Notes to Condensed Consolidated Financial Statements (Unaudited)
December 31, 2021
(in thousands, except share and per share amounts)
1. Description of Business
Digital Turbine, Inc., through its subsidiaries (collectively "Digital Turbine" or the "Company"), is a leading end-to-end solution for mobile technology companies to enable advertising and monetization solutions. Its digital media platform powers frictionless end-to-end applications ("app" or "apps") for brand discovery and advertising, user acquisition and engagement, operational efficiency, and monetization opportunities. The Company provides on-device solutions to all participants in the mobile application ecosystem that want to connect with end users and consumers who hold the device, including mobile carriers and device original equipment manufacturers (“OEMs”) that participate in the app economy, app publishers and developers, and brands and advertising agencies.
2. Restatement of Condensed Consolidated Financial Statements
On May 11, 2022, management and the Audit Committee of the Board of Directors of the Company concluded (a) the Company will restate its financial statements for the three months ended June 30, 2021, the three and six months ended September 30, 2021, and the three and nine months ended December 31, 2021 (the “Relevant Periods”), and (b) the Company’s previously issued unaudited interim condensed consolidated financial statements for the Relevant Periods included in its Quarterly Reports on Form 10-Q for the Relevant Periods, as originally filed with the Securities and Exchange Commission on August 9, 2021, November 2, 2021, and February 8, 2022, respectively, should no longer be relied upon.
In connection with the integration of the Company’s recently acquired businesses (AdColony Holding AS and Fyber N.V. (the “Acquired Companies”)), management performed a review of the presentation of revenue and license fees and revenue share expense based on accounting guidance for revenue recognition, including considerations of principal and agent (or “gross and net”) presentation. After a detailed review of the Acquired Companies' product lines and related contracts with customers and publishers, the Company concluded each Acquired Company acts as an agent in certain of their respective product lines and, as a result, revenue for those product lines should be reported net of license fees and revenue share expense. Previously, all revenue of the Acquired Companies, which are reported as separate segments referred to as In App Media – AdColony ("IAM-A") and In App Media – Fyber ("IAM-F"), were reported on a gross basis. The Company’s legacy business, which is reported in a separate segment referred to as On Device Media, is not impacted by the change described above and it's revenue continues to be reported on a gross basis. Further, the acquisitions of the Acquired Companies were completed during the three-month period ended June 30, 2021, and, as a result, there is no impact to the fiscal year ended March 31, 2021.
In addition, management determined certain hosting costs for the Acquired Companies reported as product development expenses should be reclassified as other direct costs of revenue and general and administrative expenses.
The corrections have the effect of:
1.Decreasing both net revenue and license fees and revenue share in a like amount on the condensed consolidated statements of operations and comprehensive income / (loss) for the three and nine months ended December 31, 2021;
2.Increasing other direct costs of revenue and decreasing product development expenses in a like amount on the condensed consolidated statements of operations and comprehensive income / (loss) for the three and nine months ended December 31, 2021; and
3.Increasing other direct costs of revenue and general and administrative expenses and decreasing product development expenses in a like amount on the condensed consolidated statements of operations and comprehensive income / (loss) for the nine months ended December 31, 2021.
These corrections do not relate to or have any impact on the Company’s operating performance, income from operations, net income / (loss), or cash flows, and the financial position and liquidity of the Company remain unchanged.
The following table summarizes the impact of the restatements on select unaudited condensed consolidated statements of operations and comprehensive income / (loss) line items:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended December 31, 2021 | | Nine months ended December 31, 2021 |
| | Reported | | Adjustment | | Restated | | Reported | | Adjustment | | Restated |
Net revenue | | $ | 375,487 | | $ | (158,669) | | $ | 216,818 | | $ | 898,307 | | $ | (334,846) | | $ | 563,461 |
Costs of revenue and operating expenses | | | | | | | | | | | | |
License fees and revenue share | | 267,722 | | (158,669) | | 109,053 | | 619,215 | | (334,846) | | 284,369 |
Other direct costs of revenue | | 5,125 | | 3,965 | | 9,090 | | 11,496 | | 9,889 | | 21,385 |
Product development | | 17,720 | | (3,965) | | 13,755 | | 51,171 | | (10,577) | | 40,594 |
Sales and marketing | | 15,857 | | — | | 15,857 | | 47,072 | | — | | 47,072 |
General and administrative | | 39,924 | | — | | 39,924 | | 104,537 | | 688 | | 105,225 |
Total costs of revenue and operating expenses | | 346,348 | | (158,669) | | 187,679 | | 833,491 | | (334,846) | | 498,645 |
Income from operations | | $ | 29,139 | | $ | — | | $ | 29,139 | | $ | 64,816 | | $ | — | | $ | 64,816 |
The adjustments in the table above also affect the tables and disclosures within Note 3, "Basis of Presentation and Summary of Significant Accounting Policies," Note 4, "Acquisitions," and Note 5, "Segment Information" of these financial statements.
3. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying condensed consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States (“GAAP”). The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. The Company consolidates the financial results and reports non-controlling interests representing the economic interests held by other equity holders of subsidiaries that are not 100% owned by the Company. The calculation of non-controlling interests excludes any net income / (loss) attributable directly to the Company. All intercompany balances and transactions have been eliminated in consolidation.
These financial statements should be read in conjunction with the Company's audited financial statements and related notes included in its Annual Report on Form 10-K for the fiscal year ended March 31, 2021 (the "2021 Form 10-K").
Unaudited Interim Financial Information
These accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for interim financial reporting. In the opinion of management, these unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring items, considered necessary to present fairly the Company’s financial condition, results of operations, comprehensive income, stockholders’ equity, and cash flows for the interim periods indicated. The results of operations for the three and nine months ended December 31, 2021, are not necessarily indicative of the operating results for the full fiscal year.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of income and expenses during the reporting period. Significant estimates and assumptions reflected in the financial statements include revenue recognition, including the determination of gross versus net revenue reporting, allowance for credit losses, stock-based compensation, fair value of acquired intangible assets and goodwill, useful lives of acquired intangible assets and property and equipment, fair value of contingent earn-out considerations (please see Note 14, "Commitments and Contingencies," for further information on the fair value of the Company's contingent earn-out considerations), incremental borrowing rates for right-of-use assets and lease liabilities, and tax valuation allowances. These estimates are based on information available as of the date of the financial statements; therefore, actual results could differ materially from management’s estimates using different assumptions or under different conditions.
In light of the ongoing and quickly evolving COVID-19 pandemic, management has considered the impacts of the COVID-19 pandemic on the Company’s critical and significant accounting estimates. As of the date of issuance of these financial statements, the Company is not aware of any specific event or circumstance that would require the Company to update its estimates or judgments or revise the carrying value of its assets or liabilities as a result of the COVID-19 pandemic. Management's estimates may change as new events occur and additional information is obtained. Actual results could differ from estimates and any such differences may be material to the Company’s condensed consolidated financial statements.
Summary of Significant Accounting Policies
There have been no material changes to the Company’s significant accounting policies in Note 4, “Summary of Significant Accounting Policies,” of the notes to the consolidated financial statements included in its Annual Report on Form 10-K for the fiscal year ended March 31, 2021, other than changes for revenue recognition related to the principal-versus-agent presentation matter for the businesses acquired discussed below, "New Accounting Standards Adopted" disclosed below, and changes to the Company's segment reporting disclosed in Note 5, "Segment Information."
Revenue Recognition
The Company generates revenue from transactions for the purchase and sale of digital advertising inventory through our various platforms and service offerings. Generally, our revenue is based on a percentage of the ad spend through our platforms, although for certain service offerings, we receive a fixed cost-per-thousand ("CPM") or cost-per-install ("CPI") for ad impressions sold or app installs completed. We recognize revenue upon fulfillment of our performance obligation to our customers, which generally occurs at the point in time when an ad is rendered or an end consumer action, such as an app install, is completed.
