glu_Current folio_10Q

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


FORM 10-Q


(Mark One)

 

 

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

 

For the Quarterly Period Ended September 30, 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 every Interactive Data File required to be submitted 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 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

 

◻  

  

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 November 1, 2018:  143,246,988

 

 

 


 

Table of Contents

GLU MOBILE INC.

 

FORM 10-Q

 

Quarterly Period Ended September 30, 2018

 

TABLE OF CONTENTS

 

 

 

 

Page

PART I. FINANCIAL INFORMATION 

 

 

 

ITEM 1. FINANCIAL STATEMENTS (Unaudited) 

3

 

 

Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017 

3

 

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and September 30, 2017 

4

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2018 and September 30, 2017 

5

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and September 30, 2017 

6

 

 

Notes to Unaudited Condensed Consolidated Financial Statements 

7

 

 

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

31

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 

45

 

 

ITEM 4. CONTROLS AND PROCEDURES 

46

 

 

 

 

PART II. OTHER INFORMATION 

 

 

 

ITEM 1. LEGAL PROCEEDINGS 

47

 

 

ITEM 1A. RISK FACTORS 

47

 

 

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

73

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES 

73

 

 

ITEM 4. MINE SAFETY DISCLOSURES 

73

 

 

ITEM 5. OTHER INFORMATION 

74

 

 

ITEM 6. EXHIBITS 

74

 

 

SIGNATURES 

76

 

 

 

 

 

2


 

Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

GLU MOBILE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

    

September 30, 

 

December 31, 

 

 

   

2018

 

2017

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

80,781

 

$

63,764

 

Accounts receivable, net

 

 

38,008

 

 

34,673

 

Prepaid royalties

 

 

7,020

 

 

2,994

 

Deferred royalties

 

 

4,288

 

 

4,364

 

Deferred platform commission fees

 

 

25,103

 

 

20,446

 

Restricted cash

 

 

110

 

 

602

 

Prepaid expenses and other assets

 

 

8,128

 

 

10,733

 

Total current assets

 

 

163,438

 

 

137,576

 

Property and equipment, net

 

 

12,788

 

 

14,630

 

Long-term prepaid royalties

 

 

3,822

 

 

9,302

 

Other long-term assets

 

 

2,598

 

 

3,299

 

Intangible assets, net

 

 

11,162

 

 

18,264

 

Goodwill

 

 

116,227

 

 

116,227

 

Total assets

 

$

310,035

 

$

299,298

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

16,951

 

$

21,203

 

Accrued liabilities

 

 

1,703

 

 

1,154

 

Accrued compensation

 

 

13,189

 

 

20,603

 

Accrued royalties

 

 

13,651

 

 

11,782

 

Accrued restructuring

 

 

548

 

 

759

 

Deferred revenue

 

 

83,202

 

 

77,403

 

Total current liabilities

 

 

129,244

 

 

132,904

 

Long-term accrued royalties

 

 

3,597

 

 

7,300

 

Other long-term liabilities

 

 

5,289

 

 

5,234

 

Total liabilities

 

 

138,130

 

 

145,438

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value; 5,000 shares authorized at September 30, 2018 and December 31, 2017; no shares issued and outstanding at September 30, 2018 and December 31, 2017

 

 

 —

 

 

 —

 

Common stock, $0.0001 par value; 250,000 shares authorized at September 30, 2018 and December 31, 2017; 143,142 and 138,745 shares issued and outstanding at September 30, 2018 and December 31, 2017

 

 

14

 

 

14

 

Additional paid-in capital

 

 

611,053

 

 

589,962

 

Accumulated other comprehensive income/(loss)

 

 

(1)

 

 

(6)

 

Accumulated deficit

 

 

(439,161)

 

 

(436,110)

 

Total stockholders’ equity

 

 

171,905

 

 

153,860

 

Total liabilities and stockholders’ equity

 

$

310,035

 

$

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

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

 

2018

   

2017

   

2018

   

2017

   

Revenue

 

$

99,285

 

