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, 2016

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, 2016: 132,309,543.

 

 

 


 

Table of Contents

GLU MOBILE INC.

 

FORM 10-Q

 

Quarterly Period Ended March 31, 2016

 

TABLE OF CONTENTS

 

 

 

 

Page

PART I. FINANCIAL INFORMATION 

 

 

 

ITEM 1. FINANCIAL STATEMENTS (Unaudited) 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2016 and Three Months Ended March 31, 2015 

 

 

Condensed Consolidated Statements of Comprehensive Income/(Loss) for the Three Months Ended March 31, 2016 and Three Months Ended March 31, 2015.

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and Three Months ended March 31, 2015.

 

 

Notes to Condensed Consolidated Financial Statements 

 

 

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

24 

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 

35 

 

 

ITEM 4. CONTROLS AND PROCEDURES 

37 

 

 

PART II. OTHER INFORMATION 

 

 

 

ITEM 1. LEGAL PROCEEDINGS 

38 

 

 

ITEM 1A. RISK FACTORS 

38 

 

 

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

63 

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES 

63 

 

 

ITEM 4. MINE SAFETY DISCLOSURES 

63 

 

 

ITEM 5. OTHER INFORMATION 

63 

 

 

ITEM 6. EXHIBITS 

63 

 

 

SIGNATURES 

64 

 

 

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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)

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 

 

December 31, 

 

 

   

2016

   

2015

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

159,283

 

$

180,542

 

Accounts receivable, net

 

 

16,745

 

 

17,956

 

Prepaid royalties (including prepaid royalties to a related party of $5,118 and $7,949 as of March 31, 2016 and December 31, 2015, respectively)

 

 

30,412

 

 

23,715

 

Prepaid expenses and other assets

 

 

15,205

 

 

14,841

 

Total current assets

 

 

221,645

 

 

237,054

 

Property and equipment, net

 

 

5,282

 

 

5,447

 

Restricted cash

 

 

1,498

 

 

1,498

 

Long-term prepaid royalties (including long-term prepaid royalties to a related party of $4,882 and $2,051 as of March 31, 2016 and December 31, 2015, respectively)

 

 

46,017

 

 

46,944

 

Other long-term assets

 

 

9,317

 

 

1,386

 

Intangible assets, net (including intangible assets acquired from a related party of $5,000 and $5,000 as of March 31, 2016 and December 31, 2015, respectively)

 

 

20,442

 

 

22,767

 

Goodwill

 

 

87,899

 

 

87,890

 

Total assets

 

$

392,100

 

$

402,986

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

9,055

 

$

9,386

 

Accrued liabilities

 

 

1,752

 

 

1,996

 

Accrued compensation

 

 

4,504

 

 

7,100

 

Accrued royalties (including accrued royalties to a related party of $5,118 and $10,449 as of March 31, 2016 and December 31, 2015, respectively)

 

 

14,140

 

 

21,032

 

Deferred revenue

 

 

30,750

 

 

31,112

 

Total current liabilities

 

 

60,201

 

 

70,626

 

Long-term accrued royalties (including long-term accrued royalties to a related party of $4,882 and $2,051 as of March 31, 2016 and December 31, 2015, respectively)

 

 

28,193

 

 

24,347

 

Other long-term liabilities

 

 

1,397

 

 

1,585

 

Total liabilities

 

 

89,791

 

 

96,558

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value; 5,000 shares authorized at March 31, 2016 and December 31, 2015; no shares issued and outstanding at March 31, 2016 and December 31, 2015

 

 

 —

 

 

 —

 

Common stock, $0.0001 par value; 250,000 shares authorized at March 31, 2016 and December 31, 2015; 132,229 and 131,580 shares issued and outstanding at March 31, 2016 and December 31, 2015

 

 

13

 

 

13

 

Additional paid-in capital

 

 

562,373

 

 

557,748

 

Accumulated other comprehensive loss

 

 

(279)

 

 

(85)

 

Accumulated deficit

 

 

(259,798)

 

 

(251,248)

 

Total stockholders’ equity

 

 

302,309

 

 

306,428

 

Total liabilities and stockholders’ equity

 

$

392,100

 

$

402,986

 

 

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

 

 

 

March 31, 

 

 

   

2016

   

2015

   

Revenue

   

$

54,528

 

$

69,470

   

Cost of revenue:

 

 

 

 

 

 

 

Platform commissions, royalties and other

 

