glu_Current folio_10Q

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


FORM 10-Q


(Mark One)

 

 

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

 

For the Quarterly Period Ended September 30, 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 November 1, 2016: 133,463,532.

 

 

 


 

Table of Contents

GLU MOBILE INC.

 

FORM 10-Q

 

Quarterly Period Ended September 30, 2016

 

TABLE OF CONTENTS

 

 

 

 

Page

PART I. FINANCIAL INFORMATION 

 

 

 

ITEM 1. FINANCIAL STATEMENTS (Unaudited) 

 

 

 

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

 

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 and Three and Nine Months Ended September 30, 2015 

 

 

Condensed Consolidated Statements of Comprehensive (Loss)/Income for the Three and Nine Months Ended September 30, 2016 and Three and Nine Months Ended September 30, 2015 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and September 30, 2015 

 

 

Notes to Condensed Consolidated Financial Statements 

 

 

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

27 

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 

44 

 

 

ITEM 4. CONTROLS AND PROCEDURES 

45 

 

 

PART II. OTHER INFORMATION 

 

 

 

ITEM 1. LEGAL PROCEEDINGS 

47 

 

 

ITEM 1A. RISK FACTORS 

47 

 

 

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

74 

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES 

74 

 

 

ITEM 4. MINE SAFETY DISCLOSURES 

74 

 

 

ITEM 5. OTHER INFORMATION 

74 

 

 

ITEM 6. EXHIBITS 

74 

 

 

SIGNATURES 

75 

 

 

 

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 

 

December 31, 

 

 

   

2016

   

2015

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

147,515

 

$

180,542

 

Accounts receivable, net

 

 

14,161

 

 

17,956

 

Prepaid royalties (including prepaid royalties to a related party of $0 and $7,949 as of September 30, 2016 and December 31, 2015, respectively)

 

 

10,464

 

 

23,715

 

Prepaid expenses and other assets

 

 

18,392

 

 

14,841

 

Total current assets

 

 

190,532

 

 

237,054

 

Property and equipment, net

 

 

5,539

 

 

5,447

 

Restricted cash

 

 

1,162

 

 

1,498

 

Long-term prepaid royalties (including long-term prepaid royalties to a related party of $0 and $2,051 as of September 30, 2016 and December 31, 2015, respectively)

 

 

31,877

 

 

46,944

 

Other long-term assets

 

 

3,866

 

 

1,386

 

Intangible assets, net (including intangible assets acquired from a related party of $0 and $5,000 as of September 30, 2016 and December 31, 2015, respectively)

 

 

10,891

 

 

22,767

 

Goodwill

 

 

88,108

 

 

87,890

 

Total assets

 

$

331,975

 

$

402,986

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

10,647

 

$

9,386

 

Accrued liabilities

 

 

1,646

 

 

1,654

 

Accrued compensation

 

 

9,342

 

 

7,100

 

Accrued royalties (including accrued royalties to a related party of $0 and $10,449 as of September 30, 2016 and December 31, 2015, respectively)

 

 

7,769

 

 

21,032

 

Accrued restructuring

 

 

381

 

 

342

 

Deferred revenue

 

 

32,426

 

 

31,112

 

Total current liabilities

 

 

62,211

 

 

70,626

 

Long-term accrued royalties (including long-term accrued royalties to a related party of $0 and $2,051 as of September 30, 2016 and December 31, 2015, respectively)

 

 

21,384

 

 

24,347

 

Other long-term liabilities

 

 

1,331

 

 

1,585

 

Total liabilities

 

 

84,926

 

 

96,558

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

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

 

 

 —

 

 

 —

 

Common stock, $0.0001 par value; 250,000 shares authorized at September 30, 2016 and December 31, 2015; 133,464 and 131,580 shares issued and outstanding at September 30, 2016 and December 31, 2015

 

 

14

 

 

13

 

Additional paid-in capital

 

 

568,396

 

 

557,748

 

Accumulated other comprehensive income/(loss)

 

 

113

 

 

(85)

 

Accumulated deficit

 

 

(321,474)

 

 

(251,248)

 

Total stockholders’ equity

 

 

247,049

 

 

306,428

 

Total liabilities and stockholders’ equity

 

$

331,975

 

$

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

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

 

2016

   

2015

   

2016

   

2015

   

Revenue

 

$

51,381

 

$

63,250

   

$

154,272

 

$

188,870

   

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Platform commissions, royalties and other

 

 

18,918

 

 

25,890

 

 

57,771

 

 

73,431

 

Impairment of prepaid royalties and minimum guarantees (including impairment of prepaid royalties and minimum guarantees paid to a related party of $9,866 for the three and nine months ended September 30, 2016, and $0 for the three and nine months ended September 30, 2015, respectively)