On Device Media - Carriers and OEMs
The Company enters into contracts with OEMs for our On Device Media ("ODM") segment to help the customer control, manage, and monetize the mobile device through the marketing of application slots or advertisement space/inventory to advertisers and delivering the applications or advertisements to the mobile device. The Company generally offers these services under a revenue share model or, to a lesser extent, a customer contract per-device license fee model for a two-to-four year software as a service ("SaaS") license agreement. These agreements typically include the following services: the access to a SaaS platform, hosting, solution features, and general support and maintenance. The Company has concluded that each promised service is delivered concurrently, interdependently, and continuously with all other promised services over the contract term and, as such, has concluded these promises are a single performance obligation that is delivered to the customer over a series of distinct service periods over the contract term. The Company meets the criteria for overtime recognition because the customer simultaneously receives and consumes the benefits provided by the Company's performance as the Company performs, and the same method would be used to measure progress over each distinct service period. The fees for such services are not known at contract inception, but are measurable during each distinct service period. The Company's contracts do not include advance non-refundable fees. The Company’s fees for these services are based upon a revenue-share arrangement with the carrier or OEM. Both parties have agreed to share the revenue earned from third-party advertisers, discussed below, for these services.
ODM - Third-Party Advertisers
The Company generally offers these services through CPI, cost-per-placement ("CPP"), and/or cost-per-action ("CPA") arrangements with third-party advertisers, developers, agencies, and advertising aggregators, generally in the form of insertion orders. The insertion orders specify the type of arrangement and additional terms such as advertising campaign budgets and timelines as well as any constraints on advertising types. These customer contracts can be open ended in regards to length of time and can renew automatically unless terminated; however, specific advertising campaigns are generally short-term in nature. These agreements typically include the delivery of applications to home screens of mobile devices. Access to inventory of application slots is allocated by carriers or OEMs in the contracts identified above. The Company controls these application slots and markets it on behalf of the carriers and OEMs to the advertisers. The Company has concluded that the performance obligation within the contract is complete upon delivery of the application to the device. Revenue recognition related to CPI and CPA arrangements is dependent upon an action of the end user. As a result, the transaction price is variable and is fully constrained until an install or action occurs.
ODM - Programmatic Advertising and Targeted Media Delivery
The Company generally offers these services under CPM impression arrangements and page-view arrangements.
Through its mobile phone first screen applications and mobile web portals, the Company markets ad space/inventory within its content products for display advertising. The ad space/inventory is allocated to the Company through arrangement with the carrier or OEM in the contracts discussed above. The Company controls this ad space/inventory and markets it on behalf of the carriers and OEMs to the advertisers. The Company’s advertising customers can bid on each individual display ad and the highest bid wins the right to fill each ad impression. Advertising agencies acting on the behalf of advertisers bid on the ad placement via the Company’s advertising exchange customers. When the bid is won, the ad will be received and placed on the mobile device by the Company. The entire process happens almost instantaneously and on a continuous basis. The advertising exchanges bill and collect from the winning bidders and provide daily and monthly reports of the activity to the Company. The Company has concluded that the performance obligation is satisfied at the point in time upon delivery of the advertisement to the device based on the impressions or page-view arrangement, as defined in the contract.
Through its mobile phone first screen applications and mobile web portals, the Company’s software platform also recommends sponsored content to mobile phone users and drives web traffic to a customer's website. The Company markets this content to content sponsors, such as Outbrain or Taboola, similarly to the marketing of ad space/inventory. This sponsored content takes the form of articles, graphics, pictures, and similar content. The Company has concluded that the performance obligation within the contract is complete upon delivery of the content to the mobile device.
IAM-A and IAM-F - Marketplace
The Company, through its IAM-A and IAM-F segments provide platforms that allow demand-side platforms (“DSPs”) and publishers to buy and sell ad inventory, respectively, in a programmatic, real-time bidding ("RTB") auction. The Company generally contracts with DSPs through an RTB Ad Exchange Agreement (“Exchange Agreement”). It also separately contracts with publishers through an Advertising insertion order or service order to provide access to its auction platform and the ad inventory available through the platform. The auction is held when ad inventory becomes available. AdColony will send bid requests to various DSPs, which may choose to bid on the available ad inventory. Once a DSP wins an auction, it must deliver an ad, which is generally served through the Company's software development kits (“SDK”). The entire auction process is nearly instantaneous. The Company bills the DSP based on the total number of impressions and the bid price. It then remits the payment to the publishers, net of a revenue share agreed with the publisher that is generally a percentage of the DSPs’ total spending with the publisher through the platform.
IAM-A - Brand and Performance
The Company, through its IAM-A segment for its Brand and Performance offerings, contracts directly with advertisers or agencies. through insertion orders, that require the Company to fulfill advertising campaigns by identifying and purchasing targeted ad inventory and serving ads on behalf of the advertiser. The insertion orders or addendum communications provide advertising campaign details, such as campaign start and end date, target demographics, maximum budget, and rate. Rates are generally based on an end user action (CPI) or on a CPM basis. Revenue is recognized based on the rate and the number of impressions or end user actions at the time the ad is rendered or the end user action is completed.
Principal vs Agent Reporting
The determination of whether we act as a principal or as an agent in a transaction requires significant judgement and is based on an assessment of the terms of customer arrangements and the relevant accounting guidance. When we are the principal in a transaction, revenue is reported on a gross basis, which is the amount billed to DSPs, advertisers and agencies. When we are an agent in a transaction, revenues are reported net of license fees and revenue share paid to app publishers or developers.
The Company has determined it is a principal for its advertiser services for application management and programmatic advertising and targeted media delivery when it controls the application slots or ad space/inventory. This is because it has been allocated such slots or space from the carrier or OEM and is responsible for marketing or monetizing the slots or space. The advertisers look to the Company to acquire such slots or space, and the Company’s software is used to deliver the applications, ads or content to the mobile device. The Company also may manage application or ad campaigns of advertisers associated with these services. If the applications or advertisements are not delivered to the mobile device or the Company doesn’t comply with certain policies of the advertiser, the Company would be responsible and have to indemnify the customer for these issues. The Company also has discretion in setting the price of the slots or space based on market conditions, collects the transaction prices, and remits the revenue-share percentage of the transaction price to the carrier or OEM.
The Company recognizes the transaction price received from advertisers, content providers, or websites gross and the carrier or OEM share of such transaction price as costs of revenue - license fees and revenue share - in the accompanying consolidated statements of operations and comprehensive income / (loss).
The carrier or OEM may have the right to market and sell application slots or ad space to advertisers using the Company’s software. The carrier or OEM will share revenue with the Company when it does so. The Company recognizes the revenue shared by the carrier or OEM on a net basis as the Company is not considered the primary obligor in these transactions.
The Company has determined it is a principal for its Brand and Performance offerings as the advertisers or agencies provide parameters for their target audiences, as well as a budget for ad campaigns. Once an advertiser or advertising agency provides its specifications, the Company has the discretion to fulfill the campaign by utilizing its data and proprietary technology. The Company controls the service because it has the ultimate discretion in purchasing ad inventory; and once an ad inventory slot is purchased, filling that ad inventory slot. As a result, the Company reports the revenues billed to advertisers and agencies on a gross basis and revenue shares paid to publishers as license fees and revenue share.
The Company has determined it is an agent in transactions on its Marketplace platforms. The Company acts as an intermediary between DSPs and publishers by providing access to a platform and the SDKs that allow both parties to transact in the buying and selling of ad inventory. The transaction price is determined through a real-time auction and the Company has no pricing discretion or obligation related to the fulfillment of the advertising delivery.
Recently Issued Accounting Pronouncements Not Yet Adopted
ASU 2020-04
In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period.
ASU 2020-04 became effective for all entities as of March 12, 2020, and will continue through December 31, 2022. The Company is implementing a transition plan to identify and modify, if necessary, its loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR. The Company is continuing to assess ASU 2020-04 and its impact on the Company’s condensed consolidated financial statements.