 

20,363

 

 

26,310

 

Amortization of intangible assets

 

 

2,324

 

 

2,434

 

Total cost of revenue

 

 

22,687

 

 

28,744

 

Gross profit

 

 

31,841

 

 

40,726

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

 

20,312

 

 

18,243

 

Sales and marketing

 

 

12,624

 

 

12,438

 

General and administrative

 

 

7,984

 

 

7,406

 

Amortization of intangible assets

 

 

 —

 

 

127

 

Restructuring charge

 

 

106

 

 

 —

 

Total operating expenses

 

 

41,026

 

 

38,214

 

Income/(loss) from operations

 

 

(9,185)

 

 

2,512

 

Interest and other expense, net:

 

 

 

 

 

 

 

Interest income

 

 

21

 

 

6

 

Other income/(expense)

 

 

448

 

 

(290)

 

Interest and other income/(expense), net

 

 

469

 

 

(284)

 

Income/(loss) before income taxes

 

 

(8,716)

 

 

2,228

 

Income tax benefit/(provision)

 

 

166

 

 

(1,104)

 

Net income/(loss)

 

$

(8,550)

 

$

1,124

 

 

 

 

 

 

 

 

 

Net/(loss) income per share:

 

 

 

 

 

 

 

 Basic

 

$

(0.07)

 

$

0.01

 

 Diluted

 

 

(0.07)

 

 

0.01

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 Basic

 

 

129,171

 

 

103,869

 

 Diluted

 

 

129,171

 

 

107,851

 

 

 

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

 

 

 

March 31, 

 

 

   

2016

   

2015

   

Net income/(loss)

 

$

(8,550)

 

$

1,124

 

Other comprehensive loss:

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(194)

 

 

(279)

 

Other comprehensive loss

 

 

(194)

 

 

(279)

 

Comprehensive income/(loss)

 

$

(8,744)

 

$

845

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

   

2016

   

2015

    

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income/(loss)

 

$

(8,550)

 

$

1,124

 

Adjustments to reconcile net income/(loss) to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation

 

 

656

 

 

706

 

Amortization of intangible assets

 

 

2,324

 

 

2,561

 

Mark to market adjustment on long-term investments        

 

 

(300)

 

 

 —

 

Non-cash foreign currency translation (gain)/loss

 

 

(148)

 

 

290

 

Stock-based compensation

 

 

3,545

 

 

2,129

 

Non-cash warrant expense

 

 

9

 

 

93

 

Impairment of prepaid royalties and guarantees

 

 

43

 

 

 —

 

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

 

 

 

 

 

 

 

Accounts receivable

 

 

1,138

 

 

7,592

 

Prepaid royalties

 

 

(5,228)

 

 

(9,587)

 

Prepaid expenses and other assets

 

 

(634)

 

 

1,954

 

Accounts payable and other accrued liabilities

 

 

(259)

 

 

(54)

 

Accrued liabilities

 

 

100

 

 

 —

 

Accrued compensation

 

 

(2,596)

 

 

(2,620)

 

Accrued royalties and license fees (including accrued royalties and license fees to a related party of $2,500 and $0 as of March 31, 2016 and March 31, 2015, respectively)

 

 

(1,129)

 

 

(2,591)

 

Deferred revenue

 

 

(362)

 

 

(6,672)

 

Accrued restructuring

 

 

(342)

 

 

 —

 

Other long-term liabilities

 

 

(57)

 

 

(37)

 

Net cash used in operating activities

 

 

(11,790)

 

 

(5,112)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(608)

 

 

(499)

 

Net cash paid for acquisitions

 

 

 —

 

 

(351)

 

Investments in Plain Vanilla Corp. and Dairy Free Games, Inc. (Note 6)

 

 

(7,000)

 

 

(250)

 

Purchase of intangible assets (including purchase of intangible assets from a related party of $2,500 and $0 as of March 31, 2016 and March 31, 2015, respectively)

 

 

(2,500)

 

 

 —

 

Net cash used in investing activities

 

 

(10,108)

 

 

(1,100)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from exercise of stock options and purchases under the ESPP

 

 

1,129

 

 

1,601

 

Taxes paid related to net share settlement of equity awards

 

 

(577)

 

 

(318)

 

Excess tax benefit from stock awards

 

 

 —

 

 

14

 

Proceeds from exercise of stock warrants and issuance of common stock

 

 

 —

 

 

10

 

Net cash provided by financing activities

 

 

552

 

 

1,307

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

87

 

 

(324)

 

Net increase/(decrease) in cash and cash equivalents

 

 

(21,259)

 

 

(5,229)

 

Cash and cash equivalents at beginning of period

 

 

180,542

 

 

70,912

 

Cash and cash equivalents at end of period

 

$

159,283

 

$

65,683

 

 

 

 

 

 

 

 

 

 

 

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.