 

 

29,836

 

 

1,555

 

 

29,984

 

 

1,644

 

Impairment and amortization of intangible assets (including impairment and amortization of intangible assets acquired from a related party of $5,000 for the three and nine months ended September 30, 2016, and $0 for the three and nine months ended September 30, 2015, respectively)

 

 

7,320

 

 

2,360

 

 

11,981

 

 

7,228

 

Total cost of revenue

 

 

56,074

 

 

29,805

 

 

99,736

 

 

82,303

 

Gross (loss)/profit

 

 

(4,693)

 

 

33,445

 

 

54,536

 

 

106,567

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

20,080

 

 

16,304

 

 

61,113

 

 

52,855

 

Sales and marketing

 

 

10,104

 

 

12,302

 

 

33,663

 

 

37,511

 

General and administrative

 

 

7,011

 

 

4,419

 

 

22,091

 

 

19,254

 

Amortization of intangible assets

 

 

 —

 

 

31

 

 

 —

 

 

190

 

Restructuring charge

 

 

57

 

 

 —

 

 

2,279

 

 

 —

 

Total operating expenses

 

 

37,252

 

 

33,056

 

 

119,146

 

 

109,810

 

(Loss)/income from operations

 

 

(41,945)

 

 

389

 

 

(64,610)

 

 

(3,243)

 

Interest and other expense, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

12

 

 

15

 

 

58

 

 

34

 

Other expense

 

 

(1,665)

 

 

(167)

 

 

(5,695)

 

 

(644)

 

Interest and other expense, net

 

 

(1,653)

 

 

(152)

 

 

(5,637)

 

 

(610)

 

(Loss)/income before income taxes

 

 

(43,598)

 

 

237

 

 

(70,247)

 

 

(3,853)

 

Income tax benefit/(provision)

 

 

(129)

 

 

(79)

 

 

21

 

 

(374)

 

Net (loss)/income

 

$

(43,727)

 

$

158

 

$

(70,226)

 

$

(4,227)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 Basic

 

$

(0.33)

 

$

0.00

 

$

(0.54)

 

$

(0.04)

 

 Diluted

 

$

(0.33)

 

$

0.00

 

$

(0.54)

 

$

(0.04)

 

Weighted average common shares outstanding - basic and diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 Basic

 

 

133,110

 

 

127,287

 

 

131,160

 

 

115,775

 

 Diluted

 

 

133,110

 

 

131,486

 

 

131,160

 

 

115,775

 

 

 

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)/INCOME

(Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

 

2016

   

2015

   

2016

   

2015

   

Net (loss)/income

 

$

(43,727)

 

$

158

 

$

(70,226)

 

$

(4,227)

 

Other comprehensive (loss)/income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments (1)

 

 

812

 

 

10

 

 

198

 

 

(9)

 

Other comprehensive (loss)/income:

 

 

812

 

 

10

 

 

198

 

 

(9)

 

Comprehensive (loss)/income

 

$

(42,915)

 

$

168

 

$

(70,028)

 

$

(4,236)

 

 

(1)

Includes write-off of cumulative translation adjustment upon substantial liquidation of the Company’s United Kingdom entity which is recognized in other expense in the Company’s consolidated statement of operations for the three and nine months ended September 30, 2016.

 

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

 

 

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GLU MOBILE INC. 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

   

2016

   

2015

    

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(70,226)

 

$

(4,227)

 

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

 

 

 

 

 

 

 

Depreciation

 

 

2,145

 

 

2,156

 

Impairment and amortization of intangible assets (including impairment and amortization of intangible assets acquired from a related party of $5,000 for the nine months ended September 30, 2016, and $0 for the nine months ended September 30, 2015, respectively)

 

 

11,981

 

 

7,418

 

Change in fair value of investments        

 

 

2,390

 

 

 —

 

Non-cash foreign currency translation loss

 

 

705

 

 

643

 

Stock-based compensation

 

 

9,596

 

 

8,217

 

Non-cash warrant (benefit)/expense

 

 

(29)

 

 

2,124

 

Impairment of prepaid royalties and minimum guarantees (including impairment of prepaid royalties and minimum guarantees paid to a related party of $9,866 for the nine months ended September 30, 2016, and $0 for the  nine months ended September 30, 2015, respectively)

 

 

29,984

 

 

1,644

 

Impairment of investments

 

 

2,600

 

 

 —

 

Changes in allowance for doubtful accounts

 

 

(120)

 

 

418

 

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

 

 

 

 

 

 

 

Accounts receivable

 

 

3,751

 

 

5,471

 

Prepaid royalties

 

 

(16,139)

 

 

(25,388)

 

Prepaid expenses and other assets

 

 

(1,153)