Recently Adopted Accounting Standards
ASU 2019-12
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The Company adopted this guidance as of April 1, 2021. ASU 2019-12 did not have a material impact on the Company's condensed consolidated financial statements upon adoption.
4. Acquisitions
Acquisition of Fyber N.V.
On May 25, 2021, the Company completed the initial closing of the acquisition of 95.1% of the outstanding voting shares (the “Majority Fyber Shares”) of Fyber N.V. (“Fyber”) pursuant to a Sale and Purchase Agreement (the "Fyber Acquisition") between Tennor Holding B.V., Advert Finance B.V., and Lars Windhorst (collectively, the “Seller”), the Company, and Digital Turbine Luxembourg S.ar.l., a wholly-owned subsidiary of the Company. The remaining outstanding shares in Fyber (the “Minority Fyber Shares”) are (to the Company's knowledge) held by other shareholders of Fyber (the “Minority Fyber Shareholders”) and are presented as non-controlling interests within these financial statements.
Fyber is a leading mobile advertising monetization platform empowering global app developers to optimize profitability through quality advertising. Fyber’s proprietary technology platform and expertise in mediation, real-time bidding, advanced analytics tools, and video combine to deliver publishers and advertisers a highly valuable app monetization solution. Fyber represents an important and strategic addition for the Company in its mission to develop one of the largest full-stack, fully-independent, mobile advertising solutions in the industry. The combined platform offering is advantageously positioned to leverage the Company’s existing on-device software presence and global distribution footprint.
The Company acquired Fyber in exchange for an estimated aggregate consideration of up to $600,000, consisting of:
i.Approximately $150,000 in cash, $124,336 of which was paid to the Seller at the closing of the acquisition and the remainder of which is to be paid to the Minority Fyber Shareholders for the Minority Fyber Shares pursuant to the tender offer described below;
ii.5,816,588 newly-issued shares of common stock of the Company to the Seller, which such number of shares was determined based on the volume-weighted average price of the common stock on NASDAQ during the 30-day period prior to the closing date, equal in value to $359,233 at the Company's common stock closing price on May 25, 2021, as follows.
1.3,216,935 newly-issued shares of common stock of the Company equal in value to $198,678, issued at the closing of the acquisition;
2.1,500,000 newly-issued shares of common stock of the Company equal in value to $92,640, issued on June 17, 2021;
3.1,040,364 newly-issued shares of common stock of the Company equal in value to $64,253, issued on July 16, 2021;
4.59,289 shares of common stock equal in value to $3,662, to be newly-issued during its fiscal second quarter 2022, but subject to a true-up reduction based on increased transaction costs associated with the staggered delivery of the Majority Fyber Shares to the Company, which true-up reduction has been finalized, as described below; and
iii.Contingent upon Fyber’s net revenues (revenues less associated license fees and revenue share) being equal to or higher than $100,000 for the 12-month earn-out period ending on March 31, 2022, as determined in the manner set forth in the Sale and Purchase Agreement, a certain number of shares of the Company's common stock, which will be newly-issued to the Seller at the end of the earn-out period, and under certain circumstances, an amount of cash, which value of such shares, based on the weighted average share price for the 30-days prior to the end of the earn-out period, and cash in aggregate will not exceed $50,000 (subject to set-off against certain potential indemnification claims against the Seller). Based on estimates at the time of the acquisition, the Company initially determined it was unlikely Fyber would achieve the earn-out net revenue target and, as a result, no contingent liability was recognized at that time.
The Company paid the cash closing amount on the closing date with a combination of available cash-on-hand and borrowings under the Company’s senior credit facility.
On September 30, 2021, the Company entered into the Second Amendment Agreement (the “Second Amendment Agreement”) to the Sale and Purchase Agreement for the Fyber Acquisition. Pursuant to the Second Amendment Agreement, the parties agreed to settle the remaining number of shares of Company common stock to be issued to the Seller at 18,000 shares (i.e., a reduction of 41,289 shares from the 59,289 shares described in (ii)(4) above). As a result, the Company issued a total of 5,775,299 shares of Company common stock to the Seller in connection with the Company’s acquisition of Fyber.
As of September 30, 2021, the Company determined it was likely Fyber would achieve the earn-out net revenue target, based on estimates available at that time. As a result, the Company recognized and accrued the fair value of the contingent earn-out consideration of $31,000.
As of December 31, 2021, the Company re-evaluated the fair value of the contingent earn-out consideration based on current estimates. The Company recognized a charge to change in fair value of contingent consideration on the condensed consolidated statement of operations and comprehensive income / (loss) of $18,200 for the three months ended December 31, 2021, resulting in a total accrued fair value of the contingent earn-out consideration of $49,200. The fair value of the contingent consideration is subject to material changes based upon certain assumptions, primarily the estimated likelihood of Fyber achieving the earn-out net revenue target. The Company will re-evaluate the fair value of the contingent consideration at the end of the earn-out period on March 31, 2022.
Pursuant to certain German law on public takeovers, following the closing, the Company launched a public tender offer to the Minority Fyber Shareholders to acquire from them the Minority Fyber Shares. The tender offer was approved and published in July 2021, and is subject to certain minimum price rules under German law. The timing and the conditions of the tender offer, including the consideration of €0.84 per share offered to the Minority Fyber Shareholders in connection with the tender offer, was determined by the Company pursuant to the applicable Dutch and German takeover laws. During the fiscal
quarter ended September 30, 2021, the Company purchased approximately $21,000 of Fyber's outstanding shares, resulting in an ownership percentage of Fyber of approximately 99.4%. The Company expects to complete the purchase of the remaining outstanding Fyber shares during its fiscal fourth quarter 2022.
The delisting of Fyber's remaining outstanding shares on the Frankfurt Stock Exchange was completed on August 6, 2021.
The fair values of the assets acquired and liabilities assumed at the date of acquisition are presented on a preliminary basis and are as follows1:
| | | | | | | | | | | | | | | | | | | | |
| | May 25, 2021 | | Measurement Period Adjustments | | May 25, 2021 (adjusted) |
Assets acquired | | | | | | |
Cash | | $ | 71,489 | | | $ | — | | | $ | 71,489 | |
Accounts receivable | | 64,877 | | | 293 | | | 65,170 | |
Other current assets | | 10,470 | | | — | | | 10,470 | |
Property and equipment | | 1,561 | | | — | | | 1,561 | |
Right-of-use asset | | 13,191 | | | — | | | 13,191 | |
Publisher relationships | | 106,400 | | | (95) | | | 106,305 | |
Developed technology | | 86,900 | | | — | | | 86,900 | |
Trade names | | 32,100 | | | 474 | | | 32,574 | |
Customer relationships | | 31,400 | | | — | | | 31,400 | |
Favorable lease | | 1,483 | | | — | | | 1,483 | |
Goodwill | | 303,015 | | | (4,104) | | | 298,911 | |
Other non-current assets | | 851 | | | — | | | 851 | |
Total assets acquired | | $ | 723,737 | | | $ | (3,432) | | | $ | 720,305 | |
| | | | | | |
Liabilities assumed | | | | | | |
Accounts payable | | $ | 78,090 | | | $ | (1,501) | | | $ | 76,589 | |
Accrued license fees and revenue share | | 5,929 | | | — | | | 5,929 | |
Accrued compensation | | 52,929 | | | — | | | 52,929 | |
Other current liabilities | | 12,273 | | | (224) | | | 12,049 | |
Short-term debt | | 25,789 | | | — | | | 25,789 | |
Deferred tax liability, net | | 25,213 | | | 707 | | | 25,920 | |
Other non-current liabilities | | 15,386 | | | — | | | 15,386 | |
Total liabilities assumed | | $ | 215,609 | | | $ | (1,018) | | | $ | 214,591 | |
Total purchase price | | $ | 508,128 | | | $ | (2,414) | | | $ | 505,714 | |
During the nine months ended December 31, 2021, the Company recorded a cumulative net measurement period adjustment that decreased goodwill by $4,104, as presented in the table above. The Company made these measurement period adjustments to reflect facts and circumstances that existed as of the acquisition date and did not result from intervening events subsequent to such date.
