glu_Current folio_10Q

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


FORM 10-Q


(Mark One)

 

 

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

 

For the Quarterly Period Ended March 31, 2018

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.)

 

875 Howard Street, Suite 100

San Francisco, California 94103

(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 May 1, 2018: 139,660,141

 

 

 


 

Table of Contents

GLU MOBILE INC.

 

FORM 10-Q

 

Quarterly Period Ended March 31, 2018

 

TABLE OF CONTENTS

 

 

 

 

Page

PART I. FINANCIAL INFORMATION 

 

 

 

ITEM 1. FINANCIAL STATEMENTS (Unaudited) 

3

 

 

Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017 

3

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2018 and March 31, 2017 

4

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2018 and March 31, 2017 

5

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and March 31, 2017 

6

 

 

Notes to Unaudited Condensed Consolidated Financial Statements 

7

 

 

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

32

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 

43

 

 

ITEM 4. CONTROLS AND PROCEDURES 

44

 

 

 

 

PART II. OTHER INFORMATION 

 

 

 

ITEM 1. LEGAL PROCEEDINGS 

45

 

 

ITEM 1A. RISK FACTORS 

45

 

 

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

71

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES 

71

 

 

ITEM 4. MINE SAFETY DISCLOSURES 

71

 

 

ITEM 5. OTHER INFORMATION 

72

 

 

ITEM 6. EXHIBITS 

72

 

 

SIGNATURES 

74

 

 

 

 

 

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)

 

 

 

 

 

 

 

 

 

 

    

March 31, 

 

December 31, 

 

 

   

2018

 

2017

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

48,306

 

$

63,764

 

Accounts receivable, net

 

 

34,421

 

 

34,673

 

Prepaid royalties

 

 

3,457

 

 

2,994

 

Deferred royalties

 

 

3,590

 

 

4,364

 

Deferred platform commission fees

 

 

21,923

 

 

20,446

 

Restricted cash

 

 

602

 

 

602

 

Prepaid expenses and other assets

 

 

7,202

 

 

10,733

 

Total current assets

 

 

119,501

 

 

137,576

 

Property and equipment, net

 

 

14,073

 

 

14,630

 

Long-term prepaid royalties

 

 

8,861

 

 

9,302

 

Other long-term assets

 

 

3,373

 

 

3,299

 

Intangible assets, net

 

 

16,797

 

 

18,264

 

Goodwill

 

 

116,227

 

 

116,227

 

Total assets

 

$

278,832

 

$

299,298

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

14,600

 

$

21,203

 

Accrued liabilities

 

 

1,172

 

 

1,154

 

Accrued compensation

 

 

6,835

 

 

20,603

 

Accrued royalties

 

 

8,503

 

 

11,782

 

Accrued restructuring

 

 

516

 

 

759

 

Deferred revenue

 

 

72,648

 

 

77,403

 

Total current liabilities

 

 

104,274

 

 

132,904

 

Long-term accrued royalties

 

 

6,868

 

 

7,300

 

Other long-term liabilities

 

 

5,280

 

 

5,234

 

Total liabilities

 

 

116,422

 

 

145,438

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value; 5,000 shares authorized at March 31, 2018 and December 31, 2017; no shares issued and outstanding at March 31, 2018 and December 31, 2017

 

 

 —

 

 

 —

 

Common stock, $0.0001 par value; 250,000 shares authorized at March 31, 2018 and December 31, 2017; 139,654 and 138,745 shares issued and outstanding at March 31, 2018 and December 31, 2017

 

 

14

 

 

14

 

Additional paid-in capital

 

 

596,866

 

 

589,962

 

Accumulated other comprehensive income/(loss)

 

 

20

 

 

(6)

 

Accumulated deficit

 

 

(434,490)

 

 

(436,110)

 

Total stockholders’ equity

 

 

162,410

 

 

153,860

 

Total liabilities and stockholders’ equity

 

$

278,832

 

$

299,298

 

 

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

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GLU MOBILE INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

   

2018

   

2017

   

Revenue

   

$

81,443

 

$

56,788

   

Cost of revenue:

 

 

 

 

 

 

 

Platform commissions, royalties and other

 

 

29,167

 

 

20,860

 

Impairment of prepaid royalties and minimum guarantees 

 

 

99

 

 

792

 

Amortization of intangible assets

 

 

1,467

 

 

3,262

 

Total cost of revenue

 

 

30,733

 

 