 

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 in the United States (“U.S. GAAP”) 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, 2015 filed with the SEC on March 4, 2016. 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, 2016 and its unaudited condensed consolidated results of operations for the three months ended March 31, 2016 and 2015, 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, 2015 has been derived from the audited consolidated financial statements as of that date, and the unaudited condensed consolidated balance sheet presented as of March 31, 2016 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.

 

Variable Interest Entities

 

The Company has interests in other entities that are variable interest entities (“VIEs”). Determining whether to consolidate a VIE requires judgment in assessing (i) whether an entity is a VIE and (ii) if the Company is the entity’s primary beneficiary and thus required to consolidate the entity. To determine if the Company is the primary beneficiary of a VIE, the Company evaluates whether it has (i) the power to direct the activities that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The Company’s evaluation includes identification of significant activities and an assessment of its ability to direct those activities based on governance provisions and other applicable agreements and circumstances. The Company’s assessment of whether it is the primary beneficiary of its VIEs requires significant assumptions and judgment.

 

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 United States and other locations outside of the United States. The Company performs ongoing credit evaluations of its customers’ and the Digital Storefronts’ financial condition and requires no collateral from its customers or the Digital Storefronts. The Company bases its allowance for doubtful accounts on management’s best estimate of the

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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. It reviews all other balances quarterly. The Company charges off accounts receivable balances against the allowance when it determines that the amount will not be recovered.

 

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

March 31, 

 

 

 

2016

   

2015

 

Apple

 

51.3%

 

53.6%

 

Google

 

27.4%

 

27.3%

 

 

At March 31, 2016, Apple Inc. (“Apple”) accounted for 40.9%, Google Inc. (“Google”) accounted for 20.8%, and Jirbo Inc. (dba AdColony) (“AdColony”) accounted for 20.6% of the Company’s total accounts receivable. At December 31, 2015, Apple accounted for 31.4%, AdColony accounted for 26.2%, and Google accounted for 19.2% 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 March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-19 simplifies some aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences, (b) classification of awards as either equity or liabilities, and (c) classification on the statement of cash flows. Early adoption is permitted. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers, which amends the principal-versus agent implementation guidance in the new revenue standard (ASU 2014-09), and clarifies that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer. 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 consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases.  The new guidance requires lessees to recognize most leases as assets and liabilities on the balance sheet. Qualitative and quantitative disclosures will be enhanced to better understand the amount, timing and uncertainty of cash flows arising from leases. The guidance is effective for annual and interim periods beginning after December 31, 2018. The updated standard mandates a modified retrospective transition method with early adoption permitted. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements.

 

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments — Overall - Recognition and Measurement of Financial Assets and Financial Liabilities.” The new guidance requires entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income unless the investments qualify for a practicability exception. The updated standard is effective for interim and annual reporting periods beginning after December 15, 2017. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements.

 

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. The new guidance requires that deferred tax assets and liabilities be classified as noncurrent in a classified statement of financial

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position. 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 Company early adopted this guidance on a prospective basis as of December 31, 2015. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements. 

 

In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. The new guidance requires that adjustments made to provisional amounts recognized in a business combination be recorded in the period such adjustments are determined, rather than retrospectively adjusting previously reported amounts. The new standard has been effective for fiscal years, and interim periods within those fiscal years, since December 15, 2015. The adoption of this standard did not have a material impact on the Company’s financial statements.

 

In April 2015, the FASB issued ASU 2015-05, Intangibles-Goodwill and Other-Internal-Use Software. The standard amended the existing accounting standards for intangible assets and provides explicit guidance to customers in determining the accounting for fees paid in a cloud computing arrangement, wherein the arrangements that do not convey a software license to the customer are accounted for as service contracts. The pronouncement has been effective for reporting periods beginning after December 15, 2015. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

 

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 has been effective for all annual periods, and interim periods within those annual periods, beginning after December 15, 2015. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

 

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 disclosure.