The excess of cost of the Fyber Acquisition over the net amounts assigned to the fair values of the net assets acquired was recorded as goodwill and was assigned to the Company’s In App Media - Fyber segment. The goodwill consists largely of the expected cash flows and future growth anticipated for the Company. The goodwill is not deductible for tax purposes.
The identifiable intangible assets consist of publisher relationships, developed technology, trade names, customer relationships, and a favorable lease. The publisher relationships, developed technology, trade names, and customer relationships intangibles were assigned useful lives of 20.0 years, 7.0 years, 7.0 years, and 3.0 years, respectively. The below-market favorable lease was derived from Fyber's office lease in Berlin, Germany and, per ASC 842, Leases, will be combined with Fyber's right-of-use asset for that lease and will be amortized over the remaining life of that lease. The values for the identifiable intangible assets were determined using the following valuation methodologies:
1The purchase consideration was translated using the Euro-to-United States ("U.S.") dollar exchange rate in effect on the acquisition closing date, May 25, 2021, of approximately €1.22 to $1.00.
•Publisher Relationships - Multi-Period Excess Earnings Method
•Developed Technology - Relief from Royalty Method
•Trade Names - Relief from Royalty Method
•Customer Relationships - With-and-Without Method
•Favorable Lease - Income Approach
The Company recognized $5,183 and $16,898 of costs related to the Fyber Acquisition, which were included in general and administrative expenses on the condensed consolidated statements of operations and comprehensive income / (loss) for the three and nine months ended December 31, 2021, respectively.
Acquisition of AdColony Holding AS
On April 29, 2021, the Company completed the acquisition of AdColony Holding AS, a Norway company (“AdColony”), pursuant to a Share Purchase Agreement (the "AdColony Acquisition"). The Company acquired all outstanding capital stock of AdColony in exchange for an estimated total consideration in the range of $400,000 to $425,000, to be paid as follows: (1) $100,000 in cash paid at closing (subject to customary closing purchase price adjustments), (2) $100,000 in cash to be paid six months after closing, and (3) an estimated earn-out in the range of $200,000 to $225,000, to be paid in cash, based on AdColony achieving certain future target net revenues, less associated cost of goods sold (as such term is referenced in the Share Purchase Agreement), over a 12-month period ending on December 31, 2021 (the “Earn-Out Period”). Under the terms of the earn-out, the Company would pay the seller a certain percentage of actual net revenues (less associated cost of goods sold, as such term is referenced in the Share Purchase Agreement) of AdColony, depending on the extent to which AdColony achieves certain target net revenues (less associated cost of goods sold, as such term is referenced in the Share Purchase Agreement) over the Earn-Out Period. The earn-out payment will be made following the expiration of the Earn-Out Period.
AdColony is a leading mobile advertising platform servicing advertisers and publishers. AdColony’s proprietary video technologies and rich media formats are widely viewed as a best-in-class technology delivering third-party verified viewability rates for well-known global brands. With the addition of AdColony, the Company will expand its collective experience, reach, and suite of capabilities to benefit mobile advertisers and publishers around the globe. Performance-based spending trends by large, established brand advertisers present material upside opportunities for platforms with unique technology deployable across exclusive access to inventory.
On August 27, 2021, the Company entered into an Amendment to Share Purchase Agreement (the “Amendment Agreement”) with AdColony and Otello Corporation ASA, a Norway company (“Otello”) and AdColony's previous parent company. Pursuant to the Amendment Agreement, the Company and Otello agreed to set a fixed dollar amount of $204,500 for the earn-out payment obligation, to set January 15, 2022, as the payment due date for such payment amount, and to eliminate all of the Company’s earn-out support obligations under the Share Purchase Agreement. As a result, the Company recognized an $8,913 reduction of the earn-out payment obligation in change in fair value of contingent consideration on the condensed consolidated statement of operations and comprehensive income / (loss) for the fiscal second quarter ended September 30, 2021.
The Company paid the cash consideration amounts that were due at closing and on October 26, 2021, with a combination of available cash-on-hand and borrowings under the Company’s senior credit facility. The Company intends to pay the remaining cash consideration with a combination of available cash-on-hand and borrowings under the Company's New Credit Agreement (as defined in Note 10, "Debt").
The payment made on October 26, 2021, was reduced to $98,175 due to an adjustment for the impact of accrued and unpaid taxes to the net working capital acquired. The difference between the amount due of $100,000 and amount paid resulted in an adjustment to goodwill.
The fair values of the assets acquired and liabilities assumed at the date of acquisition are presented on a preliminary basis and are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | April 29, 2021 | | Measurement Period Adjustments | | April 29, 2021 (adjusted) |
Assets acquired | | | | | | |
Cash | | $ | 24,793 | | | $ | — | | | $ | 24,793 | |
Accounts receivable | | 57,285 | | | — | | | 57,285 | |
Other current assets | | 1,845 | | | — | | | 1,845 | |
Property and equipment | | 1,566 | | | — | | | 1,566 | |
Right-of-use asset | | 2,460 | | | — | | | 2,460 | |
Customer relationships | | 102,400 | | | (600) | | | 101,800 | |
Developed technology | | 51,100 | | | — | | | 51,100 | |
Trade names | | 36,100 | | | (100) | | | 36,000 | |
Publisher relationships | | 4,400 | | | — | | | 4,400 | |
Goodwill | | 202,552 | | | (3,502) | | | 199,050 | |
Other non-current assets | | 131 | | | — | | | 131 | |
Total assets acquired | | $ | 484,632 | | | $ | (4,202) | | | $ | 480,430 | |
| | | | | | |
Liabilities assumed | | | | | | |
Accounts payable | | $ | 21,140 | | | $ | — | | | $ | 21,140 | |
Accrued license fees and revenue share | | 28,920 | | | — | | | 28,920 | |
Accrued compensation | | 8,453 | | | — | | | 8,453 | |
Other current liabilities | | 1,867 | | | — | | | 1,867 | |
Deferred tax liability, net | | 10,520 | | | (2,377) | | | 8,143 | |
Other non-current liabilities | | 1,770 | | | — | | | 1,770 | |
Total liabilities assumed | | $ | 72,670 | | | $ | (2,377) | | | $ | 70,293 | |
Total purchase price | | $ | 411,962 | | | $ | (1,825) | | | $ | 410,137 | |
During the nine months ended December 31, 2021, the Company recorded a cumulative net measurement period adjustment that decreased goodwill by $3,502, as presented in the table above. The Company made these measurement period adjustments to reflect facts and circumstances that existed as of the acquisition date and did not result from intervening events subsequent to such date.
The excess of cost of the AdColony Acquisition over the net amounts assigned to the fair values of the net assets acquired was recorded as goodwill and was assigned to the Company’s In App Media - AdColony segment. The goodwill consists largely of the expected cash flows and future growth anticipated for the Company. The goodwill is not deductible for tax purposes.
The identifiable intangible assets consist of customer relationships, developed technology, trade names, and publisher relationships and were assigned useful lives of 8.0 years to 15.0 years, 7.0 years, 7.0 years, and 10.0 years, respectively. The values for the identifiable intangible assets were determined using the following valuation methodologies:
•Customer Relationships - Multi-Period Excess Earnings Method
•Developed Technology - Relief from Royalty Method
•Trade Names - Relief from Royalty Method
•Publisher Relationships - Cost Approach
The Company recognized $486 and $3,977 of costs related to the AdColony Acquisition, which were included in general and administrative expenses on the condensed consolidated statements of operations and comprehensive income / (loss) for the three and nine months ended December 31, 2021, respectively.