24,914

 

Gross profit

 

 

50,710

 

 

31,874

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

 

22,710

 

 

25,032

 

Sales and marketing

 

 

26,810

 

 

17,287

 

General and administrative

 

 

7,890

 

 

8,497

 

Restructuring charge

 

 

80

 

 

3,712

 

Total operating expenses

 

 

57,490

 

 

54,528

 

Loss from operations

 

 

(6,780)

 

 

(22,654)

 

Interest and other expense, net

 

 

(251)

 

 

(122)

 

Loss before income taxes

 

 

(7,031)

 

 

(22,776)

 

Income tax (expense)/benefit

 

 

(175)

 

 

12

 

Net loss

 

$

(7,206)

 

$

(22,764)

 

 

 

 

 

 

 

 

 

Net loss per common share - basic and diluted

 

 

(0.05)

 

 

(0.17)

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic and diluted

 

 

139,108

 

 

134,336

 

 

 

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

 

 

 

March 31, 

 

 

   

2018

   

2017

   

Net loss

 

$

(7,206)

 

$

(22,764)

 

Other comprehensive income/(loss):

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

26

 

 

(12)

 

Other comprehensive income/(loss)

 

 

26

 

 

(12)

 

Comprehensive loss

 

$

(7,180)

 

$

(22,776)

 

 

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

 

 

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GLU MOBILE INC. 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

   

2018

   

2017

    

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(7,206)

 

$

(22,764)

 

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

 

 

 

 

 

 

 

Depreciation

 

 

976

 

 

790

 

Amortization of intangible assets

 

 

1,467

 

 

3,262

 

Stock-based compensation

 

 

6,308

 

 

3,541

 

Impairment of prepaid royalties and minimum guarantees

 

 

99

 

 

792

 

Other non-cash adjustments

 

 

846

 

 

368

 

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

 

 

 

 

 

 

 

Accounts receivable

 

 

252

 

 

(5,575)

 

Prepaid royalties

 

 

(1,945)

 

 

(12,207)

 

Deferred royalties

 

 

(15)

 

 

145

 

Deferred platform commission fees

 

 

(1,477)

 

 

(3,479)

 

Prepaid expenses and other assets

 

 

1,216

 

 

(1,542)

 

Accounts payable and other accrued liabilities

 

 

(5,994)

 

 

(1,319)

 

Accrued compensation

 

 

(13,768)

 

 

(3,959)

 

Accrued royalties

 

 

(1,887)

 

 

756

 

Deferred revenue

 

 

4,860

 

 

11,748

 

Accrued restructuring

 

 

(243)

 

 

755

 

Other long-term liabilities

 

 

46

 

 

(327)

 

Net cash used in operating activities

 

 

(16,465)

 

 

(29,015)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(1,010)

 

 

(413)

 

Proceeds from divestiture of Moscow studio

 

 

1,726

 

 

 —

 

Net cash provided by (used in) investing activities

 

 

716

 

 

(413)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from exercise of stock options and purchases under the ESPP

 

 

1,303

 

 

778

 

Taxes paid related to net share settlement of equity awards

 

 

(955)

 

 

(381)

 

Net cash provided by financing activities

 

 

348

 

 

397

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

(57)

 

 

(69)

 

Net decrease in cash, cash equivalents and restricted cash

 

 

(15,458)

 

 

(29,100)

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

64,366

 

 

103,414

 

Cash, cash equivalents and restricted cash at end of period

 

$

48,908

 

$

74,314

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 (“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, 2017 filed with the SEC on March 9, 2018. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, which the Company believes are necessary for a fair statement of the Company’s financial position as of March 31, 2018 and its unaudited condensed consolidated results of operations for the three months ended March 31, 2018 and 2017, 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, 2017 has been derived from the audited consolidated financial statements as of that date, and the unaudited condensed consolidated balance sheet presented as of March 31, 2018 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.

 

Reclassifications

 

In 2018, the Company adopted Accounting Standards Update (“ASU”) 2016-18, Restricted Cash and ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. In addition, the Company condensed certain line items on the current period cash flow statement. Accordingly, the condensed consolidated statement of cash flow for the three months ended March 31, 2017 has been reclassified to conform with the current period presentation under this new guidance. The Company adopted ASU 2016-18 by removing the line item “Decrease in restricted cash” from cash flows from investing activities for the three months ended March 31, 2017. This resulted in an increase in net cash used in investing activities of $148, reflecting the reclassification of the change in restricted cash during the three months ended March 31, 2017.

