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, 2017

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

◻  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

 

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, 2017: 135,415,000

 

 

 


 

Table of Contents

GLU MOBILE INC.

 

FORM 10-Q

 

Quarterly Period Ended June 30, 2017

 

TABLE OF CONTENTS

 

 

 

 

Page

PART I. FINANCIAL INFORMATION 

 

 

 

ITEM 1. FINANCIAL STATEMENTS (Unaudited) 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016 

3

 

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2017 and Three and Six Months Ended June 30, 2016 

4

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2017 and Three and Six Months Ended June 30, 2016 

5

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and June 30, 2016 

6

 

 

Notes to Unaudited Condensed Consolidated Financial Statements 

7

 

 

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

26

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 

39

 

 

ITEM 4. CONTROLS AND PROCEDURES 

40

 

 

 

 

PART II. OTHER INFORMATION 

 

 

 

ITEM 1. LEGAL PROCEEDINGS 

41

 

 

ITEM 1A. RISK FACTORS 

41

 

 

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

68

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES 

68

 

 

ITEM 4. MINE SAFETY DISCLOSURES 

68

 

 

ITEM 5. OTHER INFORMATION 

68

 

 

ITEM 6. EXHIBITS 

68

 

 

SIGNATURES 

69

 

 

 

 

 

2


 

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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, 

    

 

   

2017

   

2016

   

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

68,113

 

$

102,102

 

Accounts receivable, net

 

 

32,211

 

 

21,477

 

Prepaid royalties

 

 

8,699

 

 

12,465

 

Restricted cash

 

 

752

 

 

 —

 

Prepaid expenses and other assets

 

 

28,542

 

 

18,986

 

Total current assets

 

 

138,317

 

 

155,030

 

Property and equipment, net

 

 

4,414

 

 

5,640

 

Restricted cash

 

 

 —

 

 

1,312

 

Long-term prepaid royalties

 

 

35,056

 

 

31,288

 

Other long-term assets

 

 

5,949

 

 

3,506

 

Intangible assets, net

 

 

19,463

 

 

25,896

 

Goodwill

 

 

116,863

 

 

116,832

 

Total assets

 

$

320,062

 

$

339,504

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

18,496

 

$

16,298

 

Accrued liabilities

 

 

1,489

 

 

1,788

 

Accrued compensation

 

 

15,074

 

 

12,495

 

Accrued royalties

 

 

10,214

 

 

8,623

 

Accrued restructuring

 

 

713

 

 

271

 

Deferred revenue

 

 

69,859

 

 

44,865

 

Total current liabilities

 

 

115,845

 

 

84,340

 

Long-term accrued royalties

 

 

10,101

 

 

20,836

 

Other long-term liabilities

 

 

1,055

 

 

1,514

 

Total liabilities

 

 

127,001

 

 

106,690

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value; 5,000 shares authorized at June 30, 2017 and December 31, 2016; no shares issued and outstanding at June 30, 2017 and December 31, 2016

 

 

 —

 

 

 —

 

Common stock, $0.0001 par value; 250,000 shares authorized at June 30, 2017 and December 31, 2016; 135,415 and 134,001 shares issued and outstanding at June 30, 2017 and December 31, 2016

 

 

13

 

 

13

 

Additional paid-in capital

 

 

577,711

 

 

571,243

 

Accumulated other comprehensive income

 

 

210

 

 

246

 

Accumulated deficit

 

 

(384,873)

 

 

(338,688)

 

Total stockholders’ equity

 

 

193,061

 

 

232,814

 

Total liabilities and stockholders’ equity

 

$

320,062

 

$

339,504

 

 

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

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

 

2017

   

2016

   

2017

   

2016

   

Revenue

 

$

68,679

 

$

48,363

   

$

125,467

 

$

102,892

   

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Platform commissions, royalties and other

 

 

24,761

 

 

18,534

 

 

45,621

 

 

38,854

 

Impairment of prepaid royalties and minimum guarantees

 

 

 —

 

 

105

 

 

792

 

 

148

 

Amortization of intangible assets

 

 

3,171

 

 

2,336

 

 

6,433

 

 

4,660

 

Total cost of revenue

 

 

27,932

 

 

20,975

 

 

52,846

 

 

43,662

 

Gross profit

 

 

40,747

 

 

27,388

 

 

72,621

 

 

59,230

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

23,989

 

 

20,721

 

 

49,022

 

 

41,033

 

Sales and marketing

 

 

30,952

 

 

10,935

 

 

48,240

 

 

23,559

 

General and administrative

 

 

8,678

 

 

7,096

 

 

17,175

 

 

15,081

 

Restructuring charge

 

 

926

 

 

