wording

As of December 31, 2023, we were in compliance with all covenants under the New Credit Agreement. Additionally, the Company entered into a Third Amendment to the New Credit Agreement on February 5, 2024 to provide further financing flexibility to fund growth initiatives and meet general corporate obligations. Refer to Note 14 for further discussion.

Current wording

As of June 30, 2024, we were in compliance with all covenants under the New Credit Agreement. Additionally, the Company entered into a Fourth Amendment to the New Credit Agreement on August 6, 2024 to

Previous wording

We enter into hosting agreements with service providers, and, in some cases, those agreements include minimum commitments that require us to purchase a minimum amount of service over a specified time period (“the minimum commitment period”). The minimum commitment period is generally one-year in duration, and the hosting agreements include multiple minimum commitment periods. Our minimum purchase commitments under these hosting agreements total approximately $278,600 over the next four fiscal years.

Current wording

We enter into hosting agreements with service providers, and, in some cases, those agreements include minimum commitments that require us to purchase a minimum amount of service over a specified time period (“the minimum commitment period”). The minimum commitment period is generally one year in duration, and the hosting agreements include multiple minimum commitment periods. Our minimum purchase commitments under these hosting agreements total approximately $261,359 over the next six fiscal years.

Previous wording

Our cash flows from operating activities are primarily driven by revenue generated from user acquisition and advertising activity, offset by the cash costs of operations, and are significantly influenced by the timing of and fluctuations in receipts from customers and payments to our carrier and publisher partners as well as other vendors. Our future cash flows from operating activities will be diminished if we cannot increase our revenue levels and manage costs appropriately. Cash provided by operating activities was $40,433 for the nine months ended December 31, 2023, compared to $97,514 for the nine months ended December 31, 2022. The decrease of $57,081 was due to the following:

Current wording

Our cash flows from operating activities are primarily driven by revenue generated from user acquisition and advertising activity, offset by the cash costs of operations, and are significantly influenced by the timing of and fluctuations in receipts from customers and payments to our carrier and publisher partners as well as other vendors. Our future cash flows from operating activities will be diminished if we cannot increase our revenue levels and manage costs appropriately. Cash provided by (used in) operating activities was $(1,352) for the three months ended June 30, 2024, compared to $1,318 for the three months ended June 30, 2023. The decrease of $2,670 was due to the following:

Previous wording

•$12,605 increase due to changes in operating assets and liabilities, driven primarily by working capital changes, including an increase in accounts payable, accrued compensation, and other current liabilities, partially offset by a decrease in accounts receivable; and

Current wording

•$19,994 increase due to changes in operating assets and liabilities, driven primarily by working capital changes, specifically accounts receivable;

Previous wording

• $144,979 increase in non-cash charges during the nine months ended December 31, 2023 primarily related to goodwill impairment and increased stock-based compensation, partially offset by lower right-of-use assets and deferred income taxes for the nine months ended December 31, 2023.

Current wording

• $5,907 decrease in non-cash charges during the three months ended June 30, 2024 primarily related to lower deferred income taxes and stock-based compensation, partially offset by lower foreign exchange transaction gain for the three months ended June 30, 2024.

Previous wording

Our primary investing activities have consisted of acquisitions of businesses, purchases of property and equipment, and capital expenditures in support of creating and enhancing our technology infrastructure. For the nine months ended December 31, 2023, net cash used in investing activities increased by $1,691 to approximately $26,997. Our cash used in investing activities for the nine months ended December 31, 2023 and December 31, 2022, was primarily comprised of capital expenditures related to internally-developed software and equity investments in strategic businesses.

Current wording

Our primary investing activities have consisted of acquisitions of businesses, purchases of property and equipment, and capital expenditures in support of creating and enhancing our technology infrastructure. For the three months ended June 30, 2024, net cash used in investing activities decreased by $1,345 to $5,931. Our cash used in investing activities for the three months ended June 30, 2024 and June 30, 2023, was primarily comprised of capital expenditures related to internally-developed software.

Previous wording

For the nine months ended December 31, 2023, net cash used in financing activities was approximately $39,275, which was comprised of: (1) the net repayment of debt obligations of $62,134, (2) payment of $3,751 for the acquisition of the remaining minority interest shareholders’ outstanding shares in one of our subsidiaries, (3) payment of payroll withholding taxes for net share settlement of equity awards of $1,176. These cash outflows were partially offset by cash inflows comprising of proceeds from borrowings of $25,000 and stock option exercises of $2,786.

Current wording

For the three months ended June 30, 2024, net cash provided by financing activities was $9,966, which was comprised of: (1) the repayment of debt obligations of $7,000, and (2) payment of payroll withholding taxes for net share settlement of equity awards of $48. These cash outflows were offset by cash inflows comprising of proceeds from borrowings of $17,000 and stock option exercises of $14.

Previous wording

For the nine months ended December 31, 2022, net cash used in financing activities was approximately $116,701, which was comprised of repayment of debt obligations of $129,500, payment of payroll withholding taxes for net share settlement of equity awards of $6,202, partially offset by cash inflows from stock option exercises of $1,095.

Current wording

For the three months ended June 30, 2023, net cash used in financing activities was $8,951, which was comprised of repayment of debt obligations of $10,000, payment of payroll withholding taxes for net share settlement of equity awards of $931, partially offset by cash inflows from proceeds from borrowings of $5,000 and stock option exercises of $731.

Previous wording

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 management’s selection and application of accounting policies, 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 policies and estimates, please see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies,” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2023, and Note 2—Basis of Presentation and Summary of Significant Accounting Policies,” of this Report on Form 10-Q for our fiscal third quarter ended December 31, 2023.

Current wording

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 management’s selection and application of accounting policies, 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 policies and estimates, please see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies,” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2024, and Note 2—Basis of Presentation and Summary of Significant Accounting Policies,” of this Report on Form 10-Q for our fiscal first quarter ended June 30, 2024.