 

 

 

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

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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

 

 

 

 

March 31, 

 

 

 

   

2018

 

   

2017

 

Apple

 

 

57.8

%  

 

52.9

%  

Google

 

 

29.5

%  

 

29.7

%  

 

At March 31, 2018, Apple Inc. (“Apple”) accounted for 62.0% and Google Inc. (“Google”) accounted for 20.4% of total accounts receivable. At December 31, 2017, Apple accounted for 58.0% and Google Inc. accounted for 17.1%, 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

 

Recently Adopted Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The Company adopted ASU 2014-09 and its related amendments effective on January 1, 2018 using the modified retrospective method. See Note 3 "Revenue from Contracts with Customers" for the required disclosures related to the impact of adopting this standard and a discussion of the Company's updated policies related to revenue recognition.

 

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. The Company adopted this guidance in the first quarter of 2018. The adoption of this standard did not 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 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company adopted this guidance in the first quarter of 2018. The adoption of this standard did not 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 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company adopted this guidance in the first quarter of 2018. The adoption of this standard did not have a material impact on the Company’s 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

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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 adopted this guidance in the first quarter of 2018. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

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 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.  

 

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

 

 

 

March 31, 

 

 

 

2018

   

2017

   

Net loss

 

$

(7,206)

 

$

(22,764)

 

Shares used to compute net loss per share:

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

139,108

 

 

134,336

 

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

 

 

139,108

 

 

134,336

 

Net loss per share - basic and diluted

 

$

(0.05)

 

$

(0.17)

 

 

The weighted average of the following options to purchase common stock, warrants to purchase common stock, 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

 

 

 

March 31, 

 

 

 

2018

 

2017

    

Warrants to purchase common stock

 

 

3,267

 

 

4,267

 

Options to purchase common stock

 

 

18,166

 

 

16,571

 

RSUs

 

 

5,461

 

 

7,954

 

 

 

 

26,894

 

 

28,792

 

 

 

Note

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Note 3 — Revenue from Contracts with Customers

 

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. 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. 

 

The users can download the Company’s free-to-play games within the Digital Storefronts and pay to acquire virtual currency which can be redeemed in the game for virtual goods. The Company sells both consumable and durable virtual goods and receives reports from the Digital Storefronts, which breakdown the various purchases made from the Company’s 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. 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 furniture, clothes, players or other items to enhance their game-playing experience.

 

The Company adopted ASC 606 and its related amendments effective January 1, 2018 using a modified retrospective method. The reported results for 2018 reflect the application of ASC 606 guidance while the reported results for 2017 were prepared under the guidance of ASC 605, Revenue Recognition (ASC 605), which is also referred to herein as "legacy GAAP" or the "previous guidance". The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the Company's services and will provide financial statement readers with enhanced disclosures.

 

In accordance with ASC 606, revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services. To achieve this core principle, the Company applies the following five steps:

 

1)

Identify the contract with a customer

 

A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the services to be transferred and identifies the payment terms related to these services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.

 

2)

Identify the performance obligations in the contract

 

Performance obligations promised in a contract are identified based on the services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised services, the Company must apply judgment to determine whether promised services are capable of being distinct and distinct in the context of the contract. If these criteria are not met the promised services are accounted for as a combined performance obligation.

 

3)

Determine the transaction price

 

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The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring services to the customer. Determining the transaction price requires significant judgment, which is discussed by revenue category in further detail below.

 

4)

Allocate the transaction price to performance obligations in the contract

 

All of the Company’s contracts have a single performance obligation. The entire transaction price is allocated to the single performance obligation.

 

5)

Recognize revenue when or as the Company satisfies a performance obligation

 

The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised service to a customer.

 

Disaggregation of Revenue

 

The following table summarizes revenue from contracts with customers for the three months ended March 31, 2018:

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 2018

Micro-Transactions (Over-time revenue recognition)

 

$

71,926

 

Advertisements (point-in-time revenue recognition)

 

 

1,556

 

Offers (point-in-time recognition)

 

 

7,801

 

Other (point-in-time recognition)

 

 

160

 

Total Revenue

 

$

81,443

 

 

The Company reports as a single segment – mobile games. In the disaggregation above, the Company categorizes revenue by type, and by over-time or point-in-time recognition.