2,116

 

 

4,638

 

 

2,221

 

Total operating expenses

 

 

64,545

 

 

40,868

 

 

119,075

 

 

81,894

 

Loss from operations

 

 

(23,798)

 

 

(13,480)

 

 

(46,454)

 

 

(22,664)

 

Interest and other expense, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

13

 

 

25

 

 

20

 

 

45

 

Other income /(expense)

 

 

40

 

 

(4,478)

 

 

(89)

 

 

(4,030)

 

Interest and other income/(expense), net

 

 

53

 

 

(4,453)

 

 

(69)

 

 

(3,985)

 

Loss before income taxes

 

 

(23,745)

 

 

(17,933)

 

 

(46,523)

 

 

(26,649)

 

Income tax benefit/(expense)

 

 

177

 

 

(16)

 

 

189

 

 

151

 

Net loss

 

$

(23,568)

 

$

(17,949)

 

$

(46,334)

 

$

(26,498)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share - basic and diluted

 

 

(0.17)

 

 

(0.14)

 

 

(0.34)

 

 

(0.20)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic and diluted

 

 

135,065

 

 

131,198

 

 

134,700

 

 

130,185

 

 

 

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, 

 

 

 

2017

   

2016

   

2017

   

2016

   

Net loss

 

$

(23,568)

 

$

(17,949)

 

$

(46,334)

 

$

(26,498)

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(24)

 

 

(420)

 

 

(36)

 

 

(614)

 

Other comprehensive loss:

 

 

(24)

 

 

(420)

 

 

(36)

 

 

(614)

 

Comprehensive loss

 

$

(23,592)

 

$

(18,369)

 

$

(46,370)

 

$

(27,112)

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

 

 

   

2017

   

2016

    

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(46,334)

 

$

(26,498)

 

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

 

 

 

 

 

 

 

Depreciation

 

 

1,620

 

 

1,376

 

Amortization of intangible assets

 

 

6,433

 

 

4,660

 

Change in fair value of investments

 

 

 —

 

 

1,820

 

Stock-based compensation

 

 

7,064

 

 

6,506

 

Impairment of investments

 

 

 —

 

 

2,540

 

Impairment of prepaid royalties and minimum guarantees

 

 

792

 

 

148

 

Other non-cash adjustments

 

 

315

 

 

(233)

 

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

 

 

 

 

 

 

 

Accounts receivable

 

 

(10,666)

 

 

3,347

 

Prepaid royalties

 

 

(10,712)

 

 

(4,711)

 

Prepaid expenses and other assets

 

 

(11,180)

 

 

(400)

 

Accounts payable and other accrued liabilities

 

 

2,115

 

 

(40)

 

Accrued liabilities

 

 

(158)

 

 

(63)

 

Accrued compensation

 

 

2,581

 

 

902

 

Accrued royalties

 

 

773

 

 

(1,859)

 

Deferred revenue

 

 

24,995

 

 

2,130

 

Accrued restructuring

 

 

442

 

 

628

 

Other long-term liabilities

 

 

(490)

 

 

(63)

 

Net cash used in operating activities

 

 

(32,410)

 

 

(9,810)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(751)

 

 

(906)

 

Decrease in restricted cash

 

 

560

 

 

336

 

Investments in Plain Vanilla Corp and Dairy Free Games, Inc. (Note 7)

 

 

 —

 

 

(9,500)

 

Purchase of intangible assets (including purchase of intangible assets from a related party of $0 and $2,500 for the six months ended June 30, 2017, and June 30, 2016, respectively)

 

 

 —

 

 

(2,500)

 

Other investing activities

 

 

(810)

 

 

 —

 

Net cash used in investing activities

 

 

(1,001)

 

 

(12,570)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from exercise of stock options and purchases under the ESPP

 

 

781

 

 

1,029

 

Taxes paid related to net share settlement of equity awards

 

 

(1,240)

 

 

(1,301)

 

Proceeds from exercise of stock warrants and issuance of common stock

 

 

 —

 

 

255

 

Net cash used in financing activities

 

 

(459)

 

 

(17)

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

(119)

 

 

(108)

 

Net decrease in cash and cash equivalents

 

 

(33,989)

 

 

(22,505)

 

Cash and cash equivalents at beginning of period

 

 

102,102

 

 

180,542

 

Cash and cash equivalents at end of period

 

$

68,113

 

$

158,037

 

 

 

 

 

 

 

 

 

 

 

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

(Dollar and share amounts 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 for 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 third-party licensed brands, properties and other content.