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 consolidated 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 with early adoption 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 consolidated 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 shares of common stock issuable through stock-based compensation plans (including stock options,

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restricted 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

 

 

 

March 31, 

 

 

 

2016

   

2015

   

Net income/(loss)

 

$

(8,550)

 

$

1,124

 

Shares used to compute net income/(loss) per share:

 

 

 

 

 

 

 

   Weighted average common shares outstanding

 

 

131,870

 

 

107,509

 

   Weighted average common shares subject to restrictions

 

 

(2,699)

 

 

(3,640)

 

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

 

 

129,171

 

 

103,869

 

Dilutive potential common shares

 

 

 —

 

 

3,982

 

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

 

 

129,171

 

 

107,851

 

 

 

 

 

 

 

 

 

Basic net income/(loss) per share

 

$

(0.07)

 

$

0.01

 

Diluted net income/(loss) per share

 

$

(0.07)

 

$

0.01

 

 

The following weighted average options to purchase common stock, warrants to purchase common stock, unvested shares of common stock subject to restrictions, 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

 

 

 

March 31, 

 

 

 

2016

    

2015

    

Warrants to purchase common stock

 

4,267

 

2,439

 

Unvested common shares subject to restrictions

 

2,699

 

3,451

 

Options to purchase common stock

 

7,053

 

5,767

 

RSUs

 

7,002

 

3,573

 

 

 

21,021

 

15,230

 

 

 

Note 3 — Fair Value Measurements

 

Fair Value Measurements

 

The Company accounts for fair value in accordance with Accounting Standards Codification (“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. The inputs to the valuation techniques used to measure fair value are classified into the following categories:

 

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.

 

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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. 

 

As of March 31, 2016, the Company’s financial assets and financial liabilities are presented below at fair value and were classified within the fair value hierarchy as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

    

Level 1

    

Level 2

    

Level 3

    

 

March 31, 2016

 

Financial Assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

159,283

 

 —

 

 —

 

159,283

 

Restricted cash

 

1,498

 

 —

 

 —

 

1,498

 

Convertible promissory note investment in Plain Vanilla Corp.

 

 —

 

 —

 

2,900

 

2,900

 

Call option to acquire Plain Vanilla Corp. (1)

 

 —

 

 —

 

2,100

 

2,100

 

Total Financial Assets

 

160,781

 

 —

 

5,000

 

165,781

 


(1)

These assets are carried on the consolidated balance sheet on a historical cost basis (see “Note 6 - Investments")

 

As of December 31, 2015, the Company’s financial assets and financial liabilities are presented below at fair value and were classified within the fair value hierarchy as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

    

Level 1

    

Level 2

    

Level 3

    

 

December 31, 2015

 

Financial Assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

180,542

 

 —

 

 —

 

180,542

 

Restricted cash

 

1,498

 

 —

 

 —

 

1,498

 

Total Financial Assets

 

182,040

 

 —

 

 —

 

182,040

 

 

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. 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.

 

The Company engaged third party valuation experts to aid management in its analysis of the fair value of the promissory note issued to the Company, and the Company’s option to acquire all of the outstanding equity (“call option”) of, Plain Vanilla Corp (“Plain Vanilla”). See “Note 6 – Investments” below for further information on the promissory note and call option.

 

The fair value of the promissory note was estimated using a probability weighted assessment of the expected cash flows discounted to their present value.  The discount rate of 88.1% used in the analysis reflects the early stage nature of the entity and the overall gaming industry indices.  The assumptions used in the expected cash flows model are level 3 inputs as defined above. The fair value of the call option was estimated using the probability weighted Black-Scholes valuation model. The Black-Scholes valuation model requires inputs such as the expected term of the call option, expected volatility and risk-free interest rate. Certain of these inputs are subjective and require significant analysis and judgment to develop. The weighted average assumptions used by the company are level 3 inputs as defined above and are noted in the following table:

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2016

 

 

 

 

 

Dividend yield

 

 —

%

Risk-free interest rate

 

0.47

%

Expected volatility

 

45.00

%

Expected term (in years)

 

0.95

 

 

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The following table presents the changes in fair value of the Plain Vanilla promissory note and the call option:

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2016

 

 

 

Asset at the

 

Increase/

 

Asset at the

 

 

 

beginning of

 

(decrease) in

 

end of

 

 

    

the period (1)

    

fair value

    

the period

 

Convertible promissory note investment in Plain Vanilla Corp.

