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 June 30, 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 August 1, 2016: 132,997,621.

 

 

 


 

Table of Contents

GLU MOBILE INC.

 

FORM 10-Q

 

Quarterly Period Ended June 30, 2016

 

TABLE OF CONTENTS

 

 

 

 

Page

PART I. FINANCIAL INFORMATION 

 

 

 

ITEM 1. FINANCIAL STATEMENTS (Unaudited) 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015 

 

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2016 and Three and Six Months Ended June 30, 2015 

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2016 and Three and Six Months Ended June 30, 2015 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and June 30, 2015 

 

 

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 

43 

 

 

ITEM 4. CONTROLS AND PROCEDURES 

44 

 

 

PART II. OTHER INFORMATION 

 

 

 

ITEM 1. LEGAL PROCEEDINGS 

45 

 

 

ITEM 1A. RISK FACTORS 

45 

 

 

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

71 

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES 

71 

 

 

ITEM 4. MINE SAFETY DISCLOSURES 

71 

 

 

ITEM 5. OTHER INFORMATION 

71 

 

 

ITEM 6. EXHIBITS 

71 

 

 

SIGNATURES 

72 

 

 

2


 

Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

GLU MOBILE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

    

June 30, 

 

December 31, 

 

 

   

2016

   

2015

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

158,037

 

$

180,542

 

Accounts receivable, net

 

 

14,340

 

 

17,956

 

Prepaid royalties (including prepaid royalties to a related party of $2,007 and $7,949 as of June 30, 2016 and December 31, 2015, respectively)

 

 

18,403

 

 

23,715

 

Prepaid expenses and other assets

 

 

18,243

 

 

14,841

 

Total current assets

 

 

209,023

 

 

237,054

 

Property and equipment, net

 

 

4,777

 

 

5,447

 

Restricted cash

 

 

1,162

 

 

1,498

 

Long-term prepaid royalties (including long-term prepaid royalties to a related party of $7,993 and $2,051 as of June 30, 2016 and December 31, 2015, respectively)

 

 

57,552

 

 

46,944

 

Other long-term assets

 

 

3,889

 

 

1,386

 

Intangible assets, net (including intangible assets acquired from a related party of $5,000 and $5,000 as of June 30, 2016 and December 31, 2015, respectively)

 

 

18,106

 

 

22,767

 

Goodwill

 

 

87,860

 

 

87,890

 

Total assets

 

$

382,369

 

$

402,986

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

9,165

 

$

9,386

 

Accrued liabilities

 

 

1,589

 

 

1,654

 

Accrued compensation

 

 

7,998

 

 

7,100

 

Accrued royalties (including accrued royalties to a related party of $2,007 and $10,449 as of June 30, 2016 and December 31, 2015, respectively)

 

 

8,442

 

 

21,032

 

Accrued restructuring

 

 

970

 

 

342

 

Deferred revenue

 

 

33,238

 

 

31,112

 

Total current liabilities

 

 

61,402

 

 

70,626

 

Long-term accrued royalties (including long-term accrued royalties to a related party of $7,993 and $2,051 as of June 30, 2016 and December 31, 2015, respectively)

 

 

33,309

 

 

24,347

 

Other long-term liabilities

 

 

1,357

 

 

1,585

 

Total liabilities

 

 

96,068

 

 

96,558

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value; 5,000 shares authorized at June 30, 2016 and December 31, 2015; no shares issued and outstanding at June 30, 2016 and December 31, 2015

 

 

 —

 

 

 —

 

Common stock, $0.0001 par value; 250,000 shares authorized at June 30, 2016 and December 31, 2015; 132,722 and 131,580 shares issued and outstanding at June 30, 2016 and December 31, 2015

 

 

13

 

 

13

 

Additional paid-in capital

 

 

564,733

 

 

557,748

 

Accumulated other comprehensive loss

 

 

(699)

 

 

(85)

 

Accumulated deficit

 

 

(277,746)

 

 

(251,248)

 

Total stockholders’ equity

 

 

286,301

 

 

306,428

 

Total liabilities and stockholders’ equity

 

$

382,369

 

$

402,986

 

 

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

3


 

Table of Contents

GLU MOBILE INC. 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

 

2016

   

2015

   

2016

   

2015

   

Revenue

 

$

48,363

 

$

56,150

   