 

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, 2016 filed with the SEC on March 10, 2017. 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, 2017 and its unaudited condensed consolidated results of operations for the three and six months ended June 30, 2017 and 2016, 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, 2016 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, 2017 has been derived from the unaudited condensed consolidated financial statements as of that date. Certain prior year balances have been reclassified to conform to the current year presentation. Such reclassifications did not affect revenue, operating loss, net loss, cash flows, total assets, total liabilities or stockholders’ equity.

 

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.

 

Revenue Recognition

 

The Company generates revenue through in-app purchases within its games on smartphones and tablets, such as Apple’s iPhone and iPad and mobile devices utilizing Google’s Android operating system. Smartphone and tablet games are distributed primarily through Digital Storefronts.

 

Revenue

 

The Company distributes its games for smartphones and tablets to the end customer through Digital Storefronts. Within these Digital Storefronts, users can download the Company’s free-to-play games and pay to acquire virtual currency which can be redeemed in the game for virtual goods. The Company recognizes revenue, when persuasive evidence of an arrangement exists, the service has been provided to the user, the price paid by the user is fixed or determinable, and collectability is reasonably assured. Determining whether and when some of these criteria have been satisfied requires judgments that may have a significant impact on the timing and amount of revenue the Company reports in each period. For the purposes of determining when the service has been provided to the player, the Company has determined that an implied obligation exists to the paying user to continue displaying the purchased virtual goods within the game over the estimated average playing period of paying players for the game, which represents the Company’s best estimate of the estimated average life of virtual goods.

 

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The Company sells both consumable and durable virtual goods and receives reports from the Digital Storefronts, which breakdown the various purchases made from their games over a given time period. The Company reviews these reports and determines on a per-item basis whether the purchase was a consumable virtual good or a durable virtual good. Consumable goods are items that can be purchased directly by the player through the Digital Storefront and are consumed at a predetermined time or otherwise have limitations on repeated use, while durable goods are items that remain in the game for as long as the player continues to play. The Company’s revenue from consumable virtual goods has been insignificant over the previous two years. The Company recognizes revenue from consumable virtual goods immediately, since it believes that the delivery obligation has been met and there are no further implicit or explicit performance obligations related to the purchase of that consumable virtual good. Revenue from durable virtual goods are generated through the purchase of virtual coins by users through a Digital Storefront. Players convert the virtual coins within the game to durable virtual goods such as weapons, armor or other accessories to enhance their game-playing experience. The Company believes this represents an implied service obligation, and accordingly, recognizes the revenue from the purchase of these durable virtual goods over the estimated average playing period of paying users. Based on the Company’s analysis, the estimated weighted average useful life of a paying user has been determined to range from three to eight months. If a new game is launched and only a limited period of paying player data is available, then the Company also considers other quantitative and qualitative factors, such as the playing patterns for paying users for other games with similar characteristics. 

 

The Company computes its estimated average playing period of paying users at least twice each year. It has examined the playing patterns of paying users across a representative sample of its games across various genres.  

 

At the start of the second quarter of 2017, the Company began using a new model to estimate the average playing period for paying users. As the Company continues to execute on its strategy in developing new content for its existing evergreen and growth titles, the Company re-evaluated its existing estimation methodology and concluded that the “survival analysis” model provides for a singular approach to estimating the average playing period of paying users on a title by title basis for the Company’s diverse portfolio of games. The new model is a statistical model that analyzes time duration until one or more events happens. It is a commonly used model in various industries for estimating lifespans. The Company believes this is an appropriate model to estimate the average playing period of paying users for its titles as this model statistically estimates the average playing period of each title by analyzing the historical behavior patterns of paying users.

 

This model requires the stratification of user data into active and inactive monetizing users on a per title basis. Active users are those who are active in the game for the past 30 days as of the evaluation date. The remaining users are considered inactive and deemed to have churned from the game. These users are treated mathematically differently in the model than those who are still active. A distribution curve is then fit to the user data to estimate the average playing period of paying users on a per title basis.

 

The Company has selected a threshold of 120 days from the commercial launch of a title as the minimum number of days of data required for this model. This threshold was deemed to be appropriate as the Company tested the model using lower thresholds which resulted in inconsistencies in the estimate of the average playing period of paying users. For new titles with less than 120 days of data that share similar attributes with an existing title and/or prequel titles, the average playing period will be determined based on the average playing period of that existing title or prequel title, as applicable. For all other titles with less than 120 days of data, the average playing period will be determined based on the average playing period of all other remaining existing titles. The selection of the new model is considered a change in accounting estimates which was implemented in the quarter ended June 30, 2017 and had no material impact on the estimated average playing period of paying users.   