 

Micro-Transactions

 

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 initial download of the mobile game from the Digital Storefront does not create a contract under ASC 606 because of the lack of commercial substance; however, the separate election by the player to make an in-application purchase satisfies the criterion thus creating a contract under ASC 606. The Company has identified the following performance obligations in these contracts:

 

(1)

Ongoing game related services such as hosting of game play, storage of customer content, when and if available content updates, maintaining the virtual currency management engine, tracking gameplay statistics, matchmaking as it relates to multiple player gameplay, etc.

(2)

Obligation to the paying player to continue displaying and providing access to the purchased virtual goods within the game.

 

Neither of these obligations are considered distinct since the actual mobile game and the related ongoing services are both required to purchase and benefit from the related virtual goods. As such, the Company’s performance obligations represent a single combined performance obligation which is to make the game and the ongoing game related services available to the players. The transaction price, which is the amount paid for virtual currency/goods by the player, is allocated entirely to this single combined performance obligation. The Company recognizes revenue from in-application purchases of durable virtual currency/goods over the estimated average playing period of paying users. The Company’s revenue from consumable virtual goods has been insignificant over the previous two years. Based on the Company’s analysis, the estimated weighted average useful life of a paying user ranges from three to eight months.

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Advertisements and Offers

 

The Company has relationships with certain advertising service providers for advertisements within its mobile games. Revenue from these advertising service providers is generated through impressions, clickthroughs, offers and banner ads. Offers are the type of advertisements where the players are rewarded with virtual currency for completing specified actions, such as downloading another application, watching a short video, subscribing to a service or completing a survey. The Company has determined the advertising buyer (“Advertiser”) to be its customer and displaying the advertisements within the mobile games is identified as the single performance obligation. Revenue from advertisements and offers are recognized at the point-in-time the advertisements are displayed in the game or the offer has been completed by the user as the customer simultaneously receives and consumes the benefits provided from these services.

 

Other

 

Other revenue was immaterial for the three months ended March 31, 2018.

 

Other Estimates and Judgments

 

The Company estimates revenue from Digital Storefronts and advertising service providers in the current period. 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.

 

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.  

 

The Company uses the “survival analysis” model to estimate the average playing period for paying users. This 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. It is a statistical model that analyzes time duration until one or more events happens and is commonly used 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 is 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 is determined based on the average playing period of all other remaining existing titles.   

 

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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.

 

 

Principal Agent Considerations

 

The Company evaluated its Digital Storefront and advertising service provider agreements under ASC 606 in order to determine if it is acting as the principal or as an agent when selling its games or when selling advertisements within its games. The Company primarily uses Digital Storefronts for distributing its smartphone games and advertising service providers for serving advertisements within its games. The Company evaluated the following factors to assess whether it controls each specified good or service before that good or service is transferred to the customer:

 

·

the party responsible for the fulfillment of the game or serving of advertisements;

·

the party having the discretion to set pricing with the end-users; and

·

the party having inventory risk before the specified good or service have been transferred to a customer.

 

Based on the evaluation of the above indicators, the Company determined that it has control of the services before they are transferred to the end-user. Thus, the Company is generally acting as a principal and is the primary obligor to end-users for games distributed through Digital Storefronts and advertisements served through its 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.  In situations where the price paid by the end-user of the advertising service provider is not known, the Company accounts for these transactions on a net basis.

 

Deferred Platform Commissions and Royalties

 

Digital Storefronts retain platform commissions and fees on each purchase made by the paying players through the Digital Storefront. The Company is also obligated to pay ongoing licensing fees in the form of royalties related to the games developed based on or significantly incorporating licensed brands, properties or other content, and the Company plans to incorporate additional licensed content in some of its own originally branded games. As revenue from sales to paying players through Digital Storefronts are deferred, the related direct and incremental platform commissions and fees as well as third-party royalties are also deferred on the consolidated balance sheets. The deferred platform commissions and royalties are recognized in the consolidated statements of operations in “Cost of revenue” in the period in which the related sales are recognized as revenue.

 

On the date of adoption of ASC 606, the Company had $20,446 in deferred platform commission fees and $3,575 in deferred royalties, of which $15,484 and $3,012, respectively, was amortized in the three months ended March 31, 2018. As of March 31, 2018, the Company had $21,923 and $3,590 in deferred platform commission fees and deferred royalties, respectively.

