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 September 30, 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 November 1, 2015: 131,259,611.

 

 

 


 

Table of Contents

GLU MOBILE INC.

 

FORM 10-Q

 

Quarterly Period Ended September 30, 2015

 

TABLE OF CONTENTS

 

 

 

 

Page

PART I. FINANCIAL INFORMATION 

 

 

 

ITEM 1. FINANCIAL STATEMENTS (Unaudited) 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014 

 

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2015 and September 30, 2014 

 

 

Condensed Consolidated Statements of Comprehensive Income/(Loss) for the Three and Nine Months Ended September 30, 2015 and September 30, 2014 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and September 30, 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 

40 

 

 

ITEM 4. CONTROLS AND PROCEDURES 

42 

 

 

PART II. OTHER INFORMATION 

 

 

 

ITEM 1. LEGAL PROCEEDINGS 

43 

 

 

ITEM 1A. RISK FACTORS 

43 

 

 

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

67 

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES 

67 

 

 

ITEM 4. MINE SAFETY DISCLOSURES 

67 

 

 

ITEM 5. OTHER INFORMATION 

67 

 

 

ITEM 6. EXHIBITS 

67 

 

 

SIGNATURES 

68 

 

 

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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)

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

   

2015

   

2014

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

182,349

 

$

70,912

 

Accounts receivable, net

 

 

25,986

 

 

32,231

 

Prepaid royalties

 

 

17,730

 

 

864

 

Prepaid expenses and other assets

 

 

17,704

 

 

17,388

 

Total current assets

 

 

243,769

 

 

121,395

 

Property and equipment, net

 

 

5,536

 

 

6,116

 

Restricted cash

 

 

1,498

 

 

1,990

 

Long-term prepaid royalties

 

 

43,299

 

 

5,870

 

Other long-term assets

 

 

1,319

 

 

804

 

Intangible assets, net

 

 

20,103

 

 

27,524

 

Goodwill

 

 

87,915

 

 

87,964

 

Total assets

 

$

403,439

 

$

251,663

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

10,561

 

$

11,685

 

Accrued liabilities

 

 

1,858

 

 

3,812

 

Accrued compensation

 

 

5,520

 

 

10,751

 

Accrued royalties

 

 

15,841

 

 

12,440

 

Deferred revenue

 

 

34,147

 

 

37,333

 

Total current liabilities

 

 

67,927

 

 

76,021

 

Other long-term liabilities

 

 

28,912

 

 

3,936

 

Total liabilities

 

 

96,839

 

 

79,957

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value; 5,000 shares authorized at September 30, 2015 and December 31, 2014; no shares issued and outstanding at September 30, 2015 and December 31, 2014

 

 

 —

 

 

 —

 

Common stock, $0.0001 par value; 250,000 shares authorized at September 30, 2015 and December 31, 2014; 131,260 and 107,174 shares issued and outstanding at September 30, 2015 and December 31, 2014

 

 

13

 

 

11

 

Additional paid-in capital

 

 

554,876

 

 

415,766

 

Accumulated other comprehensive income/(loss)

 

 

1

 

 

(8)

 

Accumulated deficit

 

 

(248,290)

 

 

(244,063)

 

Total stockholders’ equity

 

 

306,600

 

 

171,706

 

Total liabilities and stockholders’ equity

 

$

403,439

 

$

251,663

 

 

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

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GLU MOBILE INC. 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

 

2015

   

2014

   

2015

   

2014

 

Revenue

 

$

63,250

 

$

64,791

   

$

188,870

 

$

150,281

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Platform commissions, royalties and other

 

 

27,445

 

 

25,733

 

 

75,075

 

 

51,367

 

Amortization of intangible assets

 

 

2,360

 

 

1,338

 

 

7,228

 

 

2,333

 

Total cost of revenue

 

 

29,805

 

 

27,071

 

 

82,303

 

 

53,700

 

Gross profit

 

 

33,445

 

 

37,720

 

 

106,567

 

 

96,581

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

16,304

 

 

15,355

 

 

52,855

 

 

48,231

 

Sales and marketing

 

 

12,302

 

 

15,327

 

 

37,511

 

 

32,801

 