$

102,892

 

$

125,620

   

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Platform commissions, royalties and other

 

 

18,639

 

 

21,320

 

 

39,002

 

 

47,630

 

Amortization of intangible assets

 

 

2,336

 

 

2,434

 

 

4,660

 

 

4,868

 

Total cost of revenue

 

 

20,975

 

 

23,754

 

 

43,662

 

 

52,498

 

Gross profit

 

 

27,388

 

 

32,396

 

 

59,230

 

 

73,122

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

20,721

 

 

18,308

 

 

41,033

 

 

36,551

 

Sales and marketing

 

 

10,935

 

 

12,771

 

 

23,559

 

 

25,209

 

General and administrative

 

 

7,096

 

 

7,429

 

 

15,081

 

 

14,835

 

Amortization of intangible assets

 

 

 —

 

 

32

 

 

 —

 

 

159

 

Restructuring charge

 

 

2,116

 

 

 —

 

 

2,221

 

 

 —

 

Total operating expenses

 

 

40,868

 

 

38,540

 

 

81,894

 

 

76,754

 

Loss from operations

 

 

(13,480)

 

 

(6,144)

 

 

(22,664)

 

 

(3,632)

 

Interest and other expense, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

25

 

 

12

 

 

45

 

 

18

 

Other expense

 

 

(4,478)

 

 

(186)

 

 

(4,030)

 

 

(476)

 

Interest and other expense, net

 

 

(4,453)

 

 

(174)

 

 

(3,985)

 

 

(458)

 

Loss before income taxes

 

 

(17,933)

 

 

(6,318)

 

 

(26,649)

 

 

(4,090)

 

Income tax benefit/(provision)

 

 

(16)

 

 

809

 

 

151

 

 

(295)

 

Net loss

 

$

(17,949)

 

$

(5,509)

 

$

(26,498)

 

$

(4,385)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share - basic and diluted

 

$

(0.14)

 

$

(0.05)

 

$

(0.20)

 

$

(0.04)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic and diluted

 

 

131,198

 

 

116,169

 

 

130,185

 

 

110,019

 

 

 

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 LOSS

(Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

 

2016

   

2015

   

2016

   

2015

   

Net loss

 

$

(17,949)

 

$

(5,509)

 

$

(26,498)

 

$

(4,385)

 

Other comprehensive income/(loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(420)

 

 

298

 

 

(614)

 

 

19

 

Other comprehensive income/(loss):

 

 

(420)

 

 

298

 

 

(614)

 

 

19

 

Comprehensive loss

 

$

(18,369)

 

$

(5,211)

 

$

(27,112)

 

$

(4,366)

 

 

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

 

 

5


 

Table of Contents

GLU MOBILE INC. 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

 

 

   

2016

   

2015

    

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(26,498)

 

$

(4,385)

 

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

 

 

 

 

 

 

 

Depreciation

 

 

1,376

 

 

1,438

 

Amortization of intangible assets

 

 

4,660

 

 

5,027

 

Change in fair value of long-term investments        

 

 

1,820

 

 

 —

 

Non-cash foreign currency translation (gain)/loss

 

 

(330)

 

 

416

 

Stock-based compensation

 

 

6,506

 

 

5,161

 

Non-cash warrant (benefit)/expense

 

 

(23)

 

 

228

 

Impairment of prepaid royalties and guarantees

 

 

148

 

 

89

 

Impairment of investments

 

 

2,540

 

 

 —

 

Changes in allowance for doubtful accounts

 

 

(120)

 

 

 —

 

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

 

 

 

 

 

 

 

Accounts receivable

 

 

3,587

 

 

7,058

 

Prepaid royalties

 

 

(4,711)

 

 

(10,647)

 

Prepaid expenses and other assets

 

 

(400)

 

 

783

 

Accounts payable and other accrued liabilities

 

 

(40)

 

 

(266)

 

Accrued liabilities

 

 

(63)

 

 

(143)

 

Accrued compensation

 

 

902

 

 

(783)

 

Accrued royalties and license fees

 

 

(1,859)

 

 

(4,022)

 

Deferred revenue

 

 

2,130

 

 

(6,106)

 

Accrued restructuring

 

 

628

 

 

 —

 

Other long-term liabilities

 

 

(63)

 

 

(134)

 

Net cash used in operating activities

 