 

Financial Statement Impact of Adopting ASC 606

 

The cumulative effect of applying the new guidance to all contracts with customers that were not completed as of January 1, 2018 was recorded as an adjustment to accumulated deficit as of the adoption date. As a result of applying the

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modified retrospective method to adopt the new revenue guidance, the following adjustments were made to accounts on the consolidated balance sheet as of January 1, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As

 

 

 

 

 

 

 

Reported

 

 

 

 

As Adjusted

 

 

December

 

 

Adjustments

 

January 1,

Balances

 

31, 2017

 

 

 

2018

Deferred royalties

 

$

4,364

 

$

(789)

 

$

3,575

Deferred revenue

 

$

77,403

 

$

(9,615)

 

$

67,788

Accumulated deficit

 

$

(436,110)

 

$

8,826

 

$

(427,284)

 

 

 

 

 

 

 

 

 

 

 

Sale of Offer Advertisements

 

Under the previous guidance, the fees received for offer advertisements were deferred and recognized over the average playing period of paying users. Under ASC 606, the sale of offer advertisements that result in users receiving virtual currency for redemption within a game is recognized at the time such advertisements are delivered and reported to the Company as the performance obligations are deemed to be satisfied when the advertisement has been displayed in the game.

 

Income Taxes

 

The adoption of ASC 606 primarily resulted in an acceleration of revenue in the three months ended March 31, 2018, which in turn generated additional deferred tax liabilities that ultimately reduced the Company's net deferred tax asset position. As the Company fully reserves its net deferred tax assets in the jurisdictions impacted by the adoption of ASC 606, this impact was offset by a corresponding reduction to the valuation allowance.

 

 

Practical Expedients

 

We applied the following expedients available under the cumulative effect method upon adoption of ASC 606:

 

1.

practical expedient listed under 606-10-65-1(f)(3), and chose not to disclose the amount of consideration allocated to the remaining performance obligations or an explanation of when the Company expects to recognize that amount as revenue for all reporting periods presented before the date of the initial application – i.e., January 1, 2018.

2.

practical expedient listed under 606-10-65-1(h), and chose not to restate contracts that were completed contracts as of the date of initial application i.e., January 1, 2018.

 

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Impacts on Financial Statement Line Items

 

The following table compares the reported line items in the balance sheet, statement of operations and cash flows, as of and for the three months ending March 31, 2018, to the amounts that the Company would have reported had the previous guidance been in effect:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2018

 

 

Amounts based

 

 

 

As

 

 

on previous guidance

 

Adjustments

 

Reported

 

 

 

 

 

 

 

 

 

 

Balance Sheet

 

 

 

 

 

 

 

Deferred royalties

 

$

4,270

 

$

(680)

 

$

3,590

Total current assets

 

 

120,181

 

 

(680)

 

 

119,501

Total assets

 

 

279,512

 

 

(680)

 

 

278,832

Deferred revenue

 

 

80,604

 

 

(7,956)

 

 

72,648

Total current liabilities

 

 

112,230

 

 

(7,956)

 

 

104,274

Total liabilities

 

 

124,378

 

 

(7,956)

 

 

116,422

Accumulated deficit

 

 

(441,765)

 

 

7,275

 

 

(434,490)

Total stockholders' equity

 

 

155,135

 

 

7,275

 

 

162,410

Total liabilities and stockholders' equity

 

$

279,512

 

$

(680)

 

$

278,832

 

 

 

 

 

 

 

 

 

 

 

ASC 606 accelerated the recognition of revenue and royalty costs related to offer advertisements which was previously recognized over the estimated average playing period of paying players. As of March 31, 2018, the deferred revenue and deferred royalties would have been higher by $7,956 and $680, respectively had the previous guidance been in effect.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2018

 

 

Amounts based

 

 

 

As

 

 

on previous guidance

 

Adjustments

 

Reported

Statement of Operations

 

 

 

 

 

 

Revenue

 

$

83,102

 

$

(1,659)

 

$

81,443

Platform commissions, royalties and other

 

 

29,276

 

 

(109)

 

 

29,167

Total cost of revenue

 

 

30,842

 

 

(109)

 

 

30,733

Gross profit

 

 

52,260

 

 

(1,550)

 

 

50,710

Loss from operations

 

 

(5,230)

 

 

(1,550)

 

 

(6,780)

Loss before income taxes

 

 

(5,481)

 

 

(1,550)

 

 

(7,031)

Net loss

 

$

(5,656)

 

$

(1,550)

 

$

(7,206)

 

 

 

 

 

 

 

 

 

 

Net loss per common share - basic and diluted

 

$

(0.04)

 

 

 

 

$

(0.05)

 

 

 

 

 

 

 

 

 

 

 

The acceleration of revenue recognition and royalty costs related to offer advertisements under ASC 606 resulted in revenue and royalties to be lower by $1,659 and $109, respectively, for the three months ended March 31, 2018 than they would have been under legacy GAAP.