 

2,600

 

300

 

2,900

 

Call option to acquire Plain Vanilla Corp. (2)

 

2,400

 

(300)

 

2,100

 


(1)

As of the investment date of January 19, 2016  (see “Note 6 - Investments")

(2)

These assets are carried on the consolidated balance sheet on a historical cost basis (see  “Note 6 - Investments")

 

Note 4 — Balance Sheet Components

 

Accounts Receivable

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

    

 

   

2016

   

2015

   

Accounts receivable

 

$

17,461

 

$

18,672

 

Less: Allowance for doubtful accounts

 

 

(716)

 

 

(716)

 

 

 

$

16,745

 

$

17,956

 

 

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 ended March 31, 2016 and 2015.

 

Prepaid expenses and other

 

 

 

 

 

 

 

 

 

 

 

March 31, 

    

December 31, 

 

 

   

2016

   

2015

   

Deferred platform commission fees

 

 

7,953

 

 

7,675

 

Deferred royalties

 

 

3,065

 

 

2,668

 

Taxes receivable                    

 

 

739

 

 

759

 

Other

 

 

3,448

 

 

3,739

 

 

 

$

15,205

 

$

14,841

 

 

Property and Equipment

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

    

 

   

2016

   

2015

   

Computer equipment

 

$

6,423

 

$

6,106

 

Furniture and fixtures

 

 

1,054

 

 

1,053

 

Software

 

 

7,605

 

 

7,408

 

Leasehold improvements

 

 

3,681

 

 

3,661

 

 

 

 

18,763

 

 

18,228

 

Less: Accumulated depreciation and amortization

 

 

(13,481)

 

 

(12,781)

 

 

 

$

5,282

 

$

5,447

 

 

Depreciation expense for the three months ended March 31, 2016 and 2015 was $656 and $706, respectively.

 

 

Other Long-Term Liabilities

 

 

 

 

 

 

 

 

 

 

 

March 31, 

    

December 31, 

 

 

    

2016

   

2015

    

Deferred rent

 

$

605

 

$

692

 

Uncertain tax position obligations

 

 

609

 

 

567

 

Other

 

 

183

 

 

326

 

 

 

$

1,397

 

$

1,585

 

 

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Note 5 — Goodwill and Intangible Assets

 

Intangible Assets

 

The Company’s intangible assets were acquired primarily in various acquisitions as well as in connection with the purchase of certain trademarks, brand assets and licensed content. The carrying amounts and accumulated amortization expense of the acquired intangible assets, including the impact of foreign currency exchange translation, at March 31, 2016 and December 31, 2015 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

December 31, 2015

 

 

    

    

    

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

 

3 yrs

 

$

34,683

 

$

(24,771)

 

$

9,912

 

$

34,750

 

$

(22,954)

 

$

11,796

 

Catalogs

 

1 yr

 

 

1,118

 

 

(1,118)

 

 

 —

 

 

1,152

 

 

(1,152)

 

 

 —

 

ProvisionX Technology

 

6 yrs

 

 

185

 

 

(185)

 

 

 —

 

 

190

 

 

(190)

 

 

 —

 

Carrier contract and related relationships

 

5 yrs

 

 

24,227

 

 

(20,876)

 

 

3,351

 

 

24,200

 

 

(20,597)

 

 

3,603

 

Licensed content

 

2.5 -5 yrs

 

 

7,878

 

 

(2,877)

 

 

5,001

 

 

7,866

 

 

(2,866)

 

 

5,000

 

Service provider license

 

9 yrs

 

 

457

 

 

(422)

 

 

35

 

 

454

 

 

(406)

 

 

48

 

Trademarks

 

7 yrs

 

 

5,217

 

 

(3,074)

 

 

2,143

 

 

5,217

 

 

(2,897)

 

 

2,320

 

 

 

 

 

 

73,765

 

 

(53,323)

 

 

20,442

 

 

73,829

 

 

(51,062)

 

 

22,767

 

Other intangible assets amortized to operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Emux Technology

 

6 yrs

 

 

1,192

 

 

(1,192)

 

 

 —

 

 

1,228

 

 

(1,228)

 

 

 —

 

Non-compete agreements

 

4 yrs

 

 

5,374

 

 

(5,374)

 

 

 —

 

 

5,391

 

 

(5,391)

 

 

 —

 

 

 

 

 

 

6,566

 

 

(6,566)

 

 

 —

 

 

6,619

 

 

(6,619)

 

 

 —

 

Total intangibles assets

 

 

 

$

80,331

 

$

(59,889)

 

$

20,442

 

$

80,448

 

$

(57,681)

 

$

22,767

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 March 31, 2016 and 2015, the Company recorded amortization expense in the amounts of $2,324 and $2,434 respectively, in cost of revenue. During the three months ended March 31, 2016 and 2015, the Company recorded amortization expense in the amounts of $0 and $127, respectively, in operating expenses.

 

As of March 31, 2016, total expected future amortization related to intangible assets was as follows:

 

 

 

 

 

 

    

Amortization

 

 

to Be Included in

 

 

Cost of

Year Ending December 31,

   

Revenue

2016

 

$

7,772

2017

 

 

8,076

2018

 

 

3,814

2019

 

 

780

2020 and thereafter

 

 

 —

 

 

$

20,442

 

 

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Goodwill

 

Goodwill for the periods indicated was as follows:

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

December 31, 2015

 

 

 

Total

 

Total

 

Goodwill

 

$

161,001

 

$

161,075

 

Accumulated Impairment Losses

 

 

(73,111)

 

 

(73,111)

 

Balance as of January 1

 

 

87,890

 

 

87,964

 

Goodwill Acquired during the year

 

 

 —

 

 

 —

 

Effects of Foreign Currency  Exchange

 

 

9

 

 

(74)

 

Balance as of period ended:

 

 

87,899

 

 

87,890

 

Goodwill

 

 

161,010

 

 

161,001

 

Accumulated Impairment Losses

 

 

(73,111)

 

 

(73,111)

 

Balance as of period ended

 

$

87,899

 

$

87,890

 

 

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.

 

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

 

Note 6 — Investments

 

In January 2016, the Company announced an investment of up to $7,500 in promissory notes convertible into a minority equity stake in Plain Vanilla, of which $5,000 was paid in January 2016 and the remaining $2,500 is payable upon Plain Vanilla achieving certain operational milestones during the term of the note purchase agreement pursuant to which the promissory notes were issued. As part of the investment, the Company also received a call option to acquire all outstanding equity of Plain Vanilla for 15 months from the closing of the initial investment, unless earlier terminated by the Company, at a pre-agreed price.  Plain Vanilla is the Icelandic developer of the mobile game QuizUp, and is financed primarily through equity investments.

 

In January 2016, the Company acquired a minority equity stake and entered into a commercial agreement with Dairy Free Games, Inc. (“Dairy Free”). As part of the arrangement, the Company invested $2,000 in Dairy Free’s Series A preferred stock. The Company also agreed to provide up to $1,000 of recoupable and non-refundable development funding for a mobile game under development by Dairy Free. The development funding is payable in installments, including $350 of which was paid in January 2016 and the remaining $650 of which may become payable upon Dairy Free achieving certain milestones. Dairy Free is the developer of mobile video games and is financed primarily through equity investments.

 

Plain Vanilla and Dairy Free are VIEs; however, the Company has determined that it is not the primary beneficiary of these VIEs since the Company currently does not have the power to direct the activities of the VIEs that most significantly impact their economic performance. The Company made this determination based on the following factors: (i) the development stage of the VIEs' products; (ii) the Company's inability to exercise control or decision

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making power over the VIEs, based on the Company's ownership percentage and voting rights, as well as its lack of involvement in day-to-day operations and management decisions; and (iii) the fact that the call option to acquire Plain Vanilla is currently significantly out of the money. 

 

The Company has not accounted for these investments under ASC 323, Investments – Equity Method and Joint Ventures, as the convertible promissory note issued by Plain Vanilla and the preferred stock of Dairy Free have risk and rewards characteristics that are not substantially similar to the common stock of these entities.

 

For Plain Vanilla, the Company has elected the fair value option to account for its investment in the promissory notes. The call option was recorded at cost. As of the investment date, the fair value of the promissory note and the call option was determined to be $2,600 and $2,400, respectively, and recorded in other long-term assets. As of March 31, 2016, the Company fair valued the promissory note at $2,900 and recorded a benefit of $300 in other income.

 

For Dairy Free, the preferred stock investment was recorded at cost. As of the investment date and as of March 31, 2016, the preferred stock investment was recorded at $2,000 in other long-term assets. The development funding will be recognized as research and development expense as the development activities are performed. For the three months ended March 31, 2016, the Company recognized $260 in research and development expense related to this arrangement.