Acquisition of Appreciate
On March 1, 2021, Digital Turbine, through its subsidiary Digital Turbine (EMEA) Ltd. ("DT EMEA"), an Israeli company and wholly-owned subsidiary of the Company, entered into a Share Purchase Agreement with Triapodi Ltd., an Israeli company (d/b/a Appreciate) (“Appreciate”), the stockholder representative, and the stockholders of Appreciate, pursuant to which DT EMEA acquired, on March 2, 2021, all of the outstanding capital stock of Appreciate in exchange for total consideration of $20,003 in cash (the "Appreciate Acquisition"). Under the terms of the Purchase Agreement, DT EMEA entered into bonus arrangements to pay up to $6,000 in retention bonuses and performance bonuses to the founders and certain other employees of Appreciate. None of the goodwill recognized was deductible for tax purposes.
The acquisition of Appreciate delivers valuable deep ad-tech and algorithmic expertise to help Digital Turbine execute on its broader, longer-term vision. Deploying Appreciate's technology expertise across Digital Turbine’s global scale and reach should further benefit partners and advertisers that are a part of the combined Company’s platform.
Acquisition Purchase Price Liability
The Company has recognized acquisition purchase price liability of $253,700 on its condensed consolidated balance sheet as of December 31, 2021, comprised of the following components:
•$204,500 of contingent earn-out consideration for the AdColony Acquisition
•$49,200 of contingent earn-out consideration for the Fyber Acquisition
Pro Forma Financial Information (Unaudited)
The pro forma information below gives effect to the Fyber Acquisition, the AdColony Acquisition, and the Appreciate Acquisition (collectively, the “Acquisitions”) as if they had been completed on the first day of each period presented. The pro forma results of operations are presented for information purposes only. As such, they are not necessarily indicative of the Company’s results had the Acquisitions been completed on the first day of each period presented, nor do they intend to represent the Company’s future results. The pro forma information does not reflect any cost savings from operating efficiencies or synergies that could result from the Acquisitions and does not reflect additional revenue opportunities following the Acquisitions. The pro forma information includes adjustments to record the assets and liabilities associated with the Acquisitions at their respective fair values, which are preliminary at this time, based on available information, and to give effect to the financing for the Acquisitions.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended December 31, | | Nine months ended December 31, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| | Unaudited | | Unaudited | | Unaudited | | Unaudited |
| | Restated | | | | Restated | | |
| | (in thousands, except per share amounts) |
Net revenue | | $ | 216,818 | | | $ | 163,278 | | | $ | 585,858 | | | $ | 389,651 | |
Net income / (loss) attributable to controlling interest | | $ | 7,014 | | | $ | 19,183 | | | $ | (17,255) | | | $ | 15,226 | |
Basic net income / (loss) attributable to controlling interest per common share | | $ | 0.07 | | | $ | 0.20 | | | $ | (0.18) | | | $ | 0.16 | |
Diluted net income / (loss) attributable to controlling interest per common share | | $ | 0.07 | | | $ | 0.19 | | | $ | (0.18) | | | $ | 0.15 | |
5. Segment Information
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker (“CODM”) in making decisions regarding resource allocation and assessing performance. The Company has determined that its Chief Executive Officer ("CEO") is the CODM.
Prior to the acquisitions of both AdColony and Fyber disclosed above in Note 4, "Acquisitions," the Company had one operating and reportable segment called Media Distribution. As a result of the acquisitions, the Company reassessed its operating and reportable segments in accordance with ASC 280, Segment Reporting. Effective April 1, 2021, the Company reports its results of operations through the following three segments, each of which represents an operating and reportable segment, as follows:
•On Device Media ("ODM") - This segment is the legacy single operating and reporting segment of Digital Turbine prior to the AdColony and Fyber acquisitions. This segment generates revenues from services that deliver mobile application media or content media to end users. The Company provides ODM solutions to all participants in the mobile application ecosystem that want to connect with end users and consumers who hold the device, including mobile carriers and device original equipment manufacturers (“OEMs”) that participate in the app economy, app publishers and developers, and brands and advertising agencies. This segment's product offerings are enabled through relationships with mobile device carriers and OEMs.
•In App Media – AdColony ("IAM-A") - This segment is inclusive of the acquired AdColony business and generates revenues from services provided as an end-to-end platform for brands, agencies, publishers, and application developers to deliver advertising to consumers on mobile devices around the world. IAM-A customers are primarily advertisers.
•In App Media – Fyber ("IAM-F") - This segment is inclusive of the acquired Fyber business and generates revenues from services provided to mobile application developers and digital publishers to monetize their content through advanced technologies, innovative advertisement formats, and data-driven decision making. IAM-F customers are primarily publishers.
The Company's CODM evaluates segment performance and makes resource allocation decisions primarily through the metric of net revenues less associated license fees and revenue share, as shown in the segment information summary table below. The Company's CODM does not allocate other direct costs of revenues, operating expenses, interest and other income / (expense), net, or provision for income taxes to these segments for the purpose of evaluating segment performance. Additionally, the Company does not allocate assets to segments for internal reporting purposes as the CODM does not manage the Company's segments by such metrics.
A summary of segment information follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended December 31, 2021 |
| | | | Restated | | Restated | | Restated | | Restated |
| | ODM | | IAM-A | | IAM-F | | Eliminations | | Consolidated |
Net revenues | | $ | 133,594 | | | $ | 58,425 | | | $ | 30,688 | | | $ | (5,889) | | | $ | 216,818 | |
License fees and revenue share | | 86,504 | | | 28,438 | | | — | | | (5,889) | | | 109,053 | |
Segment profit | | $ | 47,090 | | | $ | 29,987 | | | $ | 30,688 | | | $ | — | | | $ | 107,765 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended December 31, 2020 |
| | ODM | | IAM-A | | IAM-F | | Eliminations | | Consolidated |
Net revenues | | $ | 88,592 | | | $ | — | | | $ | — | | | $ | — | | | $ | 88,592 | |
License fees and revenue share | | 50,144 | | | — | | | — | | | — | | | 50,144 | |
Segment profit | | $ | 38,448 | | | $ | — | | | $ | — | | | $ | — | | | $ | 38,448 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended December 31, 2021 |
| | | | Restated | | Restated | | Restated | | Restated |
| | ODM | | IAM-A | | IAM-F | | Eliminations | | Consolidated |
Net revenues | | $ | 383,426 | | | $ | 129,368 | | | $ | 63,396 | | | $ | (12,729) | | | $ | 563,461 | |
License fees and revenue share | | 232,122 | | | 64,976 | | | — | | | (12,729) | | | 284,369 | |
Segment profit | | $ | 151,304 | | | $ | 64,392 | | | $ | 63,396 | | | $ | — | | | $ | 279,092 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended December 31, 2020 |
| | ODM | | IAM-A | | IAM-F | | Eliminations | | Consolidated |
Net revenues | | $ | 218,497 | | | $ | — | | | $ | — | | | $ | — | | | $ | 218,497 | |
License fees and revenue share | | 122,976 | | | — | | | — | | | — | | | 122,976 | |
Segment profit | | $ | 95,521 | | | $ | — | | | $ | — | | | $ | — | | | $ | 95,521 | |
Geographic Area Information