 

While the Company believes its estimates to be reasonable based on available game player information, it may revise such estimates in the future if a titles’ user characteristics change. Any adjustments arising from changes in the estimates of the average playing period for paying users would be applied to the current quarter and prospectively on the basis that such changes are caused by new information that indicates a change in user behavior patterns compared to historical titles. Any changes in the Company’s estimates of the useful life of virtual goods in a certain title may result in revenue being recognized on a basis different from prior periods’ and may cause its operating results to fluctuate.

 

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The Company also has relationships with certain advertising service providers for advertisements within smartphone games and revenue from these advertising providers is generated through impressions, clickthroughs, banner ads and offers. Revenue is recognized as advertisements are delivered and reported to the Company, an executed contract exists, the price is fixed or determinable and collectability has been reasonably assured. Delivery generally occurs when the advertisement has been displayed or the offer has been completed by the user. The fee received for certain offer advertisements that result in the user receiving virtual currency for redemption within a game are deferred and recognized over the average playing period of paying users.

 

Other Estimates and Judgments

 

The Company estimates revenue from Digital Storefronts and advertising service providers in the current period when reasonable estimates of these amounts can be made. Certain Digital Storefronts and advertising service providers provide reliable interim preliminary reporting and others report sales data within a reasonable time frame following the end of each month, both of which allow the Company to make reasonable estimates of revenue and therefore to recognize revenue during the reporting period. Determination of the appropriate amount of revenue recognized involves judgments and estimates that the Company believes are reasonable, but it is possible that actual results may differ from the Company’s estimates. When the Company receives the final reports, to the extent not received within a reasonable time frame following the end of each month, the Company records any significant differences between estimated revenue and actual revenue in the reporting period when the Company determines the actual amounts. Historically, the revenue on a final revenue report has not differed significantly from the reported revenue for the period.

 

Principal Agent Considerations

 

In accordance with ASC 605-45, Revenue Recognition: Principal Agent Considerations, the Company evaluates its Digital Storefront and advertising service provider agreements in order to determine whether or not it is acting as the principal or as an agent when selling its games or when selling advertisements within its games, which it considers in determining if revenue should be reported on a gross or net basis. The Company primarily uses Digital Storefronts for distributing its smartphone games and advertising service providers for serving advertisements within its games. Key indicators that the Company evaluates to reach this determination include:

 

·

the terms and conditions of the Company’s contracts with the Digital Storefronts and advertising service providers;

 

·

the party responsible for billing and collecting fees from the end-users, including the resolution of billing disputes;

 

·

whether the Company is paid a fixed percentage of the arrangement’s consideration or a fixed fee for each game, transaction, or advertisement;

 

·

which party sets pricing with the end-user, has the credit risk and provides customer support; and

 

·

which party is responsible for the fulfillment of the game or serving of advertisements and determines the specifications of the game or advertisement.

 

Based on the evaluation of the above indicators, the Company has determined that it is generally acting as a principal and is the primary obligor to end-users for smartphone games distributed through digital storefronts and advertisements served through our advertising service providers. Therefore, the Company recognizes revenue related to these arrangements on a gross basis, when the necessary information about the gross amounts or platform fees charged, before any adjustments, are made available by the Digital Storefronts and advertising service providers.

 

 

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.

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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, generally, 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 in excess of 10% of the Company’s revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30, 

 

 

June 30, 

 

 

    

2017

 

   

2016

 

   

2017

 

   

2016

 

Apple

 

52.8

%  

 

54.8

%  

 

52.9

%  

 

52.9

%  

Google

 

31.7

%  

 

26.1

%  

 

30.8

%  

 

26.8

%  

 

At June 30, 2017, Apple Inc. (“Apple”) accounted for 59.9% and Google Inc. (“Google”) accounted for 17.9% of total accounts receivable. At December 31, 2016, Apple accounted for 43.9%, Google accounted for 22.3%, Jirbo, Inc. (dba AdColony) accounted for 10.8%, and Fyber GmbH accounted for 10.5%, 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”) No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The new guidance, which simplifies the accounting and presentation for share-based payments, provides for a number of amendments which impact the accounting for income taxes and the accounting for forfeitures. ASU 2016-09 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016 and requires varied adoption methods for each respective amendment. The Company adopted this guidance in the first quarter of 2017 and elected to change its policy on accounting for forfeitures and recognize them as they occur using the modified retrospective transition method. This resulted in a cumulative-effect adjustment of $148 between opening accumulated deficit and additional paid in capital balance as of January 1, 2017. In addition, the other amendments related to accounting for income taxes and statutory tax withholding requirements were adopted using a prospective transition method and did not have a material impact on the Company’s consolidated financial statements.