$

81,148

   

$

270,921

 

$

206,615

   

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Platform commissions, royalties and other

 

 

34,384

 

 

28,898

 

 

95,937

 

 

74,519

 

Impairment of prepaid royalties and minimum guarantees 

 

 

 —

 

 

464

 

 

99

 

 

1,256

 

Impairment and amortization of intangible assets

 

 

4,167

 

 

2,363

 

 

7,102

 

 

8,796

 

Total cost of revenue

 

 

38,551

 

 

31,725

 

 

103,138

 

 

84,571

 

Gross profit

 

 

60,734

 

 

49,423

 

 

167,783

 

 

122,044

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

23,839

 

 

22,004

 

 

69,381

 

 

71,025

 

Sales and marketing

 

 

28,874

 

 

29,776

 

 

85,425

 

 

78,015

 

General and administrative

 

 

8,095

 

 

8,698

 

 

23,593

 

 

25,873

 

Restructuring charge

 

 

160

 

 

1,402

 

 

240

 

 

6,040

 

Total operating expenses

 

 

60,968

 

 

61,880

 

 

178,639

 

 

180,953

 

Loss from operations

 

 

(234)

 

 

(12,457)

 

 

(10,856)

 

 

(58,909)

 

Interest and other income /(expense), net

 

 

96

 

 

(271)

 

 

(521)

 

 

(340)

 

Loss before income taxes

 

 

(138)

 

 

(12,728)

 

 

(11,377)

 

 

(59,249)

 

Income tax (expense)/benefit

 

 

(118)

 

 

1,057

 

 

(500)

 

 

1,246

 

Net loss

 

$

(256)

 

$

(11,671)

 

$

(11,877)

 

$

(58,003)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share - basic and diluted

 

$

(0.00)

 

$

(0.09)

 

$

(0.08)

 

$

(0.43)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic and diluted

 

 

142,378

 

 

135,726

 

 

140,685

 

 

135,047

 

 

 

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)

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

 

2018

   

2017

   

2018

   

2017

   

Net loss

 

$

(256)

 

$

(11,671)

 

$

(11,877)

 

$

(58,003)

 

Other comprehensive income/(loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(16)

 

 

(220)

*

 

 5

 

 

(256)

*

Other comprehensive income/(loss)

 

 

(16)

 

 

(220)

 

 

 5

 

 

(256)

 

Comprehensive loss

 

$

(272)

 

$

(11,891)

 

$

(11,872)

 

$

(58,259)

 

 

* Includes release of cumulative translation adjustment upon substantial liquidation / winding down of the Company’s foreign subsidiaries which is recognized in other income/(expense) in the Company’s consolidated statements of operations for the three and nine months ended September 30, 2017.

 

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

 

 

5


 

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GLU MOBILE INC. 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 

 

 

   

2018

   

2017

    

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(11,877)

 

$

(58,003)

 

Adjustments to reconcile net loss to net cash generated from/used in operating activities:

 

 

 

 

 

 

 

Depreciation

 

 

2,887

 

 

2,447

 

Impairment and amortization of intangible assets

 

 

7,102

 

 

8,796

 

Stock-based compensation

 

 

17,530

 

 

10,639

 

Warrant expense

 

 

1,046

 

 

62

 

Impairment of prepaid royalties and minimum guarantees

 

 

99

 

 

1,256

 

Other non-cash adjustments

 

 

996

 

 

(1,594)

 

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

 

 

 

 

 

 

 

Accounts receivable

 

 

(3,598)

 

 

(12,581)

 

Prepaid royalties

 

 

(859)

 

 

(14,408)

 

Deferred royalties

 

 

(713)

 

 

(733)

 

Deferred platform commission fees

 

 

(4,657)

 

 

(8,169)

 

Prepaid expenses and other assets

 

 

65

 

 

(3,804)

 

Accounts payable and other accrued liabilities

 

 

(2,836)

 

 

6,541

 

Accrued compensation

 

 

(7,414)

 

 

3,043

 