 

 

(636)

 

Accounts payable and other accrued liabilities

 

 

674

 

 

(1,200)

 

Accrued liabilities

 

 

(14)

 

 

(58)

 

Accrued compensation

 

 

2,246

 

 

(5,222)

 

Accrued royalties and license fees

 

 

748

 

 

(1,895)

 

Deferred revenue

 

 

1,312

 

 

(3,177)

 

Accrued restructuring

 

 

40

 

 

 —

 

Other long-term liabilities

 

 

(93)

 

 

(392)

 

Net cash used in operating activities

 

 

(19,602)

 

 

(14,104)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(1,702)

 

 

(1,538)

 

Net cash paid for acquisitions

 

 

(358)

 

 

(1,916)

 

Decrease in restricted cash

 

 

336

 

 

492

 

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

 

 

(9,500)

 

 

 —

 

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

 

 

(2,500)

 

 

 —

 

Other investing activities

 

 

 —

 

 

(250)

 

Net cash used in investing activities

 

 

(13,724)

 

 

(3,212)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from exercise of stock options and purchases under the ESPP

 

 

2,164

 

 

5,360

 

Taxes paid related to net share settlement of equity awards

 

 

(1,602)

 

 

(2,403)

 

Excess tax benefit from stock awards

 

 

 —

 

 

178

 

Proceeds from exercise of stock warrants and issuance of common stock

 

 

 —

 

 

675

 

Proceeds from private offering, net of issuance costs

 

 

 —

 

 

125,156

 

Net cash provided by financing activities

 

 

562

 

 

128,966

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

(263)

 

 

(213)

 

Net (decrease)/increase in cash and cash equivalents

 

 

(33,027)

 

 

111,437

 

Cash and cash equivalents at beginning of period

 

 

180,542

 

 

70,912

 

Cash and cash equivalents at end of period

 

$

147,515

 

$

182,349

 

 

 

 

 

 

 

 

 

 

 

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 September 30, 2016 and its unaudited condensed consolidated results of operations for the three and nine months ended September 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 September 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

 

 

Nine Months Ended

 

 

 

September 30, 

 

 

September 30, 

 

 

    

2016

 

   

2015

 

   

2016

 

   

2015

 

Apple

 

52.7

%  

 

51.7

%  

 

52.9

%  

 

52.7

%  

Google

 

27.1

%  

 

26.7

%  

 

26.9

%  

 

26.7

%  

 

At September 30, 2016, Apple Inc. (“Apple”) accounted for 35.3%, Jirbo Inc. (dba AdColony) (“AdColony”) accounted for 23.0%, and Google Inc. (“Google”) accounted for 21.9% 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 the Company’s 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 October 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 requires that an entity recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing existing diversity in practice. The guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements.

 

In March 2016, FASB issued 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

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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 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 consolidated 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.

 

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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 that the updated guidance provided by these three new ASUs will have on its consolidated financial statements.

 

Note 2 — Net (Loss)/Income Per Share

 

The Company computes basic net (loss)/income/ 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 (loss)/income per share reflects the potential dilution that could occur from common shares issuable through stock-based compensation plans (including stock options, restricted stock units (“RSUs”) and common stock issuable through the Company’s employee stock purchase plan), and warrants by application of the treasury stock method.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

 

2016

   

2015

 

2016

   

2015

   

Net (loss)/income

 

$

(43,727)

 

$

158

 

$

(70,226)

 

$

(4,227)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

   Weighted average common shares outstanding

 

 

133,110

 

 

130,926

 

 

132,499

 

 

119,414

 

   Weighted average common shares subject to restrictions

 

 

 —

 

 

(3,639)

 

 

(1,339)

 

 

(3,639)

 

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

 

 

133,110

 

 

127,287

 

 

131,160

 

 

115,775

 

Dilutive potential common shares

 

 

 —

 

 

4,199

 

 

 —

 

 

 —

 

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

 

 

133,110

 

 

131,486

 

 

131,160

 

 

115,775

 

Basic net (loss)/income per share

 

$

(0.33)

 

$

0.00

 

$

(0.54)

 

$

(0.04)

 

Diluted net (loss)/income per share

 

$

(0.33)

 

$

0.00

 

$

(0.54)

 

$

(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 RSUs have been excluded from the computation of net (loss)/income per share of common stock for the periods presented because including them would have had an anti-dilutive effect:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

 

2016

    

2015

 

2016

 

2015

    

Warrants to purchase common stock

 

 

4,267

 

 

2,606

 

 

4,267

 

 

3,687

 

Unvested common shares subject to restrictions

 

 

 —

 

 

3,267

 

 

1,339

 

 

3,639

 

Options to purchase common stock

 

 

6,936

 

 

5,029

 

 

7,048

 

 

6,766

 

RSUs

 

 

7,599

 

 

4,738

 

 

7,487

 

 

5,375

 

 

 

 

18,802

 

 

15,640

 

 

20,141

 

 

19,467

 

 

 

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.