Long-lived assets, excluding deferred tax assets and intangible assets, by region follow:
| | | | | | | | | | | | | | |
| | December 31, 2021 | | March 31, 2021 |
United States and Canada | | $ | 20,026 | | | $ | 12,995 | |
Europe, Middle East, and Africa | | 5,729 | | | 40 | |
Asia Pacific and China | | 107 | | | 15 | |
Mexico, Central America, and South America | | — | | | — | |
Consolidated property and equipment, net | | $ | 25,862 | | | $ | 13,050 | |
Net revenue by geography is based on the billing addresses of the Company's customers and a reconciliation of disaggregated revenue by segment follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended December 31, 2021 |
| | | | Restated | | Restated | | Restated |
| | ODM | | IAM-A | | IAM-F | | Total |
United States and Canada | | $ | 74,431 | | | $ | 27,852 | | | $ | 17,386 | | | $ | 119,669 | |
Europe, Middle East, and Africa | | 35,667 | | | 25,856 | | | 8,441 | | | 69,964 | |
Asia Pacific and China | | 19,877 | | | 3,790 | | | 4,757 | | | 28,424 | |
Mexico, Central America, and South America | | 3,619 | | | 927 | | | 104 | | | 4,650 | |
Elimination | | — | | | — | | | — | | | (5,889) | |
Consolidated net revenue | | $ | 133,594 | | | $ | 58,425 | | | $ | 30,688 | | | $ | 216,818 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended December 31, 2020 |
| | ODM | | IAM-A | | IAM-F | | Total |
United States and Canada | | $ | 59,192 | | | $ | — | | | $ | — | | | $ | 59,192 | |
Europe, Middle East, and Africa | | 21,168 | | | — | | | — | | | 21,168 | |
Asia Pacific and China | | 7,047 | | | — | | | — | | | 7,047 | |
Mexico, Central America, and South America | | 1,185 | | | — | | | — | | | 1,185 | |
Consolidated net revenue | | $ | 88,592 | | | $ | — | | | $ | — | | | $ | 88,592 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended December 31, 2021 |
| | | | Restated | | Restated | | Restated |
| | ODM | | IAM-A | | IAM-F | | Total |
United States and Canada | | $ | 220,662 | | | $ | 60,912 | | | $ | 35,198 | | | $ | 316,772 | |
Europe, Middle East, and Africa | | 96,318 | | | 57,332 | | | 16,925 | | | 170,575 | |
Asia Pacific and China | | 54,636 | | | 9,028 | | | 11,062 | | | 74,726 | |
Mexico, Central America, and South America | | 11,810 | | | 2,096 | | | 211 | | | 14,117 | |
Elimination | | — | | | — | | | — | | | (12,729) | |
Consolidated net revenue | | $ | 383,426 | | | $ | 129,368 | | | $ | 63,396 | | | $ | 563,461 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended December 31, 2020 |
| | ODM | | IAM-A | | IAM-F | | Total |
United States and Canada | | $ | 144,550 | | | $ | — | | | $ | — | | | $ | 144,550 | |
Europe, Middle East, and Africa | | 54,051 | | | — | | | — | | | 54,051 | |
Asia Pacific and China | | 18,159 | | | — | | | — | | | 18,159 | |
Mexico, Central America, and South America | | 1,737 | | | — | | | — | | | 1,737 | |
Consolidated net revenue | | $ | 218,497 | | | $ | — | | | $ | — | | | $ | 218,497 | |
6. Goodwill and Intangible Assets
Goodwill
Changes in the carrying amount of goodwill, net, by segment follow:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | ODM | | IAM-A | | IAM-F | | Consolidated |
Goodwill as of March 31, 2021 | | $ | 80,176 | | | $ | — | | | $ | — | | | $ | 80,176 | |
Purchase of AdColony | | — | | | 199,050 | | | — | | | 199,050 | |
Purchase of Fyber | | — | | | — | | | 298,911 | | | 298,911 | |
Foreign currency translation and other | | — | | | (10) | | | (23,152) | | | (23,162) | |
Goodwill as of December 31, 2021 | | $ | 80,176 | | | $ | 199,040 | | | $ | 275,759 | | | $ | 554,975 | |
Intangible Assets
The components of intangible assets as of December 31, 2021, and March 31, 2021, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2021 |
| | (Unaudited) |
| | Weighted-Average Remaining Useful Life | | Cost | | Accumulated Amortization | | Net |
Customer relationships | | 12.34 years | | $ | 173,408 | | | $ | (16,488) | | | $ | 156,920 | |
Developed technology | | 6.51 years | | 151,973 | | | (23,675) | | | 128,298 | |
Trade names | | 6.44 years | | 68,260 | | | (6,374) | | | 61,886 | |
Publisher relationships | | 19.00 years | | 102,587 | | | (3,156) | | | 99,431 | |
Total | | | | $ | 496,228 | | | $ | (49,693) | | | $ | 446,535 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2021 |
| | Weighted-Average Remaining Useful Life | | Cost | | Accumulated Amortization | | Net |
Customer relationships | | 16.81 years | | $ | 46,400 | | | $ | (4,171) | | | $ | 42,229 | |
Developed technology | | 9.12 years | | 20,526 | | | (11,141) | | | 9,385 | |
Trade names | | 9.92 years | | 2,000 | | | (314) | | | 1,686 | |
Total | | | | $ | 68,926 | | | $ | (15,626) | | | $ | 53,300 | |
The Company recorded amortization expense of $13,773 and $34,873, respectively, during the three and nine months ended December 31, 2021, and $670 and $2,011, respectively, during the three and nine months ended December 31, 2020, in general and administrative expenses on the condensed consolidated statements of operations and comprehensive income / (loss).
Estimated amortization expense in future fiscal years is expected to be:
| | | | | | | | |
Remainder of fiscal year 2022 | | $ | 13,561 | |
Fiscal year 2023 | | 54,243 | |
Fiscal year 2024 | | 54,243 | |
Fiscal year 2025 | | 46,147 | |
Fiscal year 2026 | | 44,240 | |
Thereafter | | 234,101 | |
Total | | $ | 446,535 | |
7. Accounts Receivable
| | | | | | | | | | | | | | |
| | December 31, 2021 | | March 31, 2021 |
| | (Unaudited) | | |
Billed | | $ | 201,814 | | | $ | 28,636 | |
Unbilled | | 97,028 | | | 38,837 | |
Allowance for credit losses | | (7,642) | | | (5,488) | |
Accounts receivable, net | | $ | 291,200 | | | $ | 61,985 | |
Billed accounts receivable represent amounts billed to customers for which the Company has an unconditional right to consideration. Unbilled accounts receivable represents revenues recognized but billed after period-end. All unbilled receivables as of December 31, 2021, and March 31, 2021, are expected to be billed and collected (subject to the allowance for credit losses) within twelve months.
Allowance for Credit Losses
The Company maintains reserves for current expected credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, current economic trends, and changes in customer payment patterns to evaluate the adequacy of these reserves.
The Company recorded $512 and $693 of bad debt expense during the three and nine months ended December 31, 2021, respectively, and $187 and $415 of bad debt expense during the three and nine months ended December 31, 2020, respectively, in general and administrative expenses on the condensed consolidated statements of operations and comprehensive income / (loss).
8. Property and Equipment
| | | | | | | | | | | | | | |
| | December 31, 2021 | | March 31, 2021 |
| | (Unaudited) | | |
Computer-related equipment | | $ | 2,676 | | | $ | 2,263 | |
Developed software | | 33,510 | | | 18,473 | |
Furniture and fixtures | | 1,966 | | | 714 | |
Leasehold improvements | | 3,724 | | | 2,182 | |
Property and equipment, gross | | 41,876 | | | 23,632 | |
Accumulated depreciation | | (16,014) | | | (10,582) | |
Property and equipment, net | | $ | 25,862 | | | $ | 13,050 | |
Depreciation expense was $2,192 and $6,073 for the three and nine months ended December 31, 2021, respectively, and $1,151 and $3,052 for the three and nine months ended December 31, 2020, respectively. Depreciation expense for the three and nine months ended December 31, 2021, includes $1,316 and $3,137, respectively, related to internal-use assets included in general and administrative expense and $1,510 and $2,936, respectively, related to internally-developed software to be sold, leased, or otherwise marketed included in other direct costs of revenue. Depreciation expense for the three and nine months ended December 31, 2020, includes $403 and $1,081, respectively, related to internal-use assets included in general and administrative expense and $748 and $1,971, respectively, related to internally-developed software to be sold, leased, or otherwise marketed included in other direct costs of revenue.
9. Leases
The Company has entered into various non-cancellable operating lease agreements for certain offices as well as assumed various leases through its recent acquisitions. These leases currently have lease periods expiring between fiscal years 2022 and 2029. The lease agreements may include one or more options to renew. Renewals were not assumed in the Company's determination of the lease term unless the renewals were deemed to be reasonably assured at lease commencement. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants. The components of lease costs, weighted-average lease term, and discount rates are detailed below.
Schedule, by fiscal year, of maturities of lease liabilities as of:
| | | | | | | | |
| | December 31, 2021 |
| | (Unaudited) |
Remainder of fiscal year 2022 | | $ | 1,277 | |
Fiscal year 2023 | | 4,576 | |
Fiscal year 2024 | | 4,101 | |
Fiscal year 2025 | | 3,028 | |
Fiscal year 2026 | | 2,578 | |
Thereafter | | 3,000 | |
Total undiscounted cash flows | | 18,560 | |
(Less imputed interest) | | (1,626) | |
Present value of lease liabilities | | $ | 16,934 | |
The current portion of the Company's lease liabilities, payable within the next 12 months, is included in other current liabilities, and the long-term portion of the Company's lease liabilities is included in other non-current liabilities on the condensed consolidated balance sheets.
Associated with these financial liabilities, the Company has right-of-use assets of $16,657 as of December 31, 2021, which is calculated using the present value of lease liabilities less any lease incentives received from landlords and any deferred rent liability balances as of the date of implementation. The discount rates used to calculate the imputed interest above range from 2.00% to 6.75% and the weighted-average remaining lease term is 4.76 years.
10. Debt
The following table summarizes borrowings under the Company's debt obligations and the associated interest rates:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Balance | | Interest Rate | | Unused Line Fee |
Revolver (subject to variable rate) | | $ | 345,134 | | | 1.99 | % | | 0.30 | % |
Fyber - Bank Leumi (subject to variable rate) | | $ | 12,501 | | | 5.90 | % | | 1.00 | % |
Debt obligations on the condensed consolidated balance sheets consist of the following:
| | | | | | | | | | | | | | |
| | December 31, 2021 | | March 31, 2021 |
| | (Unaudited) | | |
Revolver | | $ | 345,134 | | | $ | 15,000 | |
Less: Debt issuance costs | | (3,544) | | | (443) | |
Debt assumed through Fyber Acquisition | | 12,501 | | | — | |
Total debt, net | | 354,091 | | | 14,557 | |
Less: Current portion of debt | | (12,501) | | | (14,557) | |
Non-current debt | | $ | 341,590 | | | $ | — | |
Revolver
On February 3, 2021, the Company entered into a credit agreement (the "Credit Agreement") with Bank of America, N.A. (“BoA”), which provides for a revolving line of credit (the "Revolver") of up to $100,000 with an accordion feature enabling the Company to increase the total amount up to $200,000. Funds are to be used for acquisitions, working capital, and general corporate purposes. The Credit Agreement contains customary covenants, representations, and events of default and also requires the Company to comply with a maximum consolidated leverage ratio and minimum fixed charge coverage ratio.
The Company incurred debt issuance costs of $469 to secure the Revolver and had $15,000 drawn against the Revolver, classified as short-term debt on the condensed consolidated balance sheet, with remaining unamortized debt issuance costs of $443 as of March 31, 2021. Deferred debt issuance costs associated with the Revolver are recorded as a reduction of the carrying value of the debt on the condensed consolidated balance sheets. All deferred debt issuance costs are amortized on a straight-line basis over the term of the loan to interest expense.
On April 29, 2021, the Company amended and restated the Credit Agreement (the "New Credit Agreement”) with BoA, as a lender and administrative agent, and a syndicate of other lenders, which provided for a revolving line of credit of up to $400,000. The revolving line of credit matures on April 29, 2026, and contains an accordion feature enabling the Company to increase the total amount of the revolver by $75,000 plus an amount that would enable the Company to remain in compliance with its consolidated secured net leverage ratio, on such terms as agreed to by the parties. The New Credit Agreement contains customary covenants, representations, and events of default and also requires the Company to comply with a maximum consolidated secured net leverage ratio and minimum consolidated interest coverage ratio.
On December 29, 2021, the Company amended the New Credit Agreement (the "First Amendment"), which provides for an increase in the revolving line of credit by $125,000, which increased the maximum aggregate principal amount of the revolving line of credit to $525,000. The First Amendment made no other changes to the term or interest rates of the New Credit Agreement.
The Company incurred debt issuance costs of $4,044 for the New Credit Agreement, inclusive of costs incurred for the First Amendment. The Company had $345,134 drawn against the New Credit Agreement, classified as long-term debt on the condensed consolidated balance sheet, with remaining unamortized debt issuance costs of $3,544 as of December 31, 2021. Deferred debt issuance costs associated with the New Credit Agreement and First Amendment are recorded as a reduction of the carrying value of the debt on the condensed consolidated balance sheets. All deferred debt issuance costs are amortized on a straight-line basis over the term of the loan to interest expense.
Amounts outstanding under the New Credit Agreement accrue interest at an annual rate equal to, at the Company’s election, (i) London Inter-Bank Offered Rate ("LIBOR") plus between 1.50% and 2.25%, based on the Company’s consolidated leverage ratio, or (ii) a base rate based upon the highest of (a) the federal funds rate plus 0.50%, (b) BoA's prime rate, or (c) LIBOR plus 1.00% plus between 0.50% and 1.25%, based on the Company’s consolidated leverage ratio. Additionally, the New Credit Agreement is subject to an unused line of credit fee between 0.15% and 0.35% per annum, based on the Company’s consolidated leverage ratio. As of December 31, 2021, the interest rate was 1.99% and the unused line of credit fee was 0.30%.
The Company’s payment and performance obligations under the New Credit Agreement and related loan documents are secured by its grant of a security interest in substantially all of its personal property assets, whether now existing or hereafter acquired, subject to certain exclusions. If the Company acquires any real property assets with a fair market value in excess of $5,000, it is required to grant a security interest in such real property as well. All such security interests are required to be first priority security interests, subject to certain permitted liens.
As of December 31, 2021, the Company had $179,866 available to withdraw on the revolving line of credit under the New Credit Agreement and was in compliance with all covenants. The fair value of the Company’s outstanding debt approximates its carrying value.
Subsequently to December 31, 2021, the Company drew an additional $179,000 against the New Credit Agreement. The proceeds, combined with available cash-on-hand, were used to satisfy the AdColony Acquisition earn-out payment of $204,500, which was made on January 15, 2022.
Debt Assumed Through Fyber Acquisition
As a part of the Fyber Acquisition, the Company assumed $25,789 of debt previously held by Fyber. This debt was comprised of amounts drawn against three separate revolving lines of credit. The Company settled two of the three revolving lines of credit, resulting in payments of $13,288, during the nine months ended December 31, 2021. Details for the remaining line of credit can be found in the first table in this note. The remaining revolving line of credit from Bank Leumi matures on January 30, 2022. The balance of this line of credit is classified as short-term debt on the condensed consolidated balance sheet as of December 31, 2021.
Interest income / (expense), net
Interest income / (expense), net, amortization of debt issuance costs, and unused line of credit fees were recorded in interest and other income / (expense), net, on the condensed consolidated statements of operations and comprehensive income, as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended December 31, | | Nine months ended December 31, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Interest income / (expense), net | | $ | (1,940) | | | $ | (266) | | | $ | (4,565) | | | $ | (859) | |
Amortization of debt issuance costs | | (190) | | | — | | | (500) | | | — | |
Unused line of credit fees and other | | (65) | | | — | | | (242) | | | — | |
Total interest income / (expense), net | | $ | (2,195) | | | $ | (266) | | | $ | (5,307) | | | $ | (859) | |
11. Stock-Based Compensation
Equity Plan Activity
The following table summarizes stock option activity:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Shares | | Weighted-Average Exercise Price (per share) | | Weighted-Average Remaining Contractual Life (in years) | | Aggregate Intrinsic Value (in thousands) |
Options outstanding as of March 31, 2021 | | 8,146,445 | | | $ | 4.01 | | | 6.86 | | $ | 622,249 | |
Granted | | 642,507 | | | 71.12 | | | | | |
Forfeited / Cancelled | | (288,460) | | | 18.57 | | | | | |
Exercised | | (859,564) | | | 3.28 | | | | | |
Options outstanding as of December 31, 2021 | | 7,640,928 | | | $ | 9.17 | | | 6.21 | | $ | 402,471 | |
Vested and expected to vest (net of estimated forfeitures) at December 31, 2021 | | 7,553,669 | | | $ | 8.88 | | | 6.18 | | $ | 399,790 | |
Exercisable as of December 31, 2021 | | 5,813,445 | | | $ | 4.19 | | | 5.48 | | $ | 331,487 | |
At December 31, 2021 and 2020, total unrecognized stock-based compensation expense related to unvested stock options, net of estimated forfeitures, was $24,233 and $6,495, respectively, with expected remaining weighted-average recognition periods of 2.26 years and 2.12 years, respectively.