Accrued royalties

 

 

380

 

 

3,419

 

Deferred revenue

 

 

15,414

 

 

29,528

 

Accrued restructuring

 

 

(211)

 

 

867

 

Other long-term liabilities

 

 

55

 

 

(641)

 

Net cash generated from / (used in) operating activities

 

 

13,409

 

 

(33,335)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(1,912)

 

 

(3,651)

 

Other investing activities

 

 

 —

 

 

(810)

 

Proceeds from divestiture of Moscow studio

 

 

2,726

 

 

 —

 

Net cash paid for acquisitions

 

 

 —

 

 

(1,659)

 

Net cash provided by / (used in) investing activities

 

 

814

 

 

(6,120)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from exercise of stock options and purchases under the ESPP

 

 

8,128

 

 

1,631

 

Taxes paid related to net share settlement of equity awards

 

 

(5,613)

 

 

(1,913)

 

Net cash provided by / (used in) by financing activities

 

 

2,515

 

 

(282)

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

(213)

 

 

(136)

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

16,525

 

 

(39,873)

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

64,366

 

 

103,414

 

Cash, cash equivalents and restricted cash at end of period

 

$

80,891

 

$

63,541

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 the state of 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 September 30, 2018 and its unaudited condensed consolidated results of operations for the three and nine months ended September 30, 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 September 30, 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 nine months ended September 30, 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 nine months ended September 30, 2017. This resulted in an increase in net cash used in investing activities of $710, reflecting the reclassification of the change in restricted cash during the nine months ended September 30, 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

 

 

Nine Months Ended

 

 

 

September 30, 

 

 

September 30, 

 

 

    

2018

 

   

2017

 

   

2018

 

   

2017

 

Apple

 

53.9

%  

 

54.8

%  

 

55.4

%  

 

53.6

%  

Google

 

31.7

%  

 

30.5

%  

 

30.4

%  

 

30.7

%  

 

At September 30, 2018, Apple Inc. (“Apple”), Google Inc. (“Google”), and Tapjoy Inc. (“Tapjoy”) accounted for 58.3%,  19.8%, and 15.1% 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

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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 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 March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The ASU adds various SEC paragraphs pursuant to the issuance of the December 2017 SEC Staff Accounting Bulletin No. 118, Income Tax Accounting implications of the Tax Cuts and Jobs Act (“SAB 118”), which was effective immediately. The SEC issued SAB 118 to address concerns about reporting entities’ ability to timely comply with the accounting requirements to recognize all of the effects of the Tax Cuts and Jobs Act in the period of enactment. SAB 118 allows disclosure that timely determination of some or all of the income tax effects from the Tax Cuts and Jobs Act are incomplete by the due date of the financial statements and if possible to provide a reasonable estimate. The Company has accounted for the tax effects of the Tax Cuts and Jobs Act under the guidance of SAB 118, on a provisional basis. The Company’s accounting for certain income tax effects is incomplete, but it has determined reasonable estimates for those effects and has recorded provisional amounts in its unaudited condensed consolidated financial statements as of September 30, 2018 and December 31, 2017.

 

 

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.  In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements and ASU 2018-10, Codification Improvements to Topic 842, Leases. ASU 2016-02 and the subsequent modifications are identified as “ASC 842”. ASC 842 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 expects the adoption will increase the assets and liabilities recorded on its consolidated balance sheet and increase the level of disclosures related to leases. In addition, the Company is in the process of identifying appropriate changes to its accounting policies, business processes, and related internal controls to support recognition and disclosure requirements under ASC 842. The Company expects to design any necessary changes to its business processes, controls and systems in the near future and implement the changes over the remainder of 2018.