 

The net impact of accounting for revenue and royalties under the new guidance decreased net loss and net loss per share by $1,550 and $0.01 per basic and diluted share, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2018

 

 

Amounts based

 

 

 

As

 

 

on previous guidance

 

Adjustments

 

Reported

Statement of Cash Flows

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

Net loss

 

$

(5,656)

 

$

(1,550)

 

$

(7,206)

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

 

 

 

 

 

 

 

 

 

Deferred royalties

 

 

94

 

 

(109)

 

 

(15)

Deferred revenue

 

 

3,201

 

 

1,659

 

 

4,860

Net cash provided by operating activities

 

$

(16,465)

 

$

 —

 

$

(16,465)

 

 

 

 

 

 

 

 

 

 

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The adoption of ASC 606 had no impact on the Company’s cash flows from operations. The aforementioned impacts resulted in offsetting shifts in cash flows throughout net loss and changes in working capital balances.

 

Contract Balances

 

The following table provides information about receivables, contracts assets, and contract liabilities from contracts with customers:

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

At Adoption

Receivables, which are included in accounts receivable, net

$

34,421

 

 

$

34,673

 

Contract assets

 

 -

 

 

 

 -

 

Contract liabilities

$

72,648

 

 

$

67,788

 

 

 

 

 

 

 

 

 

 

The Company receives payments from customers based on billing terms established in the Company’s contracts. Contract asset relates to the Company’s right to consideration for its completed performance under the contract.  At March 31, 2018, there were no contract assets recorded in the Company’s consolidated balance sheet. Accounts receivable are recorded when the right to consideration becomes unconditional.

 

Deferred revenue relates to payments received in advance of performance under the contract.  Deferred revenue is recognized as revenue as we perform under the contract. On the date of adoption of ASC 606, the Company had $67,788 in deferred revenue of which $51,306 was earned in the three months ended March 31, 2018.

 

ASC 606 requires an entity to disclose the revenue recognized in the reporting period from performance obligations satisfied (or partially satisfied) in previous periods (for example, due to changes in transaction price). For the three months ending March 31, 2018, there was $0 in revenue recognized relating to performance obligations satisfied in prior periods.

 

The Company elects to use the practical expedient under 606-10-50-14 which states an entity need not disclose the information in paragraph 606-10-50-13 for a performance obligation if the following criteria are met:

 

1.

the performance obligation is part of a contract that has an original expected duration of one year or less; and

2.

the entity recognizes revenue from the satisfaction of the performance obligation in accordance with paragraph 606-10-55-18 (right to invoice).

 

Since all of the Company’s contracts have an original expected duration of one year or less, the Company elects to use this practical expedient and does not disclose the aggregate transaction price allocated to unsatisfied or partially satisfied performance obligations.

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Note 4 — Business Combinations / Divestiture

 

Divestiture of Moscow Studio

 

On December 31, 2017, the Company entered into the following agreements related to the divestiture of its Moscow-based game development studio (the “Moscow Studio”) through the sale of its wholly-owned UK subsidiary Glu Mobile (Russia) Limited (“GMRL”):

 

·

Share Purchase Agreement (the “SPA”) between the Company and Saber Interactive (“Saber”);

·

Transitional Services Agreement (the “TSA”) among the Company, Saber and MGL. My.com (Cyprus) Limited (“MGL”); and

·

Asset Purchase and License Agreement (the “APLA”) between the Company and MGL.

 

The total cash consideration the Company is receiving under the SPA and APLA is $3,226 of which $1,726 was received in January 2018. The remaining $1,500 became due and payable in March 2018 upon completion of the transition of the legacy titles from the Moscow studio to the Company’s Hyderabad studio. As of March 31, 2018, the cash consideration of $1,000 net of a transition bonus payment of $500 is included in prepaid expenses and other current assets on the consolidated balance sheet.

 

In connection with the activities related to the transition under the Transitional Services Agreement that occurred in the first quarter of 2018, the Company recorded the following expenses in the three months ended March 31, 2018:

 

·

$500 related to bonuses that became due to the employees of the Moscow Studio and GMRL.