 

In December 2016, the FASB issued ASU No. 2016-19, Technical Corrections and Improvements. The amendments in ASU No. 2016-19 represent changes to clarify the accounting standard codification, correct unintended application of guidance, or make minor improvements to the accounting standards codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. For public companies, the standard is effective immediately for amendments that do not have transition guidance. Amendments that are subject to transition guidance, the effective date is interim and annual reporting periods beginning after December 15, 2016. The Company adopted the standard immediately upon issuance for amendments that do not have transition guidance and effective January 1, 2017 for amendments that are subject to transition guidance. The adoption of the standard did not have an impact on the Company’s consolidated financial statements.

 

In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. It is effective prospectively for the annual period ending December 31, 2018 and interim periods within that annual period. Early adoption is permitted. The impact of the new standard on the Company's results of operations,

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financial condition, or cash flows subsequent to adoption will be dependent on the terms and conditions of any modifications made to share-based awards after fiscal 2017.

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350),  Simplifying the Test for Goodwill Impairment. This new accounting standard update simplifies the measurement of goodwill by eliminating the Step 2 impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill.  The new guidance requires an entity to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.  The new guidance becomes effective for goodwill impairment tests in fiscal years beginning after December 15, 2019, though early adoption is permitted.  The Company is currently assessing the impact of this new guidance.

 

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805), which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The standard will be effective in the first quarter of fiscal 2019. Early adoption is permitted. The Company is currently evaluating the impact that this standard will have on its consolidated financial statements.

 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown in the statement of cash flows. The standard will be effective in the first quarter of fiscal 2018. 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 October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. ASU No. 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 adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU No. 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 adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases. The 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 No. 2016-01, Financial Instruments - Overall - Recognition and Measurement of Financial Assets and Financial Liabilities. The 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 May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. Under the standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount

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that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted for annual reporting periods beginning after December 15, 2016. The Company does not plan to early adopt, and accordingly, will adopt the new standard effective January 1, 2018. The FASB recently issued several amendments to the standard, including clarifications on disclosure of prior-period performance obligations and remaining performance obligations.

 

The standard permits the use of either a full retrospective or modified retrospective transition method. The Company has concluded it will apply the modified retrospective approach when it adopts the standard in the first quarter of 2018.

 

The Company has completed the evaluation of the impact of the new standard in relation to the revenue recognition of micro-transactions and advertisement revenue; the assessment of the impact in relation to the revenue derived from offer advertisements is currently being evaluated by the Company. Further, the Company anticipates that it will continue to be considered the principal in its transactions and as the primary obligor to end-users for smartphone games distributed through Digital Storefronts and advertisements served through its advertising service providers. Therefore, revenue related to these arrangements will continue to be recognized on a gross basis, if the necessary information about the gross amounts or platform fees charged, before any adjustments, are made available to the Company by the Digital Storefronts and advertising service providers.

 

 

 

 

Note 2 — Net Loss Per Share

 

The Company computes 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, 

 

 

 

2017

   

2016

 

2017

   

2016

   

Net loss

 

$

(23,568)

 

$

(17,949)

 

$

(46,334)

 

$

(26,498)

 

Shares used to compute net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

135,065

 

 

132,517

 

 

134,700

 

 

132,194

 

Weighted average common shares subject to restrictions

 

 

 —

 

 

(1,319)

 

 

 —

 

 

(2,009)

 

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

 

 

135,065

 

 

131,198

 

 

134,700

 

 

130,185

 

Net loss per share - basic and diluted

 

$

(0.17)

 

$

(0.14)

 

$

(0.34)

 

$

(0.20)

 

 

The weighted average of the following 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, 

 

 

 

2017

    

2016

 

2017

 

2016

    

Warrants to purchase common stock

 

 

4,267

 

 

4,267

 

 

4,267

 

 

4,267

 

Unvested common shares subject to restrictions

 

 

 —

 

 

1,319

 

 

 —

 

 

2,009

 

Options to purchase common stock

 

 

16,122

 

 

7,155

 

 

16,347

 

 

7,104

 

RSUs

 

 

8,352

 

 

7,858

 

 

8,153

 

 

7,430

 

 

 

 

28,741

 

 

20,599

 

 

28,767

 

 

20,810

 

 

 

Note 3 — Business Combinations

 

Crowdstar Inc.