General and administrative

 

 

4,419

 

 

6,808

 

 

19,254

 

 

17,865

 

Amortization of intangible assets

 

 

31

 

 

127

 

 

190

 

 

381

 

Restructuring charge

 

 

 —

 

 

209

 

 

 —

 

 

368

 

Total operating expenses

 

 

33,056

 

 

37,826

 

 

109,810

 

 

99,646

 

Income/(loss) from operations

 

 

389

 

 

(106)

 

 

(3,243)

 

 

(3,065)

 

Interest income and other expense, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

15

 

 

7

 

 

34

 

 

20

 

Other expense

 

 

(167)

 

 

(347)

 

 

(644)

 

 

(514)

 

Interest income and other expense, net

 

 

(152)

 

 

(340)

 

 

(610)

 

 

(494)

 

Income/(loss) before income taxes

 

 

237

 

 

(446)

 

 

(3,853)

 

 

(3,559)

 

Income tax benefit/(provision)

 

 

(79)

 

 

10,850

 

 

(374)

 

 

10,328

 

Net income/(loss)

 

$

158

 

$

10,404

 

$

(4,227)

 

$

6,769

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income/(loss) per common share - basic and diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 Basic

 

$

0.00

 

$

0.11

 

$

(0.04)

 

$

0.08

 

 Diluted

 

$

0.00

 

$

0.10

 

$

(0.04)

 

$

0.07

 

Weighted average common shares outstanding - basic and diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 Basic

 

 

127,287

 

 

98,628

 

 

115,775

 

 

87,965

 

 Diluted

 

 

131,486

 

 

105,438

 

 

115,775

 

 

93,578

 

 

 

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

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GLU MOBILE INC. 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

 

2015

   

2014

   

2015

   

2014

 

Net income/(loss)

 

$

158

 

$

10,404

 

$

(4,227)

 

$

6,769

 

Other comprehensive income/(loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

10

 

 

(284)

 

 

(9)

 

 

(78)

 

Other comprehensive income/(loss):

 

 

10

 

 

(284)

 

 

(9)

 

 

(78)

 

Comprehensive  income/(loss)

 

$

168

 

$

10,120

 

$

(4,236)

 

$

6,691

 

 

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

 

 

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GLU MOBILE INC. 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

   

2015

   

2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income/(loss)

 

$

(4,227)

 

$

6,769

 

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

 

 

 

 

 

 

 

Depreciation

 

 

2,156

 

 

1,844

 

Amortization of intangible assets

 

 

7,418

 

 

2,714

 

Stock-based compensation

 

 

8,217

 

 

9,499

 

Non-cash warrant expense

 

 

2,124

 

 

1,126

 

Change in fair value of Blammo earnout

 

 

 —

 

 

835

 

Non-cash foreign currency remeasurement loss

 

 

643

 

 

514

 

Impairment of prepaid royalties and guarantees

 

 

1,644

 

 

220

 

Changes in allowance for doubtful accounts

 

 

418

 

 

(318)

 

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

 

 

 

 

 

 

 

Accounts receivable

 

 

5,471

 

 

(10,777)

 

Prepaid royalties

 

 

(25,388)

 

 

(5,148)

 

Prepaid expenses and other assets

 

 

(636)

 

 

(8,709)

 

Accounts payable

 

 

(1,200)

 

 

(6,778)

 

Accrued liabilities

 

 

(58)

 

 

23

 

Accrued compensation

 

 

(5,222)

 

 

2,724

 

Accrued royalties

 

 

(1,895)

 

 

9,503

 

Deferred revenue

 

 

(3,177)

 

 

15,656

 

Other long-term liabilities

 

 

(392)

 

 

(8,454)

 

Net cash (used in)/provided by operating activities

 

 

(14,104)

 

 

11,243

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(1,538)

 

 

(1,917)

 

Net cash paid for acquisitions

 

 

(1,916)

 

 

(22,156)

 

Restricted cash

 

 

492

 

 

(60)

 

Other investing activities

 

 

(250)

 

 

(250)

 

Net cash used in investing activities

 

 

(3,212)

 

 

(24,383)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

PlayFirst payments on acquired line of credit and term loan

 