 

(9,810)

 

 

(6,286)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(906)

 

 

(1,005)

 

Net cash paid for acquisitions

 

 

 —

 

 

(1,634)

 

Decrease in restricted cash

 

 

336

 

 

 —

 

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

 

 

(9,500)

 

 

(250)

 

Purchase of intangible assets (including purchase of intangible assets from a related party of $2,500 and $0 as of June 30, 2016 and June 30, 2015, respectively)

 

 

(2,500)

 

 

 —

 

Net cash used in investing activities

 

 

(12,570)

 

 

(2,889)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from exercise of stock options and purchases under the ESPP

 

 

1,029

 

 

4,311

 

Taxes paid related to net share settlement of equity awards

 

 

(1,301)

 

 

(1,867)

 

Excess tax benefit from stock awards

 

 

 —

 

 

77

 

Proceeds from exercise of stock warrants and issuance of common stock

 

 

255

 

 

375

 

Proceeds from private offering, net of issuance costs

 

 

 —

 

 

125,174

 

Net cash provided by/(used in) financing activities

 

 

(17)

 

 

128,070

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

(108)

 

 

(157)

 

Net increase/(decrease) in cash and cash equivalents

 

 

(22,505)

 

 

118,738

 

Cash and cash equivalents at beginning of period

 

 

180,542

 

 

70,912

 

Cash and cash equivalents at end of period

 

$

158,037

 

$

189,650

 

 

 

 

 

 

 

 

 

 

 

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, as well as 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 June 30, 2016 and its unaudited condensed consolidated results of operations for the three and six months ended June 30, 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 June 30, 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.

 

Investments

The Company’s investments consist of equity investments and investments in financial instruments of unconsolidated entities. The Company monitors its investments for impairment and makes appropriate reductions in carrying values if it determines that an impairment charge is required based on qualitative and quantitative information. The investments are included in prepaid expenses and other assets and other long-term assets in the consolidated balance sheets.

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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 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

 

 

Six Months Ended

 

 

 

June 30, 

 

 

June 30, 

 

 

    

2016

 

   

2015

 

   

2016

 

   

2015

 

Apple

 

54.8

%  

 

52.6

%  

 

52.9

%  

 

53.2

%  

Google

 

26.1

%  

 

25.9

%  

 

26.8

%  

 

26.7

%  

 

At June 30, 2016, Apple Inc. (“Apple”) accounted for 40.2%, Google Inc. (“Google”) accounted for 21.1%, and Jirbo Inc. (dba AdColony) (“AdColony”) accounted for 19.5% 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 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.

 

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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 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.

 

There have been three new ASUs issued amending certain aspects of ASU 2014-09. ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross Versus Net), was issued in March 2016 to clarify certain aspects of the principal versus agent guidance in ASU 2014-09. In addition, ASU 2016-10, Identifying Performance Obligations and Licensing, was issued in April 2016 and amends other sections of ASU 2014-09, including clarifying guidance related to identifying performance obligations and licensing implementation. Finally, ASU 2016-12, Revenue from Contracts with Customers - Narrow Scope Improvements and Practical Expedients, provides amendments and practical expedients to the guidance in ASU 2014-09 in the areas of assessing collectability, presentation of sales taxes received from customers, non-cash consideration, contract modification and clarification of using the full retrospective approach to adopt ASU 2014-09. With its evaluation of the impact of ASU 2014-09, the Company will also consider the impact related to the updated guidance provided by these three new ASUs.

 

 

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Note 2 — Net Loss Per Share

 

The Company computes basic net loss per share by dividing its net 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

 

2016

   

2015

 

2016

   

2015

   

Net loss

 

$

(17,949)

 

$

(5,509)

 

$

(26,498)

 

$

(4,385)

 

Shares used to compute net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

   Weighted average common shares outstanding

 

 

132,517

 

 

119,808

 

 

132,194

 

 

113,658

 

   Weighted average common shares subject to restrictions

 

 

(1,319)

 

 

(3,639)

 

 

(2,009)

 

 

(3,639)

 

   Weighted average shares used to compute basic and diluted net loss per share

 

 

131,198

 

 

116,169

 

 

130,185

 

 

110,019

 

Net loss per share - basic and diluted

 

$

(0.14)

 

$

(0.05)

 

$

(0.20)

 

$

(0.04)

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

 

2016

    

2015

 

2016

 

2015

    

Warrants to purchase common stock

 

 

4,267

 

 

3,589

 

 

4,267

 

 

3,601

 

Unvested common shares subject to restrictions

 

 

1,319

 

 

3,639

 

 

2,009

 

 

3,639

 

Options to purchase common stock

 

 

7,155

 

 

6,717

 

 

7,104

 

 

6,932

 

RSUs

 

 

7,858

 

 

5,408

 

 

7,430

 

 

5,110

 

 

 

 

20,599

 

 

19,353

 

 

20,810

 

 

19,282

 

 

 

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.

 

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. 

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As of June 30, 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

    

June 30, 2016

 

Financial Assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

158,037

$

 —

$

 —

$

158,037

 

Restricted cash

 

1,162

 

 —

 

 —

 

1,162

 

Convertible promissory note investment in Plain Vanilla Corp.

 

 —

 

 —

 

3,280

 

3,280

 

Call option to acquire Plain Vanilla Corp. (1)

 

 —

 

 —

 

60

 

60

 

Total Financial Assets

$

159,199

$

 —

$

3,340

$

162,539

 


(1)

This asset is carried on the consolidated balance sheet on a historical cost basis and evaluated for impairment under ASC 325-20 (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 notes issued to the Company in each of January 2016 and May 2016 by, 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 notes and call option.

 

The fair value of the promissory notes 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

 

Six Months Ended

 

 

June 30, 

 

June 30, 

 

    

2016

 

   

2016

 

 

 

 

 

 

 

 

Dividend yield

 

 —

%

 

 —

%

Risk-free interest rate

 

0.40

%

 

0.44

%

Expected volatility

 

80.00

%

 

62.5

%

Expected term (in years)

 

0.75

 

 

0.85

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2016

 

 

 

Asset at the

 

 

 

Impairment

 

Increase/

 

Asset at the

 

 

 

beginning of

 

 

 

of cost method

 

(decrease) in

 

end of

 

 

    

the period

    

Additions

 

investment

 

fair value

    

the period

 

Convertible promissory note investment in Plain Vanilla Corp.

$

 —

$

5,100

$

 —

$

(1,820)

$

3,280

 

Call option to acquire Plain Vanilla Corp. (1)

$

 —

$

2,400

$

(2,340)

 

 —

$

60

 


(1)

This asset is carried on the consolidated balance sheet on a historical cost basis and evaluated for impairment under ASC 325-20 (see “Note 6 - Investments").

 

Note 4 — Balance Sheet Components

 

Accounts Receivable

 

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

    

 

   

2016

   

2015

   

Accounts receivable

 

$

15,176

 

$

18,672

 

Less: Allowance for doubtful accounts

 

 

(836)

 

 

(716)

 

 

 

$

14,340

 

$

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 and six months ended June 30, 2016 and 2015.

 

Prepaid expenses and other

 

 

 

 

 

 

 

 

 

 

 

June 30, 

    

December 31, 

 

 

   

2016

   

2015

   

Deferred platform commission fees

 

$

8,540

 

$

7,675

 

Deferred royalties

 

 

2,782

 

 

2,668

 

Taxes receivable                    

 

 

63

 

 

759

 

Other

 

 

6,858

 

 

3,739

 

 

 

$

18,243

 

$

14,841

 

 

Property and Equipment

 

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

    

 

   

2016

   

2015

   

Computer equipment

 

$

6,511

 

$

6,106

 

Furniture and fixtures

 

 

1,063

 

 

1,053

 

Software

 

 

7,663

 

 

7,408

 

Leasehold improvements

 

 

3,761

 

 

3,661

 

 

 

 

18,998

 

 

18,228

 

Less: Accumulated depreciation and amortization

 

 

(14,221)

 

 

(12,781)

 

 

 

$

4,777

 

$

5,447

 

 

Depreciation expense for the three months ended June 30, 2016 and 2015 was $720 and $732, respectively. Depreciation expense for the six months ended June 30, 2016 and 2015 was $1,376 and $1,438, respectively.