 

On November 2, 2016, the Company, acquired shares representing approximately 80.6% of the issued and outstanding voting power of Crowdstar Inc., a Delaware corporation (“Crowdstar”), from Time Warner Inc., Intel

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Capital Corporation and certain other stockholders of Crowdstar (the “Participating Stockholders”). Crowdstar is a developer of fashion and home decor genre games for mobile devices based in Burlingame, California. The Company acquired Crowdstar to leverage its casual games expertise, assembled workforce and existing mobile games in order to expand the Company’s game offerings on smartphones and tablets.  The Company paid approximately $40,794 in cash to the Participating Stockholders in exchange for the acquired shares. In addition, certain drag-along provisions specified in a voting agreement by and among Crowdstar and certain other stockholders of Crowdstar were triggered.  Pursuant to the drag-along provisions, certain other stockholders of Crowdstar were required to tender their Crowdstar capital stock to the Company on the same terms as the Participating Stockholders. Upon acquiring over 90% of the issued and outstanding voting power of Crowdstar pursuant to the drag-along provisions, on December 6, 2016, the Company acquired the remaining issued and outstanding shares of Crowdstar in a short-form merger under the laws of the State of Delaware for an additional $4,667 for a total of $45,461 for 100% ownership of Crowdstar.

 

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

 

 

 

 

 

Assets acquired:

    

 

 

Cash and cash equivalents

 

$

4,492

Accounts receivable

 

 

3,905

Prepaid expenses

 

 

521

Other current assets

 

 

34

Fixed assets

 

 

315

Intangible assets:

 

 

 

   Titles, content and technology

 

 

16,000

Goodwill

 

 

28,776

Total assets

 

 

54,043

 

 

 

 

Liabilities assumed:

 

 

 

Accounts payable

 

 

(584)

Accrued liabilities

 

 

(4,284)

Deferred revenue

 

 

(1,500)

Note payable - current portion

 

 

(1,279)

Long term liabilities

 

 

(935)

Total liabilities assumed

 

 

(8,582)

Net acquired assets

 

$

45,461

 

Acquisition-related intangibles included in the above table are finite-lived and are being amortized on a straight-line basis over their estimated lives of three to five years, which approximates the pattern in which the economic benefits of the intangible assets are expected to be realized. Of the total purchase price, $16,000 was allocated to identifiable intangible assets. Pursuant to ASC 805, the Company incurred and expensed a total of $1,924 and $3,506 of transitional costs associated with the acquisition of Crowdstar during the three and six months ended June 30, 2017, respectively. These costs included $1,821 and $2,936 of research and development expense during the three and six months ended June 30, 2017, respectively, and $156 and $570 of general and administrative expense during the three and six months ended June 30, 2017, respectively.

The Company allocated the residual value of $28,776 to goodwill. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. In accordance with ASC 350, Intangibles – Goodwill and Other – Internal-Use Software, (“ASC 350”), goodwill will not be amortized but will be tested for impairment at least annually. Goodwill created as a result of the Crowdstar acquisition is not deductible for tax purposes.

 

Plain Vanilla Corp.

 

On December 19, 2016, the Company acquired substantially all of the intangible assets and certain other assets of Plain Vanilla Corp. (“Plain Vanilla”), the developer of the QuizUp interactive software application for mobile devices,

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based in Reykjavik, Iceland. The Company acquired these assets in order to expand the Company’s game offerings on smartphones and tablets.

 

The Company forgave and canceled $7,500 in aggregate principal amount of convertible promissory notes of Plain Vanilla held by the Company, and all interest thereon, in exchange for acquiring the QuizUp assets and technology and other receivables. The deemed fair value of the consideration as of the acquisition date was determined to be $3,200. The acquired assets represent a business as defined in ASC 805, Business Combinations. The Company has integrated the acquired assets into the Company’s existing business. The asset purchase agreement also contains customary representations, warranties and covenants, including non-competition and indemnification provisions.

 

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

 

 

 

 

 

Fair value of purchase consideration:

    

$

3,200

 

 

 

 

Assets acquired:

 

 

 

Cash

 

$

1,200

Accounts receivable

 

 

183

Intangible assets:

 

 

 

 Title, content and technology

 

 

1,817

Total Assets acquired

 

$

3,200

 

Acquisition-related intangibles included in the above table are finite-lived and are being amortized on a straight-line basis over their estimated lives of three years, which approximates the pattern in which the economic benefits of the intangible assets are expected to be realized. Of the total purchase price, $1,817 was allocated to identifiable intangible assets. No residual value was allocated to goodwill.

Valuation Methodology

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

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

The fair value of Crowdstar’s deferred revenue was determined to be $1,500 as of the valuation date. This was valued using the estimated costs including hosting fees and salaries and benefits to support the contractual obligations associated with these revenue, plus a market participant margin. The deferred revenue will be recognized on a straight-line basis over nine months from the valuation date.

As of the valuation date, Crowdstar was in process of developing Design Home, which was launched in the fourth quarter of 2016.