 

The Company is not obligated to provide any explicit or implicit financial or other support to Plain Vanilla and Dairy Free other than what was contractually agreed to in the respective investment agreements. The Company has no exposure to loss beyond its investment in Plain Vanilla and Dairy Free.

 

Note 7 — Commitments and Contingencies

 

Leases

 

The Company leases office space under non-cancelable operating facility leases with various expiration dates through November 2020. Rent expense for the three months ended March 31, 2016 and 2015 was $1,241 and $1,002, 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 $714 and $749 at March 31, 2016 and December 31, 2015, respectively, of which $605 and $692 was included within other long-term liabilities at March 31, 2016 and December 31, 2015, respectively.

 

As of March 31, 2016, future minimum lease payments under non-cancelable operating leases were as follows:

 

 

 

 

 

 

 

    

Minimum

 

 

 

Operating

 

 

 

Lease

 

Year Ending December 31,

   

Payments

 

2016

 

$

3,730

 

2017

 

 

4,435

 

2018

 

 

2,719

 

2019

 

 

2,306

 

2020 and thereafter

 

 

1,398

 

 

 

$

14,588

 

 

Minimum Guaranteed Royalties and Developer Commitments

 

The Company has entered into license and publishing agreements with various celebrities, Hollywood studios, athletes, sports organizations, and other well-known brands and properties 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 revenue generated by the applicable game, which may not be dependent on any deliverables. The significant majority of these minimum guaranteed royalty payments are recoupable against future royalty obligations that would otherwise become payable, or in certain circumstances, where not recoupable, are capitalized and amortized over the lesser of (i) the estimated life of the title incorporating licensed content or (ii) the term of the license agreement.

 

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At March 31, 2016, future unpaid minimum guaranteed royalty commitments were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Future

 

Future

 

 

Minimum

 

Minimum

 

 

Guarantee

 

Developer

Year Ending December 31,

    

Commitments

    

Commitments

2016

 

$

35,019

 

$

800

2017

 

 

2,043

 

 

350

2018

 

 

23

 

 

 —

 

 

$

37,085

 

$

1,150

 

The amounts represented in the table above reflect our minimum cash obligations for the respective calendar years, but do not necessarily represent the periods in which they will be expensed in the Company’s Consolidated Financial Statements.

 

Future developer commitments as of March 31, 2016 were $1,150. These developer commitments reflect the Company’s minimum cash obligations to external software developers (“third-party developers”) to design and develop its software applications but do not necessarily represent the periods in which they will be expensed. The Company advances funds to these third-party developers, in installments, payable upon the completion of specified development milestones, and expenses third-party developer commitments as services are provided.

 

Licensor commitments include $36,669 of commitments to licensors that have been recorded in current and long-term liabilities and a corresponding amount in current and long-term assets because payment is not contingent upon performance by the licensor. The classification of commitments between long-term and short-term is determined based on the timing of recoupment of earned royalties calculated on projected revenue for the licensed intellectual property games.

 

Income Taxes

 

As of March 31, 2016, 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, 2016, the settlement of $609 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.

 

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 November 4, 2015, Just Games Interactive LLC (d/b/a Kung Fu Factory, f/k/a Tiny Fun Studios) (“Just Games”) filed a complaint in the U.S. District Court for the Central District of California against the Company, Kristen Jenner (f/k/a Kris Kardashian) and additional yet-to-be named defendants.  The complaint alleged direct copyright infringement against the Company and direct and contributory copyright infringement and breach of implied contract against the other defendants.  Just Games was seeking at least $10,000 in damages as well as other relief, including costs, permanent and temporary injunctive relief, an accounting of profits, a constructive trust and such other costs the Court deemed just and proper.  The Company filed a motion to dismiss the complaint on January 27, 2016.  On February 1, 2016, Just Games filed a voluntary motion to dismiss their case against the Company without prejudice.

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The Company does not believe it is party to any currently pending litigation, the outcome of which is reasonably possible 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

 

Tencent Investment

 

On April 29, 2015, the Company entered into a purchase agreement with Tencent Holdings Limited (“Tencent”) and Tencent’s controlled affiliate, Red River Investment Limited (“Red River”).  Pursuant to the Purchase Agreement, the Company issued to Red River in a private placement an aggregate of 21,000 shares of the Company’s common stock (the “Shares”) at a purchase price of $6.00 per share, for aggregate net proceeds of $125,156, after offering expenses. The Company issued 12,500 of the Shares to Red River on April 29, 2015 and issued the remaining 8,500 Shares at a second closing on June 3, 2015. 