 

 

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Other Long-Term Liabilities

 

 

 

 

 

 

 

 

 

 

 

June 30, 

    

December 31, 

 

 

    

2016

   

2015

    

Deferred rent

 

$

507

 

$

692

 

Uncertain tax position obligations

 

 

690

 

 

567

 

Other

 

 

160

 

 

326

 

 

 

$

1,357

 

$

1,585

 

 

 

 

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 June 30, 2016 and December 31, 2015 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 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

 

$

34,512

 

$

(26,482)

 

$

8,030

 

$

34,750

 

$

(22,954)

 

$

11,796

 

Catalogs

 

1 yr

 

 

1,042

 

 

(1,042)

 

 

 —

 

 

1,152

 

 

(1,152)

 

 

 —

 

ProvisionX Technology

 

6 yrs

 

 

172

 

 

(172)

 

 

 —

 

 

190

 

 

(190)

 

 

 —

 

Carrier contract and related relationships

 

5 yrs

 

 

23,860

 

 

(20,759)

 

 

3,101

 

 

24,200

 

 

(20,597)

 

 

3,603

 

Licensed content

 

2.5 -5 yrs

 

 

7,793

 

 

(2,793)

 

 

5,000

 

 

7,866

 

 

(2,866)

 

 

5,000

 

Service provider license

 

9 yrs

 

 

222

 

 

(211)

 

 

11

 

 

454

 

 

(406)

 

 

48

 

Trademarks

 

7 yrs

 

 

5,210

 

 

(3,246)

 

 

1,964

 

 

5,217

 

 

(2,897)

 

 

2,320

 

 

 

 

 

 

72,811

 

 

(54,705)

 

 

18,106

 

 

73,829

 

 

(51,062)

 

 

22,767

 

Other intangible assets amortized to operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Emux Technology

 

6 yrs

 

 

1,111

 

 

(1,111)

 

 

 —

 

 

1,228

 

 

(1,228)

 

 

 —

 

Non-compete agreements

 

4 yrs

 

 

5,339

 

 

(5,339)

 

 

 —

 

 

5,391

 

 

(5,391)

 

 

 —

 

 

 

 

 

 

6,450

 

 

(6,450)

 

 

 —

 

 

6,619

 

 

(6,619)

 

 

 —

 

Total intangibles assets

 

 

 

$

79,261

 

$

(61,155)

 

$

18,106

 

$

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 June 30, 2016 and 2015, the Company recorded amortization expense in the amounts of $2,336 and $2,434, respectively, in cost of revenue. During the six months ended June 30, 2016 and 2015, the Company recorded amortization expense in the amounts of $4,660 and $4,868 respectively, in cost of revenue. During the three months ended June 30, 2016 and 2015, the Company recorded amortization expense in the amounts of $0 and $32, respectively, in operating expenses. During the six months ended June 30, 2016 and 2015, the Company recorded amortization expense in the amounts of $0 and $159, respectively, in operating expenses.

 

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As of June 30, 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

 

$

5,435

2017

 

 

8,076

2018

 

 

3,814

2019

 

 

781

2020 and thereafter

 

 

 —

 

 

$

18,106

 

 

Goodwill

 

Goodwill for the periods indicated was as follows:

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

December 31, 2015

 

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

 

 

(30)

 

 

(74)

 

Balance as of period ended:

 

 

87,860

 

 

87,890

 

Goodwill

 

 

160,971

 

 

161,001

 

Accumulated impairment losses

 

 

(73,111)

 

 

(73,111)

 

Balance as of period ended

 

$

87,860

 

$

87,890

 

 

In accordance with ASC 350, Intangibles – Goodwill and Other – Internal-Use Software, (“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 two-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.

 

Any material impairment of prepaid royalty and license fee assets in the future periods may require the Company to perform a goodwill impairment assessment. Such assessment could result in impairments to the Company’s goodwill, which could adversely impact the Company’s results of operations.  

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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. $5,000 was paid in January 2016 and the remaining $2,500 was paid in May 2016. 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 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 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 notes 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 dates, the fair values of the promissory notes and the call option were determined to be $5,100 and $2,400, respectively. As of June 30, 2016, the Company computed the fair value of the promissory notes to be $3,280 and the fair value of the call option to be $60. Due to the decrease in the fair market value of the promissory notes, the Company recorded a charge of $2,120 and $1,820 in other expense for the three and six months ended June 30, 2016, respectively. Due to a decline in the forecasted revenue and future cash flow outlook of Plain Vanilla, the fair value