Pro Forma Financial Information

The results of operations for Crowdstar and Plain Vanilla and the estimated fair market values of the assets acquired and liabilities assumed have been included in the Company’s unaudited consolidated financial statements since their respective dates of acquisition. The unaudited pro forma financial information in the table below summarizes the combined results of the Company’s operations and those of Crowdstar and Plain Vanilla for the periods shown as if the acquisition of Crowdstar and Plain Vanilla had each occurred on January 1, 2015. The pro forma financial information

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includes the business combination accounting effects of the acquisition, including amortization charges from acquired intangible assets. The pro forma financial information presented below is for informational purposes only, and is subject to a number of estimates, assumptions and other uncertainties. 

 

 

 

 

 

 

 

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

2016

 

2016

Total pro forma revenue

 

$

61,649

 

$

129,149

Pro forma net loss

 

 

(21,955)

 

 

(34,565)

Pro forma net loss per share - basic

 

 

(0.17)

 

 

(0.27)

Pro forma net loss per share - diluted

 

 

(0.17)

 

 

(0.27)

 

 

Note 4 — Fair Value Measurements

 

Fair Value Measurements

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

 

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

 

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

 

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

 

As of June 30, 2017, 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, 2017

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

68,113

 

$

 —

 

$

 —

 

$

68,113

 

Restricted cash

 

 

752

 

 

 —

 

 

 —

 

 

752

 

Total Financial Assets

 

$

68,865

 

$

 —

 

$

 —

 

$

68,865

 

 

As of December 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

    

December 31, 2016

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

102,102

 

$

 —

 

$

 —

 

$

102,102

 

Restricted cash

 

 

1,312

 

 

 —

 

 

 —

 

 

1,312

 

Total Financial Assets

 

$

103,414

 

$

 —

 

$

 —

 

$

103,414

 

 

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.

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Note 5 — Balance Sheet Components

 

Accounts Receivable

 

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

    

 

   

2017

   

2016

   

Accounts receivable

 

$

33,048

 

$

22,314

 

Less: Allowance for doubtful accounts

 

 

(837)

 

 

(837)

 

 

 

$

32,211

 

$

21,477

 

 

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, 2017 and 2016.

 

Prepaid Expenses and Other Assets

 

 

 

 

 

 

 

 

 

 

 

June 30, 

    

December 31, 

 

 

   

2017

   

2016

   

Deferred platform commission fees

 

$

18,632

 

$

11,571

 

Deferred royalties

 

 

4,162

 

 

3,275

 

Other

 

 

5,748

 

 

4,140

 

 

 

$

28,542

 

$

18,986

 

 

 

Note 6 — 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, 2017 and December 31, 2016 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

December 31, 2016

 

 

    

Estimated

    

Gross

    

Accumulated

    

Net

    

Gross

    

Accumulated

    

Net

 

 

 

Useful

 

Carrying

 

Amortization

 

Carrying

 

Carrying

 

Amortization

 

Carrying

 

 

 

Life

 

Value *

 

Expense *

 

Value *

 

Value *

 

Expense *

 

Value *

 

Intangible assets amortized to cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Titles, content and technology

 

3 - 5 yrs

 

$

40,955

 

$

(24,844)

 

$

16,111

 

$

40,942

 

$

(19,255)

 

$

21,687

 

Carrier contract and related relationships

 

5 yrs

 

 

14,252

 

 

(12,150)

 

 

2,102

 

 

14,029

 

 

(11,427)

 

 

2,602

 

Licensed content

 

2.5 - 5 yrs

 

 

2,392

 

 

(2,392)

 

 

 —

 

 

2,334

 

 

(2,334)

 

 

 —

 

Service provider license

 

9 yrs

 

 

217

 

 

(217)

 

 

 —

 

 

212

 

 

(212)

 

 

 —

 

Trademarks

 

7 yrs

 

 

5,120

 

 

(3,870)

 

 

1,250

 

 

5,117

 

 

(3,510)

 

 

1,607

 

Total intangibles assets

 

 

 

$

62,936

 

$

(43,473)

 

$

19,463

 

$

62,634

 

$

(36,738)

 

$

25,896

 

* Including impact of foreign exchange

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 approximate 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.

 

During the three months ended June 30, 2017 and 2016, the Company recorded amortization expense in the amounts of $3,171 and $2,336, respectively, in cost of revenue.  During the six months ended June 30, 2017 and 2016, the Company recorded amortization expense in the amounts of $6,433 and $4,660, respectively, in cost of revenue.