·

$514 related to the vesting of 147 shares subject to equity awards held by certain employees of the Moscow Studio and GMRL.

·

$515 related to the amortization of transition services assets that were capitalized as part of the transaction consideration.

 

The Company’s divestiture of the Moscow Studio was part of the Company’s efforts to consolidate its studio locations, focusing on a new scaled creative center in San Francisco and a low cost, repeatable location in Hyderabad, India. This divestiture was not presented in discontinued operations in the consolidated statement of operations, because it did not represent a strategic shift in the Company’s business and is not expected to have a significant effect on the Company’s operations or financial results, as the Company continued operating similar businesses after the divestiture.

 

 

Dairy Free Games, Inc.

 

On August 1, 2017 (the “Merger Date”), the Company completed the acquisition of Dairy Free Games, Inc (“Dairy Free”) by acquiring 100% of its equity pursuant to an Agreement and Plan of Merger (the “Dairy Free Merger Agreement”) by and among the Company, Winterfell Acquisition Corp., a Delaware corporation and wholly owned subsidiary of the Company, and Dairy Free. Dairy Free, which is based in California, is building a mobile real-time strategy game. The Company acquired Dairy Free in order to expand its game offerings on smartphones and tablets.

Pursuant to the terms of the Dairy Free Merger Agreement, the Company paid $2,000 in cash for the outstanding common stock of Dairy Free. The Company had previously acquired from Dairy Free shares of its series A preferred stock (“Series A Preferred Stock”), as further described below, for $2,000. The fair value of the Series A Preferred Stock as of the Merger Date was determined to be equal to the original investment amount of $2,000. The transaction was accounted for as a business combination under the acquisition method of accounting.

The Company allocated the purchase price to the individually identifiable assets acquired and liabilities assumed based on their estimated fair values on the acquisition date. The excess of the purchase price over those fair values was recorded as goodwill. The determination of these fair values was based on estimates and assumptions requiring

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significant judgments. While the Company believes that its estimates and assumptions underlying the valuations are reasonable, different estimates and assumptions could result in different valuations assigned to the individual assets acquired and liabilities assumed, and the resulting amount of goodwill. The following table summarizes the fair values of assets acquired and liabilities assumed at the date of acquisition:

 

 

 

 

 

Assets acquired:

    

 

 

Cash and cash equivalents

 

$

341

Intangible assets:

 

 

 

  In-process research and development

 

 

2,700

Other current assets

 

 

32

Goodwill

 

 

573

Total assets

 

 

3,646

 

 

 

 

Liabilities assumed:

 

 

 

Deferred tax liability

 

 

(294)

Other accrued liabilities

 

 

(2)

Total liabilities assumed

 

 

(296)

Net acquired assets

 

$

3,350

In-process research and development included in the above table is finite-lived upon completion, and will be amortized on a straight-line basis over its estimated life of three years, which approximates the pattern in which the economic benefits of the intangible asset are expected to be realized. As of the valuation date, Dairy Free was in the process of developing a game, which the Company estimates will be launched in 2018.

The Company allocated the residual value of $573 to goodwill. The goodwill recognized is attributable primarily to expected synergies and the assembled workforce of Dairy Free. Goodwill will not be amortized but will be tested for impairment at least annually. Goodwill created as a result of the Dairy Free acquisition is not deductible for tax purposes.

In January 2016, the Company acquired a minority equity stake and entered into a commercial agreement with Dairy Free. As part of the arrangement, the Company invested $2,000 in Dairy Free’s Series A Preferred Stock. The preferred stock investment was recorded at cost. The Company had 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 was payable in installments upon Dairy Free achieving certain milestones. The development funding was fully recognized as research and development expense as the development activities were performed. The Company had recorded $650 in accrued research and development expenses. The accrued research and development expenses balance of $650 was also determined to be equal to the fair market value as of the date of the merger and was offset against the goodwill amount resulting from the acquisition of Dairy Free.

 

Valuation Methodology

The fair value of the in-process research and development acquired from Dairy Free was determined using the replacement cost method under the cost approach. The replacement cost was estimated based on the historical research and development expenses incurred, adjusted for an estimated developer’s profit and rate of return in accordance with accepted valuation methodologies.