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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. 

 

As of September 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

    

September 30, 2016

 

Financial Assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

147,515

$

 —

$

 —

$

147,515

 

Restricted cash

 

1,162

 

 —

 

 —

 

1,162

 

Convertible promissory note investment in Plain Vanilla Corp.

 

 —

 

 —

 

2,710

 

2,710

 

Call option to acquire Plain Vanilla Corp. (1)

 

 —

 

 —

 

 —

 

 —

 

Total Financial Assets

$

148,677

$

 —

$

2,710

$

151,387

 


(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. 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.

 

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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 25% 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

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2016

   

2016

 

 

 

 

 

 

 

Dividend yield

 

 —

%

 

 —

%

Risk-free interest rate

 

0.35

%

 

0.41

%

Expected volatility

 

66.65

%

 

63.88

%

Expected term (in years)

 

0.34

 

 

0.68

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2016

 

 

 

Asset at the

 

 

 

Impairment

 

 

 

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

$

 —

$

(2,390)

$

2,710

 

Call option to acquire Plain Vanilla Corp. (1)

$

 —

$

2,400

$

(2,400)

 

 —

$

 —

 


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

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

    

 

   

2016

   

2015

   

Accounts receivable

 

$

14,997

 

$

18,672

 

Less: Allowance for doubtful accounts

 

 

(836)

 

 

(716)

 

 

 

$

14,161

 

$

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 nine months ended September 30, 2016 and 2015.

 

Prepaid Expenses and Other Assets

 

 

 

 

 

 

 

 

 

 

 

September 30, 

    

December 31, 

 

 

   

2016

   

2015

   

Deferred platform commission fees

 

$

8,445

 

$

7,675

 

Convertible promissory notes investment in Plain Vanilla Corp.

 

 

2,710

 

 

 —

 

Deferred royalties

 

 

3,075

 

 

2,668

 

Taxes receivable                    

 

 

63

 

 

759

 

Other

 

 

4,099

 

 

3,739

 

 

 

$

18,392

 

$

14,841

 

 

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Property and Equipment

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

    

 

   

2016

   

2015

   

Computer equipment

 

$

6,581

 

$

6,106

 

Furniture and fixtures

 

 

1,035

 

 

1,053

 

Software

 

 

7,872

 

 

7,408

 

Leasehold improvements

 

 

4,911

 

 

3,661

 

 

 

 

20,399

 

 

18,228

 

Less: Accumulated depreciation and amortization

 

 

(14,860)

 

 

(12,781)

 

 

 

$

5,539

 

$

5,447

 

 

Depreciation expense for the three months ended September 30, 2016 and 2015 was $768 and $718, respectively. Depreciation expense for the nine months ended September 30, 2016 and 2015 was $2,145  and $2,156, respectively.

 

 

Other Long-Term Liabilities

 

 

 

 

 

 

 

 

 

 

 

September 30, 

    

December 31, 

 

 

    

2016

   

2015

    

Deferred rent

 

$

471

 

$

692

 

Uncertain tax position obligations

 

 

704

 

 

567

 

Other

 

 

156

 

 

326

 

 

 

$

1,331

 

$

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 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

 

$

23,147

 

$

(16,898)

 

$

6,249

 

$

34,750

 

$

(22,954)

 

$

11,796

 

Catalogs

 

1 yr

 

 

 —

 

 

 —

 

 

 —

 

 

1,152

 

 

(1,152)

 

 

 —

 

ProvisionX Technology

 

6 yrs

 

 

 —

 

 

 —

 

 

 —

 

 

190

 

 

(190)

 

 

 —

 

Carrier contract and related relationships

 

5 yrs

 

 

14,400

 

 

(11,549)

 

 

2,851

 

 

24,200

 

 

(20,597)

 

 

3,603

 

Licensed content

 

2.5 - 5 yrs

 

 

2,430

 

 

(2,430)

 

 

 —

 

 

7,866

 

 

(2,866)

 

 

5,000

 

Service provider license

 

9 yrs

 

 

220

 

 

(215)

 

 

5

 

 

454

 

 

(406)

 

 

48

 

Trademarks

 

7 yrs

 

 

5,122

 

 

(3,336)

 

 

1,786

 

 

5,217

 

 

(2,897)

 

 

2,320

 

 

 

 

 

 

45,319

 

 

(34,428)

 

 

10,891

 

 

73,829

 

 

(51,062)

 

 

22,767

 

Other intangible assets amortized to operating expenses: