glu_Current folio_10Q

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


FORM 10-Q


(Mark One)

 

 

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

 

For the Quarterly Period Ended March 31, 2015

OR

 

 

 

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

 

For the Transition Period from                      to                      

Commission File Number 001-33368


Glu Mobile Inc.

(Exact name of the Registrant as Specified in its Charter)


 

 

 

Delaware

91-2143667

(State or Other Jurisdiction of
Incorporation or Organization)

(I.R.S. Employer
Identification No.)

 

500 Howard Street, Suite 300

San Francisco, California 94105

(Address of Principal Executive Offices, including Zip Code)

 

(415) 800-6100

(Registrant’s Telephone number, including Area Code)


 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No    

 

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

 

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

 

 

 

 

 

 

 

 

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

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

 

Shares of Glu Mobile Inc. common stock, $0.0001 par value per share, outstanding as of May 1, 2015: 120,333,919.  

 

 


 

Table of Contents

GLU MOBILE INC.

 

FORM 10-Q

 

Quarterly Period Ended March 31, 2015

 

TABLE OF CONTENTS

 

 

 

 

Page

PART I. FINANCIAL INFORMATION 

 

 

 

ITEM 1. FINANCIAL STATEMENTS (Unaudited) 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014 

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2015 and the Three Months Ended March 31, 2014 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2015 and the Three Months Ended March 31, 2014 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March  31, 2015 and March 31, 2014 

 

 

Notes to Condensed Consolidated Financial Statements 

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 

26 

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 

37 

 

 

ITEM 4. CONTROLS AND PROCEDURES 

39 

 

 

PART II. OTHER INFORMATION 

 

 

 

ITEM 1. LEGAL PROCEEDINGS 

40 

 

 

ITEM 1A. RISK FACTORS 

40 

 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 

62 

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES 

62 

 

 

ITEM 4. MINE SAFETY DISCLOSURES 

62 

 

 

ITEM 5. OTHER INFORMATION 

62 

 

 

ITEM 6. EXHIBITS 

62 

 

 

SIGNATURES 

63 

 

 

2


 

Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

GLU MOBILE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

   

2015

   

2014

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

65,683 

 

$

70,912 

 

Accounts receivable, net

 

 

24,466 

 

 

32,231 

 

Prepaid royalties

 

 

11,894 

 

 

864 

 

Prepaid expenses and other

 

 

15,402 

 

 

17,388 

 

Total current assets

 

 

117,445 

 

 

121,395 

 

Property and equipment, net

 

 

5,859 

 

 

6,116 

 

Restricted cash

 

 

1,990 

 

 

1,990 

 

Other long-term assets

 

 

11,492 

 

 

6,674 

 

Intangible assets, net

 

 

24,963 

 

 

27,524 

 

Goodwill

 

 

87,968 

 

 

87,964 

 

Total assets

 

$

249,717 

 

$

251,663 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

11,634 

 

$

11,685 

 

Accrued liabilities

 

 

3,461 

 

 

3,812 

 

Accrued compensation

 

 

8,129 

 

 

10,751 

 

Accrued royalties

 

 

13,778 

 

 

12,440 

 

Deferred revenues

 

 

30,665 

 

 

37,333 

 

Total current liabilities

 

 

67,667 

 

 

76,021 

 

Other long-term liabilities

 

 

6,063 

 

 

3,936 

 

Total liabilities

 

 

73,730 

 

 

79,957 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value; 5,000 shares authorized at March 31, 2015 and December 31, 2014; no shares issued and outstanding at March 31, 2015 and December 31, 2014

 

 

 —

 

 

 —

 

Common stock, $0.0001 par value; 250,000 shares authorized at March 31, 2015 and December 31, 2014; 107,832 and 107,174 shares issued and outstanding at March 31, 2015 and December 31, 2014

 

 

11 

 

 

11 

 

Additional paid-in capital

 

 

419,202 

 

 

415,766 

 

Accumulated other comprehensive loss

 

 

(287)

 

 

(8)

 

Accumulated deficit

 

 

(242,939)

 

 

(244,063)

 

Total stockholders’ equity

 

 

175,987 

 

 

171,706 

 

Total liabilities and stockholders’ equity

 

$

249,717 

 

$

251,663 

 

 

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

3


 

Table of Contents

GLU MOBILE INC. 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

 

2015

   

2014

Revenues

 

$

69,470 

 

$

44,580 

Cost of revenues:

 

 

 

 

 

 

Platform commissions, royalties and other

 

 

26,310 

 

 

13,202 

Amortization of intangible assets

 

 

2,434 

 

 

554 

Total cost of revenues

 

 

28,744 

 

 

13,756 

Gross profit

 

 

40,726 

 

 

30,824 

Operating expenses:

 

 

 

 

 

 

Research and development

 

 

18,243 

 

 

15,579 

Sales and marketing

 

 

12,438 

 

 

9,485 

General and administrative

 

 

7,406 

 

 

4,926 

Amortization of intangible assets

 

 

127 

 

 

127 

Total operating expenses

 

 

38,214 

 

 

30,117 

Income from operations

 

 

2,512 

 

 

707 

Interest and other expense, net:

 

 

 

 

 

 

Interest income

 

 

 

 

Other expense

 

 

(290)

 

 

(136)

Interest and other expense, net

 

 

(284)

 

 

(130)

Income before income taxes

 

 

2,228 

 

 

577 

Income tax provision

 

 

(1,104)

 

 

(444)

Net income

 

$

1,124 

 

$

133 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 Basic

 

$

0.01 

 

$

0.00 

 Diluted

 

$

0.01 

 

$

0.00 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 Basic

 

 

103,869 

 

 

79,719 

 Diluted

 

 

107,851 

 

 

85,398 

 

 

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

4


 

Table of Contents

GLU MOBILE INC. 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

 

2015

   

2014

Net income

 

$

1,124 

 

$

133 

Other comprehensive income/(loss):

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(279)

 

 

84 

Other comprehensive income/(loss)

 

 

(279)

 

 

84 

Comprehensive income

 

$

845 

 

$

217 

 

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

 

 

5


 

Table of Contents

GLU MOBILE INC. 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

   

2015

   

2014

    

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

1,124 

 

$

133 

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation

 

 

706 

 

 

620 

 

Amortization of intangible assets

 

 

2,561 

 

 

681 

 

Stock-based compensation

 

 

2,129 

 

 

2,979 

 

Change in fair value of Blammo earnout

 

 

 —

 

 

304 

 

Non-cash warrant expense

 

 

93 

 

 

 —

 

Non-cash foreign currency remeasurement loss

 

 

290 

 

 

136 

 

Impairment of prepaid royalties and guarantees

 

 

 —

 

 

30 

 

Changes in allowance for doubtful accounts

 

 

 —

 

 

(24)

 

Changes in operating assets and liabilities, net of effect of acquisitions:

 

 

 

 

 

 

 

Accounts receivable

 

 

7,592 

 

 

(1,375)

 

Prepaid royalties

 

 

(9,587)

 

 

(180)

 

Prepaid expenses and other assets

 

 

1,954 

 

 

(1,064)

 

Accounts payable and other accrued liabilities

 

 

(54)

 

 

(1,381)

 

Accrued compensation

 

 

(2,620)

 

 

415 

 

Accrued royalties

 

 

(2,591)

 

 

109 

 

Deferred revenues

 

 

(6,672)

 

 

2,450 

 

Other long-term liabilities

 

 

(37)

 

 

(39)

 

Net cash (used in)/provided by operating activities

 

 

(5,112)

 

 

3,794 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(499)

 

 

(793)

 

Net cash paid for acquisitions

 

 

(351)

 

 

 —

 

Other investing activities

 

 

(250)

 

 

 —

 

Net cash used in investing activities

 

 

(1,100)

 

 

(793)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from exercise of stock options and ESPP

 

 

1,601 

 

 

4,660 

 

Taxes paid related to net share settlement of equity awards

 

 

(318)

 

 

 —

 

Excess tax benefit from stock awards

 

 

14 

 

 

 —

 

Proceeds from exercise of stock warrants and issuance of common stock

 

 

10 

 

 

783 

 

Net cash provided by financing activities

 

 

1,307 

 

 

5,443 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

(324)

 

 

14 

 

Net increase/(decrease) in cash and cash equivalents

 

 

(5,229)

 

 

8,458 

 

Cash and cash equivalents at beginning of period

 

 

70,912 

 

 

28,496 

 

Cash and cash equivalents at end of period

 

$

65,683 

 

$

36,954 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

Common stock issued as contingent consideration earned

 

$

 —

 

 

2,071 

 

 

 

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

 

 

6


 

Table of Contents

GLU MOBILE INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

 

Note 1 — The Company, Basis of Presentation and Summary of Significant Accounting Policies

 

Glu Mobile Inc. (the “Company” or “Glu”) was incorporated in Nevada in May 2001 and reincorporated in the state of Delaware in March 2007.  The Company develops, publishes, and markets a portfolio of games designed to appeal to a broad cross section of the users of smartphones and tablet devices who download and make purchases within its games through direct-to-consumer digital storefronts, such as the Apple App Store, Google Play Store, Amazon Appstore and others (“Digital Storefronts”).  The Company creates games based on its own original brands, third-party licensed brands, including celebrity and entertainment properties, as well as its own branded games that incorporate third-party licensed brands, properties and content.

 

The Company has generally incurred losses from operations since inception and had an accumulated deficit of $242,939 as of March 31, 2015.  However, for the three months ended March 31, 2015 and 2014, the Company generated net income of $1,124 and $133, respectively.   The Company may incur additional losses and negative cash flows in the future.  Failure to generate sufficient revenues or reduce spending could adversely affect the Company’s ability to sustain profitability and achieve its business objectives.

 

Principles of Consolidation and Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles (“GAAP”) in the United States for complete financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on March 13, 2015.  In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, which the Company believes are necessary for a fair statement of the Company’s financial position as of March 31, 2015 and its unaudited condensed consolidated results of operations for the three months ended March 31, 2015 and 2014, respectively.  These unaudited condensed consolidated financial statements are not necessarily indicative of the results to be expected for the entire year.  The unaudited condensed consolidated balance sheet presented as of December 31, 2014 has been derived from the audited consolidated financial statements as of that date.

 

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.  All intercompany balances and transactions have been eliminated.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents and accounts receivable.

 

The Company derives its accounts receivable from revenues earned from customers or through Digital Storefronts located in the U.S. and other locations outside of the U.S.  The Company performs ongoing credit evaluations of its customers’ and the Digital Storefronts’ financial condition and currently does not require any collateral from its customers or the Digital Storefronts.  The Company bases its allowance for doubtful accounts on management’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable.  The Company reviews past due balances over a specified amount individually for collectability on a monthly basis.  The Company writes off accounts receivable balances against the allowance when it determines that the amount will not be recovered.

 

7


 

Table of Contents

The following table summarizes the revenues from customers or aggregate purchases through Digital Storefronts that accounted for more than 10% of the Company’s revenues for the periods indicated:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2015

   

2014

 

Apple

 

53.6 

%  

50.6 

%  

Google

 

27.3 

 

23.3 

 

 

At March 31, 2015, Apple Inc. (“Apple”) accounted for 55.2% and Google Inc. (“Google”) accounted for 16.6% of the Company’s total accounts receivable.  At December 31, 2014, Apple accounted for 55.0% and Google accounted for 15.2% of total accounts receivable.   No other customer or Digital Storefront represented more than 10% of the Company’s total accounts receivable as of these dates.

 

Recent Accounting Pronouncements

 

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis.  ASU 2015-02 changes the guidance with respect to the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The new standard is effective for all annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted, but the guidance must be applied as of the beginning of the annual period containing the adoption date. The adoption of this standard is not expected to have a material impact on the Company’s financial statements.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. Under this guidance, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The updated standard will replace most existing revenue recognition guidance under U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The updated standard will be effective for the Company beginning January 1, 2017. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on its unaudited consolidated financial statements and related disclosures.

 

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern. The new standard provides guidance around management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s financial statements.

 

Note 2 — Net Income Per Share

 

The Company computes basic net income per share by dividing its net income for the period by the weighted average number of common shares outstanding during the period less the weighted average common shares subject to restrictions imposed by the Company.  Diluted net income per share reflects the potential dilution that could occur from common shares issuable through stock-based compensation plans (including stock options, restricted stock units 

8


 

Table of Contents

(“RSUs”) and common stock issuable through the Company’s employee stock purchase plan), and warrants by application of the treasury stock method.