Pro Forma Financial Information

The results of operations for Dairy Free 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 the date of acquisition. The unaudited pro forma financial information in the table below summarizes the combined results of the Company’s operations and those of Dairy Free, for the periods shown as if the acquisition of Dairy Free had occurred on January 1, 2016. The pro forma financial information includes the business combination accounting effects of the acquisition,

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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
March 31,

 

 

 

 

2017

Total pro forma revenue

 

 

$

56,788

Pro forma net loss

 

 

 

(23,090)

Pro forma net loss per share - basic

 

 

 

(0.17)

Pro forma net loss per share - diluted

 

 

 

(0.17)

 

 

Note 5 — 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 March 31, 2018, the Company’s financial assets are presented below at fair value and were classified within the fair value hierarchy as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Level 1

    

Level 2

    

Level 3

    

March 31, 2018

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

48,306

 

$

 —

 

$

 —

 

$

48,306

 

Restricted cash

 

 

602

 

 

 —

 

 

 —

 

 

602

 

Other investments

 

 

 —

 

 

 —

 

 

1,410

 

 

1,410

 

Total Financial Assets

 

$

48,908

 

$

 —

 

$

1,410

 

$

50,318

 

 

As of December 31, 2017, the Company’s financial assets are presented below at fair value and were classified within the fair value hierarchy as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Level 1

    

Level 2

    

Level 3

    

December 31, 2017

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

63,764

 

$

 —

 

$

 —

 

$

63,764

 

Restricted cash

 

 

602

 

 

 —

 

 

 —

 

 

602

 

Other investments

 

 

 —

 

 

 —

 

 

1,410

 

 

1,410

 

Total Financial Assets

 

$

64,366

 

$

 —

 

$

1,410

 

$

65,776

 

 

The Company’s cash and cash equivalents, which were held in operating bank accounts, are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. In addition, the Company’s restricted cash is classified within Level 1 of the fair value hierarchy.  The carrying value of accounts receivable and payables approximates fair value due to the short time to expected payment or receipt of cash. The carrying value of other investments approximates fair value, as the Company purchased these investments in fiscal 2017 and there has been no

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events or changes in circumstances that would have had a significant effect on the fair value of these investments at March 31, 2018.

 

Note 6 — Balance Sheet Components

 

Accounts Receivable, net

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

    

 

   

2018

   

2017

   

Accounts receivable

 

$

34,421

 

$

35,510

 

Less: Allowance for doubtful accounts

 

 

 —

 

 

(837)

 

 

 

$

34,421

 

$

34,673

 

 

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 months ended March 31, 2018 and 2017.

 

Prepaid Expenses and Other Assets

 

 

 

 

 

 

 

 

 

 

 

March 31, 

    

December 31, 

 

 

   

2018

   

2017

   

Deposits

 

$

3,576

 

$

5,464

 

Other

 

 

3,626

 

 

5,269

 

 

 

$

7,202

 

$

10,733

 

 

 

Cas

 

 

 

Note 7 — Cash, Cash Equivalents and Restricted Cash 

 

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the unaudited condensed consolidated balance sheets that sum to the total of the same amounts shown in the unaudited statements of cash flows:

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

    

2018

 

2017

Cash and cash equivalents at beginning of period

 

$

63,764

 

$

102,102

Restricted cash at beginning of the period

 

 

602

 

 

1,312

Cash, cash equivalents and restricted cash at beginning of period

 

$

64,366

 

$

103,414

Cash and cash equivalents at end of period

 

 

48,306

 

 

73,150

Restricted cash at end of the period

 

 

602

 

 

1,164

Cash, cash equivalents and restricted cash at end of period

 

$

48,908

 

$

74,314

 

The Company’s restricted cash is included in current assets as of March 31, 2018 and December 31, 2017. As of March 31, 2017, the Company’s restricted cash included $1,054 in current assets and $110 in long term assets. As of December 31, 2016, the Company’s restricted cash is included in long term assets. Restricted cash primarily includes deposits that the Company has provided for lines of credit to secure its obligations under operating leases.

 

 

 

 

 

 

 

 

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Note 8 — Goodwill and Intangible Assets

 

Intangible Assets

 

The Company’s intangible assets were acquired primarily in various acquisitions as well as in connection with the purchase of certain trademarks, brand assets and licensed content. The carrying amounts and accumulated amortization expense of the acquired intangible assets, including the impact of foreign currency exchange translation, at March 31, 2018 and December 31, 2017 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

December 31, 2017

 

 

    

Estimated

    

Gross

    

Accumulated