 

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The standard provides financial statement preparers with an option to reclassify stranded tax effects within Accumulated Other Comprehensive Loss to retained earnings in each period in which the effect of the

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change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. ASU 2018-02 is effective for the Company beginning in fiscal 2019, including interim periods within that fiscal year. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

 

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718):  Improvements to Employee Share-Based Payment Accounting. The guidance simplifies the accounting for share-based payments made to non-employees so the accounting for such payments is substantially the same as those made to employees. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

 

In July 2018, the FASB issued ASU 2018-09, Codification Improvements. This amendment makes changes to a variety of topics to clarify, correct errors in, or make minor improvements to the Accounting Standards Codification (ASC). The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments do not require transition guidance and are effective upon issuance of the guidance. However, many of the amendments do have transition guidance with effective dates for annual periods beginning after December 15, 2018. The Company is currently evaluating the impact that this standard will have on its consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This guidance adds, modifies and removes several disclosure requirements relative to the three levels of inputs used to measure fair value in accordance with Topic 820, Fair Value Measurement. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact that this standard will have on its consolidated financial statements.

 

In August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU clarifies the accounting treatment for implementation costs for cloud computing arrangements (hosting arrangements) that are service contracts. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact that this 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

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

 

2018

   

2017

 

2018

   

2017

   

Net loss

 

$

(256)

 

$

(11,671)

 

$

(11,877)

 

$

(58,003)

 

Shares used to compute net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

142,378

 

 

135,726

 

 

140,685

 

 

135,047

 

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

 

 

142,378

 

 

135,726

 

 

140,685

 

 

135,047

 

Net loss per share - basic and diluted

 

$

(0.00)

 

$

(0.09)

 

$

(0.08)

 

$

(0.43)

 

 

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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

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

 

2018

    

2017

 

2018

 

2017

    

Warrants to purchase common stock

 

 

3,267

 

 

4,267

 

 

3,267

 

 

4,267

 

Options to purchase common stock

 

 

18,147

 

 

15,955

 

 

18,629

 

 

16,214

 

RSUs

 

 

3,665

 

 

7,506

 

 

4,525

 

 

7,936

 

 

 

 

25,079

 

 

27,728

 

 

26,421

 

 

28,417

 

 

 

Note

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. 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.

 

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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 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

 

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 and nine months ended September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 2018

 

September 30, 2018

Micro-Transactions (Over-time revenue recognition)

 

$

85,062

 

 

$

234,066

 

Advertisements (point-in-time revenue recognition)

 

 

1,916

 

 

 

5,705

 

Offers (point-in-time recognition)

 

 

12,276

 

 

 

30,867

 

Other (point-in-time recognition)

 

 

31

 

 

 

283

 

Total Revenue

 

$

99,285

 

 

$

270,921

 

 

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

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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.

 

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 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 and nine months ended September 30, 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.

 

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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.   

 

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

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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 of which $261 and $20,446 was amortized in the three and nine months ended September 30, 2018, respectively.  On the date of adoption of ASC 606, the Company had $3,575 in deferred royalties of which $0 and $3,575 was amortized in the three and nine months ended September 30, 2018, respectively.  As of September 30, 2018, the Company had $25,103 and $4,288 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 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 and nine months ended September 30, 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 and nine months ended September 30, 2018, to the amounts that the Company would have reported had the previous guidance been in effect:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2018

 

 

Amounts based

 

 

 

As

 

 

on previous guidance

 

Adjustments

 

Reported

Balance Sheet

 

 

 

 

 

 

 

Deferred royalties

 

$

5,435

 

$

(1,147)

 

$

4,288

Total current assets

 

 

164,585

 

 

(1,147)

 

 

163,438

Total assets

 

 

311,182

 

 

(1,147)

 

 

310,035

Deferred revenue

 

 

94,380

 

 

(11,178)

 

 

83,202

Total current liabilities

 

 

140,422

 

 

(11,178)

 

 

129,244

Total liabilities

 

 

149,308

 

 

(11,178)

 

 

138,130

Accumulated deficit

 

 

(449,192)

 

 

10,031

 

 

(439,161)

Total stockholders' equity

 

 

161,874

 

 

10,031

 

 

171,905

Total liabilities and stockholders' equity

 

$

311,182

 

$

(1,147)

 

$

310,035

 