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

 

2015

   

2014

Net income

 

$

1,124 

 

$

133 

Shares used to compute net income per share::

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

107,509 

 

 

79,809 

Weighted average common shares subject to restrictions

 

 

(3,640)

 

 

(90)

Weighted average shares used to compute basic net income per share

 

 

103,869 

 

 

79,719 

Dilutive potential common shares

 

 

3,982 

 

 

5,679 

Weighted average shares used to compute diluted net income per share

 

 

107,851 

 

 

85,398 

 

 

 

 

 

 

 

Basic net income per share

 

$

0.01 

 

$

0.00 

Diluted net income per share

 

$

0.01 

 

$

0.00 

 

The following weighted average options to purchase common stock, warrants to purchase common stock, shares of common stock subject to restrictions, and RSUs have been excluded from the computation of diluted net income per share of common stock for the periods presented because including them would have had an anti-dilutive effect:  

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

 

2015

    

2014

 

 

 

 

 

 

 

Warrants to purchase common stock

 

 

2,439 

 

 

2,419 

Unvested common shares subject to restrictions

 

 

3,451 

 

 

90 

Options to purchase common stock

 

 

5,767 

 

 

6,827 

RSUs

 

 

3,573 

 

 

1,564 

 

 

 

15,230 

 

 

10,900 

 

 

 

 

Note 3 — Fair Value Measurements

 

Fair Value Measurements

 

The Company accounts for fair value in accordance with ASC 820, Fair Value Measurements and Disclosures (“ASC 820”).  Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs.  The Company uses a three-tier hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

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

 

Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The first two levels in the hierarchy are considered observable inputs and the last is considered unobservable.  The Company’s cash and cash equivalents, which were held in operating bank accounts, are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency.  As of March 31, 2015 and December 31, 2014, the Company had $65,683 and $70,912, respectively, in cash and cash equivalents.  In addition, the Company’s restricted cash is classified

9


 

Table of Contents

within Level 1 of the fair value hierarchy.  The carrying value of accounts receivable and payables approximates fair value due to the short time to expected payment or receipt of cash.

 

Note 4 — Balance Sheet Components

 

Accounts Receivable

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

   

2015

   

2014

 

Accounts receivable

 

$

24,763 

 

$

32,528 

 

Less: Allowance for doubtful accounts

 

 

(297)

 

 

(297)

 

 

 

$

24,466 

 

$

32,231 

 

 

Accounts receivable includes amounts billed and unbilled as of the respective balance sheet dates, but net of platform commissions paid to the Digital Storefronts.  The Company had no bad debts during the three months ended March 31, 2015 and 2014.

 

Prepaid expenses and other

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

    

December 31, 

 

 

   

2015

   

2014

 

Deferred platform commission fees

 

 

7,937 

 

 

9,776 

 

Deferred royalties

 

 

2,802 

 

 

3,739 

 

Deferred tax asset

 

 

921 

 

 

921 

 

Other

 

 

3,742 

 

 

2,952 

 

 

 

$

15,402 

 

$

17,388 

 

 

Property and Equipment

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

   

2015

   

2014

 

Computer equipment

 

$

6,977 

 

$

6,721 

 

Furniture and fixtures

 

 

1,038 

 

 

949 

 

Software

 

 

8,593 

 

 

8,504 

 

Leasehold improvements

 

 

3,460 

 

 

3,381 

 

 

 

 

20,068 

 

 

19,555 

 

Less: Accumulated depreciation and amortization

 

 

(14,209)

 

 

(13,439)

 

 

 

$

5,859 

 

$

6,116 

 

 

 

 

 

 

 

 

 

 

Depreciation expense for the three months ended March 31, 2015 and 2014 was $706 and $620, respectively.

 

Other long-term assets

 

As of March 31, 2015 and December 31, 2014, respectively, other long-term assets include $10,440 and $5,870 of prepaid minimum guaranteed royalties for some of our license agreements.  These amounts are recoupable against future royalties owed on revenues generated greater than one year.

 

10


 

Table of Contents

Other Long-Term Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

    

December 31, 

 

 

    

2015

   

2014

 

Deferred rent

 

$

945 

 

$

1,001 

 

Uncertain tax position obligations

 

 

995 

 

 

977 

 

Accrued royalties

 

 

2,940 

 

 

870 

 

Deferred tax liability

 

 

845 

 

 

842 

 

Other

 

 

338 

 

 

246 

 

 

 

$

6,063 

 

$

3,936 

 

 

 

 

 

Note 5 — Business Combinations

 

Cie Games, Inc.

 

On August 20, 2014, the Company completed its acquisition of Cie Games, Inc. (“Cie Games”), a developer of racing genre mobile games based in Long Beach, California. The Company acquired Cie Games’ to leverage its racing genre expertise, assembled workforce and existing mobile games in order to expand the Company’s game offerings on smartphones and tablets. The purchase price consideration included 9,983 shares of the Company’s common stock valued at $5.09 per share as of the closing date of the acquisition, for an aggregate of $50,813 in share consideration. In addition, the Company agreed to pay approximately $29,495 in cash consideration, for total overall consideration paid of $80,308. The Company is holding back in escrow approximately 2,139 of the share consideration for 18 months from the closing date to satisfy potential indemnification claims under the Merger Agreement. In addition, $280 of the cash consideration was held back and may be released to the former stockholders of Cie Games to the extent the Company receives a tax refund relating to Cie Games’ operations from January 1, 2014 through August 20, 2014, $250 of cash consideration that had been held back to satisfy potential working capital shortfalls, was paid by the Company to the former Cie Games stockholders during the fourth quarter of 2014. All outstanding Cie Games capital stock and stock options were cancelled at the closing of the acquisition.

 

The allocation of the purchase price is preliminary and based on valuations derived from estimated fair value assessments and assumptions used by the Company. While the Company believes that its preliminary estimates and assumptions underlying the valuations are reasonable, different estimates and assumptions could result in different valuations assigned to the individual assets acquired and liabilities assumed, and the resulting amount of goodwill. The following table summarizes the preliminary fair values of assets acquired and liabilities assumed at the date of acquisition:

 

 

 

 

 

 

Assets acquired:

   

 

 

Cash

   

$

5,281 

Accounts receivable, net

 

 

4,624 

Restricted Cash

 

 

200 

Other current assets

 

 

422 

Property and equipment

 

 

519 

Intangible assets:

 

 

 

Titles, content and technology

 

 

19,200 

Customer contract and related relationships

 

 

4,300 

Goodwill

 

 

57,247 

Total assets acquired

 

 

91,793 

Liabilities assumed:

 

 

 

Accounts payable

 

 

(2,317)

Other accrued liabilities

 

 

(2,053)

Deferred revenue

 

 

(294)

Deferred tax liability

 

 

(6,821)

Total liabilities acquired

 

 

(11,485)

Net acquired assets

 

$

80,308 

 

11


 

Table of Contents

Acquisition-related intangibles included in the above table are finite-lived and are being amortized on a straight-line basis over their estimated lives of three to five years, which approximates the pattern in which the economic benefits of the intangible assets are expected to be realized. Of the total purchase price, $23,500 was allocated to identifiable intangible assets. Pursuant to ASC 805, the Company incurred and expensed a total of $42 in acquisition and transitional costs associated with the acquisition of Cie Games during the three months ended March 31, 2015, which were primarily general and administrative related.