The following table summarizes restricted stock unit ("RSU") and restricted stock award ("RSA") activity:
| | | | | | | | | | | | | | |
| | Number of Shares | | Weighted-Average Grant Date Fair Value |
Unvested restricted shares outstanding as of March 31, 2021 | | 333,544 | | | $ | 4.55 | |
Granted | | 332,061 | | | 45.62 | |
Vested | | (298,350) | | | 3.69 | |
Cancelled | | (3,526) | | | 13.88 | |
Unvested restricted shares outstanding as of December 31, 2021 | | 363,729 | | | $ | 42.65 | |
At December 31, 2021 and 2020, total unrecognized stock-based compensation expense related to RSUs and RSAs was $9,448 and $1,463, respectively, with expected remaining weighted-average recognition periods of 1.86 years and 2.01 years, respectively.
Stock-Based Compensation Expense
As of December 31, 2021, 11,304,613 shares of common stock were available for issuance as future awards under the Company's equity incentive plans. Stock-based compensation expense for the three and nine months ended December 31, 2021, was $5,739 and $15,369, respectively, and was recorded within general and administrative expenses on the condensed consolidated statements of operations and comprehensive income. Stock-based compensation expense for the three and nine months ended December 31, 2020, was $160 and $4,286, respectively, and was recorded within general and administrative expenses on the condensed consolidated statements of operations and comprehensive income.
12. Earnings per Share
Basic net income per common share is calculated by dividing net income by the weighted-average number of shares of common stock outstanding during the period.
Diluted net income per common share is calculated by dividing net income by the weighted-average number of shares of common stock outstanding during the period and including the dilutive effects of employee stock-based awards outstanding during the period.
The following table sets forth the computation of basic and diluted net income per share of common stock (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended December 31, | | Nine months ended December 31, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Net income | | 7,062 | | | 14,515 | | | 15,428 | | | 24,828 | |
Less: net income / (loss) attributable to non-controlling interest | | 48 | | | — | | | (18) | | | — | |
Net income attributable to Digital Turbine, Inc. | | $ | 7,014 | | | $ | 14,515 | | | $ | 15,446 | | | $ | 24,828 | |
Weighted-average common shares outstanding, basic | | 96,548 | | | 89,003 | | | 94,620 | | | 88,140 | |
Basic net income per common share attributable to Digital Turbine, Inc. | | $ | 0.07 | | | $ | 0.16 | | | $ | 0.16 | | | $ | 0.27 | |
Weighted-average common shares outstanding, diluted | | 103,287 | | | 96,976 | | | 101,346 | | | 95,563 | |
Diluted net income per common share attributable to Digital Turbine, Inc. | | $ | 0.07 | | | $ | 0.15 | | | $ | 0.15 | | | $ | 0.26 | |
| | | | | | | | |
13. Income Taxes
The Company's 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, Accounting for Income Taxes, 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, 2021, a tax provision of $3,718 and $4,799, respectively, resulted in an effective tax rate of 34.5% and 23.7%, respectively. Differences between the tax provision and the statutory rate primarily relate to state income taxes, nontaxable adjustments to the AdColony and Fyber earn-outs, and tax deductions for stock compensation that exceed the book expense.
The Company recorded a net increase to deferred tax liabilities of $35,733 in the fiscal first quarter 2022 ended June 30, 2021, related to the AdColony and Fyber acquisitions. The increase in deferred tax liabilities primarily resulted from the revaluation of the acquired intangible assets. The Company’s valuation allowance increased by $13,667 for certain acquired deferred tax assets of Fyber GmbH due to a history of losses in the taxing jurisdiction. Net operating loss (NOL) carryforwards acquired in the AdColony and Fyber acquisitions were as follows:
AdColony
| | | | | | | | | | | | | | |
Jurisdiction | | NOLs | | Expiration Dates |
U.S. Federal | | $60,924 | | 2032 through 2037 |
U.S. Federal | | $47,704 | | Indefinite |
State taxing jurisdictions | | $129,685 | | 2026 through 2041 |
Fyber
| | | | | | | | | | | | | | |
Jurisdiction | | NOLs | | Expiration Dates |
Germany | | $90,203 | | Indefinite |
Israel | | $17,885 | | Indefinite |
During the three and nine months ended December 31, 2020, a tax provision of $1,061 and $2,098 resulted in an effective tax rate of 6.8% and 7.8%, respectively. Differences in the tax provision and statutory rate are primarily due to changes in the valuation allowance.
14. Commitments and Contingencies
Contingent Earn-Out Considerations
The Company's acquisitions of AdColony and Fyber include contingent earn-out considerations as part of the purchase prices, under which it will make future payments or issue shares of common stock to the sellers upon the achievement of certain benchmarks.
AdColony
Under the terms of the Share Purchase Agreement for the AdColony Acquisition, the Company must pay an earn-out estimated between $200,000 to $225,000 in cash following December 31, 2021. On August 27, 2021, the Company entered into an Amendment to Share Purchase Agreement (the “Amendment Agreement”) with AdColony and Otello Corporation ASA, a Norway company (“Otello”) and AdColony's previous parent company. Pursuant to the Amendment Agreement, the Company and Otello agreed to set a fixed dollar amount of $204,500 for the earn-out payment obligation, to set January 15, 2022, as the payment due date for such payment amount, and to eliminate all of the Company’s earn-out support obligations under the Share Purchase Agreement. This amount is included in acquisition purchase price liabilities on the condensed consolidated balance sheet as of December 31, 2021 and was paid in full on January 15, 2022.
Fyber
Under the terms of the Fyber Acquisition, the Company may have to make an earn-out payment of up to $50,000 through the issuance of a variable number of shares of its common stock or, under certain circumstances, cash, if Fyber's net revenues are equal to or higher than $100,000 for the 12-month period ending on March 31, 2022. As of December 31, 2021, the Company estimates the fair value of this payment to be $49,200. See Note 4, "Acquisitions," for additional discussion regarding the Fyber earn-out payment.
Acquisition Purchase Price Liability
The Company has recognized acquisition purchase price liabilities of $253,700 on its condensed consolidated balance sheet as of December 31, 2021, comprised of the following components:
•$204,500 of earn-out consideration for the AdColony Acquisition
•$49,200 of contingent earn-out consideration for the Fyber Acquisition
Hosting Agreements
The Company enters into hosting agreements with service providers and in some cases, those agreements include minimum commitments that require the Company 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 $228,800 over the next five years.
15. Subsequent Events
Debt
Subsequently to December 31, 2021, the Company drew an additional $179,000 against the New Credit Agreement. The proceeds, combined with available cash-on-hand, were used to satisfy the AdColony Acquisition earn-out payment, which was made on January 15, 2022.
Acquisition of AdColony
On January 15, 2022, the Company paid the AdColony Acquisition earn-out consideration of $204,500 with available cash-on-hand and borrowings under the New Credit Agreement.
Please refer to Note 4, "Acquisitions," for further information regarding the AdColony Acquisition.