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 September 30, 2018, the deferred revenue and deferred royalties would have been higher by $11,178 and $1,147, respectively had the previous guidance been in effect.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

Nine Months Ended September 30, 2018

 

 

Amounts based

 

 

 

As

 

Amounts based

 

 

 

As

 

 

on previous guidance

 

Adjustments

 

Reported

 

on previous guidance

 

Adjustments

 

Reported

Statement of Operations

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

97,705

 

$

1,580

 

$

99,285

 

$

269,357

 

$

1,564

 

$

270,921

Platform commissions, royalties and other

 

 

34,300

 

 

84

 

 

34,384

 

 

95,579

 

 

358

 

 

95,937

Total cost of revenue

 

 

38,467

 

 

84

 

 

38,551

 

 

102,780

 

 

358

 

 

103,138

Gross profit

 

 

59,238

 

 

1,496

 

 

60,734

 

 

166,577

 

 

1,206

 

 

167,783

Loss from operations

 

 

(1,730)

 

 

1,496

 

 

(234)

 

 

(12,062)

 

 

1,206

 

 

(10,856)

Loss before income taxes

 

 

(1,634)

 

 

1,496

 

 

(138)

 

 

(12,583)

 

 

1,206

 

 

(11,377)

Net loss

 

$

(1,752)

 

$

1,496

 

$

(256)

 

$

(13,083)

 

$

1,206

 

$

(11,877)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share - basic and diluted

 

$

(0.01)

 

 

 

 

$

(0.00)

 

$

(0.09)

 

 

 

 

$

(0.08)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The acceleration of revenue recognition and royalty costs related to offer advertisements under ASC 606 increased revenue and royalties by $1,580 and $84, respectively, for the three months ended September 30, 2018. 

 

The acceleration of revenue recognition and royalty costs related to offer advertisements under ASC 606 increased revenue by $1,564 and increased royalty costs by $358, respectively, for the nine months ended September 30, 2018. 

 

The net impact of accounting for revenue and royalties under the new guidance decreased net loss and net loss per share by $1,496 and $0.01 per basic and diluted share, respectively, for the three months ended September 30, 2018

 

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The net impact of accounting for revenue and royalties under the new guidance decreased net loss and net loss per share by $1,206 and $0.01 per basic and diluted share, respectively, for the nine months ended September 30, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

Amounts based

 

 

 

As

 

 

on previous guidance

 

Adjustments

 

Reported

Statement of Cash Flows

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

Net loss

 

$

(13,083)

 

$

1,206

 

$

(11,877)

Adjustments to reconcile net loss to net cash generated from operating activities:

 

 

 

 

 

 

 

 

 

Deferred royalties

 

 

(1,071)

 

 

358

 

 

(713)

Deferred revenue

 

 

16,978

 

 

(1,564)

 

 

15,414

Net cash generated from operating activities

 

$

13,409

 

$

 —

 

$

13,409

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

At Adoption

Receivables, which are included in accounts receivable, net

$

38,008

 

 

$

34,673

 

Contract assets

 

 -

 

 

 

 -

 

Contract liabilities

$

83,202

 

 

$

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 September 30, 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 $860 and $67,788 respectively, was earned in the three and nine months ended September 30, 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). Revenue recognized relating to performance obligations satisfied in prior periods was $0 for the three and nine months ended September 30, 2018.  

 

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 — 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 received under the SPA and APLA was $3,226, of which $1,726 was received in January 2018. The remaining $1,500, net of a  transition bonus payment of $500, was received in April 2018 upon completion of the transition of the legacy titles from the Moscow Studio to the Company’s Hyderabad studio.

 

In connection with the activities related to the transition under the TSA, no expenses were recorded in the three months ended September 30, 2018. In  connection with the activities related to the transition under the TSA, the Company recorded the following expenses in the nine months ended September 30, 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; and

·

$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.

 

 

 

 

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.

 

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

 

As of September 30, 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

    

September 30, 2018

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

80,781

 

$

 —

 

$

 —