 

The Company allocated the residual value of $57,247 to goodwill. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. In accordance with ASC 350, Intangibles – Goodwill and Other (“ASC 350”), goodwill will not be amortized but will be tested for impairment at least annually. Goodwill created as a result of the Cie Games acquisition is not deductible for tax purposes.

 

PlayFirst, Inc.

 

On May 14, 2014, the Company completed the acquisition of PlayFirst, Inc. (“PlayFirst”). PlayFirst, which is based in San Francisco, California, employs approximately 22 people and develops casual games for smartphones and other mobile devices. The Company acquired PlayFirst to leverage its casual game expertise, assembled workforce and existing mobile games in order to expand the Company’s game offerings on smartphones and tablets.

 

The purchase price consideration was $11,553, representing 2,955 shares of the Company’s common stock valued at $3.91 per share. The number of shares comprising the purchase price consideration was reduced from 3,000 shares to 2,955 shares due to a working capital adjustment. In addition, the Company withheld a total of 106 shares to cover stockholders’ agent expenses and tax obligations of some PlayFirst stockholders, which resulted in the Company issuing a total of 2,849 shares valued at $11,141 and paying $412 in cash. Of the 2,849 shares issued in the acquisition, 1,500 are being held in escrow and will be retained by the Company for 24 months to satisfy potential indemnification claims under the PlayFirst merger agreement. In addition, the Company assumed approximately $3,480 of PlayFirst net liabilities. All outstanding PlayFirst capital stock, stock options and warrants were cancelled at the closing of the PlayFirst acquisition.

 

The allocation of the purchase price is preliminary and based on valuations derived from estimated fair value assessments and assumptions used by the Company. While the Company believes that its preliminary estimates and assumptions underlying the valuations are reasonable, different estimates and assumptions could result in different valuations assigned to the individual assets acquired and liabilities assumed, and the resulting amount of goodwill. The following table summarizes the preliminary fair values of assets acquired and liabilities assumed at the date of acquisition:

 

 

 

 

 

Assets acquired:

   

 

 

Cash

   

$

123 

Accounts receivable, net

 

 

736 

Other current assets

 

 

145 

Property and equipment

 

 

15 

Intangible assets:

 

 

 

Titles, content and technology

 

 

2,200 

In Process Research and Development

 

 

800 

Customer contract and related relationships

 

 

700 

Goodwill

 

 

11,241 

Total assets acquired

 

 

15,960 

Liabilities assumed:

 

 

 

Accounts payable

 

 

(1,509)

Other accrued liabilities

 

 

(651)

Line of credit

 

 

(890)

Term loan

 

 

(1,450)

Total liabilities acquired

 

 

(4,500)

Net acquired assets

 

$

11,460 

 

Acquisition-related intangibles included in the above table are finite-lived and are being amortized on a straight-line basis over their estimated lives of three to five years, which approximates the pattern in which the economic benefits

12


 

Table of Contents

of the intangible assets are expected to be realized. Of the total purchase price, $3,700 was allocated to identifiable intangible assets.

 

The Company allocated the residual value of $11,241 to goodwill. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. In accordance with ASC 350, goodwill will not be amortized but will be tested for impairment at least annually. Goodwill created as a result of the PlayFirst acquisition is not deductible for tax purposes.

 

Valuation Methodology

 

The Company engaged a third-party valuation firm to aid management in its analyses of the fair value of PlayFirst and Cie Games. All estimates, key assumptions and forecasts were either provided by or reviewed by the Company. While the Company chose to utilize a third-party valuation firm, the fair value analyses and related valuations represent the conclusions of management and not the conclusions or statements of any third party.

 

The Company valued titles, content and technology, and in-process research and development using the Multi-Period Excess Earnings (“MPEE”) method of the income approach and key assumptions used included: projected revenue, cost of goods sold, and operating expenses for PlayFirst’s and Cie Games’ legacy titles, the future amortization tax benefit of the legacy titles, and a discount rate of between 20% and 35%.

 

As of the valuation date, PlayFirst was in the process of developing a game, which was launched in the fourth quarter of 2014, and the Company has estimated the majority of the revenues associated with this game will be generated in the remainder of 2015.

 

The Company valued customer relationships using the replacement cost method of the cost approach and based on the perceived value that a market participant would ascribe to the PlayFirst and Cie Games customer relationships, which include existing relationships with Amazon, Apple and Google. Key assumptions used in valuing customer relationships included legal fees and opportunity costs in re-establishing such relationships.

 

Pro Forma Financial Information

 

The results of operations for PlayFirst and Cie Games and the estimated fair market values of the assets acquired and liabilities assumed have been included in the Company’s unaudited condensed consolidated financial statements since their respective dates of acquisition. The unaudited pro forma financial information in the table below summarizes the combined results of the Company’s operations and those of PlayFirst and Cie Games for the periods shown as if the acquisition of PlayFirst and Cie Games had each occurred on January 1, 2014. The pro forma financial information includes the business combination accounting effects of the acquisition, including amortization charges from acquired intangible assets. The pro forma financial information presented below is for informational purposes only, and is subject to a number of estimates, assumptions and other uncertainties.

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31, 

 

 

   

2014

   

Total pro forma revenues

 

$

50,073 

 

Pro forma net income

 

$

263 

 

Pro forma net income per share - basic

 

$

0.00 

 

Pro forma net income per share - diluted

 

$

0.00 

 

 

All of the goodwill related to the PlayFirst and Cie Games acquisitions was assigned to the Company’s Americas reporting unit. See Note 6 for additional information related to the changes in the carrying amount of goodwill.

 

13


 

Table of Contents

Note 6 — Goodwill and Intangible Assets

 

Intangible Assets

 

The Company’s intangible assets were acquired primarily in connection with the acquisitions of Macrospace in 2004, iFone in 2006, MIG in 2007, Superscape in 2008, Griptonite and Blammo in 2011, GameSpy in 2012 and PlayFirst and Cie Games in 2014, as well as in connection with the purchase of the Deer Hunter trademark and brand assets from Atari, Inc. in 2012. The carrying amounts and accumulated amortization expense of the acquired intangible assets, including the impact of foreign currency exchange translation, at March 31, 2015 and December 31, 2014 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015

 

December 31, 2014

 

 

    

    

    

Gross

    

Accumulated

    

Net

    

Gross

    

Accumulated

    

Net

 

 

 

 

 

Carrying

 

Amortization

 

Carrying

 

Carrying

 

Amortization

 

Carrying

 

 

 

 

 

Value

 

Expense

 

Value

 

Value

 

Expense

 

Value

 

 

 

 

 

(Including

 

(Including

 

(Including

 

(Including

 

(Including

 

(Including

 

 

 

Estimated

 

Impact of

 

Impact of

 

Impact of

 

Impact of

 

Impact of

 

Impact of

 

 

 

Useful

 

Foreign

 

Foreign

 

Foreign

 

Foreign

 

Foreign

 

Foreign

 

 

   

Life

   

Exchange)

   

Exchange)

   

Exchange)

   

Exchange)

   

Exchange)

   

Exchange)

 

Intangible assets amortized to cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Titles, content and technology

 

2 yrs

 

$

34,787 

 

$

(17,197)

 

$

17,590 

 

$

34,895 

 

$

(15,314)

 

$

19,581 

 

Catalogs

 

1 yr

 

 

1,154 

 

 

(1,154)

 

 

 —

 

 

1,208 

 

 

(1,208)

 

 

 —

 

ProvisionX Technology

 

6 yrs

 

 

190 

 

 

(190)

 

 

 —

 

 

199 

 

 

(199)

 

 

 —

 

Carrier contract and related relationships

 

5 yrs

 

 

24,771 

 

 

(20,421)

 

 

4,350 

 

 

24,794 

 

 

(20,192)

 

 

4,602 

 

Licensed content

 

5 yrs

 

 

3,014 

 

 

(3,014)

 

 

 —

 

 

3,012 

 

 

(3,012)

 

 

 —

 

Service provider license

 

9 yrs

 

 

481 

 

 

(390)

 

 

91 

 

 

479 

 

 

(375)

 

 

104 

 

Trademarks

 

7 yrs

 

 

5,225 

 

 

(2,367)

 

 

2,858 

 

 

5,226 

 

 

(2,190)

 

 

3,036 

 

 

 

 

 

 

69,622 

 

 

(44,733)

 

 

24,889 

 

 

69,813 

 

 

(42,490)

 

 

27,323 

 

Other intangible assets amortized to operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Emux Technology

 

6 yrs

 

 

1,231 

 

 

(1,231)

 

 

 —

 

 

1,289 

 

 

(1,289)

 

 

 —

 

Noncompete agreements

 

4 yrs

 

 

5,391 

 

 

(5,317)

 

 

74 

 

 

5,417 

 

 

(5,216)

 

 

201 

 

 

 

 

 

 

6,622 

 

 

(6,548)

 

 

74 

 

 

6,706 

 

 

(6,505)

 

 

201 

 

Total intangibles assets

 

 

 

$

76,244 

 

$

(51,281)

 

$

24,963 

 

$

76,519 

 

$

(48,995)

 

$

27,524 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition-related intangibles included in the above table are finite-lived and are being amortized on a straight-line basis over their estimated lives, which approximates the pattern in which the economic benefits of the intangible assets are realized. The Company has included amortization of acquired intangible assets directly attributable to revenue-generating activities in cost of revenues. The Company has included amortization of acquired intangible assets not directly attributable to revenue-generating activities in operating expenses.

 

During the three months ended March 31, 2015 and 2014, the Company recorded amortization expense in the amounts of $2,434 and $554, respectively, in cost of revenues. During the three months ended March 31, 2015 and 2014, the Company recorded amortization expense in the amounts of $127 and $127, respectively, in operating expenses.

 

As of March 31, 2015, the total expected future amortization related to intangible assets was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Amortization

    

Amortization

    

 

 

 

 

 

Included in

 

Included in

 

Total

 

 

 

Cost of

 

Operating

 

Amortization

 

Period Ending December 31,

   

Revenues

   

Expenses

   

Expense

 

2015 (remaining nine months)

 

$

7,120 

 

$

74 

 

$

7,194 

 

2016

 

 

9,199 

 

 

 —

 

 

9,199 

 

2017

 

 

6,076 

 

 

 —

 

 

6,076 

 

2018

 

 

1,714 

 

 

 —

 

 

1,714 

 

2019 and thereafter

 

 

780 

 

 

 —

 

 

780 

 

 

 

$

24,889 

 

$

74 

 

$

24,963 

 

 

14


 

Table of Contents

Goodwill

 

The Company has goodwill attributable to its MIG, GameSpy, Blammo, Griptonite, PlayFirst, and Cie Games acquisitions as of March 31, 2015. The Company has three reporting units comprised of the 1) Americas, 2) EMEA and 3) APAC regions. The Company attributed all of the goodwill resulting from the MIG acquisition to its Asia and Pacific (“APAC”) reporting unit. All of the goodwill attributable to the GameSpy, Blammo, Griptonite, PlayFirst, and Cie Games acquisitions has been fully assigned to the Company’s Americas reporting unit. The Company had fully impaired in prior years all goodwill allocated to its EMEA reporting unit. The goodwill allocated to the Americas reporting unit is denominated in U.S. Dollars (“USD”) and the goodwill allocated to the APAC reporting unit is denominated in Chinese Renminbi (“RMB”). As a result, the goodwill attributed to the APAC reporting unit is subject to foreign currency fluctuations.

 

In the valuation of the goodwill balance for Griptonite, Blammo, MIG, GameSpy, PlayFirst, and Cie Games the Company gave consideration to the future economic benefits of other assets that were not individually identified or separately recognized. The acquired studio workforce for each of these acquisitions was estimated to have value, and since the acquired workforce is not individually identified or separately recognized, it was subsumed within the goodwill recognized as part of each business combination. The Company further planned to leverage its preexisting contractual relationships with Digital Storefronts to distribute new titles developed by the Griptonite, Blammo, PlayFirst, and Cie Games studios and the expected synergies are reflected in the value of the goodwill recognized. The Company also used the GameSpy acquired workforce and expertise to help in its development efforts for its games-as-a-service technology platform, and these synergies are reflected in the value of goodwill recognized.

 

Goodwill by reporting unit for the periods indicated was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015

 

December 31, 2014

 

 

   

Americas

   

EMEA

   

APAC

   

Total

   

Americas

   

EMEA

   

APAC

   

Total

 

Balance as of January 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

111,434 

 

$

25,354 

 

$

24,287 

 

$

161,075 

 

$

42,946 

 

$

25,354 

 

$

24,296 

 

$

92,596 

 

Accumulated Impairment Losses

 

 

(24,871)

 

 

(25,354)

 

 

(22,886)

 

 

(73,111)

 

 

(24,871)

 

 

(25,354)

 

 

(22,886)

 

 

(73,111)

 

 

 

 

86,563 

 

 

 —

 

 

1,401 

 

 

87,964 

 

 

18,075 

 

 

 —

 

 

1,410 

 

 

19,485 

 

Goodwill Acquired during the year

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

68,488 

 

 

 —

 

 

 —

 

 

68,488 

 

Effects of Foreign Currency  Exchange

 

 

 —

 

 

 —

 

 

 

 

 

 

 —

 

 

 —

 

 

(9)

 

 

(9)

 

Balance as of period ended:

 

 

86,563 

 

 

 —

 

 

1,405 

 

 

87,968 

 

 

86,563 

 

 

 —

 

 

1,401 

 

 

87,964 

 

Goodwill

 

 

111,434 

 

 

25,354 

 

 

24,291 

 

 

161,079 

 

 

111,434 

 

 

25,354 

 

 

24,287 

 

 

161,075 

 

Accumulated Impairment Losses

 

 

(24,871)

 

 

(25,354)

 

 

(22,886)

 

 

(73,111)

 

 

(24,871)

 

 

(25,354)

 

 

(22,886)

 

 

(73,111)

 

Balance as of period ended:

 

$

86,563 

 

$

 —

 

$

1,405 

 

$

87,968 

 

$

86,563 

 

$

 —

 

$

1,401 

 

$

87,964 

 

 

In accordance with ASC 350, the Company’s goodwill is not amortized but is tested for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. The Company performs its annual impairment review of its goodwill balance as of September 30 or more frequently if triggering events occur. During the three months ended March 31, 2015, there were no triggering events that required an impairment review.

 

The Company evaluates qualitative factors and overall financial performance to determine whether it is necessary to perform the first step of the multiple-step goodwill test. This step is referred to as “Step 0.” Step 0 involves, among other qualitative factors, weighing the relative impact of factors that are specific to the reporting unit as well as industry and macroeconomic factors. After assessing those various factors, if it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the entity will need to proceed to the first step of the goodwill impairment test. ASC 350 requires a multiple-step approach to testing goodwill for impairment for each reporting unit annually, or whenever events or changes in circumstances indicate the fair value of a reporting unit is below its carrying amount. The first step measures for impairment by applying the fair value-based tests at the reporting unit level. The second step (if necessary) measures the amount of impairment by applying the fair value-based tests to individual assets and liabilities within each reporting unit. The fair value of the reporting units is estimated using a

15


 

Table of Contents

combination of the market approach, which utilizes comparable companies’ data, and/or the income approach, which uses discounted cash flows.

 

Note 7 — Commitments and Contingencies

 

Leases

 

The Company leases office space under non-cancelable operating facility leases with various expiration dates through September 2020. Rent expense for the three months ended March 31, 2015 and 2014 was $1,002 and $901, respectively. The terms of the facility leases provide for rental payments on a graduated scale. The Company recognizes rent expense on a straight-line basis over the lease period, and has accrued for rent expense incurred but not paid. The deferred rent balance was $945 and $1,001 at March 31, 2015 and December 31, 2014, respectively, and was included within other long-term liabilities.

 

The Company has provided deposits for lines of credit totaling $1,990 to secure its obligations under the leases, which have been classified as restricted cash on the Company’s unaudited condensed consolidated balance sheet as of March 31, 2015.

 

At March 31, 2015, future minimum lease payments under non-cancelable operating leases were as follows:

 

 

 

 

 

 

 

 

    

Minimum

 

 

 

Operating

 

 

 

Lease

 

Period Ending December 31,

   

Payments

 

2015 (remaining nine months)

 

$

3,237 

 

2016

 

 

3,543 

 

2017

 

 

2,651 

 

2018

 

 

1,327 

 

2019

 

 

979 

 

2020 and thereafter

 

 

754 

 

 

 

$

12,491 

 

 

Minimum Guaranteed Royalties and Developer Commitments

 

The Company has entered into license and publishing agreements with various celebrities, Hollywood studios and other owners of brands, properties and intellectual property to develop and publish games for mobile devices.  Pursuant to some of these agreements, the Company is required to make minimum guaranteed royalty payments regardless of actual game sales.  These minimum guaranteed royalty payments are generally recoupable against future royalty obligations that would otherwise become payable, are capitalized and amortized over the lesser of (1) the estimated life of the title incorporating licensed content or (2) the term of the license agreement.

 

At March 31, 2015, future minimum guaranteed royalty commitments were as follows:

 

 

 

 

 

 

    

Future

 

 

Minimum

 

 

Guarantee

Period Ending December 31,

   

Commitments

2015 (remaining nine months)

 

$

5,352 

2016

 

 

2,020 

2017

 

 

100 

 

 

$

7,472 

 

The Company also from time to time contracts with various external software developers (“third-party developers”) to design and develop its games.  The Company advances funds to these third-party developers, in installments, payable upon the completion of specified development milestones.  Future developer commitments as of March 31, 2015 were $530, which are due over the next twelve months.  These developer commitments reflect the

16


 

Table of Contents

Company’s minimum cash obligations but do not necessarily represent the periods in which they will be expensed.  The Company expenses developer commitments as services are provided.

 

Income Taxes

 

As of March 31, 2015, unrecognized tax benefits and potential interest and penalties are classified within “other long-term liabilities” and “accounts payable” on the Company’s unaudited condensed consolidated balance sheets.  As of March 31, 2015, the settlement of $995 of the Company’s income tax liabilities could not be determined; however, the liabilities are not expected to become due within the next 12 months.

 

Indemnification Agreements

 

The Company has entered into agreements under which it indemnifies each of its officers and directors during his or her lifetime for certain events or occurrences while the officer or director is or was serving at the Company’s request in that capacity.  The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a director and officer insurance policy that limits its exposure and enables the Company to recover a portion of any future amounts paid.  As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal.  Accordingly, the Company had recorded no liabilities for these agreements as of March 31, 2015 or December 31, 2014.

 

In the ordinary course of its business, the Company includes standard indemnification provisions in most of its commercial agreements with Digital Storefronts and licensors.  Pursuant to these provisions, the Company generally indemnifies these parties for losses suffered or incurred in connection with its games, including as a result of intellectual property infringement, viruses, worms and other malicious software, and legal or regulatory violations.  The term of these indemnity provisions is generally perpetual after execution of the corresponding license agreement, and the maximum potential amount of future payments the Company could be required to make under these provisions is often unlimited.  To date, the Company has not incurred costs to defend lawsuits or settle indemnified claims of these types.  As a result, the Company believes the estimated fair value of these indemnity provisions is minimal.  Accordingly, the Company had recorded no liabilities for these provisions as of March 31, 2015 or December 31, 2014.

 

Contingencies

 

From time to time, the Company is subject to various claims, complaints and legal actions in the normal course of business.  The Company assesses its potential liability by analyzing specific litigation and regulatory matters using available information.  The Company’s estimate of losses is developed in consultation with inside and outside counsel, which involves a subjective analysis of potential results and outcomes, assuming various combinations of appropriate litigation and settlement strategies.  After taking all of the above factors into account, the Company determines whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed reasonably probable and the amount can be reasonably estimated.  The Company further determines whether an estimated loss from a contingency should be disclosed by assessing whether a material loss is deemed reasonably possible.  Such disclosure will include an estimate of the additional loss or range of loss or will state that an estimate cannot be made.

 

On August 19, 2014, Inventor Holdings, LLC (“IHL”), a Delaware limited liability company, filed a complaint in the U.S. District Court for the District of Delaware alleging that the Company is infringing one of its patents and seeking unspecified damages, including interest, costs, expenses and an accounting of all infringing acts, attorneys’ fees and such other costs as the Court deems just and proper.  On October 10, 2014, the Company filed a motion to dismiss the complaint with prejudice on the ground that the patent asserted by IHL claims patent-ineligible subject matter pursuant to 35 U.S.C. § 101 and thus the complaint fails to state a claim upon which relief can be granted.  On October 27, 2014, IHL filed an opposition to the Company’s motion to dismiss the complaint with prejudice.  The Company filed its reply to IHL’s opposition on November 6, 2014.   The motion remains pending.  In the meanwhile, the Court has entered a scheduling order for the case.  Trial, if necessary, is currently set to begin December 5, 2016.  However, the parties have stipulated to a stay of the action until the motion to dismiss is decided, and the Court has accordingly entered an order staying the case.  

17


 

Table of Contents

On November 5, 2014, the Company filed a complaint against Hothead Games, Inc. (“Hothead”) in the United States District Court for the Northern District of California.  In the complaint, the Company alleges that Hothead has willfully infringed, and continues to willfully infringe, certain of its copyrights and trade dress contained in its Deer Hunter 2014 game through Hothead’s release of its game, Kill Shot.  The Company’s complaint requests that the Court grant the following relief: (1) preliminary and/or permanent injunction restraining Hothead and its affiliates from directly or indirectly violating its rights under the Copyright Act and the Lanham Act; (2) an order directing that Hothead file with the Court and serve upon the Company’s counsel within 30 days after entry of such order or judgment a report in writing and under oath setting forth in detail the manner and form in which Hothead has complied with the injunction; (3) an award to the Company of damages it has sustained or will sustain by reason of Hothead’s conduct, all profits derived by Hothead from such conduct, or in lieu of any portion thereof, should it so elect, such statutory damages as provided by law; (4) its costs and reasonable attorneys’ fees; (5) prejudgment and post-judgment interest; and (6) all such further and additional relief, in law or in equity, to which it may be entitled or which the Court deems just and proper.  Following a case management conference on February 6, 2015, the Court set all pre-trial and trial dates, with a jury trial set to commence on May 31, 2016.

In November 2014, Telinit Technologies, LLC, a Texas company, filed a complaint in the U.S. District Court for the Eastern District of Texas, Marshall Division, alleging that the Company was infringing one of its patents and seeking unspecified damages, attorneys’ fees and costs.  The Company settled this dispute in January 2015 for an immaterial amount.

The Company does not believe it is party to any currently pending litigation, the outcome of which is reasonably likely to have a material adverse effect on its operations, financial position or liquidity.  However, the ultimate outcome of any litigation is uncertain and, regardless of outcome, litigation can have an adverse impact on the Company because of defense costs, potential negative publicity, diversion of management resources and other factors.

 

 

Note 8 — Stockholders’ Equity

 

Acquisition

 

On August 20, 2014, as part of the consideration for its acquisition of Cie Games, the Company issued an aggregate of 9,983 shares of its common stock to Cie Games’ former shareholders, of which approximately 2,139 shares will be held back by Glu for 18 months to satisfy potential indemnification claims under the Cie Games merger agreement.

 

On May 14, 2014, as consideration for its acquisition of PlayFirst, the Company issued an aggregate of 2,849 shares of its common stock to PlayFirst’s former shareholders, which is net of shares withheld to cover a net working capital adjustment, stockholders’ agent expenses and tax obligations of former PlayFirst shareholders.  Of the 2,849 shares issued in the acquisition, 1,500 are being held in escrow and will be retained by the Company for 24 months to satisfy potential indemnification claims under the PlayFirst merger agreement.  During the third quarter of 2014, approximately 24 shares that were being held back pursuant to the PlayFirst merger agreement were cancelled to satisfy a net working capital adjustment.  

 

Shares Issued in Connection with the Blammo Earnout

 

On August 1, 2011, the Company completed the acquisition of Blammo Games Inc. (“Blammo”), by entering into a Share Purchase Agreement (the “Share Purchase Agreement”) by and among the Company, Blammo and each of the owners of the outstanding share capital of Blammo (“the Sellers”). Pursuant to the terms of the Share Purchase Agreement, the Company agreed to issue to the Sellers, in the aggregate, 1,000 shares of the Company’s common stock plus up to an additional 3,313 shares of the Company’s common stock (the “Additional Shares”) if Blammo achieved specified Net Revenue (as such term is defined in the Share Purchase Agreement) targets during the fiscal years ending March 31, 2013, March 31, 2014 and March 31, 2015.

 

18


 

Table of Contents

As of June 30, 2014, the vesting conditions for the last two tranches of earnout shares for the fiscal years ended March 31, 2014 and 2015 were attained, and the Company issued 435 and 750 shares in May 2014 and July 2014, respectively, to the former Blammo shareholders. Since the contingency related to the number of shares to be earned in connection with the target for the fiscal year ended March 31, 2015 was resolved as of June 30, 2014, and the number of shares became fixed, the fair value of these shares has been presented in additional paid-in capital on the Company’s unaudited condensed consolidated balance sheet since June 30, 2014.

 

Three of the five Sellers were also employees of Blammo. The fair value of the contingent consideration issued to the three Sellers who were also employees of Blammo was not considered part of the purchase price, since vesting was contingent upon these employees’ continued service during the earn-out periods. In accordance with ASC 805, Business Combinations, non-employee contingent consideration issued to the two Sellers who were not employees of Blammo was recorded as part of the purchase accounting and was fair valued at each subsequent reporting period. During the three months ended March 31, 2015, the Company recorded no fair value adjustments for the non-employee contingent consideration, as the contingency related to the number of shares earned was resolved during second quarter of 2014. During the three months ended March 31, 2014, the Company recorded a fair value expense adjustment of $304. In accordance with ASC 805, changes in the fair value of non-employee contingent consideration were recognized in general and administrative expense in the Company’s unaudited condensed consolidated statements of operations.

 

The Company used a risk-neutral framework to estimate the probability of achieving the revenue targets set forth above for the above periods. The fair value of the contingent consideration was determined using a digital option, which captures the present value of the expected payment multiplied by the probability of reaching the revenue targets for each year. Key assumptions for the three months ended March 31, 2014 included a discount rate of 35.0%, volatility of 42.0%, a risk-free interest rate of 0.13% and probability-adjusted revenue levels. 

 

Public Offerings

 

In June 2014, the Company sold in an underwritten public offering an aggregate of 9,861 shares of its common stock at a public offering price of $3.50 per share for net cash proceeds of approximately $32,058 after underwriting discounts and other offering expenses.

 

Warrants to Purchase Common Stock

 

In September 2014, the Company and Kimsaprincess, Inc. (“KAP”), entered into a second amendment to their existing License Agreement (the “KAP License Agreement”). In connection with entry into the second amendment of the KAP License Agreement, the Company issued to KAP and two other entities associated with KAP’s president, Kim Kardashian West, a total of three warrants exercisable for up to an aggregate of 500 shares of the Company’s common stock (collectively, the “Kardashian Warrants”). Each of the Kardashian Warrants has an initial exercise price of $4.99 per share, subject to adjustments for dividends, reorganizations and other common stock events. Each of the Kardashian Warrants expires on September 2, 2020. Each of the Kardashian Warrants vests and becomes exercisable in equal monthly installments over the 60-month term of the KAP License Agreement, subject to full acceleration or cessation of vesting under specified circumstances, as stipulated in the amended KAP License Agreement. Each of the Kardashian Warrants may, at the election of the holder, be either exercised for cash or net exercised on a cashless basis. During the first quarter of 2015, 25 of the warrants vested and the Company recorded a corresponding warrant compensation charge of $93 classified to cost of sales. Key assumptions used in the Black Scholes valuation model for the three months ended March 31, 2015 included an expected term of 6.0 years volatility of 61.1%, risk-free interest rate of 1.99% and a dividend yield of 0%.

 

In July 2013, the Company and MGM Interactive Inc. (“MGM”) entered into a warrant agreement that gives MGM the right to purchase up to 3,333 shares of the Company’s common stock at an exercise price of $3.00 per share (the “MGM Warrant”), subject to adjustments for dividends, reorganizations and other common stock events. Of the 3,333 shares of the Company’s common stock underlying the MGM Warrant, 333 shares were immediately vested and exercisable on the warrant agreement effective date and the remaining shares will vest and become exercisable based on conditions related to the Company releasing mobile games based on mutually agreed upon intellectual property licensed by MGM to the Company. The MGM Warrant expires on July 15, 2018.

 

19


 

Table of Contents

In April 2014, the Company entered into a license agreement with MGM, United Artists Corporation and Danjaq, LLC pursuant to which the Company will develop and publish a free-to-play mobile game based on the James Bond film franchise. The commercial release by the Company of this mobile game, which is expected to occur in second half of 2015, will trigger the vesting of an additional 1,000 shares subject to the MGM Warrant.

 

During the three months ended March 31, 2015 and 2014, respectively, investors exercised warrants to purchase 7 and 522 shares of the Company’s common stock, respectively, and the Company received gross proceeds of $10 and $783, respectively, in connection with these exercises. These exercised warrants related to warrants issued by the Company in August 2010 in connection with a private placement transaction.

 

Warrants outstanding as of March 31, 2015 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

 

    

Number

 

 

 

 

 

Exercise

 

of Shares

 

 

 

 

 

Price

 

Outstanding

 

 

 

Term

 

per

 

Under

 

Date of Issuance

   

(Years)

   

Share 

   

Warrant

   

August 2010 - Warrants issued in private offering

 

 

$

1.50 

 

444 

 

July 2013 - Warrant issued to MGM

 

 

 

3.00 

 

2,667 

 

September 2014 - Warrant issued to KAP

 

 

 

4.99 

 

500 

 

 

 

 

 

 

 

 

3,611 

 

 

 

Note 9 — Stock Option and Other Benefit Plans

 

2007 Equity Incentive Plan

 

In 2007, the Company’s Board of Directors adopted, and the Company’s stockholders approved, the 2007 Equity Incentive Plan (the “2007 Plan”). The 2007 Plan permits the Company to grant stock options, RSUs, and other stock-based awards to employees, non-employee directors and consultants. In April 2013, the Company’s Board of Directors approved, and in June 2013, the Company’s stockholders approved, the amended and restated 2007 Equity Incentive Plan (the “Amended 2007 Plan”). The Amended 2007 Plan includes an increase of 7,200 shares in the aggregate number of shares of common stock authorized for issuance under the plan. It also includes a fungible share provision, pursuant to w