 

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As of June 30, 2017, total expected future amortization related to intangible assets was as follows:

 

 

 

 

 

 

    

Amortization

 

 

to Be Included in

 

 

Cost of

Year Ending December 31,

   

Revenue

2017 (Remaining 6 months)

 

$

3,839

2018

 

 

5,905

2019

 

 

4,960

2020

 

 

3,259

2021 and thereafter

 

 

1,500

 

 

$

19,463

 

Goodwill

 

Goodwill for the periods indicated was as follows:

 

 

 

 

 

 

 

 

June 30, 2017

 

Goodwill

 

$

189,943

 

Accumulated impairment losses

 

 

(73,111)

 

Balance as of December 31, 2016

 

 

116,832

 

Goodwill acquired during the year

 

 

 —

 

Effects of foreign currency exchange

 

 

31

 

Balance as of period ended:

 

 

116,863

 

Goodwill

 

 

189,974

 

Accumulated impairment losses

 

 

(73,111)

 

Balance as of period ended

 

$

116,863

 

 

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.

 

Note 7 — 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 was the Icelandic developer of the mobile game QuizUp, and was financed primarily through equity investments prior to the Company’s acquisition of all of its intangible assets and certain other assets.

  

The Company 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. 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 of the call option as of June 30, 2016 was estimated to be lower than its carrying value, which resulted in the Company recording an impairment charge of $2,340 in other expense for each of the three and six months ended June 30, 2016.

 

On December 19, 2016, the Company acquired substantially all of the intangible assets and certain other assets of Plain Vanilla in exchange for forgiveness and cancellation of $7,500 in aggregate principal amount of convertible promissory notes and all interest thereon. The call option agreement was terminated as of that date. See “Note 3 – Business Combinations” for additional details.

 

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Plain Vanilla, prior to acquisition of its assets by the Company, was a variable interest entity (“VIE”). However, the Company determined that it was not the primary beneficiary of this VIE since the Company did not have the power to direct the activities of this VIE that most significantly impacted its economic performance. This determination was based on the following factors: (i) the development stage of Plain Vanilla’s products; (ii) the Company's inability to exercise control or decision making power over Plain Vanilla, 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, before the acquisition of its assets by the Company, was significantly out of the money.

 

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 games and is financed primarily through equity investments.

 

For Dairy Free, the preferred stock investment was recorded at cost. As of the investment date and as of June 30, 2017, the preferred stock investment was recorded at $2,000 in other long-term assets. The development funding was fully recognized as research and development expense as the development activities were performed. The Company recorded $0 for the three and six months ended June 30, 2017 and $340 and $600 for the three and six months ended June 30, 2016, respectively, in research and development expense related to this arrangement.

 

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

 

The Company is not obligated to provide any explicit or implicit financial or other support to Dairy Free other than what was contractually agreed to in the investment agreement. The Company has no exposure to loss beyond its investments in Dairy Free. The Company evaluates its cost method investments for impairment on a quarterly basis. If the Company has not identified events or changes in circumstances that may have a significant adverse effect on the fair value of a cost method investment, then the fair value of such cost method investment is not estimated.

 

Note 8 — Commitments and Contingencies

 

Leases

 

The Company leases office space under non-cancelable operating facility leases with various expiration dates through November 2027. Rent expense for the three months ended June 30, 2017 and 2016 was $1,025 and $1,291, respectively. Rent expense for the six months ended June 30, 2017 and 2016 was $2,196 and $2,532, 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 Company has provided deposits for lines of credit totaling $602 to secure its obligations under the leases, which have been classified as restricted cash on the Company’s consolidated balance sheet as of June 30, 2017.

 

In May 2017, the Company entered into a lease for approximately 57,000 square feet of office space for its new San Francisco headquarters (the “Lease”). The term of the Lease begins on July 1, 2017 and the obligation to pay rent will begin on the earlier to occur of (1) the date the Company begins conducting business in the leased premises or (2) 14 days following the date of Substantial Completion of the Tenant Improvements (as such terms are defined in the Lease) (the “Rent Commencement Date”). The term of the Lease will expire on the tenth anniversary of the Rent Commencement Date. The Company paid a security deposit of $1,542 in connection with the Lease which has been classified within other long term assets on the Company’s consolidated balance sheet as of June 30, 2017.  The security

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deposit will be reduced to $1,000 on or after April 1, 2019, provided the Company has generated annual bookings of at least $250,000 for two consecutive fiscal years and is otherwise not in default under the Lease.

 

As of June 30, 2017, future minimum lease payments under non-cancelable operating leases were as follows:

 

 

 

 

 

 

 

    

Minimum

 

 

 

Operating

 

 

 

Lease

 

Year Ending December 31,

   

Payments

 

2017 (remaining 6 months)

 

$

2,681

 

2018

 

 

6,816

 

2019

 

 

6,890

 

2020

 

 

5,876

 

2021

 

 

4,627