 

 —

 

 

(2,340)

 

Proceeds from public offering, net of issuance costs

 

 

 —

 

 

32,058

 

Taxes paid related to net share settlement of equity awards

 

 

(2,403)

 

 

(439)

 

Excess tax benefit from stock awards

 

 

178

 

 

 —

 

Proceeds from private offering, net of issuance costs

 

 

125,156

 

 

 —

 

Proceeds from exercise of stock warrants and issuance of common stock

 

 

675

 

 

2,786

 

Proceeds from exercise of stock options and ESPP

 

 

5,360

 

 

7,157

 

Net cash provided by financing activities

 

 

128,966

 

 

39,222

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

(213)

 

 

(310)

 

Net increase in cash and cash equivalents

 

 

111,437

 

 

25,772

 

Cash and cash equivalents at beginning of period

 

 

70,912

 

 

28,496

 

Cash and cash equivalents at end of period

 

$

182,349

 

$

54,268

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

Common stock issued for acquisition of PlayFirst

 

$

 —

 

$

61,954

 

Common stock issued as contingent consideration earned

 

$

 —

 

$

3,750

 

 

 

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

 

 

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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, games based on celebrities and other well-known brands and properties.

 

The Company has generally incurred losses from operations since inception and had an accumulated deficit of $248,290 as of September 30, 2015. For the three months ended September 30, 2015, the Company generated net income of $158. For the nine months ended September 30, 2015, the Company incurred a net loss of $4,227. The Company may continue to incur additional losses and negative cash flows in the future.  Failure to generate sufficient revenue 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 September 30, 2015 and its unaudited condensed consolidated results of operations for the three and nine months ended September 30, 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 and the unaudited condensed consolidated balance sheet presented as of September 30, 2015 has been derived from the unaudited condensed 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 revenue 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.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

September 30, 

 

September 30, 

 

 

 

    

2015

   

2014

 

2015

   

2014

 

 

Apple

 

51.7

%  

55.2

%  

52.7

%  

50.6

%  

 

Google

 

26.7

 

23.2

 

26.7

 

24.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At September 30, 2015, Apple Inc. (“Apple”) accounted for 54.0%, Google Inc. (“Google”) accounted for 15.4%, and Jirbo Inc. (dba AdColony) (“AdColony”) accounted for 14.8% 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 permitted. The updated standard will be effective for the Company beginning January 1, 2018. 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/(Loss) Per Share

 

The Company computes basic net income/(loss) per share by dividing its net income or loss 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/(loss) per share reflects the potential dilution that could occur from common shares issuable through stock-based compensation plans (including stock options, restricted

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stock units (“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

 

 

Nine Months Ended

 

 

 

September 30, 

 

 

September 30, 

 

 

 

2015

   

2014

 

 

2015

   

2014

 

Net income/(loss)

 

$

158

 

$

10,404

 

 

$

(4,227)

 

$

6,769

 

Basic and diluted shares used to compute net income/(loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Weighted average common shares outstanding

 

 

130,926

 

 

101,104

 

 

 

119,414

 

 

89,085

 

   Weighted average common shares subject to restrictions

 

 

(3,639)

 

 

(2,476)

 

 

 

(3,639)

 

 

(1,120)

 

   Weighted average shares used to compute basic net income/(loss) per share

 

 

127,287

 

 

98,628

 

 

 

115,775

 

 

87,965

 

Dilutive potential common shares

 

 

4,199

 

 

6,810

 

 

 

 —

 

 

5,613

 

Weighted average shares used to compute diluted net income/(loss) per share

 

 

131,486

 

 

105,438

 

 

 

115,775

 

 

93,578

 

Basic net income/(loss) per share

 

$

0.00

 

$

0.11

 

 

$

(0.04)

 

$

0.08

 

Diluted net income/(loss) per share

 

$

0.00

 

$

0.10

 

 

$

(0.04)

 

$

0.07

 

 

The following weighted average options to purchase common stock, warrants to purchase common stock, shares of common stock subject to restrictions, shares contingently issuable in connection with the Blammo earnout (as described in Note 8 – Stockholders’ Equity), and RSUs have been excluded from the computation of net income/(loss) per share of common stock for the periods presented because including them would have had an anti-dilutive effect:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

 

2015

    

2014

 

2015

    

2014

 

Warrants to purchase common stock

 

 

2,606

 

 

1,728

 

 

3,687

 

 

2,273

 

Unvested common shares subject to restrictions

 

 

3,267

 

 

1,939

 

 

3,639

 

 

935

 

Options to purchase common stock

 

 

5,029

 

 

5,164

 

 

6,766

 

 

6,345

 

RSUs

 

 

4,738

 

 

2,552

 

 

5,375

 

 

2,421

 

 

 

 

15,640

 

 

11,383

 

 

19,467

 

 

11,974

 

 

 

 

 

 

 

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 September 30, 2015 and December 31, 2014, the Company had $182,349 and $70,912, respectively, in cash and cash equivalents.  In addition, the Company’s restricted cash is classified 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.

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Note 4 — Balance Sheet Components

 

Accounts Receivable

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

   

2015

   

2014

 

Accounts receivable

 

$

26,701

 

$

32,528

 

Less: Allowance for doubtful accounts

 

 

(715)

 

 

(297)

 

 

 

$

25,986

 

$

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 significant bad debts during the three and nine months ended September 30, 2015 and 2014.

 

Prepaid expenses and other

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 

    

December 31, 

 

 

   

2015

   

2014

 

Deferred platform commission fees

 

 

8,755

 

 

9,776

 

Deferred royalties

 

 

3,084

 

 

3,739

 

Deferred tax asset

 

 

921

 

 

921

 

Taxes receivable                    

 

 

778

 

 

1,218

 

Other

 

 

4,166

 

 

1,734

 

 

 

$

17,704

 

$

17,388

 

 

Property and Equipment

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

   

2015

   

2014

 

Computer equipment

 

$

7,738

 

$

6,721

 

Furniture and fixtures

 

 

1,076

 

 

949

 

Software

 

 

8,728

 

 

8,504

 

Leasehold improvements

 

 

3,633

 

 

3,381

 

 

 

 

21,175

 

 

19,555

 

Less: Accumulated depreciation and amortization

 

 

(15,639)

 

 

(13,439)

 

 

 

$

5,536

 

$

6,116

 

 

Depreciation expense for the three months ended September 30, 2015 and 2014 was $718 and $617, respectively. Depreciation expense for the nine months ended September 30, 2015 and September 30, 2014 was $2,156 and $1,844, respectively.

 

Other Long-Term Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 

    

December 31, 

 

 

    

2015

   

2014

 

Deferred rent

 

$

930

 

$

1,001

 

Uncertain tax position obligations

 

 

610

 

 

977

 

Accrued royalties

 

 

26,116

 

 

870

 

Deferred tax liability

 

 

813

 

 

842

 

Other

 

 

443

 

 

246

 

 

 

$

28,912

 

$

3,936

 

 

 

 

 

 

 

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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, of which $1,916 was paid during the nine months ended September 30, 2015, 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. All outstanding Cie Games capital stock and stock options were cancelled at the closing of the acquisition.

 

The allocation of the purchase price is based on valuations derived from estimated fair value assessments and assumptions used by the Company. While the Company believes that its 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 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

 

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, Business Combinations (“ASC 805”), for the three and nine months ended September 30, 2015, the Company incurred no significant acquisition and transitional costs associated with the acquisition of Cie Games.

 

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”), a developer of casual games for smartphones and other mobile devices based in San Francisco, California. The Company acquired PlayFirst to

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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 based on valuations derived from estimated fair value assessments and assumptions used by the Company. While the Company believes that its 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 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 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

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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.

 

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

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

   

2014

   

   

2014

   

 

Total pro forma revenue

 

$

72,784

 

 

$

171,106

 

 

Pro forma net income

 

 

9,014

 

 

 

1,421

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma net income per share — basic

 

$

0.09

 

 

$

0.02

 

 

Pro forma net income per share — diluted

 

 

0.08

 

 

 

0.01

 

 

 

 

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

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assets, including the impact of foreign currency exchange translation, at September 30, 2015 and December 31, 2014 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 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 revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Titles, content and technology

 

2 yrs

 

$

34,817

 

$

(21,140)

 

$

13,677

 

$

34,895

 

$

(15,314)

 

$

19,581

 

Catalogs

 

1 yr

 

 

1,180

 

 

(1,180)

 

 

 —

 

 

1,208

 

 

(1,208)

 

 

 —

 

ProvisionX Technology

 

6 yrs

 

 

194

 

 

(194)

 

 

 —

 

 

199

 

 

(199)

 

 

 —

 

Carrier contract and related relationships

 

5 yrs

 

 

24,411

 

 

(20,558)

 

 

3,853

 

 

24,794

 

 

(20,192)

 

 

4,602

 

Licensed content

 

5 yrs

 

 

2,917

 

 

(2,917)

 

 

 —

 

 

3,012

 

 

(3,012)

 

 

 —

 

Service provider license

 

9 yrs

 

 

462

 

 

(400)

 

 

62

 

 

479

 

 

(375)

 

 

104

 

Trademarks

 

7 yrs

 

 

5,221

 

 

(2,721)

 

 

2,500

 

 

5,226

 

 

(2,190)

 

 

3,036

 

 

 

 

 

 

69,202

 

 

(49,110)

 

 

20,092

 

 

69,813

 

 

(42,490)

 

 

27,323

 

Other intangible assets amortized to operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Emux Technology

 

6 yrs

 

 

1,258

 

 

(1,258)

 

 

 —

 

 

1,289

 

 

(1,289)

 

 

 —

 

Non-compete agreements

 

4 yrs

 

 

5,403

 

 

(5,392)

 

 

11

 

 

5,417

 

 

(5,216)

 

 

201

 

 

 

 

 

 

6,661

 

 

(6,650)

 

 

11

 

 

6,706

 

 

(6,505)

 

 

201

 

Total intangibles assets

 

 

 

$

75,863

 

$

(55,760)

 

$

20,103

 

$

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 revenue and amortization of acquired intangible assets not directly attributable to revenue-generating activities in operating expenses.

 

During the three months ended September 30, 2015 and 2014, the Company recorded amortization expense in the amounts of $2,360 and $1,338, respectively, in cost of revenue. During the nine months ended September 30, 2015 and 2014, the Company recorded amortization expense in the amounts of $7,228 and $2,333, respectively, in cost of revenue. During the three months ended September 30, 2015 and 2014, the Company recorded amortization expense in the amounts of $31 and $127, respectively, in operating expenses. During the nine months ended September 30, 2015 and 2014, the Company recorded amortization expense in the amounts of $190 and $381, respectively, in operating expenses.

 

As of September 30, 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,

   

Revenue

   

Expenses

   

Expense

 

2015 (remaining three months)

 

$

2,325

 

$

11

 

$

2,336

 

2016

 

 

9,197

 

 

 —

 

 

9,197

 

2017

 

 

6,076

 

 

 —

 

 

6,076

 

2018

 

 

1,714

 

 

 —

 

 

1,714

 

2019 and thereafter

 

 

780

 

 

 —

 

 

780

 

 

 

$

20,092

 

$

11

 

$

20,103

 

 

Goodwill

 

The Company had goodwill attributable to its MIG, GameSpy, Blammo, Griptonite, PlayFirst, and Cie Games acquisitions as of September 30, 2015. The Company formerly had 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,

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PlayFirst, and Cie Games acquisitions had 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. In September 2015, the Company reorganized its reporting units and now has one reportable unit “Mobile Games.”  This change in reporting units is due to the fact that the Company’s Chief Executive Officer, who is also chief operating decision maker, makes decisions and manages operations as one reporting unit, rather than as three separate regional territories. Changes in reporting units require that goodwill be tested for impairment both prior to and following the changes. The Company performed a “Step 0” analysis as defined below, which resulted in no impairment.  

 

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 for the periods indicated was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

December 31, 2014

 

 

   

Total

   

Total

 

Balance as of January 1

 

 

 

 

 

 

 

Goodwill

 

$

 

$

92,596

 

Accumulated Impairment Losses

 

 

(73,111)

 

 

(73,111)

 

 

 

 

87,964