 

Warrants to Purchase Common Stock

 

Celebrity Warrants 

 

During 2015, the Company issued warrants to celebrity licensors, and entities affiliated with one of the celebrity licensors, to purchase up to an aggregate of 1,100 shares of the Company’s common stock, subject to adjustments for dividends, reorganizations and other common stock events (collectively, the “Celebrity Warrants”). With respect to Celebrity Warrants covering 1,000 shares, such warrants vest with respect to 50% of the underlying shares upon public announcement of the related license agreement, with the remaining shares vesting in equal monthly installments over 24 months, subject to full acceleration in the event of (i) the Company’s full recoupment of the minimum guarantee payments under the related license agreement, (ii) the termination of the license agreement due to the Company’s material breach of the agreement or (iii) a change of control of the Company. With respect to the remaining Celebrity Warrants covering 100 shares issued in 2015, such warrants vest in equal monthly installments over 60 months, with up to 25% of the shares subject to accelerated vesting in the event the celebrity licensor approves game design documentation by a certain date and the related game commercially launches by a certain date.

 

The fair value of the outstanding Celebrity Warrants is estimated using the Black-Scholes valuation model. The Black-Scholes valuation model requires inputs such as the expected term of the Celebrity Warrants, expected volatility and risk-free interest rate. Certain of these inputs are subjective and require significant analysis and judgment to develop. The Company will estimate and record the fair value of these Celebrity Warrants using a Black-Scholes valuation model when the above vesting conditions have been met. 

 

Each of the Celebrity Warrants may, at the election of the holder, be either exercised for cash or net exercised on a cashless basis. As of March 31, 2016, Celebrity Warrants covering 1,600 shares of the Company’s common stock were outstanding.

 

With respect to the Celebrity Warrants covering the 100 shares issued in 2015, during the three months ended March 31, 2016 and 2015, the Company recorded a warrant compensation charge of $9 and $92, respectively, which was included within cost of revenue.

 

With respect to the Celebrity Warrants covering the 1,000 shares issued in 2015, the Company recorded a prepaid expense of $62 and recorded $310 under other long-term assets, in each case as of March 31, 2016. No amounts were recorded for such Celebrity Warrants as of March 31, 2015.

 

MGM Warrants

 

In July 2013, the Company and MGM Interactive Inc. (“MGM”) entered into a warrant agreement that provided MGM the right to purchase up to 3,333 shares of the Company’s common stock subject to adjustments for dividends,

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reorganizations and other common stock events (the “MGM Warrant”). As of March 31, 2016, MGM Warrants covering  2,667 shares of the Company’s common stock were outstanding. These remaining shares 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. During each of the three months ended March 31, 2016, and 2015, none of these vesting conditions were met.

 

The Company estimated the fair value of the Celebrity Warrants using the Black-Scholes valuation model and the weighted average assumptions noted in the following table:

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

2016

     

2015

 

 

 

 

 

 

 

Dividend yield

 

 —

%

 

 —

%

Risk-free interest rate

 

1.53

%

 

1.99

%

Expected volatility

 

59.60

%

 

61.10

%

Expected term (in years)

 

5.62

 

 

5.42

 

 

Warrants outstanding at March 31, 2016 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number

 

Weighted

 

 

 

 

 

 

 

of Shares

 

Exercise

 

 

 

 

 

 

 

Outstanding

 

Price

 

 

Average

 

 

 

 

Under

 

per

 

 

Contractual

 

 

 

   

Warrant

   

Share

   

 

Term

   

Warrants outstanding, December 31, 2015

 

 

4,267

 

$

3.61

 

 

 

 

Granted

 

 

 -

 

 

 -

 

 

 

 

Exercised

 

 

 -

 

 

 -

 

 

 

 

Warrants outstanding, March 31, 2016

 

 

4,267

 

 

3.61

 

 

5.50

 

 

       During the three months ended March 31, 2016 and 2015, warrant holders exercised warrants to purchase 0 and

 7 shares of the Company’s common stock, respectively, and the Company received gross proceeds of $0 and $10, respectively, in connection with these exercises. These exercised warrants were issued by the Company in 2010 in connection with a private placement transaction.